<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-36555
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<C> <C> <C>
DELAWARE
(State or other jurisdiction 4813 94-3068423
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
<TABLE>
<C> <C>
1751 PINNACLE DRIVE WILLIAM H. SEIPPEL
NORTH TOWER -- 12TH FLOOR 1751 PINNACLE DRIVE
MCLEAN, VA 22102 NORTH TOWER -- 12TH FLOOR
(703) 918-4500 MCLEAN, VA 22102
(Address, including zip code, and telephone (703) 918-4558
number, (Name, address, including zip code, and
including area code, of registrant's principal telephone number,
executive offices) including area code, of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<C> <C>
DAVID J. BEVERIDGE, ESQ. JAMES J. CLARK, ESQ.
SHEARMAN & STERLING CAHILL GORDON & REINDEL
599 LEXINGTON AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10005
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
- ---------------------.
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)(3)
==========================================================================================================
<S> <C> <C>
Common Stock, $.10 par value(2)....................... $230,000,000 $69,697
==========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(2) Rights to purchase Common Stock, par value $.10 per share, of the Company,
will be issued in a number equal to the number of shares of Common Stock,
par value $.10 per share, to be issued for no additional consideration and,
therefore, no registration fee is required therefor. Prior to the occurrence
of certain events, such rights will not be exercisable or evidenced
separately from the Common Stock.
(3) Previously paid on September 26, 1997.
THE 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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering in the United States and
Canada of 8,880,000 shares (the "U.S. Prospectus"), and one to be used in a
concurrent underwritten public offering outside the United States and Canada of
2,220,000 shares (the "International Prospectus"). The two prospectuses are
identical except for the front and back cover pages and the section entitled
"Underwriting." The form of U.S. Prospectus is included herein and is followed
by the alternate pages to be used in the International Prospectus. Each of the
alternate pages for the International Prospectus included herein is labeled
"International Prospectus -- Alternate Page." Final forms of each Prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b)
under the Securities Act of 1933.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 3, 1998
PROSPECTUS
11,100,000 SHARES
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
---------------------
All of the shares of Common Stock, par value $.10 per share (the "Common
Stock"), offered hereby are being offered by Global TeleSystems Group, Inc. (the
"Company"). Of the 11,100,000 shares of Common Stock offered hereby, 8,880,000
shares are being offered in the United States and Canada (the "U.S. Offering")
and 2,220,000 shares are being offered outside the United States and Canada (the
"International Offering" and, together with the U.S. Offering, the "Stock
Offerings"). The initial offering price per share and the underwriting discount
per share will be identical for both Stock Offerings. See "Underwriting."
The Company has also filed a registration statement with respect to the
offering of $100 million of Senior Notes due 2005 (the "Notes"), and such
offering (the "Notes Offering" and, together with the Stock Offerings, the
"Offerings") will be made by a separate prospectus. Consummation of both the
Notes Offering and the Stock Offerings are conditioned upon the consummation of
the other.
Prior to the Stock Offerings, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
per share of Common Stock will be between $17.00 and $19.00. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "GTSG." The
European Association of Securities Dealers Automated Quotation ("EASDAQ") Market
authority has approved an application for admission to trading on EASDAQ of the
Common Stock under the symbol "GTSG." Prior to the Stock Offerings, there has
been no public market for the shares of Common Stock on EASDAQ, and there can be
no assurance that any such market will develop after the closing of the Stock
Offerings or that, if developed, it will be sustained.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters (as defined
herein) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,014,000.
(3) The Company has granted to the U.S. Underwriters (as defined herein) and the
International Managers (as defined herein) options, exercisable within 30
days of the date hereof, to purchase up to an additional 1,332,000 and
333,000 additional shares of Common Stock, respectively, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
---------------------
MERRILL LYNCH & CO. IS THE BOOKRUNNER OF THE STOCK OFFERINGS.
---------------------
<TABLE>
<S> <C>
GLOBAL COORDINATOR CO-GLOBAL COORDINATOR
MERRILL LYNCH & CO. UBS SECURITIES
</TABLE>
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
---------------------
MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
LEHMAN BROTHERS
FURMAN SELZ
---------------------
The date of this Prospectus is , 1998.
<PAGE> 4
[MAP OF RUSSIA & THE CIS]
CERTAIN PERSONS PARTICIPATING IN THE STOCK OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
ii
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (as
amended, the "Registration Statement") of which this Prospectus is a part under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
summaries of the material terms of such contract, agreement or other document.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit. The
Registration Statement (including the exhibits and schedules thereto) may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C.
20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the addresses set forth above. The Company intends to furnish its
stockholders with annual reports containing consolidated financial statements
audited by its independent accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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, and
particularly in the risk factors set forth herein under "Risk Factors." Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus.
The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company, and investors, therefore, should
not place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
---------------------
Russia On Line(TM) is a trademark of the Company.
iii
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
(this "Prospectus"). Unless otherwise indicated, (i) the term "GTS" or the
"Company" refers to Global TeleSystems Group, Inc. (and, when appropriate, to
its predecessor) and its subsidiaries, (ii) references to the number of shares
of common stock outstanding after the Stock Offerings assume the Underwriters'
over-allotment option has not been exercised and (iii) the information in this
Prospectus gives effect to a 3-for-2 stock split of the Common Stock effected on
December 1, 1997. See "Exhibit A -- Glossary of Telecommunications Industry
Terms" for definitions of acronyms and technical telecommunications terms used
in this Prospectus.
THE COMPANY
GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia,
the Commonwealth of Independent States ("CIS") and Central Europe. Through its
subsidiary Hermes Europe Railtel B.V. ("HER"), GTS is developing, and operating
the initial segments of, a pan-European high capacity fiber optic network that
is designed to interconnect a majority of the largest Western and Central
European cities and to transport international voice, data and multimedia/image
traffic for other carriers throughout Western and Central Europe. GTS's strategy
to develop its businesses generally has been to establish joint ventures with a
strong local partner or partners while maintaining a significant degree of
operational control. The Company's business activities consist of the ownership
and operation of (i) international long distance businesses, which operate
through international gateways that provide international switching services and
transmission capacity, (ii) local access networks, which provide local telephone
service, (iii) cellular networks, which provide wireless telecommunications
services, (iv) a domestic long distance business, (v) data networks and (vi)
carriers' carrier networks, which provide high volume transmission capacity to
other carriers.
In Russia and the CIS, GTS's objective is to become the premier alternative
telecommunications operator. To attain its objective, the Company has partnered
with regional telephone companies and with Rostelecom, the national long
distance carrier in Russia. The Company currently operates in 24 oblasts
(regions) and the city of Moscow in Russia, as well as in 11 additional cities
in the CIS, and believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. These businesses include: (i) EDN
Sovintel ("Sovintel"), which provides Moscow, and recently St. Petersburg, with
international long distance and local telephone services and access to the major
domestic long distance carriers; (ii) TeleCommunications of Moscow ("TCM"),
which provides local access services in Moscow; (iii) TeleRoss (as defined
herein), which provides domestic long distance services in fourteen cities in
Russia, including Moscow, as well as Very Small Aperture Terminal ("VSAT")
service to customers outside its primary long distance satellite network; (iv)
Sovam Teleport ("Sovam"), which provides data services, including high-speed
data transmission, electronic mail, Internet access services, as well as Russia
On Line, the first Russian language Internet service; and (v) the Company's
cellular operations ("GTS Cellular"), which operate cellular networks in twelve
regions in Russia and also in Kiev, Ukraine, with licenses covering regions with
an aggregate population of approximately 25 million people at the end of 1995.
Whenever practical, GTS's businesses integrate and co-market their service
offerings in Russia and the CIS, utilizing TeleRoss as the domestic long
distance provider, Sovintel as the international gateway, TCM and GTS Cellular
for local access, and Sovam as the data communications and Internet access
network for business applications and on-line services. Together, GTS's Russian
and CIS ventures carried 202.5 million and 291.3 million minutes of traffic for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and had approximately 24,600 customers, including approximately
16,300 cellular subscribers, as of September 30, 1997. See "Business -- Russia
and the CIS."
In Western Europe, GTS seeks to position itself as the leading independent
carriers' carrier through the development of two ventures, HER and GTS-Monaco
Access S.A.M. ("GTS-Monaco Access"). HER's objective is to become the leading
pan-European carriers' carrier by providing centrally managed cross-border
telecommunications transmission capacity to telecommunications companies
including traditional Public
1
<PAGE> 7
Telecommunications Operators ("PTOs") 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 ("New Entrants") on an approximately 18,000 kilometer high
capacity fiber optic network designed to interconnect a majority of the largest
Western and Central European cities. HER is currently operating over an
approximately 1,700-kilometer portion of the network linking Brussels, Antwerp,
Rotterdam, Amsterdam, London and Paris. HER expects to roll out full
telecommunications transport service over approximately 3,000 kilometers of
fiber optic cable linking the cities of London, Rotterdam, Amsterdam, Antwerp,
Brussels, Paris, Dusseldorf and Frankfurt (the "initial five country network")
in the second quarter of 1998. The full 18,000 kilometer network is expected to
become fully operational during the year 2000. HER also plans to lease capacity
on a transatlantic cable linking the European network to North America and is
exploring various interconnectivity options to Russia and Asia. Such
intercontinental interconnectivity will help HER satisfy the needs of its
European customers with respect to outgoing traffic and attract additional
non-European customers with traffic terminating in Europe. HER commenced
commercial service over the Brussels-Amsterdam portion of the network in late
1996 and the London-Paris portion in November 1997. GTS-Monaco Access operates
an international gateway in Monaco in partnership with, and utilizing the
existing gateway infrastructure of, the Principality of Monaco and provides
transit and routing of international calls to other telecommunications
operators. Through its HER and GTS-Monaco Access ventures, GTS is building a new
network for transporting voice, data and multimedia/image traffic for other
carriers throughout Western and Central Europe and for worldwide international
voice, data and multimedia/image traffic that either originates or terminates
in, or transits through, Western and Central Europe. See "Business -- Western
Europe."
In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company provides
outgoing voice services and operates an international gateway and a data
services network. In Hungary, GTS operates a VSAT network, which GTS believes is
the largest VSAT network in Central Europe as measured by number of VSAT sites.
The Company has also signed an agreement to provide international data services
in Poland, subject to the receipt of necessary governmental approvals. GTS's
strategy is to expand its service offerings as the regulatory environment
permits, leverage its existing VSAT and international gateway infrastructure
where possible and provide a broad range of services to its target markets.
Although GTS does not currently own or operate significant
telecommunication assets in Asia, GTS's objective is to become an established
and diversified telecommunications provider in China and India. GTS seeks to
leverage its position in these countries to capitalize on opportunities as they
arise.
2
<PAGE> 8
The following table sets forth certain information for the principal
ventures through which the Company conducts its business:
<TABLE>
<CAPTION>
COUNTRY/REGION GTS PRINCIPAL
COMPANY NAME OF OPERATIONS OWNERSHIP PARTNER(S) BUSINESS
------------ -------------- ------------ ------------------- ------------------
<S> <C> <C> <C> <C>
CIS
Sovintel.................................... Russia 50% Rostelecom International Long
Distance; Local
Access
TCM......................................... Russia 50%(1) MTU Inform and Local Access Lines
others
TeleRoss.................................... Russia 50%(2) Various local PTOs Domestic Long
Distance
Sovam....................................... Russia 67%(3) Institute for Data and Internet
Automated Systems
GTS Cellular................................ CIS 25-70%(4) Primarily various Basic Cellular
local PTOs
WESTERN EUROPE
HER......................................... Western Europe 79%(5) Various Carriers' Carrier
GTS-Monaco Access........................... Monaco 50% Principality of Carriers' Carrier;
Monaco International
Gateway
CENTRAL EUROPE
GTS-Hungary................................. Hungary 99% -- VSAT Network
EuroHivo.................................... Hungary 70% Microsystems
Telecom Rt.;
Gerard Aircraft Paging Services
Sales and Leasing
Company
CzechNet.................................... Czech Republic 100% -- International Long
Distance
CzechCom.................................... Czech Republic 100% -- Data and Internet
ASIA
V-Tech...................................... China 75% Shanghai Science VSAT Network
and Technology
Investment
Corporation
Beijing Tianmu.............................. China 47% China International VSAT Network
Travel Service
Telecom Co.,
Ltd.(6)
CDI......................................... India 100% -- Voice, Data and
Internet
</TABLE>
- ---------------
(1) GTS holds a 50% indirect interest in TCM through its 52.6% interest in
GTS-Vox Limited, an intermediate holding company.
(2) TeleRoss consists of (i) two wholly owned holding companies and a 99% owned
subsidiary that operates a domestic long distance network (collectively,
"TeleRoss Operating Company") and (ii) thirteen joint ventures that are 50%
beneficially-owned by GTS (the "TeleRoss Ventures"). See "Business -- Russia
and the CIS -- TeleRoss."
(3) GTS has reached an agreement in principle to purchase its minority partner's
33.3% interest in Sovam and expects to consummate the transaction in
February 1998, thereby making Sovam a wholly owned subsidiary of GTS.
(4) GTS conducts its cellular operations through (i) Vostok Mobile B.V. ("Vostok
Mobile"), a wholly owned GTS subsidiary, which owns between 50% and 70% of a
series of 11 cellular joint ventures in various regions in Russia, (ii)
PrimTelefone, a 50% owned venture in Vladivostok and four other cities in
the Primorsky region of Russia and (iii) Bancomsvyaz, an approximately 25%
beneficially owned venture in Kiev, Ukraine. GTS intends to enter into the
cellular markets of additional Russian regions through Vostok Mobile. See
"Business -- Russia and the CIS -- GTS Cellular."
(5) GTS currently owns approximately 79% of HER. The Company's interest is
expected to decrease due to the stock options for common shares of HER
issued to certain HER executives under the new HER stock option plan
established in the fourth quarter of 1997. See "Executive Compensation and
Other Information -- HER 1994 Stock Option Plan" and Note 6 -- Stock Option
Plan -- HER audited consolidated financial statements.
(6) GTS owns 75% of GTS China Investments LLC ("GCI"), which owns 90% of
American China Investment Corporation ("ACIC"). ACIC owns 70% of the Beijing
Tianmu China joint venture company.
3
<PAGE> 9
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western and Central Europe through the development of a pan-European
fiber optic network and an international gateway in Monaco.
GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
- Identify and Seize Early Market Opportunities. GTS's primary strategy is
to identify less developed markets in which the incumbent operator offers
inadequate service and where liberalization of telecommunications
regulations may be pending. The Company believes that entering these less
developed markets quickly is a key competitive advantage in the global
telecommunications market. GTS leverages its management's knowledge of
the markets in which the Company operates to assess and react quickly
when attractive business opportunities arise.
- Establish Joint Ventures with Experienced Local Partners. GTS seeks to
establish and maintain strategic partnerships and relationships with key
telecommunications operators and service providers in the countries in
which it operates. The Company believes that these relationships increase
its ability to anticipate and respond to changes in the regulatory and
legal environment and assist with license renewal and expansion of its
operating companies.
- Retain Significant Operational Control. In general, GTS actively
participates in the management of its ventures by (i) providing most of
the funding for the ventures' operations, (ii) selecting key members of
the local management team, (iii) developing business plans and marketing
strategies together with local management, (iv) monitoring operating
functions, (v) maintaining close working relationships with local
partners and (vi) integrating its networks and businesses in a manner
which is consistent with the Company's overall strategic objectives.
- Build Infrastructure to Provide High Quality Services. GTS continues to
develop and expand its network infrastructure. The Company believes that
its networks offer service, quality and cost advantages over incumbent
providers as a result of the Company's customer support, network
monitoring, management systems and its ability to integrate and co-market
its service offerings.
- Leverage Management Depth and Experience. GTS's management has
significant experience in the development and operation of
telecommunications businesses outside the United States. The Company
believes that this experience, together with the Company's extensive
operations, has provided its management with the ability to identify,
evaluate and pursue international telecommunications business
opportunities. Additionally, GTS has assembled a management team
comprised of executives with extensive experience managing
telecommunications companies in the respective local markets. GTS
believes that its management team possesses a broad knowledge of relevant
political and regulatory structures, as well as the cultural awareness
and fluency with international and local business practices necessary to
implement the Company's objectives.
- Ability to Access Capital. In general, the Company's financing strategy
is to establish parent level funding to meet general corporate needs and
the costs of start-ups and acquisitions and, when it is possible and
cost-effective, to finance ongoing operations at the venture level. Since
1993, the Company has raised approximately $268 million in equity and
approximately $215 million of debt (of which approximately $74 million
was raised through shareholders). In addition, HER completed a $265
million private placement of senior notes (of which $56.6 million was
placed into escrow for the first two years' interest payments) in 1997.
The Company's principal investors include affiliates of George Soros and
Alan B. Slifka and certain of his affiliates.
4
<PAGE> 10
In addition to its overall business strategy, GTS has developed specific
market strategies to achieve its goals in emerging markets and Western Europe.
Emerging Markets. The Company pursues its goals in emerging markets through
a three-stage approach of market entry, market expansion and market integration.
- Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii) the
provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or expect to have over a
clearly defined time horizon, the ability to compete on a substantially
equal basis with the incumbent providers in terms of certain services and
the cost of providing those services. Once GTS has identified a market as
suitable for entry, the Company seeks to establish its presence in that
market by establishing a venture with a strong local partner or partners.
In general, GTS maintains a significant degree of operational control in
such ventures. Through such ventures, the Company benefits from its
partners' ability to provide infrastructure, regulatory expertise and
personnel that will provide GTS with a competitive advantage in entering
that market. When entering a new market, GTS's strategy is to provide its
customers with higher quality service as compared to the services offered
by incumbent providers.
- Market Expansion. Having entered a market successfully and established a
limited service offering to its targeted customer base, GTS then seeks to
expand the range of services it offers to existing and potential
customers and to further develop its relationships with local partners.
By broadening its service offerings, GTS anticipates achieving increased
economies of scale through the common use of administrative and operating
functions already in place, increasing the Company's share of its
customers' telecommunications spending and expanding GTS's base of
potential customers through the provision of a bundled service offering.
The Company also seeks to expand its targeted geographic market by
forming new partnerships, installing infrastructure and offering services
in additional geographic regions, allowing the Company to further enhance
its operating leverage and ability to service its customers'
telecommunications needs.
- Market Integration. GTS ultimately intends to integrate and co-market its
service offerings in each of the markets in which it operates. The
Company believes such integration enables it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure and
networks, and management information systems. As customers develop a need
for a broader variety of telecommunications services, the Company
believes GTS's integrated operations will represent an attractive service
alternative for customers seeking a single provider with the ability to
meet all their telecommunications needs.
Western Europe. The Company seeks to position itself as the leading
independent carriers' carrier within Western Europe through the development of
HER's pan-European fiber optic network and the operation of GTS-Monaco Access's
international gateway in partnership with, and utilizing the gateway
infrastructure of, the Principality of Monaco. The overall strategy of GTS in
Western Europe is to complement and enhance the services provided by PTOs and
New Entrants in a way that helps them to more successfully meet the needs of
their end-user customers. HER seeks to enter the market ahead of competition and
encourage a wide variety of carriers to use its network with service offerings
that meet their needs. To establish itself as the leading carriers' carrier for
international telecommunications within Europe, HER intends to provide its
customers with significantly higher quality transmission and advanced network
capabilities at a competitive price by utilizing advanced, uniform technology
across the region and providing redundant routing for higher levels of
reliability.
5
<PAGE> 11
FINANCING PLAN
In general, the Company's strategy is to finance general corporate cash
needs, the development of start-up ventures and acquisitions through the parent
company and, when possible and cost effective, to finance ongoing operations at
the venture level. Since 1993, the Company has raised approximately $268 million
in equity and approximately $215 million of debt (of which approximately $74
million was raised through shareholders). In addition, HER completed a $265
million private placement of senior notes (of which $56.6 million was placed
into escrow for the first two years' interest payments) in 1997.
Concurrently with the Stock Offerings, the Company is undertaking the Notes
Offering, which offering will be made by a separate prospectus. The consummation
of both the Notes Offering and the Stock Offerings are conditioned upon the
consummation of the other.
The Company believes that the net proceeds from the Offerings, together
with existing cash, will be sufficient to fund its expected capital needs until
at least June 1999. GTS expects that it may require additional capital to
execute its current business plan and to fund expected operating losses, as well
as to consummate future acquisitions and exploit opportunities to expand and
develop its businesses. Management expects that GTS and its ventures will incur
over $515 million of capital expenditures during the next three years, of which
approximately $235 million will be incurred in 1998. Of these amounts,
approximately $290 million will be used to fund construction of the HER network,
with approximately $35 million required for the roll out of the initial five
country network that is expected to be completed in the second quarter of 1998.
The Company also will need to fund operating losses of its ventures for at least
the next 12 months. In addition, as part of its business strategy, the Company
regularly evaluates potential acquisitions and joint ventures. The Company has
no definitive agreement with respect to any acquisition or joint venture,
although from time to time it has discussions with other companies and assesses
opportunities on an on-going basis. The Company may fund these acquisitions or
joint ventures with a portion of the net proceeds from the Offerings. See "Risk
Factors -- Additional Capital Requirements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
As of December 31, 1997, after giving effect to the Stock Offerings,
certain affiliates of George Soros, Alan B. Slifka and certain affiliates, and
certain affiliates of Capital Research International beneficially owned
approximately 20.4%, 11.2% and 10.3% of the Common Stock (including rights to
acquire Common Stock), respectively. See "Principal Stockholders."
* * *
The Company was founded in 1983 as a not-for-profit company under the name
San Francisco/Moscow Teleport, Inc. The Company was incorporated as a California
for-profit corporation on September 25, 1986, and by way of a reincorporation
merger, merged with and into SFMT, Inc., a Delaware corporation formed for that
purpose on September 13, 1993. The Company was renamed Global TeleSystems Group,
Inc., on February 22, 1995. The Company's principal business office is located
at 1751 Pinnacle Drive, North Tower-12th Floor, McLean, Virginia 22102, United
States, and its telephone number is (703) 918-4500.
6
<PAGE> 12
THE STOCK OFFERINGS
<TABLE>
<S> <C>
Common Stock offered by the Company
U.S. Offering...................................... 8,880,000 shares
International Offering............................. 2,220,000 shares
Total...................................... 11,100,000 shares
Common Stock to be outstanding after the
Offerings(1)....................................... 48,706,814 shares
Use of Proceeds...................................... The Company primarily intends to use the net
proceeds from the Offerings to provide working
capital for existing telecommunications
ventures, particularly in Russia and the CIS,
to expand the Company's operations, and for
general corporate purposes. The Company also
intends to use a portion of the net proceeds
to repay Chatterjee Notes (as defined herein)
and the Capital Research Notes (as defined
herein) in an aggregate principal amount of
$70 million (plus accrued interest), which
bear interest at 10% per annum and mature on
January 19, 2001 and February 2, 2001,
respectively. Also, a portion of the net
proceeds may be used by the Company in
connection with one or more acquisitions. In
addition, approximately $20.0 million of the
net proceeds of the Notes Offering will be
placed into an escrow account and will be used
to pay the first two years' interest payments
on the Notes. See "Use of Proceeds."
Listing.............................................. The Common Stock has been approved for
quotation on the Nasdaq National Market,
subject to official notice of issuance, under
the symbol "GTSG." The EASDAQ Market Authority
has approved an application for admission to
trading on EASDAQ of the Common Stock under
the symbol "GTSG."
</TABLE>
- ---------------
(1) As of December 31, 1997. Excludes (i) 7,777,776 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants at an exercise
price of $9.33 per share, (ii) 713,311 shares of Common Stock reserved for
issuance upon exercise of a put right associated with a 1996 financing
agreement, as amended, (iii) 7,081,173 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options at exercise prices
ranging from $0.53 per share to $15.67 per share, (iv) 8,044,444 shares
issuable upon conversion of the Company's Senior Subordinated Convertible
Bonds due 2000 (the "Convertible Bonds") (assuming a public offering price
in the Stock Offerings of $18.00 per share) and (v) 560,820 shares of Common
Stock reserved for issuance pursuant to the TCM business partnership
agreement as deferred consideration to TCM's partners. See "Certain Related
Party Transactions."
RISK FACTORS
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by prospective investors in evaluating an investment
in the Common Stock.
7
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data as of December
31, 1996 and September 30, 1997 and for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1997 are derived from the
Company's audited Consolidated Financial Statements. The following unaudited
summary historical consolidated financial data for the nine months ended
September 30, 1996 are derived from the Company's 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 audited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Prospectus.
Under generally accepted accounting principles, a majority of the Company's
ventures are accounted for by the equity method of accounting. Under this
method, the operating results of the ventures are included in the Company's
Consolidated Statement of Operations as a single line item, "Equity in losses of
ventures." The Company recognizes 100% of the losses in ventures where the
Company bears all of the financial risk (which includes all of the Company's
significant ventures except for Sovintel and, historically, HER). Also, the
assets, liabilities and equity of the ventures are included in the Company's
Consolidated Balance Sheets as a single line item, "Investments in and advances
to ventures." See Note 2 to the Company's audited Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." Financial information about the Company's
equity ventures is included below under "Supplemental Information -- Summary
Historical Financial Data -- Combined Equity Investments."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1994 1995 1996 1996 1997(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net........................... $ 2,468 $ 8,412 $ 24,117 $ 14,639 $ 30,216
Gross margin............................ 23 16 5,176 1,758 1,864
Operating expenses...................... 12,863 41,014 52,928 35,725 52,059
Equity in losses of ventures............ (135) (7,871) (10,150) (6,999) (18,234)
Other income (expense).................. 990 11,034 (8,729) (6,535) (16,902)
Net loss................................ (11,985) (40,400) (67,991) (48,473) (87,872)
Loss per share.......................... (0.69) (1.61) (2.22) (1.69) (2.37)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997(1)
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 57,874 $366,841
Property and equipment, net............................... 35,463 69,051
Investments in and advances to ventures................... 104,459 84,068
Total assets.............................................. 237,378 647,788
Total debt................................................ 85,547 502,482
Minority interest and stock subject to repurchase......... 6,248 32,764
Shareholders' equity...................................... 113,668 57,403
</TABLE>
- ---------------
(1) As a result of the Company's increase in ownership interest and amendment to
the HER Shareholders Agreement that was completed on July 16, 1997, the
Company accounts for its ownership interest in HER under the consolidation
method of accounting. Prior to this date, the Company accounted for HER
using the equity method of accounting.
8
<PAGE> 14
SUPPLEMENTAL INFORMATION -- SUMMARY HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS
The following unaudited summary historical financial data -- equity
investments for the years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997, are derived from the Company's
financial records. It is intended to supplement the aforementioned summary
historical consolidated financial data, which were derived from the Company's
audited Consolidated Financial Statements.
The Company believes that this information provides additional insight on
the Company's unconsolidated equity method investments. Generally accepted
accounting principles prescribe inclusion of revenues and expenses for
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line within the income statement. More
detailed financial information about the Company's equity investments is
included under "Supplemental Information -- Selected Historical Financial
Data -- Combined Equity Investments."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1995 1996 1996 1997
--------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................................... $54,051 $143,472 $93,270 $159,006
Cost of revenues................................ 33,011 80,426 50,854 87,694
Operating expenses.............................. 22,958 55,018 34,174 60,447
Net loss........................................ (6,380) (5,220) (6,150) (3,680)
Income (loss) recognized by GTS................. (7,871) (10,150) (6,999) (18,234)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1):
Revenues, net................................... (2,270) (15,385) (9,675) (17,049)
Cost of revenues................................ (2,215) (13,562) (7,596) (15,853)
Operating expenses.............................. (6,967) (8,083) (7,134) (11,105)
</TABLE>
- ---------------
(1) The adjustment amounts represent the effect of inter-affiliate transactions
between the Company's consolidated and equity method ventures. More detailed
information about inter-affiliate transactions is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology."
9
<PAGE> 15
RISK FACTORS
ADDITIONAL CAPITAL REQUIREMENTS
GTS expects that it may require additional capital to execute its current
business plan and to fund expected operating losses, as well as to consummate
future acquisitions and exploit opportunities to expand and develop its
businesses. Management expects that GTS and its ventures will incur over $515
million of capital expenditures during the next three years, of which
approximately $235 million will be incurred in 1998. Of these amounts,
approximately $290 million will be used to fund construction of the HER network,
with approximately $35 million required for the roll out of the initial five
country network that is expected to be completed in the second quarter of 1998.
The Company also will need to fund operating losses of its ventures for at least
the next 12 months. In addition, as part of its business strategy, the Company
regularly evaluates potential acquisitions and joint ventures. The Company has
no definitive agreement with respect to any material acquisition or joint
venture, although from time to time it has discussions with other companies and
assesses opportunities on an on-going basis. The Company may fund such
acquisitions or joint ventures with a portion of the net proceeds from the
Offerings.
The Company believes that the net proceeds from the Offerings, together
with existing cash, will be sufficient to fund its expected capital needs until
at least June 1999. The actual amount and timing of the Company's future capital
requirements, however, may differ materially from management's estimates. In
particular, the accuracy of management's estimates are subject to changes and
fluctuations in the Company's revenues, operating costs and development
expenses, which can be affected by the Company's ability to (i) effectively and
efficiently manage the expansion of the HER network and operations, (ii) obtain
infrastructure contracts, rights-of-way, licenses and other regulatory approvals
necessary to complete and operate the HER network, (iii) negotiate favorable
contracts with suppliers, including large volume discounts on purchases of
capital equipment and (iv) access markets, attract sufficient numbers of
customers and provide and develop services for which customers will subscribe.
The Company's revenues and costs are also dependent upon factors that are not
within the Company's control such as regulatory changes, changes in technology,
increased competition and various factors such as strikes, weather, and
performance by third-parties in connection with the Company's operations. Due to
the uncertainty of these factors, actual revenues and costs may vary from
expected amounts, possibly to a material degree, and such variations are likely
to affect the Company's future capital requirements. Historically, GTS has
experienced liquidity problems resulting in part from the Company's need to meet
the capital requirements of certain of its joint ventures in excess of forecast
amounts. In addition, certain of the Company's joint ventures have not met
management's financial performance expectations or have not been able to secure
local country financing and thus have not been able to generate the expected
cash inflows. In addition, if the Company expands its operations at an
accelerated rate or consummates acquisitions, the Company's funding needs will
increase, possibly to a significant degree, and it will expend its capital
resources sooner than currently expected. The Company may also be required to
repay its Convertible Bonds upon maturity in the year 2000 to the extent such
bonds are not converted into Common Stock. As a result of the foregoing, or if
the Company's capital resources otherwise prove to be insufficient, the Company
may need to raise additional capital. See "-- Government Regulation,"
"-- Competition," "-- Technology," "-- HER Network Roll-out," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Use of Proceeds."
If the Company decides to raise additional funds through the incurrence of
debt, it may become subject to additional or more restrictive financial
covenants and its interest obligations will increase. If the Company decides to
raise additional funds through the issuance of equity, the interests of holders
of the Common Stock, will be diluted. There can be no assurance that additional
financing will be available to GTS on favorable terms or at all, and failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require the Company to delay or abandon
some or all of its anticipated expenditures, to sell assets, or both, and could
affect the Company's ability to compete, either of which could have a material
adverse effect on the operations of the Company, and could affect the value of
the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Use of Proceeds."
10
<PAGE> 16
HISTORY OF OPERATING LOSSES
The Company has historically sustained substantial operating and net
losses. The Company had net losses of $0.4 million in 1992, $2.4 million in
1993, $12.0 million in 1994, $40.4 million in 1995, $68.0 million in 1996 and
$87.9 million for the nine months ended September 30, 1997. The Company's
cumulative net losses totalled $213.8 million from inception through September
30, 1997. Further development of the Company's business will require significant
additional expenditures and the Company expects that it will have significant
operating and net losses and will record significant net cash outflow, before
financing, in coming years. There can be no assurance that the Company's
operations will achieve or sustain profitability or positive cash flow in the
future. If the Company cannot achieve and sustain operating profitability or
positive cash flow from operations, it may not be able to meet its debt service
obligations or working capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
HER NETWORK ROLL-OUT
HER's ability to achieve its strategic objective will depend in large part
on the successful, timely and cost-effective completion of the HER network.
Although HER currently operates commercially over an approximately 1,700
kilometer portion of the network linking Brussels, Antwerp, Rotterdam,
Amsterdam, London and Paris, the development of the remainder of the network may
be delayed or adversely affected by a variety of factors, uncertainties and
contingencies. Many of these factors, such as strikes, natural disasters and
other casualties, are beyond HER's control. In addition, HER will need to
negotiate and conclude additional agreements with various parties regarding,
among other things, rights-of-way and development and maintenance of the network
infrastructure and equipment. Historically, HER has experienced substantial
delays in concluding these agreements and developing its network. There can be
no assurance that HER will be successful in concluding necessary agreements, or
that delays in concluding such agreements will not materially and adversely
affect the speed or successful completion of the network. The successful and
timely completion of the network will also depend on, among other things, (i)
the availability to HER of substantial amounts of additional capital and
financing, (ii) timely performance by various third parties of their contractual
obligations to engineer, design and construct portions of the network and (iii)
HER's ability to obtain and maintain applicable governmental approvals.
HER expects to roll out full telecommunications service over the initial
five country network in the second quarter of 1998, and the 18,000 kilometer
network to be operational during the year 2000. Although HER believes that its
cost estimates and the build-out schedule are reasonable, there can be no
assurance that the actual construction costs or time required to complete the
network build-out will not substantially exceed current estimates.
Any significant delay or increase in the costs associated with development
of the HER network could have a material adverse effect on HER and the Company.
Development of the HER network is capital intensive. Management expects
that approximately $290 million in capital expenditures will be incurred in
connection with the buildout of the HER network, with approximately $35 million
required for the roll out of the initial five country network that is expected
to be completed in the second quarter of 1998. While HER raised approximately
$265 million in a private placement of its senior notes in August 1997 (of which
$56.6 million has been placed in escrow for the first two years' interest
payments on the notes), additional financing must be obtained to construct the
HER network and there can be no assurance that such additional financing will be
completed. Failure to obtain necessary financing may require HER to delay or
abandon its plans for deploying the remainder of the network and would adversely
affect the viability of HER, or may require the Company to make additional
capital contributions to HER at the expense of the Company's other operations,
either of which could have a material adverse effect on the operations of the
Company. HER's revenues and the cost of deploying its network and operating its
business will depend upon a variety of factors including, among other things,
HER's ability to (i) effectively and efficiently manage the expansion of its
network and operations, (ii) negotiate favorable contracts with suppliers, (iii)
obtain additional licenses, regulatory approvals, rights-of-way and
infrastructure contracts to complete and operate the network, (iv) access
markets and attract sufficient numbers of
11
<PAGE> 17
customers and (v) provide and develop services for which customers will
subscribe. HER's revenues and costs are also dependent upon factors that are not
within HER's control such as regulatory changes, changes in technology,
increased competition and various factors such as strikes, weather and
performance by third-parties in connection with the development of the network.
Due to the uncertainty of these factors, actual costs and revenues may vary from
expected amounts, possibly to a material degree, and such variations would
likely affect HER's future capital requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." HER must obtain additional infrastructure provider
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 build out the network. There can be no assurance that HER will be
able to maintain all of its existing agreements, rights and permits or to obtain
and maintain the additional agreements, rights and permits needed to implement
its business plan on acceptable terms. Loss of substantial agreements, rights
and permits or the failure to enter into and maintain required arrangements for
the HER network could have a material adverse effect to enter on HER's business.
In addition, HER depends on third parties for leases of dark fiber for
substantial portions of its network. There can be no assurance that HER will be
able to enter into and maintain required arrangements for leased portions of the
HER network, which could have a material adverse effect on HER's business.
In order to operate and, in the case of some countries, even to construct
the network in accordance with current plans, HER must obtain the necessary
regulatory approvals. To date, HER has obtained licenses, authorizations and/or
registrations in the United Kingdom, the Netherlands, Belgium, Germany and
France and has obtained a trial concession to operate in Switzerland. In
addition, HER intends to file applications in other countries in anticipation of
service launch in accordance with the HER network roll-out plan. The terms and
conditions of these licenses, authorizations or registrations may limit or
otherwise affect HER's scope of operations. There can be no assurance that HER
will be able to obtain, maintain or renew licenses, authorizations or
registrations to provide the services it currently provides and plans to
provide, that such licenses, authorizations or registrations will be issued or
renewed on terms or with fees that are commercially viable, or that the
licenses, authorizations or registrations required in the future can be obtained
by HER. The loss of, or failure to obtain, these licenses, authorizations or
registrations or a substantial limitation upon the terms of these licenses,
authorizations or registrations could have a material adverse effect on HER. See
"Business -- Western Europe -- HER -- Licenses and Regulatory Issues."
RISKS RELATING TO REORGANIZATION OF RUSSIAN TELECOMMUNICATIONS INDUSTRY
Svyazinvest was established by the Russian government in 1994 to hold the
government's interest in 88 regional telecommunication companies. In April 1997,
President Yeltsin approved the transfer of additional government-owned
telecommunications assets, including the government's 51% stake in Rostelecom
(the government controlled international and long distance operator), to
Svyazinvest. On July 30, 1997, Mustcom Ltd., a Cyprus-based company that
represents the interests of a consortium which includes ICFI Cyprus, Renaissance
International Ltd., Deutsche Morgan Grenfell, Morgan Stanley, and an affiliate
of George Soros, purchased a 25% stake in Svyazinvest for $1.87 billion. As of
September 30, 1997, affiliates of George Soros beneficially owned 25.8% of the
Company's Common Stock. The President has also authorized the sale of another
24% of Svyazinvest at a future date. This sale is scheduled to occur in the
first half of 1998 and is currently reserved solely for Russian investors. The
Russian government has announced that it will retain a controlling 51% interest
in Svyazinvest. As a result of the government's actions, a single entity,
Svyazinvest, now owns a majority interest in most of the Company's principal
venture partners and other telecommunication service providers in Russia which
together provide a range of international and domestic long distance and local
telecommunications services throughout Russia. The consolidation of many of its
partners under Svyazinvest and the possible sale of a significant interest in
Svyazinvest to foreign and/or Russian investors will likely subject the Company
to more coordinated competition from Svyazinvest, and may lead to material
adverse changes in the business relationships between the Company and such
partners, which business relationships represent a material component of the
Company's business strategy in Russia. There can be no assurance that the
continuing privatization of Svyazinvest, or the evolution of government policy
regarding Svyazinvest and Rostelecom, will not have a material adverse effect on
the Company or its ventures. See
12
<PAGE> 18
"-- Competition," "-- Dependence on Certain Local Parties; Absence of Control"
and "Business -- Russia and the CIS -- Overview" and "Principal Stockholders."
MANAGING RAPID GROWTH
As a result of the Company's past and expected continued growth and
expansion, significant demands have been placed on the Company's management,
operational and financial resources and on its systems and controls. The Company
continues to construct segments of the HER network, expand its operations within
Russia and the CIS and expand into additional geographic and service markets
when business and regulatory conditions warrant. In order to manage its growth
effectively, the Company must continue to implement and improve its operational
and financial systems and controls, purchase and utilize additional
telecommunications facilities and expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of market demand could result in
insufficient or excessive telecommunications facilities and disproportionate
fixed expenses for certain of its operations. There can be no assurance that the
Company will be able to construct and operate the entire HER network as
currently planned, expand with the markets in which its ventures are currently
operating or expand into additional markets at the rate presently planned by the
Company, or that any existing regulatory barriers to such expansion will be
reduced or eliminated. As the Company proceeds with its development and
expansion, there will be additional demands on the Company's customer support,
sales and marketing and administrative resources and network infrastructure.
There can be no assurance that the operating and financial control systems and
infrastructure of the Company and its ventures will be adequate to maintain and
effectively manage future growth. The failure to continue to upgrade the
administrative, operating and financial control systems or the emergence of
unexpected expansion difficulties could materially and adversely affect the
Company's business, results of operations and financial condition.
RISKS RELATING TO EMERGING MARKETS
Substantially all of the Company's revenue is derived from operations in
emerging markets, where the Company's businesses are subject to numerous risks
and uncertainties, including political, economic and legal risks, such as
unexpected changes in regulatory requirements, tariffs, customs, duties and
other trade barriers, difficulties in staffing and managing foreign operations,
problems in collecting accounts receivable, political risks, fluctuations in
currency exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity, and potentially adverse tax consequences
resulting from operating in multiple jurisdictions with different tax laws,
which could materially adversely impact the Company's business, results of
operations and financial condition.
The political systems of many of the emerging market countries in which the
Company operates or plans to operate are slowly emerging from a legacy of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance. Expropriation of private businesses in such
jurisdictions remains a possibility, whether by an outright taking or by
confiscatory tax or other policies. There can be no assurance that GTS's
operations will not be materially and adversely affected by such factors or by
actions to expropriate or seize its operations. The success of free market
reforms undertaken in certain of the emerging market countries in which the
Company operates is also uncertain, and further economic instability may occur.
These factors may reduce and delay business activity, economic development and
foreign investment.
Legal systems in emerging market countries frequently have little or no
experience with commercial transactions between private parties. The extent to
which contractual and other obligations will be honored and enforced in emerging
market countries is largely unknown. Accordingly, there can be no assurance that
difficulties in protecting and enforcing rights in emerging market countries
will not have a material adverse effect upon GTS and its operations.
Additionally, the Company's businesses operate in uncertain regulatory
environments. The laws and regulations applicable to GTS's activities in
emerging market countries are in general new and subject to change and, in some
cases, incomplete. There can be no assurance that local laws and regulations
will become stable in the future, or that changes thereto will not materially
adversely affect the operations of GTS. Additionally, telecommunications
regulations in the more developed Western European
13
<PAGE> 19
markets in which GTS participates are currently undergoing changes initiated by
the Commission of the European Union. See "Business."
RISKS RELATING TO RUSSIA AND THE CIS
Substantially all of the Company's revenue is derived from operations in
Russia and the CIS. Foreign companies conducting operations in the former Soviet
Union face significant political, economic, and legal risks.
Political. The political systems of Russia and the other independent
countries of the CIS, which are in a stage of relative infancy, are vulnerable
to instability due to the populace's dissatisfaction with reform, social and
ethnic unrest and changes in government policies. Such instability could lead to
events that could have a material adverse effect on the Company's operations in
these countries. In recent years, Russia has been undergoing a substantial
political transformation. During this transformation, legislation has been
enacted to protect private property against expropriation and nationalization.
However, due to the lack of experience in enforcing these provisions in the
short time they have been in effect and due to potential political changes in
the future, there can be no assurance that such protections would be enforced in
the event of an attempted expropriation or nationalization. Expropriation or
nationalization of the Company, its assets or portions thereof, whether by an
outright taking or by confiscatory tax or other policies potentially without
adequate compensation, would have a material adverse effect on the Company.
The various government institutions and the relations between them, as well
as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. For
example, the Constitution of the Russian Federation gives the President of the
Russian Federation substantial authority, and any major changes in, or rejection
of, current policies favoring political and economic reform by the President may
have a material adverse effect on the Company. Furthermore, the political and
economic changes in Russia have resulted in significant dislocations of
authority. The local press and international press have reported that
significant organized criminal activity has arisen and high levels of corruption
among government officials exist where the Company operates. While the Company
does not believe it has been adversely affected by these factors to date, no
assurance can be given that organized or other crime will not in the future have
a material adverse effect on the Company.
Economic. Over the past five years the Russian government has enacted
reforms to create the conditions for a more market-oriented economy. Despite
some progress in implementing its reforms, including progress in reducing
inflation and stabilizing the currency and industrial production, there remains
generally rising unemployment and underemployment, high government debt relative
to gross domestic product and high levels of corporate insolvency. No assurance
can be given that reform policies will continue to be implemented and, if
implemented, will be successful, that Russia will remain receptive to foreign
trade and investment or that the economy will improve.
In addition, Russia, the CIS and other emerging countries in which the
Company operates currently receive substantial financial assistance from several
foreign governments and international organizations. To the extent any of this
financial assistance is reduced or eliminated, economic development in Russia,
the CIS and such other countries may be adversely affected.
Russian and CIS businesses have a limited operating history in
market-oriented conditions. The relative infancy of the business culture is
reflected in the Russian banking system's under-capitalization and liquidity
crises. There have been concerns about rumors that many Russian banks continue
to have cash shortages. The Russian Central Bank has reduced banks' reserve
requirements in order to inject more liquidity into the Russian financial
system, but has stressed that it will not bail out the weaker banks. Many of
these banks are expected to disappear over the next several years as a result of
bank failure and anticipated consolidation in the industry. A general Russian
banking crisis could have a material adverse effect on the Company's operations
and financial performance and on the viability of the Company's receivables.
Regulation of the Telecommunications Industry. The Russian
telecommunications system is currently regulated largely through the issuance of
licenses. There is currently no comprehensive legal framework with
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respect to the provision of telecommunications services in Russia, although a
number of laws, decrees and regulations govern or affect the telecommunications
sector. As a result, ministry officials have a fairly high degree of discretion
to regulate the industry. Although telecommunication licenses may not be
transferred under Russian law, the Russian Ministry of Communications (the
"MOC") has adopted the position that licensees may enter into agreements with
third parties in connection with the provision of services under the licensee's
license; however, the MOC does not generally review agreements entered into by
licensees. There can be no assurances that the current or future regulation of
the Russian telecommunications systems will not have a material adverse effect
on the Company.
Current Russian legislation governing foreign investment activities does
not prohibit or restrict foreign investment in the telecommunications industry.
However, on February 28, 1997, the State Duma, the lower house of parliament,
approved, on the first reading, draft foreign investment legislation which would
restrict any significant future foreign investment in numerous sectors of the
Russian economy, including telephone and radio communications. It is unlikely
that such restrictive legislation will be enacted, unless the political climate
changes dramatically. See "-- Political." More likely is the emergence of
restrictions on foreign investment in strategic industries, which could result
in foreign ownership limitations in industries such as telecommunications which
are not uncommon in many countries. The draft legislation has been referred to
the Russian government for comment. For such draft legislation to become Federal
law, it must be passed by a majority vote of the State Duma at another two
readings, then be approved by a majority of the Federation Council, the upper
house of parliament, and signed by the President of the Russian Federation.
Rejection of such legislation by the Federation Council can be overridden by a
two-thirds majority of the State Duma. Rejection of such legislation by the
President can be overridden by a two-thirds majority of each of the Federation
Council and the State Duma. There can be no assurance that future regulation of
foreign investment in the telecommunications industry will not have a material
adverse effect on the Company.
In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to
Russia, there can be no assurance that recent government policies liberalizing
control over the telecommunications industry will continue. Any change in or
reversal of such governmental policies could have a material adverse effect on
the Company. See "Business -- Russia and the CIS -- Licenses and Regulatory
Issues."
Legal Risks. As part of the effort to transform their economies into more
market-oriented economies, the Russian and other CIS governments have rapidly
introduced laws, regulations and legal structures intended to give participants
in the economy a greater degree of confidence in the legal validity and
enforceability of their obligations. Risks associated with the legal systems of
Russia and the other independent republics of the CIS include (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influence; (ii) the relative inexperience of judges
and courts in commercial dispute resolutions and generally in interpreting legal
norms; (iii) inconsistencies among laws, presidential decrees, government
resolutions and ministerial orders; (iv) frequently conflicting local, regional
and national laws, rules and regulations; (v) the lack of legislative, judicial
or administrative guidance on interpreting the applicable rules; and (vi) a high
degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly in
areas such as company law, commercial and contract law, securities and antitrust
law, foreign trade and investment law and tax law. Accordingly, there can be no
assurance that the Company will be able to enforce its rights in any disputes
with its joint venture partners or other parties in Russia or the CIS or that
its ventures will be able to enforce their respective rights in any disputes
with partners, customers, suppliers, regulatory agencies or other parties in
Russia or that the Company can be certain that it will be found to be in
compliance with all applicable laws, rules and regulations.
Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. The Company is resolving licensing issues with
respect to certain intercompany loans and capital contributions with the
applicable government agencies and believes that any licensing irregularities
that
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may arise will not have a material adverse effect on its financial condition or
results of operations. There can be no assurance, however, that Russian
government authorities will not take an unexpected adverse position which could
materially adversely affect the Company's business.
Taxes. Generally, taxes payable by Russian companies are substantial. In
addition, taxes payable by Russian companies are numerous and include taxes on
profits, revenue, assets and payroll as well as value-added tax ("VAT").
Moreover, statutory tax returns of Russian companies are not consolidated and
therefore, each company must pay its own Russian taxes. Because there is no
consolidation provision, dividends are subject to Russian taxes at each level.
Currently, dividends are taxed at 15% and the payor is required to withhold the
tax when paying the dividend, except with respect to dividends to foreign
entities that qualify for an exemption under treaties on the avoidance of double
taxation. To date, the system of tax collection has been relatively ineffective,
resulting in the continual imposition of new taxes in an attempt to raise
government revenues. This history, plus the existence of large government budget
deficits, raises the risk of a sudden imposition of arbitrary or onerous taxes,
which could adversely affect the Company.
Because of uncertainties associated with the laws and regulations of the
Russian tax system and the increasingly aggressive interpretation, enforcement
and collection activities of the Russian tax authorities, the Company's Russian
taxes may be in excess of the estimated amount expensed to date and accrued on
the Company's balance sheets. It is the opinion of management that the ultimate
resolution of the Company's Russian tax liability, to the extent not previously
provided for, will not have a material adverse effect on the financial condition
of the Company. However, depending on the amount and timing of an unfavorable
resolution of this contingency, it is possible that the Company's future results
of operations or cash flows could be materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay VAT on
the purchase or importation of assets, and for certain other transactions. In
many instances, VAT can be offset against VAT which the Company collects and
otherwise would remit to the tax authorities, or may be refundable. Because the
law in some jurisdictions is unclear, the local tax authorities could assert
that the Company is obligated to pay additional amounts of VAT. In the opinion
of management, any additional VAT which the Company may be obligated to pay
would not be material.
ADEQUACY OF MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN EMERGING MARKETS
Many of the emerging market countries in which the Company operates,
particularly in Russia and the CIS where the Company has to date derived most of
its revenues, are deficient in management and financial reporting concepts and
practices, as well as in modern banking, computer and other control systems. The
Company historically has had difficulty in hiring and retaining a sufficient
number of qualified employees to work in these markets. As a result of these
factors, the Company has experienced difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
The Company has a policy worldwide of complying with all applicable laws
and seeks to ensure that all persons in its employ comprehend and comply with
such laws. The application of the laws of any particular country, however, is
not always clear, particularly in emerging market countries where commercial
practices differ significantly from practices in the United States and other
Western countries and the legal and regulatory frameworks are less developed. In
addition, some practices, such as the payment of fees for the purpose of
obtaining expedited customs clearance and other commercial benefits, that may be
common methods of doing business in these markets might be unlawful under the
laws of the United States. As a result of the difficulty the Company
historically has experienced in emerging markets in instituting business
practices that meet Western reporting and control standards, it historically has
been unable to ascertain whether certain practices by its ventures, which were
not in accordance with Company policy, were in compliance with applicable U.S.
and foreign laws. If it were to be determined that the Company or any of its
ventures were involved in unlawful practices and were the factual and legal
issues relating thereto to be resolved adversely, the Company or its ventures
could be exposed, among other things, to significant fines, risk of prosecution
and loss of its licenses. See "-- Risks Relating to Emerging Markets" and
"-- Government Regulation."
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In light of these circumstances, in the second half of 1996 the Company
increased its efforts to improve its management and financial controls and
business practices. The Company recruited a more experienced financial and legal
team, including a new Chief Financial Officer of the Company, a senior finance
officer overseeing all of the regions in which the Company operates, a senior
finance officer for the CIS region, and a senior legal officer for the CIS
region. The Company also established a Treasury group and adopted a more
rigorous Foreign Corrupt Practices Act ("FCPA") compliance program. The Company
has developed and implemented a training program for employees regarding U.S.
legal and foreign local law compliance. The Company also appointed a Compliance
Officer responsible for monitoring compliance with such laws and training
Company personnel around the world. In connection with these developments, the
Company expanded its corporate business practices policy to include, in addition
to compliance with U.S. laws such as the FCPA, compliance with applicable local
laws such as the conflict of interest rules under the 1996 Russian Joint Stock
Company Law, currency regulations and applicable tax laws.
In early 1997, the Company retained special outside counsel to conduct a
thorough review of certain business practices of the Company in the emerging
markets in which the Company operates in order to determine whether deficiencies
existed that needed to be remedied. As a result of this review, the Company
replaced certain senior employees in Russia and instituted additional and more
stringent management and financial controls. As a result of the review, the
Company has not identified any violations of law that management believes would
have a material adverse effect on the Company's financial condition. There can
be no assurances, however, that if the Company or any of its ventures were found
by government authorities to have committed violations of law that, depending on
the penalties assessed and the timing of any unfavorable resolution, the
Company's future results of operations and cash flows would not be materially
adversely affected in a particular period.
Although the Company believes that this review was properly conducted and
was sufficient in scope, there can be no assurance that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated by the Company will be effective. If the Company or any of
its ventures are ever found to have committed violations of law, depending on
the penalties assessed and the timing of any unfavorable resolution, the
Company's future results of operations and cash flows could be materially
adversely affected in a particular period. Management believes, however, that
the actions taken during the past twelve months to strengthen the Company's
management, financial controls and legal compliance, coupled with the
implementation of the recent recommendations from the review and the oversight
provided through the Audit Committee of the Board of Directors of the Company to
ensure compliance, will be adequate to address the recurrence of any past
possible deficiencies.
DEPENDENCE ON CERTAIN LOCAL PARTIES; ABSENCE OF CONTROL
Many GTS operations including Sovintel, TeleRoss and GTS Cellular have been
developed in cooperation or partnership with key local parties, such as regional
PTOs. The Company is substantially dependent on its local partners to provide
marketing expertise and knowledge of the local regulatory environment in order
to facilitate the acquisition of necessary licenses and permits. Any failure by
the Company to form or maintain alliances with local partners, or the preemption
or disruption of such alliances by the Company's competitors or otherwise, could
adversely affect the Company's ability to penetrate and compete successfully in
the emerging markets it operates in or enters. In addition, in the uncertain
legal environments in which GTS operates, certain GTS businesses may be
vulnerable to local government agencies or other parties who wish to renegotiate
the terms and conditions of, or terminate, their agreements or other
understandings with GTS.
While the Company may have the right to nominate key employees, direct the
operations and determine the strategies of such joint ventures, under the terms
of their respective constituent documents, the Company's partners in some of the
ventures have the ability to frustrate the exercise of such rights. Significant
actions by most of GTS's ventures, such as approving budgets and business plans,
declaring and paying dividends, and entering into significant corporate
transactions effectively require the approval of GTS's local partners. Further,
the Company would be unlikely as a practical matter to want to take significant
initiatives without the
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approval of its joint venture partners. Accordingly, the absence of unilateral
control by the Company over the operations of its joint ventures could have a
material adverse effect on the Company.
In addition, the Company and its venture partners frequently compete in the
same markets. For example, Rostelecom, GTS's partner in Sovintel, is the
dominant international and domestic long distance carrier in Russia. In
addition, many of the regional telephone companies partnered with GTS in the
TeleRoss Ventures offer cellular services in direct competition with certain of
the operations of GTS Cellular. Such competition with its partners may lead to
conflicts of interest for GTS and its partners in the operations of their
ventures. There can be no assurance that any such conflicts will be resolved in
favor of GTS. In addition, the combination under Svyazinvest of the Russian
government's majority interest in Rostelecom and 85 of the regional telephone
companies gives Svyazinvest a majority interest in entities that provide
international and domestic long distance and local telecommunications services
throughout Russia and may expose the Company to more coordinated competition
from its partners in the Russian telecommunications market. See "-- Risks
Relating to Reorganization of Russian Telecommunications Industry."
GOVERNMENT REGULATION
As a multinational telecommunications company, GTS through its ventures is
subject to varying degrees of regulation in each of the jurisdictions in which
its ventures provide services. Local laws and regulations, and the
interpretation of such laws and regulations, differ significantly among the
jurisdictions in which the Company and its ventures operate. There can be no
assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on the Company, that regulators or third parties will
not raise material issues with regard to the Company's or its ventures'
compliance or noncompliance with applicable regulations or that any changes in
applicable laws or regulations will not have a material adverse effect on the
Company or any of its ventures.
Many of GTS's ventures require telecommunications licenses, most of which
have been granted for periods of three to ten years. The terms and conditions of
these licenses may limit or otherwise affect the ventures' scope of operations.
The Company has had favorable experience obtaining, maintaining and renewing
licenses in the past. However, there can be no assurance that it will be able to
obtain, maintain or renew licenses to provide the services it currently provides
and plans to provide, that such licenses will be issued or renewed on terms or
with fees that are commercially viable, or that licenses required by future
ventures can be obtained by the Company or its partners. The loss of or a
substantial limitation upon the terms of these telecommunications licenses could
have a material adverse effect on the Company. See each section under "Business"
entitled "Licenses and Regulatory Issues."
A substantial portion of HER's strategy is based upon the timely
implementation of regulatory liberalization of the European Union ("EU")
telecommunications market on January 1, 1998 under existing European Community
("EC") directives. Although EU member states have a legal obligation to
liberalize their markets in accordance with their requirements, certain more
detailed aspects of the EU regulatory framework to apply in the liberalized
environment after January 1, 1998 still remain to be adopted. In addition,
Ireland, Portugal, Spain, Luxembourg and Greece have been granted extensions
from the January 1, 1998 deadline. There can be no assurance that each EU member
state will proceed with the expected liberalization on schedule, or at all, or
that the trend toward liberalization will not be stopped or reversed in any of
the countries. Accordingly, HER faces the risk that it will establish the HER
network and make capital expenditures in a given country in anticipation of
regulatory liberalization which does not subsequently occur.
In order to give effect to EC directives in each member state, national
governments must pass legislation liberalizing their respective markets. This
applies not only to the liberalization requirements set out in existing EC
directives, but also to requirements set out in directives which have yet to be
adopted. The implementation of EC directives in the telecommunications sector
has been inconsistent or ambiguous in some EU member states. Such implementation
could limit, constrain or otherwise adversely affect HER's ability to provide
certain services. Furthermore, national governments may not necessarily pass
legislation implementing an EC directive in the form required, or at all, or may
pass such legislation only after a significant delay. Even if a national
legislature enacts appropriate regulation within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from PTOs, regulators, trade unions and other
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<PAGE> 24
sources. Further, HER's provision of services in Europe may be materially
adversely affected if any EU member state imposes greater restrictions on non-EU
international services than on international services within the EU. These and
other potential obstacles to liberalization could have a material adverse effect
on HER's operations by preventing HER from establishing its network as currently
intended, as well as a material adverse effect on the Company.
COMPETITION
GTS faces significant competition in all of its existing telecommunications
businesses and for the types of acquisition and development opportunities it
seeks in both emerging and Western European markets. GTS's competition in these
markets includes national PTOs, multinational telecommunications carriers, other
telecommunications developers and certain niche telecommunications providers. In
addition, certain of the Company's joint venture partners, including Rostelecom
and the regional telephone companies in Russia, certain of HER's rail-based
shareholders and other entities in the emerging markets in which the Company
operates, are also competitors of the Company. As a result of the recent
combination under Svyazinvest of the government's majority interest in
Rostelecom and 85 of the regional telephone companies, the Company may in the
future be subject to more coordinated competition from its partners in the
Russian telecommunications market. Although the Company believes it has a
favorable and cooperative relationship with its joint venture partners, there
can be no assurance that these partners will continue to cooperate with the
Company in the future or that they will not increase competitive pressures on
the Company. Any measures taken by the partners that reduce the level of
cooperation with the Company could jeopardize the Company's ability to
participate in the management and operation of its joint ventures and could have
a material adverse effect on the Company.
WorldCom, Inc. ("WorldCom") recently announced the construction of a
pan-European fiber network, the first phase of which is expected to connect
London, Amsterdam, Brussels, Frankfurt and Paris by early 1998. Although the
Company believes that the proposed WorldCom pan-European network is primarily
intended to carry WorldCom traffic, WorldCom has stated that any excess capacity
on such network will be used to provide a competitive "carriers' carrier"
service.
HER also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through International
Private Leased Circuits. In addition, the liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets. There can be no assurance
that HER will compete effectively against its current or future competitors.
Many of the Company's competitors have technical, financial, marketing and
other resources substantially greater than those of GTS. There can be no
assurance that the Company will be able to overcome successfully the competitive
pressures to which it is subject, both in the markets in which it currently
operates and in markets into which it might expand. See each section under
"Business" entitled "Competition." In addition, many of the Company's current
and potential competitors are not subject to, or constrained by the prohibitions
of, the FCPA, including the prohibition against making payments to government
officials in order to obtain commercial benefits. The Company is subject to and
seeks to comply with the limitations and prohibitions of such law, and
accordingly may be subject to competitive disadvantages to the extent that its
competitors are able to secure business, licenses or other preferential
treatment through the making of such payments. Accordingly, there can be no
assurances that the Company will be able to compete effectively against
companies free from such limitations in the emerging markets where such
commercial practices are commonplace. See "-- Adequacy of Management, Legal and
Financial Controls in Emerging Markets."
CONTROL BY CERTAIN STOCKHOLDERS
Certain persons control substantial portions of the Company's voting stock.
At December 31, 1997, after giving effect to the Stock Offerings, Soros
Foundation-Hungary and certain of its affiliates (collectively the "Soros
Foundations"), Alan B. Slifka and certain of his affiliates, and affiliates of
Capital Research
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International beneficially owned approximately 20.4%, 11.2% and 10.3%,
respectively, of the Common Stock (including rights to acquire Common Stock).
20
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See "Principal Stockholders." In addition, three persons affiliated with the
Soros Foundations currently serve on the Company's Board of Directors (the
"Board of Directors"). Consequently, these entities are in a position to
exercise control over the outcome of matters submitted for stockholder actions,
including the election of members to the Board of Directors, and are able to
influence the management and affairs of the Company. Additionally, affiliates of
the Soros Foundations and of Capital International, Inc. have purchased debt
securities of the Company that include covenants that restrict the operating and
financing activities of the Company. In certain situations, the interests of
holders of the Company's equity securities may diverge from the interests of the
holders of the Company's debt securities, and holders of both equity and debt
securities of the Company may be in a position to require GTS to act in a way
that is not consistent with the general interests of the holders of the Common
Stock. See "-- Additional Capital Requirements," "Management," "Principal
Stockholders" and "Certain Related Party Transactions."
CURRENCY AND EXCHANGE RISKS
All of GTS's operations are conducted outside the United States. A
substantial portion of the Company's anticipated revenues (as well as the
majority of its operating expenses) will be in foreign currency. As a result,
the Company will be subject to significant foreign exchange risks. In
particular, GTS's ventures in countries whose currencies are considered "soft
currencies" subject the Company to the risk that it will accumulate currencies
which may not be readily convertible into hard currency and which may be subject
to significant limitations on repatriation. The Company does not enter into
hedging transactions to limit its foreign currency risk exposure, although the
Company may implement such practices in the future. There can be no assurance
that GTS's operations will not be adversely affected by such factors. In
addition, these factors may limit the ability of the Company to reinvest
earnings from ventures in one country to fund the capital requirements of
ventures in other countries.
In Russia, where the Company derives most of its revenue, the ruble has
generally experienced a steady depreciation relative to the U.S. Dollar over the
past three years, although there has been some instability in the ruble exchange
rate over this period of time. The Company's tariffs are denominated in U.S.
Dollars but charges are invoiced and collected in rubles, while the Company's
major capital expenditures are generally denominated and payable in various
foreign currencies. To the extent such major capital expenditures involve
importation of equipment and the like, current law permits the Company to
convert its ruble revenues into foreign currency to make such payments. The
ruble is generally not convertible outside Russia. A market exists within Russia
for the conversion of rubles into other currencies, but it is limited in size
and is subject to rules limiting the purposes for which conversion and payment
may be effected. The limited availability of other currencies may tend to
inflate their values relative to the ruble and there can be no assurance that
such a market will continue to exist indefinitely. Moreover, the banking system
in Russia is not yet as developed as its Western counterparts and considerable
delays may occur in the transfer of funds within, and the remittance of funds
out of, Russia. Any delay in converting rubles into a foreign currency in order
to make a payment or delay in the transfer of such foreign currency could have a
material adverse effect on the Company.
EXCHANGE CONTROLS AND REPATRIATION RISKS RELATING TO RUSSIAN SECURITIES
Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. The Company is resolving licensing issues with
respect to certain intercompany loans and capital contributions with the
applicable government agencies and believes that any licensing irregularities
that may arise will not have a material adverse effect on its financial
condition or results of operations. There can be no assurance, however, that
Russian government authorities will not take an unexpected adverse position
which could materially affect the Company's business.
No assurance can be given that Russian foreign investment and currency
legislation will continue to permit repatriation of the proceeds from
investments. Furthermore, no assurance can be given that further restrictions
will not be imposed on the conversion of ruble earnings into foreign currency
for purposes of making dividend payments or on the repatriation of profits. If
any such further restrictions were imposed, they would have a material adverse
effect on the Company's interests in Russia.
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TRANSACTIONS WITH AFFILIATES
The Company has entered into financing agreements with certain of its
affiliates. It is the Company's view that each such transaction has been on
terms no less favorable to the Company than other similar transactions available
to the Company with unaffiliated parties, if available at all. Generally, such
transactions have been the Company's only recourse to meet financing needs
and/or business goals. Despite the foregoing, prospective purchasers may wish to
consider the circumstances in which such transactions were made, the terms of
such transactions and the Company's possible alternative courses of action. The
Company may enter into transactions in the future with affiliates in order to
meet its financing needs and/or business goals. See "Certain Related Party
Transactions" and "Description of Certain Indebtedness."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its growth and future success will depend in
large part upon the efforts of a small number of key executive officers, as well
as on its ability to attract and retain highly skilled and qualified personnel
to work in the emerging markets in which it operates. Henry Radzikowski, who
served as Chief Executive Officer -- CIS and Eastern Europe Operations from
February 1994 until January 1997 and who has extensive experience in the
telecommunications industry in Russia, resigned in 1997. Stewart Reich became
Senior Vice President-Russia effective September 1, 1997. The Company has also
replaced or reassigned executive officers and senior personnel. The competition
for qualified personnel in the telecommunications industry is intense,
particularly in emerging markets where the Company operates and, accordingly,
there can be no assurance that the Company will be able to hire and retain
qualified personnel. Although the Company believes it has maintained a strong
management team, despite the change of personnel in Russia and the CIS, there
can be no assurance as to what effect such personnel changes will have on the
Company's operations in Russia and the CIS.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, the Company must record and process massive
amounts of data quickly and accurately. While the Company believes its ventures'
management information systems are currently adequate, certain of such systems
will have to grow as the ventures' businesses expand. The Company believes that
the successful expansion of its information systems and administrative support
will be important to its continued growth, its ability to monitor and control
costs, to bill customers accurately and in a timely fashion and to achieve
operating efficiencies. There can be no assurance that the Company will not
encounter delays or cost-overruns or suffer adverse consequences in implementing
these systems. Any such delay or other malfunction of the Company's management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
TAXES; AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
The tax rules and regimes prevailing in certain emerging market countries
in which the Company operates or plans to operate are, in many cases, new and
rapidly changing. Repatriation of profits may result in additional taxes. In
addition, other forms of taxation, including VAT, excise taxes and import
duties, change at an unpredictable pace and may have an adverse effect on the
Company's operations.
Availability of tax holidays and provisions of tax treaties with the United
States are subject to changes which may affect GTS's utilization of certain tax
benefits in the countries in which it operates as well as in the United States.
Certain ventures in the CIS and Hungary are operating under tax holidays granted
by local governments. Tax holidays are for periods ranging from five to several
years after achieving profitability under local tax regulations. In addition to
these holidays, certain of the Company's foreign ventures have foreign tax loss
carryforwards in excess of $50.0 million.
As of September 30, 1997, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $92.5 million expiring in
fiscal years 2003 through 2012. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards will be subject to an annual limitation as a result of the
consummation of the Offerings.
21
<PAGE> 28
The Company's financial statements do not reflect any provision for
benefits that might be associated with the U.S. and non-U.S. loss carryforwards.
There can be no assurance that such loss carryforwards will be allowed, in part
or full, by local tax authorities against future income.
TECHNOLOGY
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 Company obtains
telecommunications equipment from a number of vendors, upon whom it is dependent
for the adaptation of such equipment to meet varying local telecommunications
standards. The cost of implementation of emerging and future technologies could
be significant. There can be no assurance that the Company will maintain
competitive services or that the Company will obtain appropriate new technology
on a timely basis or on satisfactory terms. Any failure by the Company to
maintain competitive services or obtain new technologies could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Development and operation of the HER network are also subject to certain
technological risks. The network has been designed to utilize SDH technology.
While SDH represents an advanced, new transmission technology, HER's ability to
upgrade technology from this platform may be important in establishing and/or
maintaining a cost advantage over competitive carriers. There can be no
assurance that the HER network will achieve the technical specifications for
which it was designed or that HER will be able to upgrade the network as
technological improvements in telecommunications equipment are introduced.
Failure to achieve current specifications for, or future upgrades of, the
network may materially and adversely affect the viability of the HER network and
could have a material adverse effect on the business and prospects of GTS.
DIFFICULTY IN OBTAINING RELIABLE MARKET INFORMATION
The Company operates in markets in which it is difficult to obtain reliable
market information. The Company's business planning has been based on certain
assumptions concerning subscriber base, usage levels, pricing and operating
expenses based on the Company's experience and the Company's own investigation
of market conditions in the emerging market countries in which it operates. No
assurances can be given as to the accuracy of such assumptions, and such
assumptions may not be indicative of the actual performance of the Company's
operations.
DILUTION
The initial public offering price per share of Common Stock exceeds the net
tangible book value per share of the Common Stock. In addition, the net tangible
book value per share of the Common Stock will decrease upon the exercise of
outstanding options and warrants. Accordingly, purchasers of the Common Stock
offered hereby will incur an immediate and substantial dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE FROM SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market following
the Stock Offerings could adversely affect the market price of the Common Stock
and adversely affect the Company's ability to raise capital at a time and on
terms favorable to the Company.
As of December 31, 1997, after giving effect to the Stock Offerings, there
would have been 48,706,814 shares of Common Stock outstanding, (i) assuming no
exercise of the Underwriters' over-allotment options and (ii) excluding (x)
11,258,886 shares for which outstanding warrants and vested options are
exercisable, (y) 713,311 shares reserved for issuance upon exercise of a put
right and (z) 8,044,444 shares into which the Convertible Bonds are convertible
(assuming an initial public offering price of $18.00 per share). Of the
48,706,814 outstanding shares, (i) the 11,100,000 shares registered in the Stock
Offerings will be freely tradable without restriction under the Securities Act
(except that any shares purchased in the Stock Offerings by "affiliates" of the
Company may generally be resold only in compliance with applicable provisions
22
<PAGE> 29
of Rule 144, as described below) and (ii) 9,430,629 additional shares may be
resold under Rule 144 without restriction under the Securities Act (subject to
the lock-up agreements described below). Beginning 90 days after the date of
this Prospectus, an additional 19,650 shares may be resold under Rule 144
without restriction under the Securities Act and an additional 25,164,324 shares
may be resold under Rule 144 subject to the volume and manner limitations
therein (in each case, subject to the lock-up agreements described in
"Underwriting"). In addition, the Company will cause to become effective, (i) a
registration statement on Form S-1 covering the resale of the shares of Common
Stock into which the Convertible Bonds are convertible and (ii) a registration
statement on Form S-8 covering the resale of shares of Common Stock issued to
employees, officers and directors of the Company pursuant to employee benefit
plans. Holders of approximately 29,623,784 shares of Common Stock and warrants
to purchase 7,777,776 shares of Common Stock, and an affiliate of the Company
with an option with respect to 438,311 shares of Common Stock, have certain
demand and piggy-back registration rights.
Prior to the Stock Offerings, there has been no established market for the
Common Stock and no predictions can be made about the effect, if any, that
future sales of Common Stock or the availability of the Common Stock for sale
would have on the market price for the Common Stock. Sales of large numbers of
shares of Common Stock in the public market pursuant to Rule 144 or pursuant to
an effective registration statement under the Securities Act, or the perception
that sales could occur, may have an adverse effect on the market price for the
Common Stock. See "Shares Eligible for Future Sale" and "Description of Capital
Stock -- Prior Purchase Agreements -- Registration Rights."
ABSENCE OF DIVIDENDS
The Company has not paid any dividend on its Common Stock and does not
intend to pay dividends in the foreseeable future. In addition, the indenture
governing the Notes will contain dividend restrictions. In the event that the
Company and/or certain operating companies of the Company enter into future
financings, the terms of such financings may include dividend restrictions. See
"Dividend Policy."
ANTI-TAKEOVER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law that contains certain anti-takeover provisions which prohibit a "business
combination" between a corporation and an "interested stockholder" within three
years of the stockholder becoming an "interested stockholder" except in certain
limited circumstances. The business combination provisions of Section 203 of the
Delaware General Corporation Law may have the effect of deterring merger
proposals, tender offers or other attempts to effect changes in control of the
Company that are not negotiated and approved by the Board of Directors.
Accordingly, stockholders of the Company could be prevented from realizing a
premium on their shares in a transaction not approved by the Board of Directors.
In addition, the Company's Certificate of Incorporation and/or By-Laws have
several provisions that could also have the effect of delaying or preventing a
change of control of the Company (although the effectiveness of certain of such
provisions in the By-Laws is subject to final Board approval and the
effectiveness of certain of such provisions in the Certificate of Incorporation
is subject to filing applicable amendments to the Certificate of Incorporation
with the Secretary of State of the State of Delaware). Specifically, the
Company's Certificate of Incorporation and/or By-Laws provide for a classified
Board of Directors serving staggered three-year terms, restrictions on who may
call a special meeting of stockholders, a prohibition on stockholder action by
written consent, restrictions on the removal of directors and supermajority
voting requirements with respect to certain amendments to the Certificate of
Incorporation. The Company's Certificate of Incorporation also grants the Board
of Directors the authority to issue up to 10,000,000 shares of preferred stock
in one or more series and to determine the rights, voting powers, dividend rate,
conversion rights, redemption price, liquidation preference and other terms of
such preferred stock without any further vote or action by the stockholders.
Further, the Company has adopted a stockholders rights plan and in connection
therewith, 200,000 shares of preferred stock have been authorized as Series A
Preferred Stock (as defined herein). The foregoing provisions, and any issuance
of preferred stock (including Series A Preferred Stock) with voting or
conversion rights, may adversely affect the voting power of the holders of
Common Stock and may have the effect of delaying or preventing a change of
control of the Company or adversely affect the market price of the Common Stock.
See "Description of Capital Stock -- Certain Charter and By-Law Provisions."
23
<PAGE> 30
ENFORCEABILITY OF JUDGMENTS
Substantially all of the assets of the Company (including all of the assets
of the Company's operating ventures) 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 United States court (including those with
respect to federal securities law claims) against the assets of the operating
ventures, including foreclosure upon such assets, and there can be no assurance
that any U.S. judgments would be enforced under any such foreign laws.
NO PRIOR PUBLIC MARKET: VOLATILITY OF STOCK PRICE
Prior to the Stock Offerings, there has been no public market for the
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after the Stock Offerings. The initial public offering
price of the Common Stock has been determined through negotiations between the
Company and the Representatives of the Underwriters (as defined herein) and may
not be indicative of the market prices for the Common Stock after consummation
of the Stock Offerings. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The market price
for the Common Stock could be subject to significant fluctuations in response to
various other factors such as announcements of new contracts, technological
innovations or new products by the Company or its competitors, other
announcements concerning the Company or its competitors, changes in government
regulations, fluctuations in the Company's quarterly and annual operating
results and general market conditions. In addition, the stock markets have in
recent years experienced significant price fluctuations. Those fluctuations
often have been unrelated to the operating performance of the specific companies
whose stock is traded. Market fluctuations, as well as economic conditions, may
adversely affect the market price of the Common Stock.
BENEFITS OF THE OFFERINGS TO CURRENT STOCKHOLDERS
The Company intends to use a portion of the net proceeds of the Offerings
to repay the $70 million (plus accrued interest) of Capital Research Notes and
the Chatterjee Notes, which notes are held by current stockholders of the
Company. Upon completion of the Offerings, certain additional benefits will
accrue to the current stockholders of the Company, including the creation of a
public market for their shares of Common Stock, an increase of $3.36 in the net
tangible book value per share of Common Stock and possibly ownership of Common
Stock in a Company having a lower debt-to-equity ratio than existed prior to the
completion of the Offerings. Additionally, the aggregate unrealized gain to
current stockholders will be approximately $391 million. See "Dilution."
24
<PAGE> 31
USE OF PROCEEDS
The aggregate net proceeds of the Stock Offerings are estimated to be
approximately $186.8 million after deducting estimated expenses of the Stock
Offerings payable by the Company. Concurrently with the sale of the shares of
Common Stock, the Company intends to complete the Notes Offering, the net
proceeds of which is expected to be approximately $96.0 million after deducting
estimated expenses of the Notes Offering payable by the Company.
The Company primarily intends to use the net proceeds from the Offerings to
provide working capital for existing telecommunications ventures, particularly
in Russia and the CIS, to expand the Company's operations, and for general
corporate purposes. The Company also intends to use a portion of the net
proceeds to repay the Chatterjee Notes (as defined herein) and the Capital
Research Notes (as defined herein) in an aggregate principal amount of $70
million (plus accrued interest), which bear interest at 10% per annum and mature
on January 19, 2001 and February 2, 2001, respectively. Also, as part of its
business strategy, the Company regularly evaluates potential acquisitions and
joint ventures, including the acquisition of minority interests in existing
joint ventures. The Company has no definitive agreement with respect to any
material acquisition or joint venture, although from time to time it has
discussions with other companies and assesses opportunities on an on-going
basis. A portion of the net proceeds from the Offerings may be used to fund such
acquisitions. In addition, approximately $20.0 million of the net proceeds of
the Notes Offering will be placed into an escrow account and will be used to pay
the first two years' interest payments on the Notes. Pending any use of its net
proceeds from the Offerings in the manner described above, the Company intends
to invest the proceeds in short-term investment grade obligations, bank
deposits, U.S. government securities or similar instruments.
DIVIDEND POLICY
GTS has not paid any dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. In addition, the indenture governing
the Notes will contain restrictions on the payment of dividends.
25
<PAGE> 32
DILUTION
At September 30, 1997, the net tangible book value of the Common Stock was
$12.5 million in the aggregate, or $0.33 per share of Common Stock. "Net
tangible book value per share" represents the amount of total tangible assets of
the Company reduced by the amount of total liabilities and divided by the number
of shares of Common Stock outstanding. After giving effect to the sale of
11,100,000 shares of Common Stock offered hereby (at an assumed public offering
price of $18.00 per share and after deduction of the estimated Stock Offerings
expenses) and the Note Offering (with $100.0 million gross proceeds and after
deduction of the estimated Notes Offering expenses), the pro forma net tangible
book value of the Common Stock would be $179.9 million in the aggregate, or
$3.69 per share. This represents an immediate increase in net tangible book
value of $3.36 per share of Common Stock to existing shareholders and an
immediate dilution per share of $14.31 to new investors purchasing shares of
Common Stock in the Stock Offerings. "Dilution per share" represents the
difference between the price per share to be paid by new investors and the pro
forma net tangible book value per share after the Stock Offerings. The following
table illustrates the dilution per share as described above:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.00
Net tangible book value per share at September 30, 1997..... $0.33
Increase in net tangible book value per share attributable
to the Stock Offerings.................................... 3.36
-----
Pro forma net tangible book value per share after the Stock
Offerings................................................. 3.69
------
Dilution per share to new investors in the Stock
Offerings................................................. $14.31
======
</TABLE>
<TABLE>
<CAPTION>
SHARES OF TOTAL
COMMON STOCK CONSIDERATION AVERAGE PRICE
-------------------- ---------------------- PER SHARE OF
NUMBER PERCENT AMOUNT PERCENT COMMON STOCK
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholders........... 37,606,814 77.2% $285,542,000 58.8% $ 7.59
New investors.................. 11,100,000 22.8 199,800,000 41.2% $18.00
---------- ----- ------------ -----
Total................ 48,706,814 100.0% $485,342,000 100.0%
========== ===== ============ =====
</TABLE>
The above computations assume no exercise of any outstanding options or
warrants. At December 31, 1997, there were outstanding options to purchase
7,081,173 shares of Common Stock at a weighted average exercise price of $9.08
per share and warrants to purchase 7,777,776 shares of Common Stock at an
exercise price of $9.33 per share. To the extent outstanding options are
exercised, there will be further dilution to new investors. See "Certain Related
Party Transactions," "Management" and Note 7 to the audited Consolidated
Financial Statements of the Company.
26
<PAGE> 33
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997 and as adjusted to give effect to the Offerings
and the application of the net proceeds thereof.
<TABLE>
<CAPTION>
ACTUAL(2) AS ADJUSTED(3)
---------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Related party debt maturing within one year......... $ 11,760 $ --
Debt maturing within one year....................... 14,815 14,815
--------- ---------
Current debt.............................. 26,575 14,815
Long-term obligations (net of current portion)
Related party debt, less current portion.......... 64,715 7,656
Senior Notes due 2005............................. -- 100,000
HER Senior Notes due 2007......................... 265,000 265,000
Convertible subordinated notes.................... 141,256 141,256
Capital Leases.................................... 1,452 1,452
Other long-term debt, less current portion........ 3,484 3,484
--------- ---------
Long term debt............................ 475,907 518,848
--------- ---------
Total debt................................ 502,482 533,663
--------- ---------
Minority interest................................... 20,275 20,275
Common stock subject to repurchase.................. 12,489 14,346
Shareholders' equity(1):
Common stock, $0.10 par value (135,000,000 shares
authorized; 37,606,814 shares issued and
outstanding, actual; 48,706,814 shares issued
and outstanding, as adjusted).................. 3,761 4,871
Additional paid-in capital.......................... 274,433 458,264
Accumulated deficit................................. (213,770) (229,064)
Other............................................... (7,021) (7,021)
--------- ---------
Total shareholders' equity................ 57,403 227,050
--------- ---------
Total capitalization................................ $ 592,649 $ 795,334
========= =========
</TABLE>
- ---------------
(1) Excludes at December 31, 1997 (i) 7,777,776 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants at an exercise price of
$9.33 per share, (ii) 7,081,173 shares of Common Stock reserved for issuance
upon exercise of outstanding stock options at a weighted average exercise
price of $9.08 per share, (iii) 713,311 shares of Common Stock reserved for
issuance upon exercise of a put right associated with a 1996 financing
agreement, as amended, (iv) 8,044,444 shares issuable upon conversion of the
Convertible Bonds (assuming a public offering price in the Offerings of
$18.00 per share) and (v) 560,820 shares of Common Stock reserved for
issuance pursuant to the TCM business partnership agreement as deferred
consideration to TCM's partners. See "Certain Related Party Transactions."
(2) As a result of the Company's increase in ownership interest and amendment to
the HER shareholders agreement that was completed as of July 16, 1997, the
Company accounts for its ownership interest in HER under the consolidation
method of accounting. Prior to this date, the Company accounted for HER
using the equity method of accounting.
(3) Anticipates $199.8 million gross proceeds from the Stock Offerings
(11,100,000 shares at $18.00 per share), with estimated offering expenses of
6.5% or $13.0 million. Amount also includes $100.0 million gross proceeds
from the Notes Offering with estimated offering expenses of 4.1% or $4.1
million as well as the repayment of $70.0 million, plus accrued interest of
$12.3 million and the write-off of unamortized debt discount and issuance
costs of $15.3 million, of loans from shareholders which bear interest at
10% per annum and mature on January 19, 2001 and February 2, 2001. Further,
amount also recognizes the accretion of the outstanding common stock that is
subject to repurchase (797,100 shares at September 30, 1997) for the fair
value of the Company's Common Stock at September 30, 1997, from $15.67 per
share, to the $18.00 per share offering price in the Stock Offerings.
27
<PAGE> 34
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data as of and for
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and as of and for
the nine months ended September 30, 1997 are derived from the Company's audited
Consolidated Financial Statements. The following unaudited selected historical
consolidated financial data as of and for the nine months ended September 30,
1996 are derived from the Company's unaudited Consolidated Financial Statements.
The selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited Consolidated Financial Statements and related notes
thereto appearing elsewhere in this Prospectus.
Under generally accepted accounting principles, most of the Company's
ventures are accounted for by the equity method of accounting. Under this
method, the operating results of the ventures are included in the Company's
Consolidated Statement of Operations as a single line item, "Equity in (losses)
earnings of ventures." The Company recognizes 100% of the losses in ventures
where the Company bears all of the financial risk (which includes all of the
Company's significant ventures except for Sovintel and, historically, HER).
Also, the assets, liabilities and equity of the ventures are included in the
Company's Consolidated Balance Sheets as a single line item "Investments in and
advances to ventures." See Note 2 to the Company's audited Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Financial information about
the Company's equity ventures is included below under "Supplemental
Information -- Selected Historical Financial Data -- Combined Equity
Investments."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997(1)
------ ------ ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net......................... $1,690 $ 328 $ 2,468 $ 8,412 $24,117 $ 14,639 $ 30,216
Gross margin.......................... 1,690 328 23 16 5,176 1,758 1,864
Operating expenses.................... 1,992 3,340 12,863 41,014 52,928 35,725 52,059
Equity in (losses) earnings of
ventures........................... (134) 472 (135) (7,871) (10,150) (6,999) (18,234)
Other (expense) income................ (2) 100 990 11,034 (8,729) (6,535) (16,902)
Net loss.............................. (437) (2,440) (11,985) (40,400) (67,991) (48,473) (87,872)
Loss per share........................ (0.06) (0.26) (0.69) (1.61) (2.22) (1.69) (2.37)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............. $1,597 $3,641 $29,635 $ 9,044 $57,874 $ 86,504 $366,841
Property and equipment,
net................................ 41 829 8,393 29,523 35,463 34,599 69,051
Investments in and advances to
ventures........................... 270 794 13,841 56,153 104,459 83,341 84,068
Total assets.......................... 2,051 5,968 61,957 115,621 237,378 233,879 647,788
Total debt............................ -- 725 2,152 27,454 85,547 76,518 502,482
Minority interest and stock subject to
repurchase......................... -- -- 8 5,273 6,248 6,271 32,764
Shareholders' equity.................. 1,659 4,685 54,684 55,322 113,668 120,979 57,403
</TABLE>
- ---------------
(1) As a result of the Company's increase in ownership interest and amendment to
the HER Shareholders Agreement that was completed on July 16, 1997, the
Company accounts for its ownership interest in HER under the consolidation
method of accounting. Prior to this date, the Company accounted for HER
under the equity method of accounting.
28
<PAGE> 35
SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS
The following unaudited selected historical financial data -- equity
investments for the years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997, are derived from the Company's
financial records. It is intended to supplement the aforementioned selected
historical consolidated financial data. The financial data set forth below
represents 100% of the results of operations for each of the entities.
The Company believes that this information provides additional insight on
the Company's unconsolidated equity method investments. Generally accepted
accounting principles prescribe inclusion of revenues and expenses for
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line within the income statement.
<TABLE>
<CAPTION>
OWNERSHIP COST OF OPERATING NET
INTEREST(2) REVENUES REVENUES EXPENSES INCOME/(LOSS)
----------- -------- -------- ---------- -------------
(IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Sovintel.................................................. 50% $44,292 $26,247 $ 7,047 $ 7,648
TCM....................................................... 50% 49 -- 57 (7)
TeleRoss.................................................. 50% 176 59 242 (193)
Sovam..................................................... 66.7% 4,434 2,914 3,273 (1,789)
GTS Cellular Companies.................................... 50%(3) 4,574 2,834 2,960 (2,165)
Other..................................................... 50%(3) 526 957 9,379 (9,874)
--- -------- -------- --------- --------
Total............................................... 54,051 33,011 22,958 (6,380)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1)........... (2,270) (2,215) (6,967)
YEAR ENDED DECEMBER 31, 1996
Sovintel.................................................. 50% $75,040 $43,910 $ 10,411 $ 14,762
TCM....................................................... 50% 16,507 3,330 1,854 8,874
TeleRoss.................................................. 50% 2,413 832 2,293 (841)
Sovam..................................................... 66.7% 11,671 8,236 5,714 (2,138)
GTS Cellular Companies.................................... 50%(3) 25,778 11,883 13,614 (3,406)
Other..................................................... 50%(3) 12,063 12,235 21,132 (22,471)
--- -------- -------- --------- --------
Total............................................... 143,472 80,426 55,018 (5,220)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1)........... (15,385) (13,562) (8,083)
NINE MONTHS ENDED SEPTEMBER 30, 1996
Sovintel.................................................. 50% $51,977 $30,613 $ 7,311 $ 9,522
TCM....................................................... 50% 12,559 2,267 1,197 6,998
TeleRoss.................................................. 50% 1,265 485 1,527 (753)
Sovam..................................................... 66.7% 8,007 5,895 4,169 (2,048)
GTS Cellular Companies.................................... 50%(3) 16,544 8,216 5,871 (1,362)
Other..................................................... 50%(3) 2,918 3,378 14,099 (18,507)
--- -------- -------- --------- --------
Total............................................... 93,270 50,854 34,174 (6,150)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1)........... (9,675) (7,596) (7,134)
NINE MONTHS ENDED SEPTEMBER 30, 1997
Sovintel.................................................. 50% $82,029 $51,048 $ 12,324 $ 14,215
TCM....................................................... 50% 20,715 4,733 2,270 9,653
TeleRoss.................................................. 50% 5,113 1,419 2,460 512
Sovam..................................................... 66.7% 12,877 7,867 4,635 (168)
GTS Cellular Companies.................................... 50%(3) 29,412 14,227 13,022 (2,746)
Other..................................................... 50%(3) 8,860 8,400 25,736 (25,146)
--- -------- -------- --------- --------
Total............................................... 159,006 87,694 60,447 (3,680)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1)........... (17,049) (15,853) (11,105)
</TABLE>
- ---------------
(1) The adjustment amounts represent the effect of inter-affiliate transactions
between the Company's consolidated and equity method ventures. More detailed
information about inter-affiliate transactions is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology."
(2) The ownership interest column indicates the Company's legal ownership
percentage for the respective equity investments. The information is being
provided to assist an investor or analyst in determining the Company's legal
rights associated with the presented financial data. See Note 3 in the
Company's audited Consolidated Financial Statements for additional
disclosures related to the Company's equity investments.
(3) The Company generally maintains a 50% ownership interest in these equity
investments. See Note 3 in the Company's audited Consolidated Financial
Statements for additional disclosures related to the Company's equity
investments.
29
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company as of September 30, 1997 and 1996, December 31, 1996
and 1995 and for the nine months ended September 30, 1997 and 1996 and for the
years ended December 31, 1996, 1995 and 1994. The following discussion should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes related thereto. 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, (iii) changes in the Company's competitive environment and
(iv) the performance of future equity-method investments, contain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
OVERVIEW
Business. GTS is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers in
Russia and the CIS and Central Europe. Through HER, GTS is developing, and
operating the initial segments of, a pan-European high capacity fiber optic
network which is designed to interconnect a majority of the largest Western and
Central European cities and to transport international voice, data and
multimedia/image traffic for other carriers throughout Western and Central
Europe. GTS's strategy to develop its businesses generally has been to establish
joint ventures with a strong local partner or partners while maintaining a
significant degree of operational control. The Company's business activities
consist of the ownership and operation of (i) international long distance
businesses, which operate through international gateways that provide
international switching services and transmission capacity, (ii) local access
networks, which provide local telephone service, (iii) cellular networks, which
provide wireless telecommunications services, (iv) a domestic long distance
business, (v) data networks and (vi) carriers' carrier networks, which provide
high volume transmission capacity to other carriers.
The Company began to acquire interests in numerous telecommunications
ventures beginning in 1994 and continued to acquire such interests throughout
1995 and 1996. Ventures with significant financial results in 1994 included
Sovintel (an international long distance and domestic and local access
telecommunications service provider) and GTS-Hungary (a VSAT network
telecommunications service provider); ventures that incurred start-up costs
associated with building out their business infrastructure in 1994 included
Sovam (a data and internet telecommunications service provider) and EuroHivo (a
paging telecommunications service provider). In 1995, TeleRoss (a domestic long
distance telecommunications service provider) and GTS Cellular (a basic cellular
telecommunications service provider) began operations and expanded into numerous
regions within the CIS by the end of 1996. Telecommunications of Moscow ("TCM")
(a local access telecommunications service provider) began operations in 1996.
HER (a carriers' carrier telecommunications service provider) began its network
build-out in 1995, began limited operations at the end of 1996 and expects to
continue to develop its network during 1998 and beyond. The fact that these
ventures are in various stages of development affects the discussion of
comparative results below.
GTS has invested significantly in its ventures through capital
contributions and loans. In addition, the Company has made a significant
commitment to its businesses and ventures through the provision of management
assistance and training. GTS has also incurred significant expenses in
identifying, negotiating and pursuing new telecommunications opportunities. GTS
and certain of its ventures are experiencing continuing losses and negative
operating cash flow primarily because the businesses are in the developmental
and start-up phases of operations. Management recognizes that the Company must
generate additional capital resources in order to continue its operations and
meet its new development initiatives. The ultimate recoverability of the
Company's investments in and advances to ventures is dependent on many factors
including, but not limited to, the ability of the Company to obtain sufficient
financing to continue to meet its capital and operational commitments, the
economies of the countries in which it does business and the ability of the
Company to maintain the necessary telecommunications licenses.
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<PAGE> 37
The Company's businesses are developing rapidly. Some of the businesses
operate in countries with emerging economies which have uncertain economic,
political and regulatory environments. The general risks of operating businesses
in the CIS and other developing countries include the possibility for rapid
change in government policies including telecommunications regulations, economic
conditions, the tax regime and foreign currency regulations.
ACCOUNTING METHODOLOGY
Accounting for Business Ventures. Wholly owned subsidiaries and majority
owned ventures where the Company has unilateral operating and financial control
are consolidated. Those ventures where the Company exercises significant
influence, but does not exercise unilateral operating and financial control, are
accounted for by the equity method. The Company has certain majority owned
ventures that are accounted for by the equity method as a result of
super-majority voting conditions or other governmentally imposed uncertainties
so severe that they prevent the Company from obtaining unilateral control of the
venture.
Profit and Loss Accounting. The Company recognizes profits and losses in
accordance with its underlying ownership percentage or allocation percentage as
specified in the agreements with its partners; however, the Company recognizes
100% of the losses in ventures where the Company bears all of the financial risk
(which includes all of the Company's significant ventures except for Sovintel
and, historically, HER). Accordingly, the portion of the losses that would
normally be assigned to the minority interest partner ("Excess Losses") is
recognized by the Company. When such ventures become profitable, the Company
recognizes 100% of the profits until such time as the Excess Losses previously
recognized by the Company have been recovered. As of September 30, 1997, $5.3
million and $9.7 million represents the net unrecovered Excess Losses for the
Company's consolidated and equity method investments, respectively, that is
expected to favorably benefit future period results from operations upon the
Company's existing business ventures becoming profitable. This accounting policy
was adopted prior to 1995; however, 1995 was the first year that the excess loss
amount was deemed material for recognition within the Company's accounting
records. For the period from January 1, 1997, through August 31, 1997, the
Company recognized 100% of HER's losses due to GTS being the financing partner
during this period. As a result of HER's completion of a private placement of
$265.0 million of senior notes (of which $56.6 million was placed in escrow for
the first two years' interest payments) in August 1997, management no longer
considers itself as the financing partner.
Inter-Affiliate Transactions. Several of the Company's ventures have
entered into business arrangements through which they provide integrated
solutions for their customers by leveraging each others' telecommunications
infrastructure. These arrangements have historically been focused primarily
within a region; however, as GTS has increased its geographic coverage and
telecommunication capabilities, these arrangements have expanded between
regions. In accordance with generally accepted accounting principles, all
significant intercompany accounts and transactions are eliminated upon
consolidation.
Turnover Taxes. The Company's ventures within the CIS region incur a 4%
turnover tax that is based on the revenues earned. The Company includes these
taxes as a component of its operating expenses, since these taxes are incidental
to the revenue cycle.
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The following table summarizes the accounting methodology for the principal
business ventures through which the Company conducts its business.
<TABLE>
<CAPTION>
EFFECTIVE
COUNTRY/REGION GTS ACCOUNTING
COMPANY NAME OF OPERATIONS OWNERSHIP METHODOLOGY
------------ -------------- --------- -----------
<S> <C> <C> <C>
RUSSIA/CIS
Sovintel Russia 50% Equity
TCM Russia 50% Equity
TeleRoss Operating
Company Russia 100%(1) Consolidated
TeleRoss Ventures Russia 50%(2) Equity
Sovam Russia 67%(3) Equity
GTS Cellular CIS 25%-70%(4) Equity
WESTERN EUROPE
HER Western Europe 79% Consolidated(5)
GTS-Monaco Access Monaco 50% Equity
CENTRAL EUROPE
GTS-Hungary Hungary 99% Consolidated
EuroHivo Hungary 70% Equity
CzechNet Czech Republic 100% Consolidated
CzechCom Czech Republic 100% Consolidated
ASIA
V-Tech China 75% Equity
Beijing Tianmu China 47% Equity
CDI India 100% Consolidated
</TABLE>
- ---------------
(1) The TeleRoss Operating Company is comprised of two wholly owned holding
companies and a 99% owned subsidiary that operates a domestic long distance
network and holds the applicable operating license for TeleRoss and performs
the customer invoicing and collection functions for telecommunications
services. TeleRoss Operating Company is accounted for under the
consolidation method of accounting because GTS has unilateral control over
the operations and management decisions. TeleRoss Operating Company's
operations are further discussed in "-- Results of
Operations -- Consolidated Ventures." A significant portion of TeleRoss
Operating Company's costs of revenue consists of settlement fees paid to the
TeleRoss Ventures, with such fees being recorded as revenue by the TeleRoss
Ventures. In 1996 and for the nine months ended September 30, 1997, all of
the TeleRoss Ventures' revenue was derived from such fees. Any decline in
the business or operations of the TeleRoss Ventures would have a material
adverse effect on the results of TeleRoss Operating Company.
(2) TeleRoss Ventures is comprised of thirteen joint ventures that are 50%
beneficially owned by GTS, which originate traffic and provide local
termination of calls through agency arrangements with TeleRoss Operating
Company. GTS does not exercise unilateral control over the TeleRoss Ventures
and therefore, they are appropriately accounted for under the equity method
of accounting. TeleRoss Ventures' operations are further discussed in
"-- Results of Operations -- Non-Consolidated Ventures (Equity Investees)."
(3) GTS has reached an agreement in principle to purchase its minority partner's
33% interest in Sovam and expects to close the transaction in February 1998,
thereby making Sovam a wholly owned subsidiary of GTS.
(4) GTS conducts its cellular operations through (i) Vostok Mobile, a wholly
owned GTS venture which owns between 50% and 70% of a series of 11 cellular
joint ventures in various regions in Russia, (ii) PrimTelefone, a 50% owned
venture in Vladivostok, Russia and (iii) Bancomsvyaz, an approximately 25%
beneficially owned venture in Kiev, Ukraine.
(5) As of July 16, 1997, HER is accounted for by the consolidation as opposed to
the equity method of accounting.
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RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, GTS-Hungary, CzechNet and
CzechCom (collectively the "Czech Companies") and HER (for fiscal 1997). See
"Results of Operations -- Non-Consolidated Ventures (Equity Investees)" for a
discussion of the operating results of Sovintel, TCM, Sovam, TeleRoss Ventures,
GTS Cellular, HER (prior to fiscal 1997), GTS-Monaco Access, EuroHivo and the
Asia business ventures.
Nine Months Ended September 30, 1997 compared to Nine Months Ended September
30, 1996
Revenue. The Company's consolidated revenue for the nine months ended
September 30, 1997 increased by $15.6 million to $30.2 million, an increase of
over 100% from the comparable period in 1996. TeleRoss Operating Company's
growth accounted for approximately 54.3% of the Company's total revenue over the
nine months ended September 30, 1997.
The CIS region's consolidated revenue was $17.8 million for the nine months
ended September 30, 1997, of which TeleRoss' revenue comprised 92.1%. TeleRoss
Operating Company's revenue increased by $10.3 million to $16.4 million for the
nine months ended September 30, 1997, from the comparable period in 1996.
Service revenue represented approximately 69.5% of the total TeleRoss Operating
Company revenue for the nine months ended September 30, 1997. The remaining
revenue generated by TeleRoss Operating Company was primarily related to
equipment sales and installation revenue of $2.9 million and $1.8 million for
the nine months ended September 30, 1997 and 1996, respectively.
Within the Central Europe region, GTS-Hungary and the Czech Companies
accounted for 100% of the $9.5 million in revenue earned for the nine months
ended September 30, 1997. GTS-Hungary's revenue increased by $1.4 million to
$5.9 million for the nine months ended September 30, 1997, from the comparable
period in 1996, largely due to a 25.0% increase in the number of VSATs installed
since September 1996. Revenue of the Czech Companies, which provide a range of
international telephone, private data and internet access services, increased by
$2.4 million to $3.6 million, for the nine months ended September 30, 1997, from
the comparable period in 1996, primarily due to increased voice and internet
traffic and lease line services.
All of Western Europe's consolidated revenue of $2.3 million for the nine
months ended September 30, 1997 was derived from HER's initial Amsterdam to
Brussels route.
Gross Margin. GTS's consolidated gross margin was $1.9 million and $1.8
million, or 6.3% and 12.3% of total revenue, for the nine months ended September
30, 1997 and 1996, respectively. The decrease in consolidated gross margin as a
percentage of revenue was attributable to the consolidation of HER in fiscal
1997.
TeleRoss Operating Company had a gross margin of $1.0 million and $(1.0)
million for the nine months ended September 30, 1997 and 1996, respectively.
GTS-Hungary had gross margins of $2.7 million and $1.9 million for the nine
months ended September 30, 1997 and 1996, respectively (representing 45.8% and
42.2% of GTS-Hungary's revenue during these periods). The remaining consolidated
gross margin of $(1.8) million and $0.9 million for the nine months ended
September 30, 1997 and 1996, respectively, was primarily attributable to HER,
which generated a negative gross margin of $(3.2) million for the nine months
ended September 30, 1997, and to the Czech Companies, which generated gross
margin of $0.9 million and $0.2 million for the nine months ended September 30,
1997 and 1996, respectively.
Operating Expenses. Consolidated operating costs were $52.1 million and
$35.7 million for the nine months ended September 30, 1997 and 1996,
respectively. The increase in operating costs reflected the growth in
expenditures associated with building business infrastructure, the inclusion of
HER's operating expenses and increasing corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $18.2 million and $7.0 million for
the nine months ended September 30, 1997 and 1996, respectively. Included in
these losses were $7.3 million and $5.1 million for the nine months ended
September 30, 1997 and 1996, respectively, that related to GTS's ownership share
of the losses incurred. Also included in the losses for the nine months ended
September 30, 1997 was a write-off of approximately $5.4 million which
represented the net balance of certain investments in and advances to ventures
in Asia
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<PAGE> 40
(primarily Beijing Tianmu and V-Tech) and Central Europe (Eurohivo) which were
stated in excess of their net realizable value. The Company followed the
authoritative guidance as prescribed by APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock" ("APB No. 18") for its
determination of the $5.4 million charge. The Company's recoverability analysis
was based on its projected undiscounted cash flows of their equity investees
since this is the lowest level of cash flow information available. The
underlying reasons for the write-down of the Company's investments were the
result of the problems that are more specifically addressed in Results of
Operations -- Non-Consolidated Ventures (Equity Investees) -- Asia.
Additionally, included within GTS's ownership share of the losses incurred and
the Excess Losses for the nine months ended September 30, 1997 is approximately
$14.4 million of losses (of the $14.4 million, approximately $13.5 million
related to the write-off of advances to several Chinese owned operating
telecommunications companies to which the Company provides technical and
financial assistance and $0.9 million related to the write-off of inventories,
receivables, and other assets) which represented the Company's share of asset
write-offs recorded by certain of the ventures in Asia (Beijing Tianmu and
V-Tech). See "-- Results of Operations -- Non-Consolidated Ventures (Equity
Investees) -- Asia." The Company would have recognized earnings from its
investments in non-consolidated ventures of $1.6 million for the nine months
ended September 30, 1997, had the Company not recognized the write-downs
of investments and assets of approximately $5.4 million and $14.4 million,
respectively. The write-down of Central Europe's investment in EuroHivo was a
result of the Company's decision in the third quarter to recognize the
contingent liabilities associated with the expected liquidation and
discontinuation of EuroHivo's operations as of September 30, 1997. In addition,
the Company's results were negatively affected by the recognition of Excess
Losses of $5.5 million and $1.9 million for the nine months ended September 30,
1997 and 1996, respectively. As of September 30, 1997, $9.7 million represents
the net unrecovered Excess Losses for the Company's equity method investments,
respectively, that is expected to favorably benefit future period results from
operations upon the Company's existing equity method business ventures becoming
profitable. CIS' ventures, primarily Sovintel and TCM (with combined earnings to
the Company of $11.6 million and $8.3 million for the nine months ended
September 30, 1997 and 1996, respectively), generated earnings for the Company
of approximately $8.2 million and $5.0 million for the nine months ended
September 30, 1997 and 1996, respectively, which partially offset losses
generated by other ventures. See "-- Results of Operations -- Non-Consolidated
Ventures (Equity Investees)." See Footnote 3 in the Company's Consolidated
Financial Statements.
Interest, Net. GTS incurred interest expenses of $21.1 million and $7.3
million for the nine months ended September 30, 1997, and 1996, respectively.
Interest expense is comprised of interest accrued from debt maturing within one
year, long-term debt obligations, amortization of debt discount on the long-term
debt obligations and various other debt instruments. The increase in interest
expense was primarily related to the issuance of $144.8 million in Convertible
Bonds in July 1997 and $265.0 million in senior notes raised in August 1997 by
HER. See "-- Liquidity and Capital Resources."
GTS earned interest income of $5.3 million and $1.5 million for the nine
months ended September 30, 1997 and 1996, respectively, primarily as a result of
investing the proceeds from equity and debt offerings in various highly liquid
investments.
Provision for Income Taxes. The Company's consolidated tax provision was
$1.8 million and $1.0 million for the nine months ended September 30, 1997 and
1996, respectively. The Company's income tax rates are significantly affected by
foreign taxes and the utilization of net operating losses. In addition, the
Company operates worldwide in numerous tax jurisdictions. As a result, losses
incurred in one jurisdiction may not be available to offset income in another.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995 and
compared to Year Ended December 31, 1994
Revenue. The Company's consolidated revenue was $24.1 million, $8.4 million
and $2.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The growth in revenue was attributable to the commencement in 1995
of commercial operations by TeleRoss Operating Company, as well as the continued
expansion of services and customer base in Central Europe.
TeleRoss Operating Company generated revenue of $9.2 million and $3.8
million, representing 38.2% and 45.2% of the Company's consolidated revenue for
the years ended December 31, 1996 and 1995, respectively. Service revenue
represented 64.1% and 21.1% of TeleRoss Operating Company's revenue for the
years ended December 31, 1996 and 1995, respectively, with the balance of its
revenue in such periods principally represented by equipment sales. The growth
in revenue was a result of increased traffic volume generated by
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<PAGE> 41
the TeleRoss Ventures as they expanded to seven new cities during the year ended
December 31, 1996, added customers in existing cities and installed several
VSATs at customer locations outside of cities in which they have a presence.
GTS-Hungary and the Czech Companies accounted for $6.9 million and $2.3
million of the Company's consolidated revenue in 1996, respectively, compared to
$4.2 million and $0.3 million in 1995, respectively, and $1.3 million and none
in 1994, respectively. The growth in revenue of GTS-Hungary from 1994 to 1996
was due to the expansion of its customer base and the introduction of microwave
technology services. The Hungary state lottery accounted for 55.3%, 65.0% and
67.2% of GTS-Hungary's revenue in 1996, 1995 and 1994, respectively. The growth
in revenue of the Czech Companies was generated through increases in voice
traffic carried from sixteen buildings at December 31, 1996 as compared to eight
buildings at December 31, 1995.
Gross Margin. GTS's consolidated gross margin was $5.2 million, or 21.6% of
revenue, for the year ended December 31, 1996 and $0.02 million, or 0.0% of
revenue, for the years ended December 31, 1995 and 1994.
TeleRoss Operating Company incurred a negative gross margin of $1.0 million
for both the years ended December 31, 1996 and 1995 which was the result of the
high fixed cost component of its network hub in Moscow. GTS-Hungary had a gross
margin of $3.0 million, $1.7 million and $(0.3) million, representing 43.5%,
40.5% and (23.1)% of GTS-Hungary's revenue for the years ended December 31,
1996, 1995 and 1994, respectively. The favorable gross margin trend reflected
the increased utilization of GTS-Hungary's 1,000 VSAT capacity hub located in
Budapest. The remaining gross margin of $3.2 million for the year ended December
31, 1996 was attributable to the higher margin sales of equipment and consulting
services.
Operating Expenses. Consolidated operating costs were $52.9 million, $41.0
million and $12.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in operating costs reflected the growth in
expenditures associated with building business infrastructure for primarily the
TeleRoss Operating Company and GTS-Hungary and increasing corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $10.2 million, $7.9 million and $0.1
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in these losses were $5.7 million, $5.2 million and $0.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively, that related to
GTS's ownership share of the losses. In addition, the Company's results were
negatively affected due to the recognition of Excess Losses of $4.5 million and
$2.7 million for the years ended December 31, 1996 and 1995, respectively. See
"--Overview." The Company would have recognized additional losses of $8.2
million and $3.3 million for the years ended December 31, 1996 and 1995,
respectively, had the Company been considered the financing partner of HER
during those time periods. The Company's losses from its ventures were primarily
the result of most of its ventures being in the early stages of operations.
Sovintel and TCM, however, generated combined earnings of $11.8 million and $3.8
million for the years ended December 31, 1996 and 1995, respectively, which
partially offset losses generated by other ventures.
Other Non-Operating Income. Favorably affecting the 1995 results was the
non-recurring $10.3 million gain the Company recognized as a result of its cash
settlement of certain claims with a third party in 1995.
Interest, Net. GTS incurred interest expense of $11.1 million, $0.7 million
and $0.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in interest expense was due to the $60.0 million
increase in debt during 1996. See "--Liquidity and Capital Resources."
GTS earned interest income of $3.6 million, $2.2 million and $1.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively, primarily as
a result of investing the proceeds from private placements of common stock in
various highly liquid investments.
Provision for Income Taxes. The Company's consolidated tax provision was
$1.4 million and $2.6 million for the years ended December 31, 1996 and 1995,
respectively. These rates were significantly affected by foreign taxes and the
utilization of net operating losses. In addition, the Company operates
world-wide in numerous tax jurisdictions. As a result, losses incurred in one
jurisdiction may not be available to offset income in another. The Company had
no income tax expense for the year ended December 31, 1994.
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RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES (EQUITY INVESTEES)
Nine Months Ended September 30, 1997 compared to Nine Months Ended September
30, 1996
RUSSIA -- CIS
Sovintel. Sovintel's revenue increased by 57.7% to $82.0 million for the
nine months ended September 30, 1997, from $52.0 million for the comparable
period in 1996. The increase in revenue was primarily the result of
telecommunications services revenue, which increased to $61.5 million for the
nine months ended September 30, 1997, from $34.9 million for the nine months
ended September 30, 1996, due to the Moscow customer base growth and traffic
from other GTS ventures that generated increased volume of outgoing
international and domestic minutes carried by Sovintel. Incoming international
revenue grew significantly by $3.6 million to $9.9 million for the nine months
ended September 30, 1997, from the comparable period in 1996. Included in
Sovintel's 1997 traffic revenue was $8.7 million for the nine months ended
September 30, 1997, that was related to customers using phone numbers provided
by TCM. This revenue was derived primarily from international/long distance
traffic and local traffic. Sovintel and TCM have an arrangement whereby Sovintel
reimburses TCM 50% of installation charges, monthly fees and local traffic
revenues and approximately 33% of the international/long distance billings from
TCM-supplied phone numbers.
Sovintel's non-traffic related revenue increased to $20.6 million for the
nine months ended September 30, 1997, from $16.7 million for the comparable
period in 1996. In March 1997, Sovintel's historically largest customer for port
sales revenue, MTS, received its own numbering plan. Accordingly, management
expects revenue from port sales to continue to decline.
Sovintel's gross margin percentage decreased to 37.8% for the nine months
ended September 30, 1997, as compared to 41.1% for the comparable period in
1996, in part due to a general price decrease implemented in April 1997.
Operating expenses were $12.3 million and $7.3 million, or 15.0% and 14.0%
of total revenue, for the nine months ended September 30, 1997 and 1996,
respectively. The increase in operating expenses for the nine months ended
September 30, 1997 was related to an increase in turnover taxes associated with
revenues, and also increased personnel, advertising and sales force costs
required to support Sovintel's growth.
Income tax expense was $4.1 million and $3.9 million for the nine months
ended September 30, 1997 and 1996, respectively.
TCM. TCM's revenue grew 64.9% to $20.7 million for the nine months ended
September 30, 1997, from the comparable period in 1996. TCM's gross margin was
$16.0 million and $10.3 million, or 77.3% and 81.7% of total revenue, for the
nine months ended September 30, 1997 and 1996, respectively. The decrease in
gross margin as a percentage of revenue was attributable to higher
infrastructure and settlement costs. Operating expenses were $2.0 million and
$1.2 million, or 9.7% and 9.5% of total revenue, for the nine months ended
September 30, 1997 and 1996, respectively.
Sovam. Sovam's revenue increased by 61.3% to $12.9 million for the nine
months ended September 30, 1997, from the comparable period in 1996. Sovam's
revenue was derived primarily from data services, network capabilities and
application revenues. The increase in revenue is primarily attributable to the
expansion of Sovam's network throughout Russia and the CIS and the improvement
in the quality of Internet services due to increased international bandwidth.
Sovam's gross margin was $5.0 million, or 38.8% of total revenue, for the
nine months ended September 30, 1997, up from $2.1 million, or 26.3%, for the
nine months ended September 30, 1996. Operating expenses were $4.6 million and
$4.2 million, or 35.7% and 52.5% of total revenue, for the nine months ended
September 30, 1997 and 1996, respectively.
TeleRoss Ventures. Revenue for the TeleRoss Ventures for the nine months
ended September 30, 1997 and 1996 was $5.1 million and $1.3 million,
respectively. The increase in revenues reflected growth in settlement fees
charged to the TeleRoss Operating Company. The settlement fees are based on
minutes of use by regional customers in the core switched voice services, as
well as installation work and equipment sales.
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<PAGE> 43
Gross margin was $3.7 million and $0.8 million, or 72.5% and 61.5% of total
revenue, for the nine months ended September 30, 1997 and 1996, respectively.
Operating expenses of $2.5 million and $1.5 million were incurred for the nine
months ended September 30, 1997 and 1996, respectively.
GTS Cellular. The Company operates three cellular networks through
differing ownership structures; Vostok Mobile, Prim Telefone and Bancomsvyaz.
Revenue for Vostok Mobile increased by 41.5% from $10.6 million to $15.0
million for the nine months ended September 30, 1997, from the comparable period
in 1996, as a result of increased subscribership to approximately 11,000 at
September 30, 1997. Vostok Mobile's gross margin was $7.6 million and $5.3
million, or 50.7% and 50.0% of total revenue, for the nine months ended
September 30, 1997 and 1996, respectively. Operating expenses were $4.8 million
and $5.4 million for the nine months ended September 30, 1997 and 1996,
respectively. The higher operating costs in 1996 was attributed to development
and start-up expenses related to new business ventures.
Revenue for PrimTelefone increased by 43.9% to $8.2 million for the nine
months ended September 30, 1997, from the comparable period in 1996, due to an
increase in subscribership to approximately 4,600 as of September 30, 1997.
PrimTelefone's gross margin was $4.7 million and $3.0 million, or 57.3% and
52.6% of total revenue, for the nine months ended September 30, 1997 and 1996,
respectively. Operating expenses were $2.7 million and $1.5 million, or 32.9%
and 26.3% of total revenue, for the nine months ended September 30, 1997 and
1996, respectively.
Revenues for Bancomsvyaz was $4.0 million for the nine months ended
September 30, 1997, with a gross margin of $1.5 million and operating expenses
of $3.4 million for the nine months ended September 30, 1997, respectively.
WESTERN EUROPE
GTS-Monaco Access. In 1997, GTS-Monaco Access revenue increased
significantly to $7.9 million for the nine months ended September 30, 1997, from
$2.2 million for the same period in 1996. The increase was the result of a
substantially larger traffic base and number of countries covered under the
network. Gross margin for the nine months ended September 30, 1997 and 1996 was
$0.4 million and $(0.3) million, respectively.
CENTRAL EUROPE
Eurohivo. Eurohivo's operating results were minimal for the nine months
ended September 30, 1997 and 1996. In September 1997, the Company recorded a
$2.4 million charge in the third quarter to recognize the contingent liabilities
associated with the planned liquidation and discontinuance of Eurohivo's
operations. See Footnote 2 in the Company's condensed consolidated financial
statements for additional disclosures related to Eurohivo.
ASIA
Most of the Company's ventures within the Asia region were in the start-up
phase and had not commenced operations in 1996. The non-consolidated ventures in
the Asia region had no revenue for the nine months ended September 30, 1997, and
had minimal revenue of $0.5 million for the nine months ended September 30,
1996. During the nine months ended September 30, 1997, the V-tech and Beijing
tianmu business ventures (the "Asia Ventures") determined that a charge of
$14.4 million (GTS's portion) was appropriate in the quarter as a result of the
write-off of $13.5 million of advances to several Chinese owned operating
telecommunications companies to which the Asia Ventures provide technical and
financial assistance and $0.9 million related to the write-off of inventories,
receivables and other assets. The Asia Ventures followed the authoritative
guidance as prescribed by SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" for their
determination of the $13.5 million charge as they believed that the advances,
as evidenced by legal agreements between the Asia Ventures and the underlying
operating telecommunications comopaniues, represents long-lived assets. (The
Asia Ventures would have reflected the same charge had they followed the
authoritative accounting guidance as prescribed by APB No. 18 or SFAS No. 5,
"Accounting for Contingencies"). The Asia Ventures reciverability analysis was
based on their projected undiscounted cash flows of their respective operations
since this is the lowest level of cash flow information available. The
underlying reasons for the write-offs were the result of problems dealing with
one of the Asian partners; the inability of the Chinese operating
telecommunications companies to develop markets for their services; and
technical problems, all of which surfaced during the third quarter 1997. See
Footnote 2 in the Company's condensed consolidated financial statements for
additional disclosures related to the Company's Asia operations.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995 and
compared to Year Ended December 31, 1994
RUSSIA -- CIS
Sovintel. Sovintel's revenue for the years ended December 31, 1996, 1995
and 1994 was $75.0 million, $44.3 million, and $20.7 million, respectively.
Sovintel's revenue was derived from telecommunications services, including
international, domestic and local traffic, and other non-traffic related revenue
associated with port and equipment sales, leased line installation and
maintenance. Telecommunications services traffic
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revenue was $50.8 million, $26.8 million and $19.5 million, representing 67.7%,
60.5% and 94.2% of Sovintel's total revenue, for the years ended December 31,
1996, 1995 and 1994, respectively.
Revenue from outgoing international, domestic long distance and Moscow
local traffic was $44.0 million, $24.6 million and $18.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. This growth was due to
Sovintel's increased customers in Moscow and traffic from other GTS ventures.
Sovintel began providing Moscow local access services in 1995. Revenue from
incoming international minutes was $6.8 million, $2.2 million and $1.5 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Included in
Sovintel's 1996 traffic revenue was $5.0 million from customers using phone
numbers provided by TCM.
Sovintel's non-traffic related revenue of $24.2 million, $17.5 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994, respectively,
was primarily attributable to non-recurring port sales revenues of $12.4 million
and $14.4 million for the years ended December 31, 1996 and 1995, respectively.
Included in 1996 non-traffic related revenue was $3.7 million from one-time
installation charges related to TCM-supplied phone numbers. There were no
significant port sales in 1994.
Sovintel's gross margin was $31.1 million, $18.0 million and $8.2 million,
or 41.5%, 40.6% and 39.6% of revenue, for the years ended December 31, 1996,
1995 and 1994, respectively. The gross margin percentage remained relatively
unchanged over the past three years as the decrease in average revenue per
minute for international and intercity calls was partially offset by the
decrease in average settlement cost per minute.
Operating expenses were $10.3 million, $7.1 million and $4.6 million, or
13.7%, 16.0% and 22.2% of total revenue, for the years ended December 31, 1996,
1995 and 1994, respectively. Turnover taxes and personnel related costs
comprised the majority of the increase in selling, general and administrative
costs. The increase in personnel related costs reflected the growth in sales and
general operations of Sovintel.
Income tax expense was $5.2 million and $2.6 million for the years ended
December 31, 1996 and 1995, respectively. The increase in income tax expense was
attributable to Sovintel's profitable operations. According to Russian
Federation tax holiday provisions, Sovintel was exempt from income taxes for a
two-year period beginning with the first year of taxable income, which was in
1993.
TCM. TCM's total revenue was $16.5 million for the year ended December 31,
1996 and had minimal activities in 1995. TCM had a gross margin of $13.2
million, or 80.0% of total revenue, and operating expenses of $1.9 million, or
11.5% of total revenue, for the year ended December 31, 1996.
Sovam. Sovam's revenue was $11.7 million, $4.4 million and $3.3 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The increase in
revenues is primarily attributable to the wider variety of service offerings,
including the introduction of Russia On Line services.
Gross margin was $3.4 million, $1.5 million and $1.8 million, or 29.1%,
34.1% and 54.5% of total revenue for the years ended December 31 in 1996, 1995
and 1994, respectively. The decline in gross margin as a percentage of revenue
was reflective of the higher cost of sales component in Sovam's recently
introduced products. Operating expenses were $5.7 million, $3.3 million and $2.1
million, or 48.7%, 75.0% and 63.6% of total revenue, for the years ended
December 31, in 1996, 1995 and 1994, respectively.
TeleRoss Ventures. Revenues for TeleRoss Ventures for the years ended
December 31, 1996 and 1995 were $2.4 million and $0.2 million, respectively.
Revenues resulted from settlement fees charged to TeleRoss Operating Company.
The growth in total revenue was the result of steady growth in sales of core
switched voice services in the five cities serviced in 1995 as well as the
addition of seven new cities to the network in 1996.
Gross margin for the years ended December 31, 1996 and 1995 was $1.6
million and $0.1 million, respectively. Operating expenses of $2.3 million and
$0.2 million were incurred for the years ended December 31, 1996 and 1995,
respectively.
GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz.
Revenue for Vostok Mobile was $16.5 million and $2.0 million for the years
ended December 31, 1996 and 1995, respectively. Vostok Mobile's gross margin was
$9.3 million and $1.1 million, or 56.4% and 55.0% of
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total revenue, and operating expenses were $9.2 million and $4.7 million for the
year ended December 31, 1996 and 1995, respectively.
Revenue for PrimTelefone was $8.4 million and $2.2 million for the years
ended December 31, 1996 and 1995, respectively. PrimTelefone's gross margin was
$4.7 million and $0.6 million, or 56.0% and 27.3% of total revenue, and
operating expenses were $3.7 million and $0.7 million for the years ended
December 31, 1996 and 1995, respectively.
Bancomsvyaz did not have significant operations until 1997.
WESTERN EUROPE
HER. HER represents substantially all of GTS's investment in the Western
Europe region. A small operational revenue stream was earned in 1996.
Operating expenses were $16.0 million, $6.7 million and $0.2 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The increase in
selling, general and administrative expenses reflected HER's continued
transition from the start-up phase to the operational phase.
GTS-Monaco Access. Limited international traffic was carried from GTS
subsidiaries through GTS-Monaco Access for termination worldwide during 1995
which resulted in minimal revenues earned. Total revenue was $3.9 million and
gross margin was $(0.4) million for the year ended December 31, 1996.
CENTRAL EUROPE
EuroHivo. EuroHivo's revenue was $1.0 million and $0.5 million for the
years ended December 31, 1996 and 1995, respectively. Although revenue improved
significantly during 1996, EuroHivo continued to show negative gross margins of
$(0.2) million and $(0.5) million for the years ended December 31, 1996 and
1995, respectively. Furthermore, operating expenses decreased to $1.9 million
for the year ended December 31, 1996 from $2.4 million for the year ended
December 31, 1995 despite a 64.0% increase in personnel during 1996. This was
primarily attributable to management's decision to grow revenue through
alternative measures resulting in significant reductions to advertising
expenditures in 1996.
ASIA
Most of the Company's ventures within the Asia region were in the start-up
phase and had not commenced operations in 1996. The non-consolidated ventures in
the Asia region had revenue of $7.0 million and $0.0 million for the years ended
December 31, 1996 and 1995, respectively. The revenue in 1996 consisted
principally of equipment sales. The Company believes that future revenue will be
derived primarily from providing telecommunications engineering and consulting
services.
LIQUIDITY AND CAPITAL RESOURCES
The telecommunications business is capital intensive. The Company generally
is the primary source of funding for its ventures, both for working capital and
capital expenditures. Under a typical arrangement, GTS's venture partner
contributes the necessary licenses or permits under which the venture will
conduct its business, office space and other equipment. GTS's contribution is
generally cash and equipment, but may consist of other specific assets as
required by the joint venture agreement.
The Company has raised capital through the issuance of equity securities
and through various debt agreements. The issuance of equity securities has
raised $36.5 million, $107.7 million, $42.1 million and $62.1 million in 1997,
1996, 1995 and 1994, respectively, net of placement fees, for a total of $248.4
million. In addition, the Company and HER received $409.8 million, $60.0 million
and $23.3 million in 1997, 1996 and 1995, respectively, for a total of $493.1
million under various debt agreements. Included within the debt proceeds
identified above, the Company received $3.5 million, $60.0 million and $10.0
million in 1997, 1996 and 1995, respectively, from lenders who are affiliated
with, and are considered related parties to, the Company as a result of their
(or their affiliates) ownership of the Company's Common Stock.
The Company had working capital of $353.4 million and $66.5 million as of
September 30, 1997 and 1996, respectively. Approximately $190.0 million of the
$353.4 million of working capital at September 30, 1997, is intended to be used
for the buildout of the HER Network. The Company had an accumulated deficit
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of $213.8 million as of September 30, 1997, including a net loss of
approximately $87.9 million and $48.5 million for the nine months ended
September 30, 1997 and 1996, respectively. During 1997, the Company has incurred
and expects to continue to incur substantial expenditures to fund the working
capital requirements of its ventures, to provide capital equipment for certain
of its ventures, and to engage in new development and acquisitions.
GTS will require substantial capital investment to execute its business
plans and to fund expected operating losses. Management expects that GTS and its
ventures will incur over $515.0 million of capital expenditures during the next
three fiscal years, of which approximately $235.0 million will be incurred in
1998. The Company has obtained funds in 1997 through a variety of financing
arrangements, including (i) the issuance in September 1997 of $39.2 million of
Common Stock in a private placement of equity with a value of $15.67 per common
share, (ii) the issuance in August 1997 of $265.0 million in gross proceeds (of
which $56.6 million was placed into escrow to fund the first two years' interest
payments) of 11.5% Senior Notes by HER that may be redeemed upon the successful
completion of a complying equity offering or meeting other certain criteria, and
(iii) the issuance in July and August 1997 of $144.8 million in gross proceeds
of the Convertible Bonds by GTS, that are convertible into Common Stock upon the
Company's completion of a complying equity offering.
The Company believes that the net proceeds from the Offerings, together
with existing cash, will be sufficient to fund its expected capital needs until
at least June 1999. The Company expects that it may require additional capital
to execute its current business plan and to fund expected operating losses, as
well as to consummate future acquisitions and exploit opportunities to expand
and develop its businesses. There can be no assurances that the Company will be
able to consummate additional financing on favorable terms. As a result, the
Company may be subject to additional or more restrictive financial covenants,
its interest obligations may increase significantly and its existing
shareholders may be adversely diluted. Failure to generate sufficient funds in
the future, whether from operations or by raising additional debt or equity
capital, may require the Company to delay or abandon some or all of its
anticipated expenditures, to sell assets, or both, either of which could have a
material adverse effect on the operations of the Company.
HER
Construction of the HER fiber optic network is one of the Company's most
significant business activities. The buildout of the network is expected to
require approximately $290.0 million of capital expenditures during fiscal year
1998 and thereafter, with approximately $35.0 million required for the initial
five country network. As of September 30, 1997, approximately $27.6 million has
been spent on network capital expenditures. In August 1997, HER completed the
issuance of $265.0 million in gross proceeds of 11.5% Senior Notes due in August
2007. The Senior Notes are general unsecured obligations of HER. HER currently
estimates that its capital resources will be sufficient to fund operations and
expected network development through December 1998, at which time it may be
required to obtain additional funds. Sources of capital to fund network
development after 1998 may include internally generated funds, bank debt and
vendor financing. HER is currently in discussion with a number of financial
institutions to obtain debt financing and to negotiate vendor financing with key
suppliers of network equipment. Any failure to obtain necessary financing may
require HER to delay or abandon its plans for deploying the remainder of the
network and would jeopardize the viability of HER, or may require the Company to
make additional capital contributions to HER at the expense of the Company's
other operations, either of which could have a material adverse effect on the
operations of the Company. There can be no assurance that GTS or its partners in
HER would have sufficient capital to make contributions to HER, or that they
would be willing to do so.
Pursuant to the Recapitalization, HER offered to GTS-Hermes, HIT Rail and
the eleven individual members of the HIT Rail consortium the right to subscribe
to additional common stock of the Company. GTS-Hermes and two of the members of
HIT Rail exercised their rights, while HIT Rail and the nine remaining members
of HIT Rail declined to participate.
As a result of the finalization of the Recapitalization, total shareholder
loans of ECU 39.4 million (approximately $48.5 million) from, collectively,
GTS-Hermes, HIT Rail and two of the members of HIT Rail, were converted into
equity. Additionally, GTS-Hermes contributed ECU 46.0 million (approximately
$51.8 million) and one of the members of HIT Rail contributed a ten-year fiber
optic cable lease which was
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valued at ECU 1.8 million (approximately $2.0 million). The ownership of HER
subsequent to the recapitalization was as follows: GTS-Hermes, 79.08%; HIT Rail,
12.63%; and the two members of HIT Rail combined, 8.29%. See
"Business -- Western Europe -- HER -- HER Recapitalization."
Liquidity Analysis
The Company had cash and cash equivalents of $366.8 million and $86.5
million as of September 30, 1997 and 1996, respectively. Approximately $190.0
million of the $366.8 million of cash and cash equivalents at September 30,
1997, is intended to be used for the build-out of the HER network. The Company
had restricted cash of $59.8 million and $3.9 million as of September 30, 1997
and 1996, respectively. Restricted cash included amounts held in escrow to pay
the first two years' interest payments on the Senior Notes of HER, amounts held
for equipment purchases under various debt agreements, and cash maintained in
foreign financial institutions that may not be readily convertible into dollars
or easily repatriated.
During the nine months ended September 30, 1997 and 1996, the Company used
$38.9 million and $31.8 million, respectively, of cash for operating activities.
Cash used for investing activities was $73.0 million and $48.0 million for the
nine months ended September 30, 1997 and 1996, respectively. The use of cash in
operations and for investing activities reflected primarily the development and
buildout of existing telecommunications networks and the funding of fully
operational ventures.
Substantially all of the Company's operations are in foreign countries and
therefore the Company's consolidated financial results are subject to
fluctuations in currency exchange rates. The Company's consolidated operations
transact their business in the following significant currencies: Russian Ruble,
Hungarian Forint, Belgian Franc and the European Currency Unit. For those
operating companies that transact their business in currencies that are not
readily convertible, the Company attempts to minimize its exposure by indexing
its invoices and collections to the applicable dollar/foreign currency exchange
rate to the extent its costs (including interest expense, capital expenditures
and equity) are incurred in U.S. dollars. Although the Company will continue to
attempt to match revenues, costs, borrowing and repayments in terms of their
respective currencies, the Company may experience economic loss and a negative
impact on earnings with respect to holdings solely as a result of foreign
currency exchange rate fluctuations, which include foreign currency devaluations
against the U.S. dollar. Furthermore, certain of the Company's operations have
notes payable and notes receivable which are denominated in a currency other
than their own functional currency or loans linked to the U.S. dollar. The
Company may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.
The Company is in the process of developing risk management policies that
will establish guidelines for managing foreign exchange risk. The Company
expects that these policies will be implemented in the first quarter of 1998,
and anticipates that these policies will allow management to use financial
hedging instruments to manage foreign exchange exposure. Currently, the Company
is considering alternatives to hedge foreign exchange exposure resulting from
the issuance of $265 million in senior notes by HER.
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing its year 2000
compliance costs and of converting its computer systems to year 2000 compliant
software. This process includes obtaining confirmations from the Company's
primary vendors that plans are being developed or are already in place to
address processing of transactions in the year 2000. The Company does not expect
that the cost of converting such systems will be material to its financial
condition or results of operations. The Company currently believes it will be
able to achieve year 2000 compliance by the end of 1999, and currently does not
anticipate any material disruption in its operations as the result of any
failure by the Company to be in compliance or that year 2000 compliance costs
will have a material effect on the Company's earnings.
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BUSINESS
INTRODUCTION
GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia,
the CIS and Central Europe. Through HER, GTS is developing, and operating the
initial segments of, a pan-European high capacity fiber optic network that is
designed to interconnect a majority of the largest Western and Central European
cities and to transport international voice, data and multimedia/image traffic
for other carriers throughout Western and Central Europe. GTS's strategy to
develop its businesses generally has been to establish joint ventures with a
strong local partner or partners while maintaining a significant degree of
operational control. The Company's business activities consist of the ownership
and operation of (i) international long distance businesses, which operate
through international gateways that provide international switching services and
transmission capacity, (ii) local access networks, which provide local telephone
service, (iii) cellular networks, which provide wireless telecommunications
services, (iv) a domestic long distance business, (v) data networks and (vi)
carriers' carrier networks, which provide high volume transmission capacity to
other carriers.
In Russia and the CIS, GTS's objective is to become the premier alternative
telecommunications operator. To attain its objective, the Company has partnered
with regional telephone companies and with Rostelecom, the national long
distance carrier in Russia. The Company currently operates in 24 oblasts
(regions) and the city of Moscow in Russia, as well as in 11 additional cities
in the CIS, and believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. These businesses include: (i)
Sovintel, which provides Moscow, and recently St. Petersburg, with international
long distance and local telephone services and access to the major domestic long
distance carriers; (ii) TCM, which provides local access services in Moscow;
(iii) TeleRoss, which provides domestic long distance services in fourteen
cities in Russia, including Moscow, as well as VSAT service to customers outside
its primary long distance satellite network; (iv) Sovam, which provides data
services, including high-speed data transmission, electronic mail, Internet
access services, as well as Russia On Line, the first Russian language Internet
service; and (v) GTS Cellular, which operates cellular networks in twelve
regions in Russia and also in Kiev, Ukraine, with licenses covering regions with
an aggregate population of approximately 25 million people at the end of 1996.
Whenever practical, GTS's businesses integrate and co-market their service
offerings in Russia and the CIS, utilizing TeleRoss as the domestic long
distance provider, Sovintel as the international gateway, TCM and GTS Cellular
for local access, and Sovam as the data communications and Internet access
network for business applications and on-line services. Together, GTS's Russian
and CIS ventures carried 202.5 million and 291.3 million minutes of traffic for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and had approximately 24,600 customers, including approximately
16,300 cellular subscribers, as of September 30, 1997. See "-- Russia and the
CIS."
In Western Europe, GTS seeks to position itself as the leading independent
carriers' carrier through the development of two ventures, HER and GTS-Monaco
Access. HER's objective is to become the leading pan-European carriers' carrier
by providing centrally managed cross-border telecommunications transmission
capacity to telecommunications companies including traditional PTOs and New
Entrants on an approximately 18,000 kilometer pan-European high capacity fiber
optic network designed to interconnect a majority of the largest Western and
Central European cities. HER is currently operating over an approximately 1,700-
kilometer portion of the network linking Brussels, Antwerp, Rotterdam,
Amsterdam, London and Paris. HER expects the initial five country network to be
placed in operation in the second quarter of 1998. This segment of the network
is expected to deliver managed transport services over approximately 2,900
kilometers of fiber optic cable linking the cities of London, Rotterdam,
Amsterdam, Antwerp, Brussels, Paris, Dusseldorf and Frankfurt. The full 18,000
kilometer network is expected to become fully operational during the year 2000.
HER also plans to lease capacity on a transatlantic cable linking the European
network to North America and is exploring various interconnectivity options to
Russia and Asia. Such intercontinental interconnectivity will help HER to
satisfy the needs of its European customers with respect to outgoing traffic and
to attract additional non-European customers with traffic terminating in Europe.
HER commenced commercial service over the Brussels-Amsterdam portion of the
network in late 1996, and the London-Paris portion in November 1997. GTS-Monaco
Access operates an international gateway in Monaco in partnership with, and
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utilizing the existing gateway infrastructure of, the Principality of Monaco and
provides transit and routing of international calls to other telecommunications
operators. Through its HER and GTS-Monaco Access ventures, GTS is building a new
network for transporting voice, data and multimedia/image traffic for other
carriers throughout Western and Central Europe and for worldwide international
voice, data and multimedia/image traffic that either originates or terminates
in, or transits through, Western and Central Europe. See " -- Western Europe."
In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company provides
outgoing voice services and operates an international gateway and a data
services network. In Hungary, GTS operates a VSAT network, which GTS believes is
the largest VSAT network in Central Europe as measured by number of VSAT sites.
The Company has also signed an agreement to provide international data services
in Poland, subject to the receipt of necessary governmental approvals. GTS's
strategy is to expand its service offerings as the regulatory environment
permits, leverage its existing VSAT and international gateway infrastructure
where possible and provide a broad range of services to its target markets. See
" -- Central Europe."
Although GTS does not currently own or operate significant
telecommunication assets in Asia, GTS's objective is to become an established
and diversified telecommunications provider in China and India. GTS seeks to
leverage its position in these countries to capitalize on opportunities as they
arise. See "-- Asia."
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western and Central Europe through the development of a pan-European
fiber optic network and an international gateway in Monaco.
GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
- Identify and Seize Early Market Opportunities. GTS's primary strategy is
to identify less developed markets in which the incumbent operator offers
inadequate service and where liberalization of telecommunications
regulations may be pending. The Company believes entering these less
developed markets quickly is a key competitive advantage in the global
telecommunications market. GTS leverages its management's knowledge of
the markets in which the Company operates to assess and react quickly
when attractive business opportunities arise.
- Establish Joint Ventures with Experienced Local Partners. GTS seeks to
establish and maintain strategic partnerships and relationships with key
telecommunications operators and service providers in the countries in
which it operates. The Company believes that these relationships increase
its ability to anticipate and respond to changes in the regulatory and
legal environment and assist with license renewal and expansion of its
operating companies.
- Retain Significant Operational Control. In general, GTS actively
participates in the management of its ventures by (i) providing most of
the funding for the ventures' operations, (ii) selecting key members of
the local management team, (iii) developing business plans and marketing
strategies together with local management, (iv) monitoring operating
functions, (v) maintaining close working relationships with local
partners and (vi) integrating its networks and businesses in a manner
which is consistent with the Company's overall strategic objectives.
- Build Infrastructure to Provide High Quality Services. GTS continues to
develop and expand its network infrastructure. The Company believes that
its networks offer service, quality and cost advantages over incumbent
providers as a result of the Company's customer support, network
monitoring, management systems and its ability to integrate and co-market
its service offerings.
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- Leverage Management Depth and Experience. GTS's management has
significant experience in the development and operation of
telecommunications businesses outside the United States. The Company
believes that this experience, together with the Company's extensive
operations, has provided its management with the ability to identify,
evaluate and pursue international telecommunications business
opportunities. Additionally, GTS has assembled a management team
comprised of executives with extensive experience managing
telecommunications companies in the respective local markets. GTS
believes that its management team possesses a broad knowledge of relevant
political and regulatory structures, as well as the cultural awareness
and fluency with international and local business practices necessary to
implement the Company's objectives.
- Ability to Access Capital. In general, the Company's financing strategy
is to establish parent level funding to meet general corporate needs and
the costs of start-ups and acquisitions and, when it is possible and
cost-effective, to finance ongoing operations at the venture level. Since
1993, the Company has raised approximately $268 million in equity and
approximately $215 million of debt (of which approximately $74 million
was raised through shareholders). In addition, HER completed a $265
million private placement of senior notes (of which $56.6 million was
placed in escrow for the first two years' interest payments) in 1997. The
Company's principal investors include affiliates of George Soros and Alan
B. Slifka and certain of his affiliates.
In addition to its overall business strategy, GTS has developed specific
market strategies to achieve its goals in emerging markets and Western Europe.
Emerging Markets. The Company pursues its goals in emerging markets through
a three-stage approach of market entry, market expansion and market integration.
- Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii) the
provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or expect to have over a
clearly defined time horizon, the ability to compete on a substantially
equal basis with the incumbent providers in terms of certain services and
the cost of providing those services. Once GTS has identified a market as
suitable for entry, the Company seeks to establish its presence in that
market by establishing a venture with a strong local partner or partners.
In general, GTS maintains a significant degree of operational control in
such ventures. Through such ventures, the Company benefits from its
partners' ability to provide infrastructure, regulatory expertise and
personnel that will provide GTS with a competitive advantage in entering
that market. When entering a new market, GTS's strategy is to provide its
customers with higher quality service as compared to the services offered
by incumbent providers.
- Market Expansion. Having entered a market successfully and established a
limited service offering to its targeted customer base, GTS then seeks to
expand the range of services it offers to existing and potential
customers and to further develop its relationships with local partners.
By broadening its service offerings, GTS anticipates achieving increased
economies of scale through the common use of administrative and operating
functions already in place, increasing the Company's share of its
customers' telecommunications spending and expanding GTS's base of
potential customers through the provision of a bundled service offering.
The Company also seeks to expand its targeted geographic market by
forming new partnerships, installing infrastructure and offering services
in additional geographic regions, allowing the Company to further enhance
its operating leverage and ability to service its customers'
telecommunications needs.
- Market Integration. GTS ultimately intends to integrate and co-market its
service offerings in each of the markets in which it operates. The
Company believes such integration enables it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure and
networks, and management information systems. As customers develop a need
for a broader variety of telecommunications services, the Company
believes GTS's integrated operations will represent an attractive service
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alternative for customers seeking a single provider with the ability to
meet all their telecommunications needs.
Western Europe. The Company seeks to position itself as the leading
independent carriers' carrier within Western Europe through the development of
HER's pan-European fiber optic network and the operation of GTS-Monaco Access's
international gateway in partnership with, and utilizing the gateway
infrastructure of, the Principality of Monaco. The overall strategy of GTS in
Western Europe is to complement and enhance the services provided by PTOs and
New Entrants in a way that helps them to more successfully meet the needs of
their end-user customers. HER seeks to enter the market ahead of competition and
encourage a wide variety of carriers to use its network with service offerings
that meet their needs. To establish itself as the leading carriers' carrier for
international telecommunications within Europe, HER intends to provide its
customers with significantly higher quality transmission and advanced network
capabilities at a competitive price by utilizing advanced, uniform technology
across the region and providing redundant routing for higher levels of
reliability.
RUSSIA AND THE CIS
OVERVIEW
GTS is a leading provider of a broad range of telecommunications services
in Russia. GTS's services include international long distance services, domestic
long distance services, high speed data transmission and Internet access,
cellular services and local access services. GTS was among the first foreign
telecommunications operators in the CIS, where it began offering data links to
the United States in 1986, international long distance services in 1992, local
access to its networks in 1994 and cellular services in 1995. GTS has developed
these businesses into a leading provider of telecommunications service offerings
in Russia by building its own infrastructure, including a fully digital overlay
network and interconnections with its local Russian telecommunications partners.
The Company believes that evolving changes in government policy over the
last several years and the overall inadequacy of basic telecommunications
services throughout Russia have created a significant opportunity. Before 1990,
all international, domestic long distance and local telecommunications in the
Soviet Union were provided by a monopoly state telecommunications company
managed by the Ministry of Posts and Communications. In 1990, the Council of
Ministers established a joint-stock company called Sovtelecom and transferred to
it all of the telecommunications assets and operations of the Soviet Ministry of
Posts and Communications. Following the dissolution of the Soviet Union in 1991,
the name of the company was changed to Intertelecom. In 1992, the Russian
government decided to split Intertelecom into several components to foster
privatization, competition and investment. The international and long-distance
assets and operations were combined into Rostelecom, creating a monopolistic
service provider. The local telecommunications assets and operations were broken
up into 88 independent regional joint-stock companies, seven of which serve
cities, including the Moscow City Telephone Network and the Petersburg Telephone
Network. Most of the regional companies have a telecommunications trunk operator
and provide a domestic long distance service within their service region.
Domestic long distance calls to and from areas outside the companies' service
area, as well as international calls, are switched to and from Rostelecom, which
forwards the calls to and from another regional company or a foreign carrier for
international calls. Exceptions to this rule include the seven city operators.
In Moscow and St. Petersburg, the trunk operators have been isolated into
separate, long distance companies called Moscow MMT and St. Petersburg MMT. All
domestic long distance and international calls originating from or terminating
in Moscow and St. Petersburg are switched through the MMTs, which forward the
calls to and from Rostelecom.
Following the former Soviet Union's transformation from a centralized
economy to a more market-oriented economy, increased demand from emerging
private businesses and from individuals, together with the poor state of the
public telephone network, has led to rapid growth in the telecommunications
sector in Russia and the CIS. In 1991 the MOC was established as the Russian
successor to the Soviet Ministry of Posts and Communications to regulate and
improve the telecommunications industry and to be the government's
representative for its ownership share of the 88 regional operating companies,
the assets currently held by
45
<PAGE> 52
\Svyazinvest (then the monopoly international and domestic long distance service
provider) and national radio, television and satellite operating companies. This
enabled the MOC and operating organizations to begin the privatization process,
attract foreign investment and initiate joint ventures with foreign partners.
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the CIS has
occurred. Under Russian law, state-owned enterprises within the
telecommunications sector were subject to privatization but only pursuant to a
decision of the Russian government in each individual case and with the state
retaining a certain percentage of the stock of the privatized entity for three
years, subject to extension for national security reasons. At present, virtually
all of the former state telecommunications enterprises have been privatized and,
subject to the above restrictions, shares of the newly formed joint stock
companies have been sold to the public. Also, a significant number of private
operators provide a wide variety of telecommunications services pursuant to
licenses from the MOC to a growing number of customers throughout Russia.
According to the MOC, more than 6,000 licenses have been granted to
telecommunications operators in Russia, a large portion of which is assumed to
represent licenses reissued to the same operators as a result of their
reorganization or obligation to hold such licenses on counterfeit-proof paper.
In October 1994, the President authorized the establishment of Svyazinvest
with the stated purpose of fostering greater efficiency and economies of scale
within the industry through competition. As a wholly government-owned company,
Svyazinvest was granted a controlling stake in approximately 85 regional
telecommunications companies in order to compete in these respective markets.
Svyazinvest was also given control of more than 20 million of the 25.5 million
telephone lines in Russia, except in Moscow and St. Petersburg.
In April 1997, President Yeltsin approved the transfer of the federal
government's 51% stake in Rostelecom, as well as similar stakes in Central
Telegraph (the national PTO), the Ekaterinburg City Telephone Network and
Giprosvyaz (a telecommunications research institute), to Svyazinvest. On July
30, 1997, Mustcom Ltd., a Cyprus-based company that represents the interests of
a consortium which includes ICFI Cyprus, Renaissance International Ltd.,
Deutsche Morgan Grenfell, Morgan Stanley, and an affiliate of George Soros,
purchased a 25% stake in Svyazinvest for $1.87 billion. The President has also
authorized the sale of another 24% of Svyazinvest at a future date. This sale is
scheduled to occur in the first half of 1998 and is currently reserved solely
for Russian investors. The Russian government has announced that it will retain
a controlling 51% interest in Svyazinvest.
The Russian government's interest in Svyazinvest is held by the MOC, which
was reclassified as the State Committee on Telecommunications and Informatics
during a recent government reorganization. The MOC remains the central body of
federal authority in the Russian Federation, having responsibility for state
management of the communications industry and supervisory responsibility for the
condition and development of all types of communications.
Despite the recent changes in the Russian telecommunications industry, the
level of telecommunications service generally available from most public
operators in Moscow remains significantly below that available in cities of
Western Europe and the United States, although in recent years, the Moscow local
telephone infrastructure has benefitted from significant capital investment. By
1995, there were approximately 16 lines per 100 persons in Russia and 45 lines
per 100 persons in Moscow. In comparison, there were 60 and 58 lines per 100
persons in the United States and Western Europe, respectively. In addition, the
quality of services, reflected as the percentage of digital switching in local
telephone networks, currently is approximately 12% in Russia compared to 65% and
66% in the United States and Western Europe, respectively.
Outside Moscow (and to a lesser extent St. Petersburg), most standard
Russian telecommunications equipment is obsolete. For example, many of the
telephone exchanges are electromechanical and most telephones still use pulse
dialing. The Russian population is over 145 million, of which approximately two-
thirds is concentrated in urban areas. The telecommunications market in Russia
currently includes a number of operators that compete in different service
offering segments -- local, inter-city, international, data and cellular
services. In large measure, the relative lack of economic development in the
regions accounts for the lack of improvement in local telecommunications
infrastructure. Although the regions still generally rely on an
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<PAGE> 53
outdated infrastructure inherited from the former Soviet Union, they are
starting to resort to sophisticated sources of finance, such as municipal bond
offerings, in order to upgrade it.
Growth in the Russian telecommunications industry has been principally
driven by businesses in Moscow requiring international and domestic long
distance voice and data services and by consumers using mobile telephony. This
growth has been most significant as multinational corporations have established
a presence in Moscow and Russian businesses have begun to expand. The service
sector, which includes operations in distribution, financial services and
professional services and tends to be the most telecommunications-intensive
service sector of the economy, is growing rapidly in Moscow. Since moving to a
more market-oriented economy, the economic conditions in the outlying regions in
Russia have also generally improved. The telecommunications industry in the
outlying regions has experienced recent growth, principally as a result of
growth in the industrial sector as well as the establishment of satellite
offices in the regions by multinational corporations and growing Russian
businesses. The extent of overall market growth will depend in part on the rate
at which the Russian economy expands, although recent revenue growth in the
sector has been significant (in spite of a declining economy in certain regions)
because of increasing traffic from pre-existing customers and the normalization
of tariffs for business services.
The Company believes it is well-positioned to take advantage of market
growth factors due to (i) its early market entry, (ii) its strong infrastructure
position in Moscow, by far the most important regional market, (iii) the local
market experience of its local partners, (iv) the extent of its existing
customer base and (v) its extensive range of international and domestic
telecommunications services. GTS believes it is the only operator in Russia
currently capable of providing a broad range of service offerings and marketing
them as a single end-to-end service offering for its customers.
STRATEGY
GTS's objective is to become the premier alternative carrier in Russia and
other key growth markets of the CIS. To attain this objective, the Company has
developed and implemented the following strategy:
- Develop Strong Local Partnerships. The Company has and continues to
develop its Russian and CIS business through alliances with experienced
local partners, which to date have been primarily regional telephone
companies and Rostelecom. These ventures combine the management,
financial and marketing expertise of GTS together with its partner's
ability to provide infrastructure and local regulatory experience. GTS
believes that these relationships lend it credibility and increase its
ability to anticipate and respond to the evolving regulatory and legal
environment. GTS maintains a significant degree of managerial and
operational control in its joint ventures through its foundation
documents, which enable GTS to develop them in a manner consistent with
its overall strategic objectives.
- Expand Customer Base. The Company continues to expand its customer base
through the provision of basic telephone and digital services in markets
where such services are not currently provided. Once they have
established a presence in a market, the Company's ventures seek for
opportunities to expand further into neighboring regions and cities.
- Increase Range of Digital Services. As its business customers expand
their operations throughout Russia and the CIS and as their
telecommunications needs become more sophisticated, the Company seeks to
increase its revenues by expanding the range of integrated digital
services offered to its customers.
- Offer High Quality Telecommunications Service and Customer Service. The
Company continues to invest in and build sophisticated high-speed digital
networks and other infrastructure through which customers can gain local
access to the Company's services. In addition to providing advanced, high
quality network infrastructure, the Company emphasizes and offers its
customers a level of customer service which the Company believes cannot
be found elsewhere in the market.
To date, GTS has made substantial progress employing this strategy. The
Company provides digital voice, data and local services in Moscow through its
Sovintel, Sovam and TCM ventures and provides these same services to thirteen
additional Russian cities through its TeleRoss long distance network.
47
<PAGE> 54
OPERATIONS
GTS provides a broad range of telecommunications services in Russia,
including international long distance services, domestic long distance services,
cellular services, high speed data transmission, Internet access and local
access services. These services are supported by operator assistance, itemized
call reporting and billing, and other value-added capabilities that leverage
GTS's investment in advanced switching, data collection and processing
equipment. GTS also provides customized systems integration, including PABXs,
key systems, wiring and interconnectivity. GTS's own infrastructure is
supplemented with dedicated and leased capacity to allow GTS to bypass the
severely congested and poorly maintained local, domestic and long distance
circuits of the Russian carriers.
Whenever practical, GTS's business units integrate and co-market their
service offerings, utilizing TeleRoss as the long distance provider, Sovintel as
the international gateway, TCM and GTS Cellular for local access, and Sovam as
the data communications and Internet access network for business applications
and on-line services. Through this integrated marketing approach, GTS is able to
provide comprehensive telecommunications solutions to multinational corporations
operating throughout Russia and the CIS.
The following table sets forth certain operating data related to the
Company's operating ventures in Russia and the CIS.
<TABLE>
<CAPTION>
AT AND FOR THE YEAR
ENDED DECEMBER 31, AT AND FOR THE NINE
------------------------ MONTHS ENDED
1994(1) 1995 1996 SEPTEMBER 30, 1997
------- ---- ----- --------------------
<S> <C> <C> <C> <C>
Cities In Service................................. 5 24 33 40
Total Voice Minutes (millions)(2)
Inter-city...................................... -- (3) 2.3 15.8 33.8
Local........................................... 0.0 22.1 133.0 174.9
International Outgoing.......................... 7.7(3) 10.5 20.5 31.7
Incoming........................................ 2.0 4.5 33.2 50.9
Total Data Customers (thousands).................. 1.9 2.9 6.2 8.3
Total Cellular Subscribers (thousands)............ 0.0 1.6 9.8 16.3
</TABLE>
- ---------------
(1) In 1994, the Company's interest in ventures operating in Russia consisted of
a ten-percent interest in Baltic Communications Limited, a one-third
interest in Sovam, and Sovintel, in which the Company owned a 12.5% interest
through May 1994 and a 50% interest thereafter.
(2) Amounts include minutes between Company affiliates.
(3) International and inter-city long distance outgoing minutes not segregated
in 1994.
SOVINTEL
GTS owns 50% of Sovintel, a joint venture with Rostelecom, the national
long distance carrier. Sovintel was founded in 1990 by GTS, Rostelecom and GTE
Spacenet, with GTS acquiring GTE Spacenet's interest in 1994. Sovintel markets a
broad range of high quality telecommunications services by (i) directly
providing international direct dial access to over 170 countries and private
line dedicated voice channels and (ii) leveraging the infrastructure and
services of the other GTS ventures, including TeleRoss, TCM and Sovam. In
addition, Sovintel provides and installs for its customers equipment such as
PABXs, key systems and wiring and provides maintenance and other value-added
services. Sovintel customers, which primarily consist of businesses, hotels and
Moscow-based cellular operators, are able to access these telecommunications
services through Sovintel's fully-digital overlay network in Moscow. In
addition, Sovintel has recently commenced construction of a limited network in
St. Petersburg that is interconnected to Sovintel's Moscow network and is
intended to support Sovintel's Moscow clients which have a presence in St.
Petersburg. Sovintel serviced over 40,500 telephone numbers, or "ports," for
business customers and cellular providers and had over 240 employees as of
September 30, 1997.
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<PAGE> 55
Sovintel has constructed and operates a fully-digital overlay network in
and around Moscow which consists of (i) an approximately 600-kilometer fiber
optic ring, (ii) over 250 PABXs linked to the fiber optic ring, (iii) a
fully-digital microwave network, (iv) a wireless local loop and (v) an
international gateway connected to the fiber optic ring. In addition, Sovintel
leases dedicated international long distance channels. Customers are connected
to the Sovintel network via last mile connections to over 250 PABXs that provide
"points-of-presence" in and around Moscow. The PABXs are connected to the
network through a direct fiber connection or a digital microwave network. Some
of Sovintel's new customers are temporarily connected to the network through a
wireless local loop. The wireless local loop provides a significant competitive
advantage because it allows Sovintel to connect customers to its network more
quickly than alternative methods. As these customers are provided permanent
connections to Sovintel's network through direct connections to the PABXs,
additional customers are rolled onto the wireless local loop.
[GTS SOVINTEL MOSCOW NETWORK]
After a customer is connected to the Sovintel network, local telephone
services are provided through the Sovintel fiber optic ring's interconnection
with the switches of either TCM or MTU Inform. These switches provide access to
local telephone service in Moscow through interconnections with the Moscow city
telephone network ("MGTS") and the principal Moscow cellular providers. Sovintel
provides its customers access to domestic long distance service through the
TeleRoss long distance network, or through Rostelecom's network in cities not
currently served by TeleRoss. International service is provided primarily
through the Sovintel international gateway, which transmits international
traffic via dedicated international leased long distance channels. Sovintel's
customers also can receive high speed data services through Sovintel's
interconnection with the Sovam data network. Accordingly, from a customer's
perspective, Sovintel offers a broad range of telecommunication services.
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<PAGE> 56
The following table sets forth certain operating data related to Sovintel's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED DECEMBER 31, NINE MONTHS
-------------------------------------- ENDED SEPTEMBER 30,
1994 1995 1996 1997
-------- --------- --------- -------------------
<S> <C> <C> <C> <C>
MINUTES OF USE(1)
International Minutes
Number of Minutes.................... 7,681(2) 10,516 20,839 30,628
Average Rate Per Minute.............. $ 2.35 $ 2.06 $ 1.55 $ 1.19
Domestic Long Distance Minutes
Number of Minutes.................... --(2) 2,047 10,098 16,946
Average Rate Per Minute.............. -- $ 0.86 $ 0.65 $ 0.55
Moscow (Local) Fixed Line Minutes
Number of Minutes.................... -- -- -- 2,302
Average Rate Per Minute.............. -- -- -- $ 0.06
Moscow (Local) Cellular Minutes
Number of Minutes.................... -- 21,478 83,673 82,333
Average Rate Per Minute.............. -- $ 0.06 $ 0.08 $ 0.08
Incoming Minutes
Number of Minutes.................... 1,967 3,839 24,306 34,571
Average Rate Per Minutes............. $ 0.76 $ 0.58 $ 0.28 $ 0.29
PORTS
Number of Ports (cumulative)............ -- 6,079 29,646 40,563
NUMBER OF PRIVATE LINE CHANNELS
International........................... 1 26 89 162
Inter- and Intra-City................... 1 26 103 184
APPROXIMATE EQUIPMENT SALES (THOUSANDS)... $1,100 $ 1,400 $ 2,200 $ 2,500
</TABLE>
- ---------------
(1) Minutes in thousands. Amounts include minutes among affiliates.
(2) International and domestic long distance outgoing minutes not segregated in
1994.
Services. Sovintel markets a broad range of high quality telecommunications
services by (i) directly providing international direct dial access to over 170
countries and private line dedicated voice services and (ii) by leveraging the
infrastructure and services of the other GTS ventures. Sovintel's services
include:
- Switched International, Domestic Long Distance and Local
Services. Customers are provided switched international long distance
services directly through Sovintel's international gateway in Moscow and
its leased long distance channels. Domestic long distance services are
marketed by Sovintel and provided either through the TeleRoss long
distance network or, where the call destination is not served by
TeleRoss, through Rostelecom's network. Local call service is provided by
Sovintel indirectly as a result of its interconnection, through TCM or
MTU Inform, with the Moscow city telephone network. Based on its
familiarity with the market, the Company believes that Sovintel's
services are distinguished by a higher level of quality than those of its
competitors, particularly with respect to call completion rates for its
domestic long distance and local call services. In addition, the Company
trains its employees to provide customer service at a level which is
comparable to that provided by Western telecommunications companies. As a
result, the Company believes that customers choose Sovintel over its
competitors because it has earned a reputation for providing high quality
telecommunications services through an experienced and professional
customer service staff.
- Private Line Channels. Private line channels, which are provided over
dedicated leased lines, are principally utilized by customers with
high-volume data traffic needs, such as Sovam and large data providers.
Private line customers have access to intra-city service in Moscow
through Sovintel's fiber optic ring and to inter-city service between
Moscow and St. Petersburg via fiber leased by Sovintel, in each case
benefitting from Sovintel's high quality infrastructure. Private line
domestic long distance
50
<PAGE> 57
service is provided through TeleRoss and, for cities not served by
TeleRoss, through Rostelecom. International private line service is
provided through dedicated leased fiber channels from Rostelecom.
- Equipment Sales, Installation Services and Project Planning and
Management Services. In providing the above services to its customers,
Sovintel installs and maintains equipment on its customers' premises,
including PABXs, key systems and wiring. Sovintel also provides project
planning and management services, including system design and management,
to its customers.
- World Access Service. Customers are able to access Sovintel's
international long distance services through the World Access Card, which
provides customers either direct or calling-card-based portable access to
domestic and international long distance service. The calling card can be
used in 15 Russian cities, including Moscow and St. Petersburg, and 23
countries.
Sovintel complements its service offerings by providing a wide range of
value-added services including operator assistance, maintenance and customer
support and itemized call reporting and billing.
Customers and Pricing. Sovintel's customers consist primarily of
high-volume business and professional customers, such as IBM, Credit Suisse
Group and Reuters, other multinational corporations and Russian enterprises, a
number of premium Moscow hotels and other telecommunications carriers. In
addition, Sovintel is one of the primary providers of domestic and international
long distance service for the major cellular service providers in Moscow,
including VimpelCom, MTS and Moscow Cellular. Sovintel's customers typically
demand a higher level of service than generally available in the market.
Sovintel further provides to its large corporate customers data services such as
frame relay and Internet access contracted from Sovam in order to offer
"one-stop shopping" telecommunications solution to these customers, who
increasingly require this type of service.
The pricing structure for international and domestic long distance calls is
based upon traffic volume and overall market rates, with Sovintel's rates
varying depending on the time and destination of the call. Local calls, other
than calls placed to cellular phones, are completed without charge. Sovintel
expects to continue its practice of not charging to complete local calls unless
and until the MGTS begins to charge for completion of such calls. Sovintel
prices its international long distance services slightly below those of its
principal competitors, and has recently reduced its rates in anticipation of
increased competitive pricing pressures. Sovintel's average revenue per minute
for outgoing international long distance calls has declined from approximately
$2.35 per minute for the year ended December 31, 1994 to approximately $1.19 per
minute for the nine months ended September 30, 1997. Sovintel expects increased
pricing pressure from competitors over time. Sovintel prices domestic long
distance services in line with those of its principal competitors. Prices for
domestic long distance services have increased significantly over the last
several years, although such prices stabilized in the second half of 1996.
Sovintel's private line services are priced competitively. Sovintel provides
private line channels by releasing lines it leases from Rostelecom. The lines
are leased by Sovintel from Rostelecom at wholesale rates and leased by Sovintel
to its customers at prices in line with Rostelecom's retail rate.
Customers are billed monthly with larger-volume customers receiving
discounts of up to 25%. Customers using international services, domestic long
distance or data services are billed in U.S. dollars. To the extent permitted by
law, payment is made either in U.S. dollars or in rubles at the ruble/dollar
exchange rate at the time of payment, plus a conversion charge in order to
minimize the impact of currency fluctuations. Sovintel currently bills on an
invoicing system that was internally developed. Currently, the system is
adequate for Sovintel's present customer base; however, the Company is
evaluating alternatives for upgrading the system in anticipation of future
growth.
Sales and Marketing. Sovintel's sales and marketing strategy targets large
multinational and Russian businesses both directly and through contacts with
real estate developers and business center managers in the greater Moscow area.
These developers and managers typically determine which telecommunications
service provider will service their respective properties. By identifying and
building relationships with these developers and managers at an early stage
(typically up to one year prior to the completion of a new building project),
Sovintel seeks to enhance the likelihood of winning the service contract. In
addition to its traditional target
51
<PAGE> 58
market, Sovintel has recently begun to market its services to smaller
businesses. Sovintel utilizes a departmentalized sales force in order to focus
its sale efforts on the different segments within its target market. The sales
force is comprised of 40 sales personnel, including 15 account managers, all of
whom specialize in serving specific targeted industries. Dedicated marketing and
customer support personnel provide technical support, customer service,
training, market monitoring and promotional functions for Sovintel. Sovintel's
sales and marketing personnel are paid through a combination of salary,
commissions and incentive bonuses.
Ownership and Control. Sovintel is a joint venture between a wholly owned
entity of GTS and Rostelecom with each having a 50% ownership interest. Under
Sovintel's charter, GTS and Rostelecom each have the right to appoint three of
the six members of Sovintel's managing board. Rostelecom has the right to
nominate the Director General (the highest ranking executive officer at
Sovintel), while GTS has the right to nominate the First Deputy Director General
(the next-highest ranking executive officer at Sovintel). In practice, the
Director General and the First Deputy Director General together perform the role
of a chief executive officer. Certain business decisions, including the adoption
of Sovintel's annual budget and business plan as well as the distribution of
profits and losses require the approval of both GTS and Rostelecom. Neither GTS
nor Rostelecom are obligated to fund Sovintel's operations or capital
expenditures. Losses and profits of Sovintel are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1997, GTS and Rostelecom have each made equity contributions
of $1.0 million to Sovintel. In addition, Sovintel had outstanding loans of $9.0
million to GTS as of September 30, 1997. See "Management's Discussion and
Analysis -- Accounting Methodology -- Profit and Loss Accounting." The Sovintel
joint venture agreement does not have an expiration date. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control."
TCM
GTS beneficially owns approximately 50% of TCM, a joint venture founded in
1994 that provides a licensed numbering plan and interconnection to the Moscow
city telephone network for carriers needing basic local access service in
Moscow. GTS's partners in TCM are MTU-Inform and a group of entrepreneurs with
extensive telecommunications experience. TCM is currently licensed to provide
100,000 numbers in Moscow, of which approximately 44,000 have been leased. TCM
has contracted with MGTS to construct up to an additional 100,000 numbers in
several stages over the next five years, and currently plans to construct 10,000
numbers in each of 2000, 2001 and 2002. Any such construction, however, is
subject to TCM obtaining a license covering the additional numbers and the
availability of such numbers in the portion of the MGTS numbering plan in which
TCM plans to construct such numbers. TCM's switching facilities are fully
integrated with the networks of Rostelecom, Sovintel, and MGTS, allowing it to
provide high quality digital service to its customers.
Services. TCM acts as a local gateway by providing numbers and ports to
carriers in Moscow, including Sovintel, VimpelCom, MTS and Moscow Cellular, and
thus providing interconnectivity to the Moscow city telephone network. Access to
the Moscow city telephone network provides customers with the higher quality and
broader range of services available in Moscow, such as the services provided by
Sovintel. Access from outlying regions is typically obtained through a domestic
long distance service provider such as TeleRoss. See "-- Sovintel" and
"-- TeleRoss."
Customers and Pricing. TCM provides its services on the wholesale level to
primary carriers. VimpelCom is TCM's primary customer and accounts for
substantially all of TCM's revenues, hence the loss of VimpelCom as a customer
would have a material adverse effect on the Company. TCM also provides ports to
Sovintel and to other network operators including MTS and Moscow Cellular. TCM's
ports are leased principally to carriers in Moscow. Although local access
services are priced upon the basis of supply and demand factors in the local
market, in general, for each port cellular operators pay an approximately $300
installation fee and a $16 flat monthly fee plus a per minute charge for traffic
while other carriers pay a larger initial fee of approximately $500 and a
monthly fee of approximately $25. Local access services are typically provided
pursuant to five-year contracts that may be renewed upon expiration for
additional one-year periods. TCM has entered into an agreement with Sovintel
pursuant to which billing and collecting functions for TCM-Sovintel joint
customers are performed by Sovintel, with Sovintel remitting such amounts (less
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<PAGE> 59
applicable settlement charges and administrative costs) to TCM. The rapid growth
of cellular services in markets like Moscow has placed a premium on new numbers,
which has translated into attractive prices for these numbers. TCM, however,
believes these prices will decline over time.
Ownership and Control. GTS's indirect interest in TCM is represented by its
approximately 52% interest in a holding company, which owns 95% of TCM. This
structure provides GTS with 50% beneficial ownership interest in TCM. Decisions
of the holding company regarding TCM require unanimous board approval and
neither GTS nor its partner in the holding company is obligated to fund
operations or capital expenditures of the holding company. In addition, neither
the holding company nor the TCM shareholders are obligated to fund operations or
capital expenditures of TCM. At both the holding company and TCM level, losses
and profits are allocated to the partners in accordance with their ownership
percentages, in consideration of funds at risk. GTS acquired its indirect, 50%
beneficial interest in TCM for approximately $700,000 and certain additional
consideration. As of September 30, 1997, GTS had no outstanding loans relating
to TCM. See "Management's Discussion and Analysis -- Accounting
Methodology -- Profit and Loss Accounting." None of the operative charters and
agreements relating to the holding company or TCM have expiration dates. See
"Risk Factors -- Dependence on Certain Local Parties; Absence of Control."
TELEROSS
TeleRoss, which began operations in 1995, consists of (i) two wholly owned
holding companies and a 99% owned subsidiary of GTS that operates a domestic
long distance network (collectively, the "TeleRoss Operating Company") and (ii)
thirteen joint ventures that are 50% beneficially-owned by GTS that originate
traffic and provide local termination of calls (the "TeleRoss Ventures" and,
together with TeleRoss Operating Company, "TeleRoss"). The TeleRoss domestic
long distance network serves fourteen major Russian cities, including Moscow
and, through VSAT technology, 19 customers located outside these cities.
TeleRoss provides digital domestic long distance services and other value-added
services through its own infrastructure as well as access to Sovintel's
international gateway services and access to the Moscow city telephone network
through TCM's switching facilities. Sovam uses the TeleRoss digital channels to
provide regional data service and has co-located its access facilities with
TeleRoss. As of September 30, 1997, TeleRoss employed approximately 188 persons
of which approximately 90 people were based in Moscow and approximately 98
people were deployed in the regions in which TeleRoss operates.
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<PAGE> 60
TeleRoss's licenses cover the city of Moscow and a total of 39 regions
throughout Russia. Most of the thirteen cities in which TeleRoss primarily
operates are regional capitals, with an aggregate population of approximately
11.5 million. TeleRoss's licenses cover the entire oblast surrounding these
cities, with populations totalling approximately 38.1 million persons, and GTS
intends eventually to extend the reach of the TeleRoss network beyond the
regional capitals to the surrounding areas. The cities in which TeleRoss
currently offers its services are:
<TABLE>
<CAPTION>
1995 POPULATION
---------------------------------------
(IN MILLIONS)
URBAN
CITY(4) CITY(1) OBLAST(2) TOTAL OBLAST(3)
------- ------- --------- ---------------
<S> <C> <C> <C>
Arkhangelsk....................................... 0.6 1.2 1.6
Ekaterinburg...................................... 1.4 4.1 4.7
Irkutsk........................................... 0.6 2.3 2.9
Khabarovsk........................................ 0.6 1.5 1.9
Krasnodar......................................... 0.6 2.6 4.8
Nizhni Novgorod................................... 1.4 2.9 3.7
Novosibirsk....................................... 1.4 2.1 2.8
Syktyvkar......................................... 0.3 0.9 1.3
Tyumen............................................ 0.5 2.4 3.1
Ufa............................................... 1.0 2.6 4.0
Vladivostok....................................... 1.2 1.8 2.2
Volgograd......................................... 0.9 2.0 2.6
Voronezh.......................................... 1.0 1.5 2.5
---- ---- ----
Total................................... 11.5 27.9 38.1
---- ---- ----
</TABLE>
- ---------------
(1) This column reflects the population residing in cities. Source: GTS estimate
(2) This column reflects the urban population in oblast. Source: Rusline
(3) This column reflects the total population residing in the oblast, including
rural population. Source: Rusline
(4) TeleRoss plans to expand to the city of Samara in February, 1998. The 1995
city population, urban oblast population and total oblast population for
Samara was 1.2 million, 2.7 million and 3.3 million, respectively.
The TeleRoss network architecture involves local city switches connected to
remote earth stations which communicate via satellite to a Moscow-based hub.
This hub consists of the network control center, earth station equipment,
multiplexing equipment and a switch. The earth stations, hub and related
equipment are owned by TeleRoss, which gives TeleRoss the flexibility to
redeploy network assets to other locations as necessary. The hub interconnects
to Sovintel's network providing access to Sovam's data networks, TCM's switching
facilities and Sovintel's international gateway, which transports international
traffic via dedicated international leased satellites and fiber channels and
provides access to Rostelecom's long distance networks. Outside of Moscow,
TeleRoss's local joint venture partners provide interconnection to the local
public telephone networks in each of the cities it serves. In addition to
providing services through its network, TeleRoss currently serves 19 customers
in 18 additional cities through VSAT technology which links the customers via
satellite to the Moscow hub.
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<PAGE> 61
The following table sets forth certain operating data related to TeleRoss's
operations:
<TABLE>
<CAPTION>
AT AND FOR
AT AND FOR THE NINE
THE YEAR MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
MINUTES OF USE(1)
Domestic Minutes (thousands).............................. 3,478 14,440
Average Rate Per Domestic Minute.......................... $ 0.99 $ 0.66
International Minutes (thousands)......................... 189 486
Average Rate Per International Minute..................... $ 2.76 $ 2.56
NUMBER OF CITIES SERVED..................................... 13 14
WORLD CONNECT DIAL/RUSSIA
Number of Connect Dial Ports.............................. 472 961
Average Revenue Per Port Per Month........................ $ 767 $ 378
MOSCOW CONNECT
Number of Ports........................................... 49 56
Average Revenue Per Port Per Month........................ $1,165 $ 1,513
DEDICATED CIRCUITS
Number of Dedicated Channels.............................. 33 43
Average Price Per Channel................................. $4,553 $ 4,264
WORLD ACCESS SERVICE
Number of World Access Card Users......................... 3,929 4,360
Average Revenue Per Card Per Month........................ $ 52 $ 45
VSAT SERVICES
Number of VSATs........................................... 12 20
</TABLE>
- ---------------
(1) Includes minutes among affiliates.
Services. Through its network and VSAT offerings, TeleRoss offers the
following services:
- Carriers' Carrier Services. TeleRoss provides services as a "carriers'
carrier," providing domestic long distance carrier services to cellular
operators, Sovintel, the TeleRoss Ventures' regional partners and
competitive bypass operators from the cities in which the TeleRoss
Ventures operate, and to customers in remote cities using VSAT stations.
These services are provided to and from Moscow, and are provided by
TeleRoss at wholesale rates competitive with those offered by Rostelecom.
TeleRoss also provides private line channels to Sovam in cities where the
TeleRoss Ventures operate. In addition, TeleRoss has recently received a
license to provide international private line service.
- World Connect Dial/Russia Connect Dial. Customers in TeleRoss's cities
are provided dedicated local access to the regional TeleRoss switch
through lines leased from the TeleRoss Venture's regional joint venture
partner. These customers then have access to the domestic long distance
service provided by TeleRoss, international long distance service
provided by Sovintel and are fully integrated into the local phone
networks operated by the applicable TeleRoss Venture's partner and to
the Moscow city telephone network through TCM.
- Moscow Connect. Customers are provided with dedicated last mile
connection over lines leased from the regional joint venture partner
which lines are connected to a local TeleRoss switch. The TeleRoss
network and its interconnection to TCM provide customers with a Moscow
dial tone which allows users in remote locations better access to
Moscow's advanced telecommunications infrastructure. In addition, Moscow
Connect service provides better call quality at lower rates for domestic
and international long distance. Moscow Connect also facilitates
communications between users and their
55
<PAGE> 62
Moscow-based associates as calls can be made to and from Moscow without
the use of prefixes and without long distance charges accruing to the
Moscow-based parties.
- Dedicated Circuits. Customers are provided with point-to-point clear
channel circuits within Russia and internationally through the TeleRoss
backbone and its interconnection with Sovintel's international gateway in
Moscow. Dedicated circuits are generally used by news services, banks and
other commercial customers who require high capacity and high quality
service. This service can be used for voice or data, depending on the
user's needs. In providing dedicated circuits, TeleRoss competes against
other alternative communications providers, however, TeleRoss believes
that it has a distinct price advantage over its competitors because of
the use of its own infrastructure and the bulk purchase of satellite
capacity.
- World Access Service. TeleRoss and Sovintel co-market World Access
Service to their customers in each of the cities they serve through two
products: World Access Direct and World Access Card. Through World Access
Direct, TeleRoss customers can access domestic long distance and
international service anywhere within the customer's city through the
local telephone network. The World Access Card is a calling card which
allows TeleRoss customers portable access to domestic long distance and
international service from 15 Russian cities, including Moscow and St.
Petersburg, and 23 countries. This service is provided through Sovintel's
infrastructure.
- VSAT Services. For customers that are located outside the cities serviced
by TeleRoss or that cannot be physically linked to TeleRoss's regional
switches, TeleRoss offers VSAT service which connects these customers
directly to TeleRoss's Moscow-based hub through a VSAT antenna installed
at the customer's location. Both dedicated and switched services are
provided through these VSAT arrangements.
In addition to continuing the development of its core domestic long
distance business, TeleRoss's strategy includes the development of local access
networks to capitalize on demand for local phone service and to capture
additional customers for its long distance and value-added service offerings.
Outside Moscow, TeleRoss has primarily pursued a strategy whereby it develops
its own intra-city trunking network with copper based or fiber optic facilities
leased from the regional joint venture partners. As of September 30, 1997,
TeleRoss, in conjunction with regional joint venture partners, has installed
approximately 25 kilometers of fiber optic cable in 3 cities and plans to
install an aggregate of approximately 100 kilometers of additional fiber optic
cable in up to an additional 6 cities over the next 24 to 30 months. Customers
who obtain local phone numbers from TeleRoss's venture partners are directly
interconnected to the local telephone company and to the Company's long distance
network and Sovintel's international gateway and may obtain a broad range of
value-added services offered by the Company.
Customers and Pricing. TeleRoss's customers include businesses and other
telecommunications service providers such as carriers, PTOs, cellular operators,
Sovintel and Sovam. TeleRoss's business customers consist of large multinational
and Russian businesses in each of the regions it services, as well as medium and
small-sized businesses. Between 1993 and mid-1996, consumer prices in TeleRoss's
industry increased significantly as a result of Rostelecom raising its prices in
an effort to raise capital for investment and development of its network
infrastructure, although prices have stabilized over the past six months. In the
first nine months of 1997, TeleRoss increased sales to carriers, which sales
were made at wholesale rates, resulting in a decrease in the average rate per
minute for TeleRoss. TeleRoss strategically prices its domestic long distance
services at a slight premium over similar services offered by Rostelecom to
account for a higher quality of service, but in line with the prices offered by
regional competitors.
Sales and Marketing. TeleRoss markets its services to carriers and
businesses through direct sales channels. As of September 30, 1997, TeleRoss
employed 27 sales and marketing personnel, approximately half of which are based
in Moscow with the other half deployed regionally to identify and contact
prospective customers. The Moscow-based sales and marketing personnel are
organized into industry groups in order to better identify and serve customer
needs. Each region is typically served by one or two sales representatives.
TeleRoss's sales efforts are supported by market research and promotional
activities carried out at the joint venture level and tailored to the specific
market base of each region. TeleRoss's marketing strategy is to attract
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<PAGE> 63
carrier customers by focusing on those carriers with high volume minutes
operating in regions where TeleRoss has a competitive advantage. Through
cross-marketing agreements with Sovintel and Sovam, TeleRoss markets many of the
other service offerings of GTS's Russian businesses to customers throughout its
service regions. Billing functions and the monitoring of quality control and
technical issues are performed centrally through the Moscow-based hub.
Ownership and Control. TeleRoss consists of the TeleRoss Operating Company,
and the 50% beneficially owned TeleRoss Ventures. GTS controls TeleRoss
Operating Company (which holds the network license) and co-manages the TeleRoss
Ventures under the terms of the applicable TeleRoss Ventures' foundation
agreements and charters. Under some of these charters, GTS generally has the
right to designate the Chairman of the board of directors, and GTS's local
partner has the right to designate the Deputy Chairman, for the first two-year
term (and thereafter GTS and the local partner nominate the Chairman and Deputy
Chairman for approval by the entire board on a rotating basis). The foundation
agreements and charters do not have expiration dates. While GTS has significant
influence within these ventures, decisions, including the decision to declare
and pay dividends, are generally subject to GTS's partner's approval. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control." Neither GTS
nor its respective joint venture partners are obligated to fund operations or
capital expenditures of the TeleRoss Ventures. Losses and profits are allocated
to the partners in accordance with their ownership percentages, in consideration
of funds at risk. As of September 30, 1997, GTS and its partners had each made
equity contributions aggregating $1.7 million to the various TeleRoss Ventures.
Contributions made by the partners include contributions of cash and intangible
assets, such as licenses. In addition, the various TeleRoss Ventures had
outstanding loans of $3.3 million to GTS as of September 30, 1997. See
"Management's Discussion and Analysis -- Accounting Methodology -- Profit and
Loss Accounting."
SOVAM
Sovam is a venture owned 66.7% by GTS and 33.3% by the Institute for
Automated Systems ("IAS"). Sovam was founded in 1990 as a venture equally owned
by GTS and IAS. In 1992, Cable & Wireless acquired a 33% ownership interest in
Sovam, which interest was subsequently acquired by GTS in 1994, bringing GTS's
ownership interest to its current 66.7%. GTS has entered into an agreement to
purchase IAS's interest in Sovam and expects to close the transaction in
February 1998, thereby making Sovam a wholly owned subsidiary of GTS. Sovam
provides high-speed data communications services, electronic mail and database
access over a high-speed packet/frame relay network in 30 major Russian and CIS
cities. Sovam also offers Russia On Line, the first Russian language Internet
service, which provides direct access to the Internet as well as access to a
wide range of local and international information services and databases. As of
September 30, 1997, Sovam had approximately 1,667 data service customers and
approximately 3,272 Russia On Line customers. Sovam employed over 100 persons in
Moscow and other regions of the CIS as of September 30, 1997. Sovam provides
equipment and maintains marketing and technical support personnel at each
location either through its own infrastructure or through the infrastructure of
TeleRoss.
In addition to serving the Moscow and St. Petersburg markets, Sovam
co-locates its operations with the TeleRoss Ventures, offering its services in
all TeleRoss cities, and also serves 15 additional cities in Russia and the CIS.
Sovam operates under its own license within Russia while services elsewhere in
the CIS are provided through applicable joint venture or local partner licenses.
The local partners of the TeleRoss Ventures provide facilities, assist in the
provision of leased lines to Sovam customers that allow them to connect with
Sovam's local data switches and also provide technical support. Sovam utilizes
Sovintel's international capabilities and, in TeleRoss-served locations,
TeleRoss's satellite overlay network, to take data through its local data
switches and over the leased lines to its customers. Customers may obtain
virtual private data networks without investing in, acquiring, installing and
maintaining their own network nodes and switches.
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The following table sets forth certain operating data related to Sovam's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
BASIC DATA SERVICE
Percentage of Total Sovam Revenue..... 96% 91% 79% 80%
Number of Customers................... 1,335 1,587 1,726 1,667
Average Revenue Per Month Per
Customer........................... $ 180 $ 201 $ 446 $ 675
Number of Cities in Service........... 2 11 25 30
EQUIPMENT AND HARDWARE SALES
Percentage of Total Sovam Revenue..... 4% 8% 14% 10%
RUSSIA ON LINE SERVICE
Percentage of Total Sovam Revenue..... -- 1% 7% 10%
Number of Subscribers(1).............. -- 407 1,854 2,606
Average Revenue Per Month Per
Subscriber......................... -- $ 49 $ 52 $ 67
</TABLE>
- ---------------
(1) In addition to the subscribers included above, Sovam frequently connects
potential Russia On Line subscribers on a complimentary one-month trial
basis. As of September 30, 1997, there were approximately 600 such potential
subscribers.
Services. Sovam's service offerings are comprised of data services,
equipment and hardware sales and its Russia On Line services.
- Data Services. Sovam provided high speed connectivity, electronic mail,
database access and fax services to approximately 1,667 customers as of
September 30, 1997, in Russia and the CIS. Sovam customers can use
electronic mail systems to send and receive messages and data and to
access public and private data networks (including the Internet)
worldwide. Customers may obtain virtual private data networks without
investing in, acquiring, installing and maintaining their own network
nodes and switches. In addition, Sovam offers its customers value-added
data services. For example, Sovam offers "one-stop shopping" for
hardware, software, installation and maintenance support and products
such as "SovamMail," an e-mail service which allows customers to use
Sovam's data network to send telex or facsimile messages to overseas
recipients worldwide. Data services are currently available in 30 cities
throughout Russia and the CIS, including Moscow, St. Petersburg, each of
the cities served by TeleRoss and some cities outside of the TeleRoss
network.
- Equipment and Hardware Sales. Sovam sells communications equipment and
hardware, and provides related installation, maintenance and support
functions, to its customers. Sovam's primary customers in the equipment
and hardware market are banking clients who use the equipment to
interface with Sovam's network.
- Russia On Line. Russia On Line is the first Russian language, as well as
the first dual language, graphical user interface online service for
accessing domestic and international information sources designed to
appeal to a wide commercial audience. This service, which is distributed
via GTS's domestic long distance infrastructure, provides customers with
access to international databases (including the Internet), as well as an
array of proprietary Russian and English language information services,
such as news stories and market updates. Sovam had 2,606 Russia On Line
subscribers as of September 30, 1997. Sovam has developed a modified
version of Netscape's Internet browser, which utilizes the Cyrillic
alphabet, as part of its Russia On Line package. Sovam's enhanced Russian
version of Netscape's browser is provided by Sovam to its customers under
a distribution agreement with Netscape. In addition, Sovam has signed a
letter of intent with Microsoft whereby Microsoft has agreed to include
software access to Russia On Line in its Russian version of Windows 97,
which had not been released as of September 1997. Sovam has also entered
into agreements with equipment
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manufacturers, including Dell, Hewlett-Packard and U.S. Robotics, to
include Russia On Line software with their products.
Customers and Pricing. Sovam's data communications customers consist
primarily of banking and financial services organizations and large
multinational companies, while Sovam's Russia On Line customers consist of a
wide variety of commercial enterprises. Sovam charges customers an installation
fee when service is commenced and a charge for any equipment which is installed.
Thereafter, customers are billed on a monthly basis for leased line fees, port
access charges and charges for data and Russia On Line services rendered during
the month. Data services are priced on a two-tier structure with high volume
users generally negotiating a flat-rate fee and lower volume uses paying a
volume-based fee which on average was $446 and $675 per subscriber in 1996 and
for the nine months ended September 30, 1997, respectively. Russia On Line
customers pay a fixed monthly access charge plus an additional volume-based fee.
Customers are billed in dollars and payment is remitted in rubles and, to the
extent permitted by law, in dollars, with a 5% conversion fee added to
ruble-denominated payments.
Sales and Marketing. Sovam employs a dedicated sales and marketing force
comprised of 23 Russian nationals, 18 of which are based in Moscow with the
remainder deployed in the other Russian and CIS regions. Salespersons are paid a
fixed salary supplemented by sales commissions and performance-based bonuses.
Sovam's sale efforts are focused primarily on the banking and financial
communities and large multinational companies, although small and medium sized
entities are also emerging as potential Sovam customers. Bundled service
packages, which include Sovam's data and Internet service, Sovintel's
international service and TeleRoss's long distance service, are frequently
marketed together in order to offer customers a comprehensive telecommunications
solution. In addition to data communications services, Sovam offers its
customers hardware, installation and maintenance service and is a distributor of
Northern Telecom equipment.
Ownership and Control. GTS owns 66.7% of Sovam and IAS owns the remaining
33.3%. GTS has entered into an agreement to purchase IAS's interest in Sovam and
expects to close the transaction in February 1998, thereby making Sovam a wholly
owned subsidiary of GTS. The Sovam managing board is comprised of three GTS
representatives and two IAS representatives. Decisions of the managing board are
adopted by a majority vote. Changes to the charter and certain business
decisions, including decisions on distribution of profits and losses, obtaining
loans and approving major transactions, require unanimous approval. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control." The Sovam
charter does not have an expiration date. Neither GTS nor IAS are obligated to
fund Sovam's operations or capital expenditures. Losses and profits of Sovam are
allocated to the partners in accordance with their ownership percentages, in
consideration of funds at risk. As of September 30, 1997, GTS and its partner
had made equity contributions of $1.3 million and $0.7 million, respectively, to
Sovam. In addition, Sovam had outstanding loans of $10.4 million to GTS as of
September 30, 1997. See "Management's Discussion and Analysis -- Accounting
Methodology -- Profit and Loss Accounting."
GTS CELLULAR
GTS Cellular operates three cellular businesses in Russia and Ukraine. In
Russia, GTS has a wholly owned subsidiary Vostok Mobile, which operates eleven
AMPS cellular companies in Russian regions west of the Urals under the trade
name Unicel. Vostok Mobile owns between 50% and 70% of these cellular joint
ventures (the "Unicel Ventures") in Russia. In addition, GTS intends to enter
into the cellular markets of additional Russian regions through its Vostok
Mobile venture. GTS also participates in PrimTelefone, a 50% owned joint venture
that operates an NMT-450 network in Vladivostok and four other cities in the
Primorsky region of Russia. In Ukraine, GTS has an approximately 25% beneficial
interest in Bancomsvyaz which operates a DCS-1800 cellular network in Kiev, and
an international overlay network in Ukraine. GTS Cellular entities possess
licenses covering major Russian and Ukrainian markets (excluding Moscow and St.
Petersburg) with an aggregate 1995 population of approximately 25 million
people.
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GTS currently offers cellular services in the following regions as of
September 30, 1997:
<TABLE>
<CAPTION>
URBAN
GTS'S POPULATION TOTAL
OPERATING ECONOMIC CITY IN OBLAST NUMBER OF
COMPANY INTEREST(1)(4) CITY POPULATION(3) OBLAST(2) POPULATION(2) SUBSCRIBERS
--------- -------------- ---- ------------- ---------- ------------- -----------
(MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
RUSSIA
Vostok Mobile(4)
Arkhangelsk Mobile
Networks................ 50.0% Arkhangelsk 0.6 1.2 1.6 499
Astrakhan Mobile.......... 50.0% Astrakhan 0.6 0.7 1.0 1,116
Chuvashi Mobile........... 70.0% Cheboksary 0.5 0.8 1.4 1,052
Lipetsk Mobile............ 70.0% Lipetsk 0.5 0.8 1.2 1,237
Murmanskaya Mobilnaya
Set..................... 50.0% Murmansk 0.6 1.1 1.8 1,170
Penza Mobile.............. 60.0% Penza 0.6 1.0 1.5 603
Saratov Mobile............ 50.0% Saratov 0.2 2.0 2.7 1,599
Parma Mobile.............. 50.0% Syktyvkar 0.3 0.9 1.3 360
Volgograd Mobile.......... 50.0% Volgograd 0.9 2.0 2.6 1,309
Votec Mobile.............. 50.0% Voronezh 1.0 1.5 2.5 1,631
Mar Mobile................ 50.0% Yoshkar-ola 0.4 0.5 0.8 415
PrimTelefone................. 50.0% Vladivostok(5) 1.2 1.8 2.2 3,907
UKRAINE
Bancomsvyaz.................. 24.9% Kiev 2.6 3.7 4.5 1,438
---- ---- ---- ------
Total................ 10.0 18.0 25.1 16,336
---- ---- ---- ------
</TABLE>
- ---------------
(1) Represents the indirect economic interest of GTS in each entity.
(2) Source: Rusline (1995), except Kiev (from Ukraine Ministry of Statistics
(1995)).
(3) Source: GTS estimate (1995).
(4) Prior to September 26, 1997, GTS owned 62% of Vostok Mobile. On September
26, 1997, GTS acquired the minority interest in Vostok Mobile, making Vostok
Mobile a wholly owned subsidiary of GTS. Vostok Mobile owns between 50% and
70% of a series of 11 cellular joint ventures in various regions in Russia.
In addition, Vostok Mobile has acquired a 50% interest in a cellular joint
venture in the city of Barnaul, is expected to begin commercial service in
February 1998. GTS intends to enter into the cellular markets of additional
Russian regions through its Vostok Mobile venture.
(5) Includes Vladivostok and four other cities in the Primorsky region.
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The following table sets forth certain operating data related to GTS
Cellular's operations:
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- ----------------
<S> <C> <C> <C>
Vostok Mobile
Total Subscribers................................... 850 6,884 10,991
Average Revenue Per Subscriber Per Month............ -- $ 128 $ 138
Minutes of Use(1)(thousands)........................ -- 10,561 18,800
Population Covered by Licenses (thousands).......... 18,400 18,400 18,400
Population Covered by Networks (thousands).......... 4,000 6,500 6,500
Subscriber Penetration of Population Covered by
Networks.......................................... -- 0.11% 0.17%
PrimTelefone
Total Subscribers(2)................................ 792 2,822 3,907
Average Revenue Per Subscriber Per Month............ $ 282 $ 236 $ 230
Minutes of Use(1)(thousands)........................ 725 6,919 10,592
Population Covered by Licenses (thousands).......... 2,200 2,200 2,200
Population Covered by Networks (thousands).......... 500 1,175 1,175
Subscriber Penetration of Population Covered by
Networks.......................................... 0.16% 0.24% 0.39%
Bancomsvyaz
Cellular Network
Total Subscribers................................... -- 121 1,438
Average Revenue Per Subscriber Per Month............ -- $ 62 $ 185
Minutes of Use(1)(thousands)........................ -- 9 2,261
Population Covered by Licenses (thousands).......... -- 4,500 4,500
Population Covered by Networks (thousands).......... -- 1,669 1,669
Subscriber Penetration of Population Covered by
Networks.......................................... -- 0.01% 0.09%
Overlay Network
Minutes of Use(1)(thousands)........................ -- -- 2,232
Number of Ports..................................... -- -- 555
Average Revenue Per Minute.......................... -- -- $ 0.36
</TABLE>
- ---------------
(1) Includes minutes among affiliates.
(2) Includes active subscribers only.
Vostok Mobile. Through Vostok Mobile, GTS participates in eleven cellular
joint ventures in Russia. Vostok Mobile owns between 50% and 70% interests in
each of the eleven Unicel Ventures with regional telephone companies and, in one
instance, a private Russian company, owning the remaining ownership interest.
The Unicel Ventures each operate an AMPS-based cellular network, which was
chosen principally because of the lower licensing fees and equipment costs
associated with AMPS operations. The Company believes that the Unicel Ventures'
AMPS-based networks can be upgraded to digital AMPS ("D-AMPS") for an
incremental capital investment. Cellular networks which utilize digital
technology, such as D-AMPS, DCS and GSM offer several advantages over analog
technology including improved overall signal and sound quality, improved call
security, potentially lower incremental infrastructure costs for additional
subscribers and the ability to provide enhanced data transmission services, such
as facsimile and e-mail. Digital technology also provides increased system
capacity. The ventures intend to convert to D-AMPS at such time as there exists
sufficient competitive pressures and/or market demand for digital services to
merit the additional investment.
AMPS technology is widely used by other cellular networks throughout
Russia, making roaming commercially feasible. The Unicel Ventures have entered
into roaming agreements with other AMPS-based cellular providers, which allow
their subscribers to manually roam throughout Russia. Manual roaming, as opposed
to automated roaming, requires subscribers to notify their local cellular
providers of their travel plans
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in order to receive roaming capability. Vostok Mobile is currently working with
VimpelCom to develop automated roaming standards which will provide subscribers
with automated roaming capability.
The Unicel Ventures, collectively, are licensed to provide cellular service
to regions with an aggregate population of approximately 18.4 million people and
the cellular networks of these ventures cover populations of approximately 6.5
million people. Over the next five years, Vostok Mobile plans to expand the
coverage of the cellular networks to approximately 9.8 million people.
The Unicel Ventures are the only cellular operators in many of their
respective regions. Each region, however, has the potential for three licensed
operators, including one operator for each of the AMPS, NMT and GSM cellular
standards, and the Company expects competition to increase in the future as the
Russian economy develops and telephony demands increase. Each of the Unicel
Ventures operates independently within uniform guidelines established by Vostok
Mobile. The Unicel Ventures employ local engineering and marketing personnel,
which helps the ventures maximize their presence in their respective markets and
maintain quality control. Vostok Mobile and its ventures employed over 279
persons as of September 30, 1997, with over 240 persons employed regionally.
PrimTelefone. GTS's cellular operations in Vladivostok are conducted
through PrimTelefone, a 50% owned GTS subsidiary, with the local electrosviaz
owning the remaining 50%. PrimTelefone began operations in 1995 and operates an
NMT-450 network in Vladivostok and four other cities in the Primorsky region.
PrimTelefone entered and penetrated the Vladivostok market by leveraging its
network design and full interconnection with the city telephone network. As a
result, PrimTelefone's subscriber base has grown to 3,907 as of September 30,
1997 and PrimTelefone has been able to capture approximately half of the
Vladivostok cellular market. PrimTelefone has also updated its billing system,
which allows it to offer automated roaming. Although PrimTelefone has
experienced significant growth, it does face competition. PrimTelefone's only
current competitor has recently upgraded its network for more complete coverage
and has been fully interconnected to the city telephone network and may prove to
be more competitive in the future. PrimTelefone employs approximately 60 persons
which include dedicated sales, marketing and customer service personnel.
PrimTelefone holds a license to provide cellular service to a region having
a population of approximately 2.2 million people and, as of September 30, 1997,
its cellular network covered an area with a population of approximately 1.2
million people. PrimTelefone plans to expand its network's coverage to
approximately 1.7 million people over the next five years.
Bancomsvyaz. GTS operates in Ukraine through a 60% owned intermediate
holding company which holds an approximately 49% interest in Bancomsvyaz, giving
GTS an indirect approximately 25% economic interest in Bancomsvyaz. The
remaining approximately 51% interest in Bancomsvyaz is owned by Bancomservice, a
private company whose principals include telecommunications industry
participants in Ukraine, and a Ukranian national. Bancomsvyaz is co-managed by
GTS and Bancomservice, with Bancomservice appointing the General Director and
GTS appointing the Chief Operating Officer, Chief Financial Officer and two
Business Line directors. The current General Director has been active in the
development of the telecommunications industry in Ukraine. Through Bancomsvyaz,
GTS participates in the operation of a cellular network and an international
overlay network. With over 85 employees, Bancomsvyaz markets its services and
closely monitors technical and quality-related issues.
Cellular network. Bancomsvyaz operates a cellular network in Kiev utilizing
DCS-1800 cellular technology, and operates under a cellular license that covers
the Kiev oblast. Bancomsvyaz began cellular operations in 1996 by covering the
city center of Kiev and expanded its coverage to include the entire city in
1997. Bamcomsvyaz currently provides automated roaming capability in the U.K.
and has entered into a clearinghouse agreement with a European PTO which
provides Bancomsvyaz customers with automated roaming capability with all GSM
signatories with a roaming agreement with this PTO.
Bancomsvyaz holds a license to provide cellular service to a region having
a population of approximately 4.5 million people and, as of September 30, 1997,
its cellular network covered an area with approximately 1.7 million people.
Bancomsvyaz plans to expand its network's coverage to approximately 3.2 million
people over the next five years.
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Overlay network. Bancomsvyaz provides switched traffic service through its
overlay network in Kiev. Bancomsvyaz owns and operates a partitioned mobile
switch for both its overlay and cellular businesses. Bancomsvyaz has seven
central offices in the city and also provides last mile connections (which are
primarily copper) from the central offices to customers. Local traffic is routed
to the local telephone network through the mobile switch. International traffic
is routed through a government-owned satellite dish to the GTS-Monaco Access
international gateway. Bancomsvyaz emphasizes its high quality service and
markets primarily to multinational companies, real estate developers and hotels.
Bancomsvyaz is also negotiating with Sovintel to provide a link to Moscow and
plans to offer VSAT-based connections to its network in the future.
Sales and Marketing. The GTS Cellular entities have entered into agreements
with local distributors to more effectively reach their target markets.
Particular emphasis is placed on product branding. Vostok Mobile's sales and
marketing efforts are focused on the branding of its trade name, Unicel, which
is marketed and promoted at the local level by each of the Unicel Ventures. By
promoting the Unicel trade name, local ventures can emphasize their
relationships with Vostok Mobile and the other Unicel Ventures, allowing
customers to view the Unicel Ventures as integrated parts of a large cellular
organization rather than as lone, independent operators. Bancomsvyaz operates
under the trade name Golden Telecom.
Customers and Pricing. GTS Cellular's customers are primarily large,
mid-sized and start-up businesses and wealthy individuals. Increases in the
number of customers for GTS Cellular's ventures is typically linked to the
economic health of the region in which such venture operates. Cellular service
is generally a premium service in the cities in which GTS Cellular operates and
is priced as such. Each venture begins with two tariff plans, a "standard"
tariff plan and a "premium" tariff plan, which includes a fixed amount of
airtime at a discounted per-minute rate. Each plan prices late night and weekend
calls at off-peak rates. The Company expects that prices will decrease as
competition increases. Connection fees are minimized in order to reduce license
fees in AMPS regions (which are partially calculated by reference to connection
fees), as well as to keep market entry costs low. GTS Cellular has benefited
from high margins generated by the sale of handsets, which are marked up in line
with other cellular operators in Russia and the CIS. Value-added services, such
as call forwarding and conference calling, when available, are priced nominally
and discounted when sold in packages. Cellular accounts are recorded in dollars
and customers remit payment in rubles at the exchange rate on the date of the
bill and, in instances permitted by law, in dollars. Ruble accounts generally
are charged a two percent conversion fee and payments in rubles are applied at
the rate of exchange on the date of payment. In order to lessen risks to its
receivables, the Company and its cellular ventures require advance payment from
all customers with prepayments averaging approximately $250 per customer or six
to eight weeks of service.
Ownership and Control. GTS Cellular's Russian operations (except for the
Vladivostok operations) are conducted through ventures that are owned between
50% and 70% by Vostok Mobile, a wholly owned subsidiary of GTS. GTS Cellular's
Vladivostok and Ukrainian operations are conducted through ventures which
require partner approval for most decisions. The applicable foundation
agreements and charters do not have expiration dates. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control." Neither GTS
nor any of its respective partners in its Vladivostok or Ukrainian operations
are obligated to fund operations or capital expenditures. Losses and profits of
all such ventures are allocated to the partners in accordance with their
ownership percentages, in consideration of funds at risk. As of September 30,
1997, GTS and its partners had made equity contributions aggregating $15.8
million and $15.3 million, respectively, to the various GTS Cellular Ventures.
Contributions made by the partners include contributions of cash and intangible
assets, such as licenses. In addition, the various GTS Cellular Ventures had
outstanding loans of $28.0 million to GTS as of September 30, 1997. See
"Management's Discussion and Analysis -- Accounting Methodology -- Profit and
Loss Accounting."
LICENSES AND REGULATORY ISSUES
Telecommunications operators in Russia are nominally subject to the
regulations of the Regional Communications Committee (the "RCC"). As a practical
matter, national telecommunications authorities of the individual CIS countries
and certain regional and local authorities generally regulate telecommunications
operators in their markets through their power to issue licenses and permits.
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The Communications Law sets out a comprehensive legal and regulatory
framework for the sector. It also sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. This
institutional framework is implemented by separate legislation.
Licenses to provide telecommunications services are issued by the MOC on
the basis of a decision by the Licensing Commission at the MOC. No new licensing
regulations have been issued since the enactment of the Communications Law and
in practice the MOC continues to issue licenses based on the Licensing
Regulations. Under the Licensing Regulations, licenses for rendering
telecommunications services may be issued and renewed for periods ranging from 3
to 10 years and several different licenses may be issued to one person. Once the
licenses are received, the licensee is required to register its right to hold
and operate under the license with Gossvyaznadzor, the national authority
responsible for monitoring compliance with regulatory and technical norms.
Renewals may be obtained upon application to the MOC and verification by
appropriate government authorities that the licensee has conducted its
activities in accordance with the licenses. Officials of the MOC have fairly
broad discretion with respect to both the issuance and renewal procedures. Both
the Communications Law and the Licensing Regulations provide that a license may
not be transferred. However, regional authorities are sometimes in a practical
position to limit these national authorities. In August 1995, the Russian
government created Svyazinvest, a holding company, to hold the federal
government's interests in the majority of Russian local telecommunications
operators. Such entities at the oblast and krai levels (administrative regions
within Russia) and two cities -- Moscow and St. Petersburg -- exercise
significant control over their respective local telephone networks.
License procedures for the Company's cellular services include frequency
licensing from the MOC through a two step process. A license must first be
obtained from the MOC for permission to operate mobile cellular services on a
commercial basis in a specific standard and frequency bandwidth. Thereafter, an
approval to use specific frequencies within the band must be received from the
State Radio Frequencies Commission. Once the licenses are received,
Gossvyaznadzor confirms the rights of an operator to offer radio frequency
transmissions on specific frequencies, administers type acceptance procedures
for radio communications equipment and monitors compliance with licensing
constraints. In each instance, the Company is required to obtain additional
licenses and permits with respect to the use of equipment and the provision of
services.
Telecommunications laws and regulations in Ukraine are similar in many
respects to those of Russia but are subject to greater risks and uncertainties.
Regulations currently prohibit foreign entities from owning more than 49% of any
telecommunications operating company. GTS's Ukrainian joint venture agreements
provide it with the option of purchasing an additional one percent of the
cellular network if these rules are liberalized. The Ukrainian government has
proposed substantial frequency permit fees in connection with providing GSM
service in Ukraine. Although the government has not imposed additional fees on
Bancomsvyaz's existing DCS-1800 service, there can be no assurance that such
fees will not be imposed in the future.
GTS's subsidiaries and ventures hold the following licenses in Russia and
Ukraine:
Switched Services. In Russia, the Company holds two licenses. The first
license was reissued to Sovintel in November 1996 and authorizes Sovintel to
operate as an international overlay network with the ability to interconnect
with the Moscow region and St. Petersburg public switched telecommunications
network ("PSTN"). This license ultimately requires Sovintel to provide service
to at least 50,000 subscribers and expires in May 2000. It was amended in
February 1997 to cover the Leningrad region. The second license was reissued to
SFIT, Ltd., a wholly-owned subsidiary of GTS in February 1997, for provision of
intercity services in 39 regions and in Moscow with ability to interconnect with
the PSTN. In Kiev, Ukraine, the company holds a license for provision of overlay
network services, including international services, in the name of its
affiliate, Bancomsvyaz. In addition, Sovintel is an ITU recognized private
operating agency ("RPOA"), which enables it to maintain a separate dialing code
(7-501) that can be directly dialed from over 170 countries. Sovintel's status
as an RPOA also enables it to terminate calls directly with other operators.
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Leased Circuits. In September 1996 the MOC issued to Sovintel a five-year
license to lease local, intercity and international circuits in the territory of
Moscow, Moscow region and St. Petersburg, valid until September 2001. The total
amount of circuits leased is approximately 300 and may be increased up to a
total authorized capacity of 2,500.
Data Services. In August 1996, the MOC reissued to Sovam a 2 1/2-year
license, effective July 1996, to provide data transmission services via a
dedicated network to a number of oblasts and other regions covering a large
portion of Russia. The license permits a network capacity of not less than 5,000
customers, allows it to interconnect with other data transfer networks in
Russia, and expires January 1, 1999.
Local Access Services. In January 1997, the MOC has licensed TCM to provide
local telephone service in Moscow to not less than 100,000 subscriber local
access lines. The license expires in May 2006. TCM has an agreement with MGTS to
provide up to 200,000 lines, which would require an extension to its license,
when its current capacity is reached.
Cellular Services. In connection with cellular operations, Russian law
apportions the responsibility for regulating and licensing cellular businesses
between national and regional regulators. National telecommunications regulators
have been assigned the responsibility of regulating and licensing cellular
businesses utilizing the GSM and NMT-450 cellular standards prevalent in Europe.
These regulators have auctioned licenses to provide these services to a number
of ventures that have included large, well capitalized western
telecommunications providers such as U S WEST and Nokia during the last four
years. Regional telecommunications authorities have been given the rights to
supervise the observance of licenses by cellular businesses utilizing AMPS
cellular standard service, which is prevalent in the United States. However,
AMPS licenses are issued by the MOC. GTS believes that, in many instances,
cellular operators obtaining AMPS standard licenses, particularly those in
second tier cities, pay license fees that are lower than those paid for the GSM
and NMT-450 "national standards". Licenses for cellular providers have a term of
approximately 10 years.
The Company's twelve Russian cellular companies have licenses which expire
between 2005 and 2007. One of the companies initially received an operating
license in 1994, six companies initially received an operating license in 1995
and five companies initially received an operating license in 1996.
Bancomsvyaz holds a license for provision of DCS-1800 mobile services in
the Kiev oblast.
COMPETITION
Overview. GTS faces significant competition in virtually all of its
existing telecommunications businesses in the CIS. Many of the Company's
competitors and potential competitors, which include large multinational
telecommunications companies, have substantially greater financial and technical
resources than the Company and have the ability to operate independently or with
global or local partners and to obtain a dominant position in these markets. The
Company believes that it has a competitive advantage in each of these markets
because of its operating history, its ability to bundle a broad range of
telecommunications services in the region and its ability to make rapid
decisions in pursuing new business opportunities and addressing customer service
needs. The Company also believes that its local partnerships and reliance on
nationals in the management of its businesses and joint ventures provide it with
better knowledge of local political and regulatory structures, cultural
awareness and access to customers.
International Services. Sovintel faces significant competition from more
than ten other existing service providers in Moscow, including Rostelecom and
joint ventures between local parties and multinational telecommunications
providers. Large competitors include the "Combelga" joint venture, an RPOA
operator in which Alcatel and the Belgian PTO participate as foreign investors,
"Comstar", a joint venture between GPT Plessey and MGTS, providing services
similar to those provided by the Company, TelMos, a joint venture between AT&T,
MGTS, Global One, through its Moscow based ventures, and Peterstar, in
Petersburg, which is part of the PLD Telekom group. Several smaller companies,
such as DirectNet, and Aerocom provide high-volume and carrier's carrier
services in Moscow. Bancomsvyaz competes in the switched international traffic
market with the Kiev electrosviaz and UTel, a joint venture that includes
Western partners with substantial capital and technical resources who together
hold a dominant share of the
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Kiev market. The Company expects that market consolidation will take place among
the competitive field in international services.
Domestic Long Distance Services. The Company believes its major competitors
in the Russian domestic long distance market consist of Rostelecom, the
electrosviazs, including those which are partners in the Company's TeleRoss
Ventures, and a variety of ventures that include foreign partners with
substantial financial resources. The most significant of such competitors
include: Global One, through its regional operations; Rustel, a venture that
includes Rostelecom, other Russian partners and International Business
Communication Systems, a Massachusetts telecommunications firm; Belcom, a
private company in which Comsat has a majority interest and which provides VSAT
services primarily to the energy sector; Satcom, a Russian joint venture
licensed to provide local, long distance and international service over private
and public switched networks; Teleport TP, a satellite overlay company jointly
owned by Rostelecom and Petersburg Long Distance that provides satellite
teleports in cities throughout Russia; and Comincom, a Russian private venture.
In the Russian far east, TeleRoss competes with Vostok Telecom, which is owned
by the Japanese companies KDD and NIC and certain Russian partners; and Nakhodka
Telecom, which is owned by Cable & Wireless and certain Russian partners.
GTS both cooperates and competes with Rostelecom. Rostelecom provides only
international and long distance services to international carriers and regional
electrosviazs, and does not provide end-to-end customer services. GTS provides
last mile, account management, and transit services for Rostelecom in Moscow,
and uses Rostelecom channels and switches for both international and long
distance services. GTS provides long distance and international services on an
end-to-end basis, using service elements of Rostelecom, the electrosviazs and
its own resources. However, Rostelecom does compete with Teleross, in that
Teleross provides intercity services to customers, using satellite channels
provided by other state agencies (Intersputnik), and provides transit services
to various electrosviazs, on a traffic overflow basis.
GTS believes that it enjoys a number of competitive advantages in the
Russian domestic long distance market, the most important being the maturity of
its international and data service businesses in Russia. This provides GTS with
access to the services, customers, products, licenses and facilities of its
other businesses. The Company also believes that it has more experienced
management, a more comprehensive strategy to build out a nationwide long
distance network and stronger relationships with many regional telephone
companies and with satellite capacity providers, such as Intersputnik, than most
of its competitors. In addition, the Company believes that it does not have any
significant competitor in the regional inter-city market (i.e., calls between
Russian cities other than Moscow or St. Petersburg).
Data Services. Sovam has several primary competitors in the market for data
services: Global One, which began packet-switched service in Moscow and St.
Petersburg in June 1992, under the Sprint Networks venture; Demos, an Internet
service provider; and Relcom, a cooperative affiliation of computer users that
relies on an older generation of technology that supplies slower and lower-cost
messaging facilities to customers (primarily domestic commodities traders) that
do not require higher levels of service. In addition MCI and Rostelecom have
recently announced their agreement to create a national Internet access network
utilizing Rostelecom's domestic network and MCI's international infrastructure.
Rostelecom has also announced the formation of a new Internet services company
called RTK Internet, with Relcom as its partner. Although Sovam's business has
grown quickly, the Company believes that Global One is the market leader. GTS
believes that other potential competitors, including foreign PSTNs, Infotel,
Infocom and Glasnet, are also active in this market.
Although the Company faces significant competition in this market, it
believes that it enjoys certain competitive advantages, including the ability to
reach a wide area throughout Russia through TeleRoss, innovative service
offerings such as Russia On Line, the maturity of its business in the key
banking services segment, high levels of customer service and support, and high
speed digital channels through TeleRoss.
Local Access Services. The Company believes that its major competition in
the Moscow local access market consists of a number of ventures with Western
partners, including Telmos (which includes AT&T), Comstar (which includes GPT
Plessey), and Combelga. However, since TCM has obtained an allocation of
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up to 100,000 numbers, the Company believes that TCM will account for a
substantial proportion of the new capacity to come onto the market within the
next five years.
Cellular Services. Most Russian cellular markets have the potential for
three licensed operators, including one operator for each of the GSM and NMT-450
cellular standards, which Russia has adopted as national standards, and one
operator using the AMPS cellular standard, which has been set as a regional
standard. Many large Western telecommunications operators, including U S WEST,
Deutsche Telekom, STET, Midcom and Millicom, have participated in auctions for
licenses to provide GSM and NMT-450 cellular service to certain significant
Russian urban centers. In addition, a CDMA auction is likely to occur in the
future which could result in one or more CDMA operators entering the market. In
Ukraine, Bancomsvyaz competes primarily with an NMT operator and a GSM operator
in Kiev. Additional GSM licenses were auctioned off in early 1997 and other GSM
operators may enter other markets in 1998.
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WESTERN EUROPE
OVERVIEW
GTS seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of two ventures, HER and
GTS-Monaco Access. HER's objective is to become the leading pan-European
carriers' carrier by providing centrally managed cross-border telecommunications
transmission capacity to telecommunications companies including traditional PTOs
and New Entrants on an approximately 18,000 kilometer high capacity fiber optic
network designed to interconnect a majority of the largest Western and Central
European cities. HER is currently operating over an approximately
1,700-kilometer portion of the network linking Brussels, Antwerp, Rotterdam,
Amsterdam, London and Paris. HER expects the initial five country network to be
placed in operation in the second quarter of 1998. This segment of the network
is expected to deliver managed transport services over approximately 3,000
kilometers of fiber optic cable linking the cities of London, Rotterdam,
Amsterdam, Antwerp, Brussels, Paris, Dusseldorf and Frankfurt. The full 18,000
kilometer network is expected to become fully operational during the year 2000.
HER also plans to lease capacity on a transatlantic cable linking the European
network with North America and is exploring various interconnectivity options to
Russia and Asia. Such intercontinental interconnectivity will help HER satisfy
the needs of its European customers with respect to outgoing traffic and attract
additional non-European customers with traffic terminating in Europe. HER
commenced commercial service over the Brussels-Amsterdam portion of the network
in late 1996, and the London-Paris portion in November 1997. GTS-Monaco Access
operates an international gateway in Monaco in partnership with, and utilizing
the existing gateway infrastructure of, the Principality of Monaco and provides
transit and routing of international calls to other telecommunications
operators. Through its HER and GTS-Monaco Access ventures, GTS is building a new
network for transporting voice, data and multimedia/image traffic for other
carriers throughout Western and Central Europe and for worldwide international
voice, data and multimedia/image traffic that either originates or terminates
in, or transits through, Western and Central Europe.
The Company believes that the international segment of the Western and
Central European telecommunications market will be an attractive market for new
telecommunications entrants because of its large size, the high operating costs
and low productivity of current providers, and the barriers to entry created by
the need to control a network and its rights-of-way.
The European telecommunications market has historically been dominated by
monopoly PTOs. This system has ensured the development of broad access to
telecommunications services in Europe, but it has also restricted the growth of
high quality and competitively priced pan-European voice and data services. The
current liberalization occurring in Europe is intended to address these
structural deficiencies by breaking down PTO monopolies, allowing new
telecommunications operators to enter the market and increasing the competition
within the European telecommunications market. In March 1996, the European
Commission adopted a directive (the "Full Competition Directive") requiring the
full liberalization of all telecommunications services in most EU member states
by January 1, 1998. The Company expects that full liberalization in these
European countries will lead to the emergence of New Entrants with new and
competitive service offerings. HER expects this increase in competition will
result in lower prices and a substantial increase in the volume of traffic and
range of telecommunication services provided. HER believes that as a result of
the increased call volume and growth in value added services, participants in
these markets will require significant amounts of new cross-border
telecommunications transport capacity to provide their services.
The Hermes network will offer PTOs and New Entrants an attractive
alternative for the transport of cross-border European telecommunications
traffic. In the traditional system, PTOs own and control circuits only within
their national borders, and as a result, cross-border traffic must be passed
from one PTO to another PTO at the national boundary. No single PTO therefore
owns or controls end-to-end circuits for cross-border calls. The alternative for
carriers of this traffic will be to build their own transport capacity or use
International Private Leased Circuits ("IPLCs") which are provisioned by
combining half-circuits on the networks of two or more PTOs. The Company
believes that there are a number of problems with these options that result in
HER being well-positioned to become the leading independent carriers' carrier in
Western and Central Europe. In particular, building their own transport capacity
is unlikely to be an attractive option for most
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carriers because of the high traffic volumes required to justify the expense,
the need to focus resources on marketing and customer service, the time
commitment and the regulatory and administrative complexities involved,
particularly in obtaining the rights of way across national borders. Likewise,
IPLCs provided by the PTOs also have a number of disadvantages, including high
prices, lack of end-to-end quality control, lack of redundancy, low quality due
to diversity of network systems and equipment, limited availability of bandwidth
and long lead times for provisioning.
HER
HER's objective is to become the leading pan-European carriers' carrier by
providing centrally managed cross-border telecommunications transmission
capacity to telecommunications companies including PTOs and New Entrants. HER
intends to offer these target customers a better transport system than is
currently available in Europe with a higher and more consistent level of
transmission quality, redundancy, network functionality and service across
Europe at lower prices. Development of the HER network is dependent upon, among
other things, HER's continuing ability to obtain the necessary financing,
rights-of-way, licenses and other regulatory approvals in a timely and
cost-effective manner. See "Risk Factors -- HER Network Roll-out."
HER is developing an approximately 18,000 kilometer, pan-European high
capacity fiber optic network designed to interconnect a majority of the largest
Western and Central European cities. Each access point of the network will be
placed in operation as it is linked to the network. HER intends to build the
network using the most accessible and cost-efficient infrastructure base in each
of the regions served, including using rights-of-way and existing infrastructure
of railways, motorways, pipeline companies, waterways and power companies. HER
plans a flexible approach to the network build-out plan and intends to fine-tune
the scope, route and design of the network based upon the evaluation of customer
demand.
HER began initial trials of the Brussels-Amsterdam portion of the network
in the third quarter of 1996 and commenced commercial service in November 1996.
Commercial service connecting Paris to Amsterdam, Brussels and London started in
November 1997.
HER expects to continue to roll-out full telecommunications transport
service on the initial network in the first five countries linking the
additional cities of Dusseldorf and Frankfurt in the second quarter of 1998.
This initial network in the first five countries is expected to consist of 3,000
kilometers of fiber optic cable covering countries which, in 1995, originated
over 60% of all outgoing calls and terminated over 60% of all incoming calls in
the countries to be served by the full network. Network coverage is planned to
be expanded to include Munich, Berlin, Geneva, Zurich, Stockholm, Copenhagen,
and Milan in the third quarter of 1998. By the year 2000, the 18,000 kilometer
HER network is expected to have points of presence in at least 32 cities in 15
European countries, including Southern and Central Europe. HER also plans to
lease capacity on a transatlantic cable linking the European network with North
America and is exploring various interconnectivity options to Russia and Asia.
HER has entered into agreements for the construction and/or lease of fiber
optic routes for the initial network in the first five countries. Contracts have
been concluded with respect to the portion of the network connecting Germany
with each of France, the Netherlands and Switzerland and HER continues to
negotiate rights-of-way and other infrastructure arrangements in five other
Western European countries representing the remainder of the Western European
portion of the rollout. HER will need to negotiate similar agreements to
complete the network in four Central European countries. Buildout of the HER
network is subject to numerous risks and uncertainties that could delay
deployment or increase the costs of the network, or make the network
commercially unfeasible. See "Risk Factors -- HER Network Roll-out."
HER was formed on July 6, 1993 by HIT Rail. HIT Rail was incorporated in
1990 by eleven national railways to carry out telecommunications engineering
activities in order to construct and exploit a data communications network for
railway traffic. GTS-Hermes purchased a 34.4% interest in HER in 1994 and has
increased its interest to 50% in 1995 and to 79% in 1997. GTS-Hermes is a wholly
owned subsidiary of GTS.
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Business and Marketing Strategy
The overall strategy of HER is to offer PTOs and New Entrants pan-European
cross-border telecommunications transport services to help them, in turn, more
successfully meet the needs of their end-user customers. The HER network also
provides a vehicle through which a carrier can compete in markets where it does
not own infrastructure. HER expects to enter the market ahead of similar
competition and encourage a wide variety of carriers to use its network with
service offerings that meet their needs. HER's primary service offerings are
large-capacity circuits for "wholesale" customers such as PTOs and New Entrants.
HER's focus on carriers is designed to complement and not compete with carriers'
own business objectives in providing services to end-users.
To establish HER as the leading carriers' carrier for international
telecommunications within Europe, HER intends to offer its customers
significantly higher quality transmission and extended/advanced network
capabilities at a competitive price by focusing on the following:
High Capacity International Network Facilities. The HER network is
designed to offer its customers access to high capacity network facilities
outside their domestic markets, providing cross-border capabilities without
requiring customers to invest in network infrastructure or being
constrained by a narrow range of capacity offerings. With STM-64 technology
and Wavelength Division Multiplexing ("WDM") upgrades, HER's fiber
deployment plan provides for the equivalent of 128 fiber pairs of capacity
across Europe.
Uniform Network Architecture. The HER network is designed to offer
managed transport services from country to country and across multiple
countries utilizing a single uniform network, in contrast to services
currently available that use multiple providers over several networks with
varying technologies and each under the control of separate, not
necessarily compatible, network control systems. The HER network's uniform
technology enhances service by providing quality and reliability as well as
uniformity of features throughout the network.
Diverse Routing. The HER network architecture includes diverse,
redundant routes that are designed to provide high levels of reliability.
The network is designed to provide availability of over 99.98% for most
routes and to provide customers with a wide range of telecommunications
transmission capacity. To achieve this level of reliability without the use
of a network similar to the HER network, HER believes that carrier
customers would need to purchase additional dedicated circuits to provide
for redundancy.
Rapid Provisioning. HER services provide access to the network, such
that additional capacity can be provided to customers on the HER network on
a rapid basis. This access provides a level of capabilities that HER
believes is unavailable in Europe today. This ability to rapidly provide
service is largely due to HER's development of capacity substantially in
excess of HER's forecasted requirements.
- Flexibility. HER services are focused on providing customers flexibility
across the network through which the customer may minimize risk by
enabling network rerouting, eventually even under customer direct
control.
- Advanced Technology. HER is deploying SDH technology which, by using WDM
techniques and hardware, is upgradeable and will permit significant
expansion of transmission capacity without increasing the number of fiber
pairs in the network. This technology also provides the basis for
structuring advanced operating features, such as virtual private network
service and ATM-based services. Additionally, the SDH technology deployed
by HER may be upgraded.
- Innovative Pricing. Currently the price of E1 equivalent circuits on
transborder European routes is artificially high and not necessarily
related to the cost of such circuits. HER intends to offer competitive
pricing. HER will also offer highly tailored contract terms and volume
discounts, which allow carrier customers to plan more efficiently the
fixed costs of their service portfolio. Customers can select varying
capacity, access, guaranteed availability and contract terms at
competitive prices. Customers sourcing from PTOs are generally limited to
order from a very narrow set of capabilities offered under inflexible
pricing plans.
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Although HER and GTS have relationships with certain PTOs or other access
providers for specific projects, they do not have wide-ranging alliances with
any of the major consortia or large Western telecommunications companies.
Additionally, HER's strategy calls for it to focus on carriers' carrier
services, so that it will limit overlap of target markets with its carrier
customers in end user markets. HER believes that this independence will make it
an attractive service provider for carriers who may otherwise be reluctant to
obtain services from other providers of intra-European transport that also may
be their competitors in the retail market.
SERVICES
HER's primary service is large capacity cross-border European circuits
provided to carriers and service providers over an integrated, managed
pan-European network structure thus providing a service for wholesale customers
such as PTOs and New Entrants. The HER network will be based on SDH technology,
which provides for digital transmission capability upon which a broad range of
advanced functionality may be built and which offers network availability,
flexibility, bandwidth speeds and error performance not otherwise available to
carriers for transport of telecommunications traffic across national borders in
Western and Central Europe. The network is designed to provide customers with a
wide variety of bandwidth speeds, ranging from VC12/E1 Standard (equivalent to
2.048 Mbps) to STM-1/E4 Standard (equivalent to 155 Mbps) and beyond.
HER will provide high quality cross-border transmission services for
licensed or otherwise authorized telecommunications providers. Services are
based on the principle of adding greater value than currently available in the
market while retaining competitive prices.
Point-to-Point Transport Service. The current market for cross-border
transport is served by IPLCs provided by PTOs. IPLCs are formed by combining
half-circuits from two PTOs between customer locations, often with additional
PTOs providing transit segments. Under the IPLC service, overall service quality
guarantees generally are not provided and only a limited range of bandwidth is
available, usually only E1 and in certain instances, E3. The Company believes
that HER's Point-to-Point Transport Service will be a major improvement to the
PTO-based approach because it provides a greater range of bandwidths (from 2
Mbps (E1 or VC-12) to 140/155 Mbps (E4 or VC-4)) and allows customers to choose
a service level agreement with guarantees appropriate for their applications,
including guarantees for on-time service delivery and service availability.
Point-to-Point Transport Service consists of two services, "Integrated" and
"Node-to-Node." The HER "Integrated" service provides an end-to-end service
between customer-specified locations where the customer can request for HER to
arrange for "last mile" services from the HER node location to the customer's
location. The HER "Node-to-Node" service can be selected when the customer
prefers to provides its own services to reach the local HER node location. In
Node-to-Node Service, HER guarantees service only on its portion of the network
between HER nodes. Both services are competitively priced relative to current
service offerings. A premium is charged for the highest guaranteed level of
service which incorporates an end-to-end, fully diverse, protected, "Integrated"
service. The customer can choose flexible contract terms from one to five or
more years' duration, with volume discount schemes designed to ensure that HER
remains a cost-effective solution.
Virtual Infrastructure Service. Carriers and operators that plan to expand
their operations to become pan-European service providers as the European
marketplace is liberalized require a flexible and cost-effective means of
telecommunications transport. To date such service providers obtain
international transport service by leasing IPLCs. Leasing IPLCs requires a
carrier to lease channels on a segment-by-segment basis from multiple PTOs,
linking the target cities under arrangements having fixed capacity and pricing
structure for each segment of the carrier's network. Leasing IPLCs has several
disadvantages, including (i) difficulty in obtaining discount/volume pricing
schemes since there is no single provider of pan-European coverage, (ii) delays
in implementation due to numerous contractual negotiations and having to
interconnect numerous IPLCs, (iii) limited availability of pan-European leased
capacity at high bandwidth and (iv) variability of quality due to multiple
operators and the absence of a single uniform network. Operators could also
construct
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their own network, which is expensive, time-consuming and complex and which may
not be justified by such operators' traffic volume.
HER's Virtual Infrastructure Service will offer a new solution and an
attractive alternative to leasing IPLCs or building infrastructure. This service
will enable HER's customers to obtain a uniform pan-European or cross-border
network under one service agreement by allowing the customer to select any
number of cities along the HER network at a pricing structure based on the
overall amount of leased capacity for the customer's entire network. The key
feature behind Virtual Infrastructure Service is that it gives the customer the
ability to add or reconfigure capacity in 24 hours between locations connected
in the Virtual Infrastructure Service, thereby enabling the customers to respond
almost immediately to changes in traffic. By being able to transfer capacity
among the network routes, HER's customers are able to avoid over- and
under-utilization of leased channels. This service offering provides a customer
with the benefits of ownership (rapid provisioning, freedom to rearrange and
control) with a "pay-as-you-go" managed service offering, without the burdens of
up-front investment and costs required to build a network, and without having to
manage the on-going maintenance and operation of the network.
The service would be delivered through pre-installed physical facilities at
each of the customer locations. These facilities are designed to ensure that
most growth or changes in customer requirements can be addressed purely by
remote logical reconfiguration from the HER Network Operations Center. This
remote network management ability is inherent in SDH technology and allows rapid
provisioning and high quality of service.
Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements, and prefer to have physical
configuration control over their networks. The HER Ring Service connects
multiple customer locations with multiple VC-4 paths in a ring configuration.
The customer has direct control over the configuration of the VC-3 and VC-12
paths within the ring, and has exclusive control over the routing. Additional
ring capacity can be added with no service interruption and additional customer
locations may be added to the ring with minimal service interruption. Because
HER is not required to configure 'idle' bandwidth or to manage the 'SDH subnet'
this service can be provided at a very competitive rate vis-a-vis other
point-to-point services.
Sales and marketing of HER's services are conducted through its sales and
marketing department, which includes a director and senior sales managers
responsible for various regions and customer segments. Additionally, HER expects
that its railway shareholders that develop domestic telecommunications
businesses, or other local network access providers, can provide an effective
distribution channel to smaller carrier customers.
PRICING
Currently the price of cross-border pan-European calls are often
significantly higher than the underlying cost of transport 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 HER
to attractively and competitively price services in the face of declining
overall tariffs for telecommunication services. HER's low-cost basis is due to,
among other things, its use of up-to-date technology without the burden of
legacy networks, which requires fewer employees to operate.
The term of a typical customer agreement currently ranges from 1 to 3
years. The customer agrees to purchase, and HER agrees to provide, cross-border
transmission services. In general the customer agrees to pay certain
non-recurring charges and recurring charges on an annual basis, payable in
twelve monthly installments. If the customer terminates the service order prior
to the end of the contract term, it is generally required to pay HER a
cancellation charge equal to three months service for each of the twelve months
remaining in the contract term. HER guarantees transmission services to a
certain service level. If such levels are not met or HER fails 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.
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CUSTOMERS
HER's high capacity, SDH-based fiber optic network is designed to enable
PTOs and New Entrants to integrate high quality, cross-border capacity into
their end user offerings. As of November 30, 1997, fifteen customers were under
contract for service on the HER network, including PTOs, a global consortium of
PTOs, Internet service providers, an international carrier, VANs and resellers.
HER provided capacity of approximately 180 E1 equivalent circuits as of November
30, 1997. The type and quality of HER's customers validates the concept of the
HER network, and illustrates the type of customers who will be attracted to the
full network. The success of this limited network also demonstrates the demand
for cross-border transport services. In total, HER is targeting seven major
market segments or customer groups which can be characterized as follows:
- Existing PTOs. This customer segment consists of the traditional
European PTOs that generally participate in the standard bilateral
agreements for cross-border connectivity. Hermes provides a vehicle
for PTOs to compete in non-domestic markets both before and after
January 1, 1998. As of January 1, 1998, both reserved and
non-reserved traffic can be transported by alternative infrastructure
providers, thus vastly expanding the available PTO market for HER.
- Global Consortia of Telecommunications Operators. Many of the
largest PTOs and international carriers have pooled resources and
formed consortia in order to compete more effectively in important
telecommunications markets such as those in Western Europe
particularly outside their home markets. Prior to liberalization of
the provision of switched voice services in Western European markets,
one of the primary objectives of these consortia is to provide
non-reserved pan-European services to multinational business
customers, including X.25/frame relay (high speed data network)
service and closed-user group voice services. Under the current
regulatory framework, consortia would otherwise be required to
purchase leased lines at negotiated retail rates, even within their
home countries. HER believes that it provides an attractive
alternative at better pricing in those environments where such a
consortium does not already own its infrastructure. Furthermore, HER
believes that it is well positioned to provide cross-border
connectivity between different domestic infrastructures of these
alliances.
- International Carriers. This customer segment consists of
non-European carriers with traffic between European and other
international gateways. Such carriers include Teleglobe, GTS-Monaco
Access and eventually the U.S. Regional Bell Operating Companies. HER
can provide these customers a pan-European distribution network to
gather and deliver traffic to and from their own and other hubs.
- Alternative Carriers. This segment consists of second carriers,
cable TV and mobile carriers and competitive access providers. These
new carriers have chosen to compete with the incumbent PTOs in their
respective countries, and the Company believes that they would look
favorably to an alternative such as HER. HER believes that this
segment will sustain the largest growth as competition emerges in
Europe. HER also believes that non-PTO competitors in Europe will
prefer to use a non-PTO alternative like HER to meet their
cross-border telecommunication transport needs.
- Internet Backbone Networks. Internet backbone networks are a fast
emerging segment and are expected to generate significant
requirements for the services HER offers. These require large
capacity international connectivity services between Internet nodes
(point of interconnection between local Internet service providers)
in all local European markets. The Internet segment is experiencing
significant growth in demand for transmission capacity.
- Resellers. Resellers are carriers that do not own transmission
facilities, but obtain communications services from another carrier
for resale to the public. Resellers are also a growing segment of the
market and are expected to increase in conjunction with the
liberalization of the European telecommunications market. In the
U.S., for example, resellers were a significant factor in the
expansion of competition.
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- Value Added Networks ("VANs") and other Service Providers. VANs are
data communications systems in which special service features 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. VANs' basic network transmission requirement
is to connect data switches or processors. VANs currently purchase
their own international circuits and build additional resiliency into
their network infrastructure. HER will allow them to meet these needs
cost-effectively, and to extend their services to new markets or
customers without substantial capital investment.
HER expects that additional demand for alternative service providers will
come from increased usage of dedicated circuits for Internet access, private
lines for the deployment of wide-area networks by large corporations, "single
source" local and long distance services by small and medium-sized businesses
and emerging broad band applications such as cable TV programming distribution
(other than broadcast) to the end user.
CURRENT OPERATIONS
HER currently operates an approximately 1,700 kilometer network connecting
the cities of Brussels, Antwerp, Rotterdam, Amsterdam, London and Paris. HER
began initial trials of a 244 kilometer portion of the network between Brussels
and Amsterdam in the third quarter of 1996 and commenced commercial service in
November 1996. Commercial service connecting Paris to Amsterdam, Brussels and
London started in November 1997. HER's Network Operations Center located in
Brussels, Belgium and its backup center located in Antwerp, Belgium are fully
operational and house network management and customer support services which
operate 24 hours a day, seven days a week. Billing and customer service
functions are also operational.
NETWORK DESIGN
Network Architecture. The network architecture is based on a highly meshed
flat topology which covers a wide geographical area with large distances between
individual network nodes. This architecture allows rerouting of traffic at
electronic speeds in the event of a network failure. This approach also lowers
network cost by allowing each node to be sized to match anticipated traffic
volumes rather than to a standard capacity. Individual nodes can be configured
to connect any trunk to any other in the nodes, thus allowing efficient
transmission of traffic. Each node will be connected to at least two other nodes
allowing rerouting of traffic in the event of a network failure. HER believes
that its network will be the first cross border pan-European network with such
redundancy.
The HER network has been designed to be controlled by a single network
management center and supported by advanced operational support systems. A
centralized network center can pinpoint overloaded pathways or malfunctioning
circuitry and reroute traffic much more quickly than networks controlled by
separate network centers operated by PTOs in different countries. HER primarily
uses Alcatel for the supply of transmission equipment and network management
systems. HER's advanced operational support systems allow it to correct network
failures and isolate equipment faults with greater speed and at a lower cost
than is the case with heterogeneous multi-operator networks. Critical elements
of the network, including network maintenance and control systems, are designed
with redundancy in order to ensure a high quality of service. The network design
has several important resilience features including: multiple paths to each
node, built-in hardware redundancy and redundant power supplies. For all network
routings, there will be at least two paths. Should service failure occur on one
route, the network is designed to automatically re-route traffic to another
route. HER believes that these techniques will result in performance of 99.98
percent or better for premium service customers for most routes.
HER expects to operate the entire network and to own substantially all of
the 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 HER because they reduce the capital expense burden
of building large quantities of capacity before they can be used. Where HER
leases dark fiber, the infrastructure provider
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will generally be responsible for maintaining such fiber optic cable. HER will
enter into agreements with Alcatel and infrastructure providers and other third
parties to supply and/or maintain the equipment for the HER network. See "Risk
Factors -- HER Network Roll-out."
Network Capacity. The network will consist of Synchronous Digital
Hierarchy ("SDH") STM-16 links managed by equipment and operating centers owned
by HER and running on dark fiber leased from infrastructure providers or built
by HER on leased rights of way. Each line system and multiplexer works initially
at the 2.5 Gbps (STM-16) level. The most important types of equipment used or to
be used in this network are Add-Drop Multiplexors ("ADMs") and regulators and a
variety of optical amplifiers for boosting optical signals. The STM-16 links are
expected, where needed, to be upgraded to STM-64. Furthermore, fibers will be
multiplexed using WDM, also as required. Additional capacity can be achieved by
adding new fiber accesses to a given city over alternative routes, thereby
achieving more meshing and the resulting improved network availability.
Network Agreements. HER has entered into agreements and letters of intent
with various infrastructure providers for construction and/or dark fiber lease
of portions of the HER network. HER's agreements for leases of portions of the
network typically required the infrastructure provider to provide a certain
number of pairs of dark fiber and node and/or regenerator sites along the
network route commencing on certain dates provided by HER. The term of a lease
agreement typically ranges from 10 to 18 years. An agreement typically contains
optical specification standards for the fiber and methods of testing. HER is
allowed to use the cable for the transmission of messages and in other ways,
including increasing capacity. The infrastructure provider also provides space
for the location of equipment and spare parts and guarantees the provision of
power and other utilities together with environmental controls and security to
ensure the proper functioning of the equipment. The infrastructure provider is
typically responsible for maintenance of the cable and the provision of first
line maintenance to equipment and permits HER access to such facilities. Access
arrangements to the nodes are also provided so that connection may be made to
HER customers or to the rest of the network. An agreement also provides for an
annual price for the provision of fiber and for the facilities and maintenance.
The agreements typically provide for termination by the parties only for
material breach, with a 90 day minimum cure period. The agreements typically
contain a transition period after termination of the agreement to allow HER to
continue to serve its customers until it can reach agreement with an alternative
infrastructure provider.
Local Access. Access to the HER network will be provided to clients
through SDH access lines including at the STM-1 or STM-4 level. However,
customers who continue to use the older PDH technology may also access the HER
network. In each city, as a HER point of presence is deployed, HER may contract
with a local access network supplier for "last mile" services to customer
locations. HER will not invest in building local access infrastructure but such
connectivity can be supplied on a case-by-case basis via preferred local access
partner arrangements. Currently Telfort in the Netherlands and Belgacom in
Belgium are providing local access to the operating Amsterdam-Brussels route. In
London and Paris, HER has contracted with local access providers to connect the
HER network to intra-city networks in those cities. Pursuant to this agreement,
HER can offer its carrier customers local connectivity in those cities. Various
Local Access Network Suppliers may also be interested in HER for the purpose of
linking the business centers in which they are active. Therefore, the
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Company believes that the relationships between HER and local access network
suppliers can benefit both parties. Set forth below is an illustration of the
connection between the HER network and local access providers.
[SDH/WDM NETWORK CHART]
Network Routes. The table below sets forth the current planning dates of
the development of routes in the initial network in the first five countries.
<TABLE>
<CAPTION>
ESTIMATED
COMMERCIAL
SERVICE TOTAL ROUTE
AVAILABILITY KILOMETERS OF
FROM TO DATE FIBER
- ------------ ---------- ------------ --------------
<S> <C> <C> <C>
Amsterdam Brussels Operational 244
Amsterdam London Operational 458
Brussels London Operational 474
Paris Brussels Operational 514
Dusseldorf Amsterdam April 1998 246
Paris Frankfurt June 1998 574
Frankfurt Dusseldorf June 1998 236
</TABLE>
HER is currently operating on an approximately 1,700 kilometer portion of
the network. Under HER's current plan, HER expects to have an aggregate of
approximately 3,000 kilometers completed in the first half of 1998,
approximately 10,200 kilometers completed at the end of 1998 and the entire
18,000 kilometer network completed by the year 2000. Hermes also plans to lease
capacity on a transatlantic cable linking the European network with North
America in 1999.
The Dusseldorf-Amsterdam, Frankfurt-Dusseldorf and Paris-Frankfurt fiber
optic routes are currently under construction. "Under construction" means that
with respect to each of the segments that make up each of these routes, one of
the following is occurring: (i) HER has contracted to build or is contracting to
build the
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fiber optic cable segment, and (ii) HER has leased or will lease such segment of
dark fiber optic cable from a third party who has built or is currently building
such segment. The dates set forth above may be subject to delays due to a
variety of factors, many of which are beyond the control of the Company. See
"Risk Factors -- HER Network Roll-Out."
HER is deploying the network along the rights-of-way of several
shareholders as well as the rights-of-way of a variety of alternative sources,
including motorways, waterways, pipelines and utilities. The rights-of-way of
HER-built portions of the network will be provided pursuant to long-term leases
or other arrangements entered into with railroads, highway commissions, pipeline
owners, utilities or others. HER generally prefers to use the infrastructure of
its rail-based shareholders when such infrastructure is available on a timely
and commercially reasonable basis. In certain cases, however, HER has not been
able to reach agreement with such shareholders for the provision of
rights-of-way along their railways, which has resulted in significant delays to
the network buildout. In all cases, it is the policy of HER to evaluate multiple
alternative infrastructure suppliers in order to maximize flexibility. As a
result of its network development activities to date, HER has gained access to
infrastructure for its network routes which, in certain cases, HER believes will
be difficult for its competitors to duplicate.
Competition
The European and international telecommunications industries are
competitive. HER's success depends upon its ability to compete with a variety of
other telecommunications providers offering or seeking to offer cross-border
services, including (i) the respective PTO in each country in which HER operates
and (ii) global alliances among some of the world's largest telecommunications
carriers. HER expects that some of these potential competitors may also become
its customers. HER believes that the ongoing liberalization of the European
telecommunications market will attract New Entrants to the market and increase
the intensity of competition. Competitors in the market compete primarily on the
basis of price and quality. HER intends to focus on these factors and on service
innovation as well. HER business plan anticipates substantial head-to-head
competition as well as indirect competition.
WorldCom recently announced plans to construct a pan-European fiber
network, the first phase of which is expected to connect London, Amsterdam,
Frankfurt, Brussels and Paris by early 1998. Although the Company believes that
the proposed WorldCom pan-European network is primarily intended to carry
WorldCom traffic, WorldCom has stated that any excess capacity on such network
will be used to provide a competitive carrier's carrier service.
HER also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through International
Private Leased Circuits. In addition, the liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets.
If HER's competitors, many of whom possess greater technical, financial and
other resources than HER, devote significant resources to the provision of
pan-European, cross-border telecommunications transport services to carriers,
such action could have a material adverse effect on HER's business, financial
condition and results of operations. There can be no assurance that HER will be
able to compete successfully against such new or existing competitors. See "Risk
Factors -- Competition."
HER RECAPITALIZATION
HER has completed a recapitalization (the "HER Recapitalization"), wherein
HER extended rights to subscribe to additional shares of HER to GTS-Hermes, HIT
Rail and the eleven railways comprising the HIT Rail consortium. Pursuant
thereto, GTS-Hermes and two of the eleven railways that comprise the HIT Rail
consortium have exercised their subscription rights, while HIT Rail and the
other nine railways have declined to exercise their subscription rights. HER has
issued (i) 150,592 shares to GTS-Hermes in exchange for the conversion of loans
and additional consideration, (ii) 24,007 shares to HIT Rail in exchange for the
conversion of loans, (iii) 11,424 shares to Societe Nationale des Chemins de Fer
Belges S.A. de Droit Public/Nationale Maatschappij der Belgische Spoorwegen N.V.
Van Publiek Recht (the Belgian national railway)
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("SNCB/NMBS") and (iv) 4,365 shares to AB Swed Carrier (a wholly owned
subsidiary of SJ, the Swedish national railway). As a result, GTS-Hermes owns
79.1%, HIT Rail owns approximately 12.6%, SNCB/NMBS owns 6.0% and AB Swed
Carrier owns 2.3% of the issued HER shares. Pursuant to the HER
Recapitalization, HER, GTS-Hermes, HIT Rail, SNCB/NMBS and AB Swed Carrier have
executed a new Shareholders Agreement, the principal terms of which are set
forth below.
Under the new Shareholders Agreement, actions to be taken by shareholders
will be adopted by a simple majority vote with the exception of certain actions
which will require at least 85% of the votes cast: (i) purchase by HER of its
own shares and any redemption thereof, (ii) exclusion of preemptive rights in
the case of the issuance of new shares and the transfer of shares held by HER,
except in the event of a public listing of the shares or of new shares or of an
offering of shares or options on new shares (warrants) to professional investors
in order to obtain further funding, (iii) winding up or dissolution of HER, (iv)
any amendment to the articles of association other than those pertaining to
increases in the authorized capital of HER or to convert HER into an N.V.
("Naamloze Vennootschap") to enable a public listing of shares or new shares,
(v) any amendment to the scope of HER's business, (vi) the declaration of
dividends and (vii) the admission of new shareholders to the Shareholders
Agreement. In addition, the Shareholders Agreement provides that (a) if
GTS-Hermes is the owner of at least 50% of the issued shares, then it will have
the right to make a binding nomination for the appointment of half of the
members of the Board of Supervisory Directors or (b) if GTS-Hermes is the owner
of at least two-thirds of the issued shares, then it will have the right to make
a binding nomination for the appointment of half of the members of the Board of
Supervisory Directors plus one member more, appointed pursuant to nominations by
all other shareholders. As long as HIT Rail is the owner of at least one share,
HIT Rail will be entitled to make a binding nomination for the appointment of at
least one member of the Supervisory Board. The Shareholders Agreement also
provides that shareholders who participated in the capital restructuring other
than GTS-Hermes and HIT Rail with a shareholding of at least 6.8% subject to
adjustment in the discretion of the other shareholders will be entitled to make
a binding nomination for the appointment of one member of the Board of
Supervisory Directors. Shareholders who participated in the capital
restructuring other than GTS-Hermes and HIT Rail who hold fewer than 6.8% of the
issued share capital of HER will be entitled on a rotating basis to make one
binding nomination for the appointment of a member of the Board of Supervisory
Directors for two-year periods.
Articles of Association and Shareholders Agreement
Under the Articles of Association and the Shareholders Agreement, both
GTS-Hermes and HIT Rail have preemptive rights in connection with issuances of
ordinary shares and options on shares to be issued in proportion to the total
nominal value of the shares held by each of them. Preemptive rights can be
exercised for four weeks after the date the notice of the offer is received by
the shareholders.
The Shareholders Agreement provides that HER or its designated vendor will
provide fiber capacity in its network for use by the shareholders of HER on fair
commercial terms, use, quantity and price to be negotiated on a bilateral basis.
In the Shareholders Agreement, HIT Rail has covenanted to (i) use its best
efforts to establish such commercial agreements between individual HIT Rail
shareholders and HER, to obtain rights of way from individual HIT Rail
shareholders and to cooperate in obtaining such licenses as may advance the
business of HER, (ii) use its best efforts to ensure that the HIT Rail
shareholders cooperate in obtaining such license in accordance with the business
plan of HER and as may be necessary or advisable in furtherance of HER's
business, (iii) will not, so long as both HIT Rail and GTS-Hermes are
shareholders of HER and for one year after HIT Rail ceases to be a shareholder,
agree with any entity other than GTS-Hermes or HER to assist or cooperate in the
development of any pan-European telecommunications operator and (iv) use its
best efforts to obtain on HER's behalf such materials as may be required and
arrange inspection visits of selected rights of way for the purpose of making
initial cost estimates.
The foregoing summary of the Shareholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the Shareholders
Agreement.
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LICENSES AND REGULATORY ISSUES
A summary discussion of the regulatory framework in the countries of the
network in the first five countries and the next five countries into which HER
expects to develop the 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.
National authorities in individual member states of the EU are responsible
for regulating the operation (and in some cases the construction) of
telecommunications infrastructure. HER believes that the adoption of the Full
Competition Directive and the various related Directives adopted by the European
Parliament and the Council of the EU have resulted in the removal of most
regulatory barriers to the operation of telecommunications infrastructure in the
countries of the initial network in the first five countries.
HER requires licenses, authorizations or registrations in all countries to
operate the network. There can be no assurance that HER will be able to obtain
such licenses, authorizations or registrations or that HER's operations will not
become subject to other regulatory, authorization or registration requirements
in the countries in which it plans to operate. Licenses, authorizations or
registrations have been obtained in the United Kingdom, the Netherlands,
Belgium, France and Germany and a trial concession has been granted in
Switzerland. HER intends to file applications in other countries in anticipation
of service launch in accordance with the network roll-out plan.
On June 28, 1990, the European Commission, in an effort to promote
competition and efficiency in the European Union, issued a directive (the "1990
Directive") requiring EU member states to immediately liberalize all
telecommunication services with the exception of voice telephony to the general
public (basic voice services provided over the public switched voice network).
This step liberalized value added services and voice services over corporate
networks and/or "closed user groups," although the exact definitions of the
terms used in the 1990 Directive were not altogether clear.
On July 22, 1993, the Council of EU agreed that all voice telephony
services in EU member states should be liberalized by January 1, 1998 subject to
additional transitional periods of up to five years to allow member states with
less developed networks to achieve the necessary adjustments. It was agreed that
such exemptions would be granted to Spain, Ireland, Greece and Portugal, subject
to formal application and satisfaction of certain requirements. Luxembourg,
because of the small size of its market, would be eligible for a special
transitional period of up to two years.
In April 1995, a communication from the European Commission sought to
clarify the types of services that were liberalized by the 1990 Directive,
stating that the burden of proof as to why a service should be considered
"reserved" and therefore not open to competition should be upon the PTOs and the
regulatory authorities of member states. Along with this statement came the
threat of formal procedures under the Treaty of Rome against member states that
do not implement the 1990 Directive "within a reasonable time." Procedures have
been brought so far against Italy, Greece, Germany and Spain for failing to
apply the requirements of the 1990 Directive.
On March 13, 1996, the European Commission adopted the Full Competition
Directive extending the 1990 Directive to all services, requiring that licensing
procedures for these services be transparent and non-discriminatory, requiring
member states to fully liberalize alternative infrastructure to allow a
competitive market for "non-reserved" services such as data, value added
services and non-public (closed-user group) switched voice services by July 1,
1996 and mandating open competition in all public telecommunications services,
including voice telephony to the general public, by January 1, 1998 (except for
countries to which grace periods were granted in accordance with the 1993
Council Resolution).
On April 10, 1997, the European Parliament and the Council of Ministers
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 will be required to be dealt with in a
timely fashion. The number of licenses may only be restricted to the extent
required to ensure the efficient use of radio frequencies or for the time
necessary to make available sufficient numbers in accordance with EC law.
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HER believes that many European countries have revised telecommunications
regulations to comply with the 1990 Directive and the Full Competition Directive
and that such changes will enhance HER's ability to obtain other necessary
regulatory approvals for its operations.
As a multinational telecommunications company, HER is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which HER operates.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on HER, that domestic or
international regulators or third parties will not raise material issues with
regard to HER's compliance or noncompliance with applicable regulations or that
regulatory activities will not have a material adverse effect on HER. See "Risk
Factors -- Government Regulation." The regulatory framework in certain
jurisdictions in which HER provides its services is briefly described below.
United Kingdom
Since the elimination in 1991 of the United Kingdom telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the United Kingdom telecommunications regulatory
authority, 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. HER
has received a license from the Secretary of State for Trade and Industry which
grants it the right to run a telecommunications system or systems in the United
Kingdom connected to an overseas telecommunications system and to provide
international services over such systems. Like the licenses granted to other
providers of international facilities-based services, the license granted to HER
on December 18, 1996 was for an initial six months' duration and thereafter is
subject to revocation on one month's notice in writing. The short duration of
these initial licenses was adopted for administrative convenience on the
opening-up of the United Kingdom market for international facilities-based
services. The Department of Trade and Industry ("DTI") has confirmed that it
intends to replace the initial licenses with new licenses and that it would not
normally expect to revoke an initial license without replacing it with another
license giving an equivalent authorization. The DTI is currently discussing with
license holders the arrangements to put these new licenses into effect and
although the DTI has indicated that the new licenses are expected to be of 25
years duration, there can be no certainty that this will be the case or that the
new licenses will not contain terms or conditions unfavorable to HER.
The Netherlands
On July 1, 1997 the Dutch government abolished the prohibition on the use
of fixed infrastructure for the provision of public voice telephony, thereby
complying with the requirements of the Full Competition Directive six months
ahead of schedule. On August 1, 1996, HER was granted a license for the
installation, maintenance and use of a fixed telecommunications infrastructure.
An entirely new Telecommunications Bill was introduced to the Second
Chamber (the House of Representatives) of the Parliament on September 15, 1997.
The new Telecommunications Act is intended to confirm the full liberalization of
the telecommunications market according to European Community standards. It is
not expected that the new Telecommunications Act will detrimentally affect the
conduct of business by HER.
Belgium
Belgium has implemented the "alternative infrastructure" provider provision
of the Full Competition Directive. The decision-making process regarding the
adoption of the full package of liberalization legislation (including licensing
regimes for voice telephony and public network infrastructure) is in the final
stages and is anticipated to be completed in early 1998. Given the fact that the
implementation of the EC Directives is late, the Belgian authorities have made
public that they will work during the first months of 1998 with a system of
provisional licenses. HER has obtained, through a wholly-owned subsidiary, a
license from the Belgian regulatory authority to provide liberalized services
using alternative infrastructure and is currently operating
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under its license in Belgium on the Brussels-Amsterdam route. HER also has
authorization to build infrastructure between major Belgian population centers
and the relevant border crossings.
Germany
Germany has approved legislation to implement the Full Competition
Directive and remove all remaining restrictions on competition from January
1998. HER was granted a license by the German regulatory authorities on July 18,
1997. The license permits HER to operate the portions of the network in Germany
connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to the Dutch border;
and Stuttgart to the French and Swiss borders. HER expects to extend its license
in Germany as appropriate in order to enable it to operate the remaining
portions of the network in Germany.
France
A new regulatory agency, the Autorite de Regulation des Telecommunications
("ART"), was established in France effective January 1, 1997. In 1996, France
approved legislation to implement the Full Competition Directive and to remove
all remaining restrictions on competition from January 1998. HER applied for an
authorization to operate its network in specific regions of France, which was
approved on October 22, 1997.
Switzerland
The Swiss Parliament has recently passed a new Telecommunications Law which
will enter into force on January 1, 1998. Although Switzerland is not a Member
State of the EU, the effect of the law is largely to mirror the EC
telecommunications liberalization Directives and therefore from that date
existing voice telephony monopoly will be abolished and such services will be
fully liberalized. An independent national regulatory authority has previously
been established. HER obtained a trial concession on October 30, 1997, in order
to roll out its network and to provide its services in advance of the full
liberalization coming into effect on January 1, 1998.
Italy
Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy enacted legislation on July 31, 1997 which
substantially completes the liberalization of services in accordance with the
Full Competition Directive. The Parliament has also approved the creation of an
independent national regulatory authority for the telecommunications and
audiovisual sectors. The most recent EC liberalization Directives relating to
licensing and interconnection remain to be implemented. HER intends to apply for
a license to provide its services in due course.
Spain
Under the Full Competition Directive Spain was granted the right to request
a delay of up to five years in liberalizing fully its telecommunications market.
However, the Spanish government and the European Commission have agreed that
full liberalization should take place on December 1, 1998. In order to ensure
effective liberalization from that date, the Commission Decision granting the
eleven month extension sets out a timetable of interim measures leading up to
full liberalization. These measures include the passing of legislation
authorizing regional cable operators to provide telecommunications services and
the adoption of a new General Telecommunications Bill effectively transposing EC
Directives into Spanish law. Further RETEVISION, S.A. has been granted a second
national operator's license to compete with the national PTO and Spain has
agreed to grant a third national operator license in early 1998. HER intends to
apply for a license to provide its services in due course.
Sweden
Full liberalization of the Swedish telecommunications market occurred in
1993. A new Telecommunications Act was passed this year to reinforce the powers
of the national regulatory authority, to ensure conformity with EC Directives
and to supplement the pre-existing licensing regime with a general authoriza-
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tion regime for services other than telephony services, mobile services and
leased lines. HER intends to register to provide its services in due course.
Denmark
With the liberalization of infrastructure from July 1, 1997 Denmark has
fully liberalized its telecommunications markets in accordance with the
requirements of the relevant EC Directives. An independent national regulatory
authority has been established. According to the Danish rules, HER will not
require any regulatory approval in order to install or operate the network in
Denmark.
GTS-MONACO ACCESS
GTS owns a 50% interest in and manages GTS-Monaco Access, a joint venture
with the Principality of Monaco created to develop Monaco's existing
international telecommunications infrastructure into an international gateway
hub for transport of international traffic to European and overseas
destinations. The Principality has constructed and operates a sophisticated
international gateway infrastructure that includes an international digital
switching center and a satellite earth station to support significant amounts of
carriers' carrier traffic. Through Monaco's network, GTS-Monaco Access is linked
to approximately 170 countries worldwide. GTS believes that this partnership
provides it with the opportunity to build a strong international gateway
operator in lucrative Western European markets.
GTS-Monaco Access offers competitively priced international switching and
transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, as distinguished
from "retail" services offered to end users. Basic service offerings include (i)
international switched traffic; (ii) international private lines; (iii)
facilities management, including billing, customer management and fault
reduction systems; (iv) resale distribution for Internet service providers; and
(v) prepaid calling card platform services.
With the cooperation of Monaco Telecom ("MT"), GTS-Monaco Access is
entitled to exercise the privileges of signatories to international treaties
such as the ITU, and to international satellite agreements, such as Intelsat,
Inmarsat and Eutelsat. Other signatories are generally PTOs and other
quasi-governmental telecommunications entities. GTS-Monaco Access purchases
capacity on international fiber routes at rates available only to recognized
operators which are substantially below the rates charged to other service
providers. These fiber-based facilities are an important element for GTS-Monaco
Access's core network and provide it with capacity that may be leased or resold
to customers. Monaco inaugurated its independent country code, 377, on June 21,
1996, which made it eligible for certain privileges, including special terms
(generally reserved for PTOs) in connection with transmission agreements,
transit agreements, settlements and low-cost accounting rates with select
carriers.
GTS's partner in GTS-Monaco Access is an investment fund designated by the
Principality of Monaco to represent its interests. GTS-Monaco Access functions
in cooperation with MT under a commercial agreement governing, among other
things, the terms of use of existing facilities, access to and acquisition of
new international infrastructure, and sales and marketing. GTS exercises
operational control of the joint venture, and provides managerial and financial
support, international telecommunications expertise and strategic planning.
Neither GTS nor its partner is obligated to fund operations or capital
expenditures of GTS-Monaco Access. Losses and profits of GTS-Monaco Access are
allocated to the partners in accordance with their ownership percentages, in
consideration of funds at risk. As of September 30, 1997, GTS and its partner
had each made equity contributions of $0.8 million to GTS-Monaco Access. In
addition, GTS-Monaco Access had outstanding loans of $2.9 million to GTS as of
September 30, 1997. See "Management's Discussion and Analysis -- Accounting
Methodology -- Profit and Loss Accounting." The agreement between GTS-Monaco
Access and MT, by its terms, continues in operation until 2020.
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BUSINESS AND MARKETING STRATEGY
GTS's strategy for developing GTS-Monaco Access into an international
gateway hub includes the following:
- Develop Advanced Carrier Services Offerings. GTS-Monaco Access may
develop its "advanced carrier services" offerings to include global 0800
services and international free phone services, which GTS believes will
broaden customer relationships, enhance revenues and help to protect it
from price-based competition.
- Develop Relationships to Broaden Service Offerings. GTS-Monaco Access may
develop relationships to broaden its service offerings. GTS-Monaco Access
has entered into agreements with UUNET, one of its gateway customers, to
provide wholesale Internet access to GTS-Monaco Access's carrier
customers in a number of Western European countries. The agreement allows
these services to be "cobranded" with GTS's affiliates.
- Pricing. Price is a critical factor in the market for international
switching as competition increases due to expanding international
capacity, advances in technology and falling regulatory barriers. GTS-
Monaco Access intends to price its services competitively with the
prevailing price for comparable inter-PTO transit and gateway services.
GTS-Monaco Access is not bound by legacy systems, infrastructure and
personnel levels and can, therefore, manage lower cost operations.
- Leverage Non-Aligned Position. Because GTS's Western European activities
are not allied with any of the major consortia or large Western European
telecommunications companies, and generally focus on carriers' carrier
services, GTS-Monaco Access will not compete with its carrier customers
in retail markets. This independence should make GTS-Monaco Access an
attractive service provider for Western European carriers who may
otherwise be reluctant to obtain services from the larger operators of
international gateways that are often their competitors in the retail
market.
- Exploit GTS Synergies. GTS-Monaco Access may ally with other GTS
companies in Europe and the CIS. GTS-Monaco Access is expected to realize
significant reductions in its cost structure through access to low-cost
pan-European transmission capacity through alternative infrastructure
providers such as HER, Sovintel and C-Datacom International, Inc., GTS's
Indian venture, already route international traffic through GTS-Monaco
Access's gateway.
CUSTOMERS
Targeted customers for GTS-Monaco Access include:
- Non-Aligned PTOs. GTS believes that various large American and Western
European PTOs that lack adequate international switching and transport
facilities of their own may be persuaded to purchase international
services from GTS-Monaco Access, rather than from competing PTOs or
consortia.
- Mobile Carriers. GTS believes that some of the non-PTO mobile carriers,
which currently provide only a small percentage of Western European
mobile telecommunications traffic, may prefer the "independent"
international gateway service offerings of GTS-Monaco Access to those of
their PTO competitors.
- Internet Service Providers. Growth in Internet usage creates a
significant opportunity for a nonaligned Internet access provider such as
GTS-Monaco Access, since many Internet service providers will be in
direct competition with PTO-owned services in large European markets.
- Second Carriers/Resellers. GTS believes that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity.
- Established ("Aligned") PTOs. This customer segment will be a niche
market for GTS-Monaco Access. As markets are deregulated and carriers
become increasingly competitive, traditional friendly correspondent
relations may become strained, and opportunities may emerge to leverage
GTS's non-aligned status to route traffic between rivals or to displace
incumbents for transit relationships.
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- Other GTS Companies. GTS-Monaco Access currently provides gateway
services indirectly to Sovintel, CDI and other GTS companies that
aggregate traffic or provide international long distance services. It may
also provide these services to HER.
In January 1998, GTS-Monaco Access terminated its relationship with a major
traffic partner as a result of which GTS expects that the venture will lose
approximately $6 million of revenues in 1998. Although GTS-Monaco Access is
putting in place plans to replace such revenues from other sources, no assurance
can be provided that such revenues will be replaced in the current fiscal year.
NETWORK
GTS has enhanced MT's existing technology platform of digital switching,
fiber optic transmission, satellite and submarine cable facilities by
interconnecting this existing network infrastructure to multiple terrestrial
routes covering Europe and to undersea fiber optic cables connecting the
GTS-Monaco Access network to Asia and the Americas.
The network infrastructure of GTS-Monaco Access is complementary with that
of HER, with each serving the carriers' carrier market from different
perspectives; HER for bandwidth services and GTS-Monaco Access for switched call
terminations and other carrier services.
LICENSES AND REGULATORY ISSUES
Because it operates in coordination with MT, the licensed operator of the
Monaco public network, and in indirect partnership with the government,
GTS-Monaco Access's telecommunications activities in Monaco require no
telecommunications license.
Because the Principality of Monaco is not an EU member state, GTS-Monaco
Access's telecommunications activities in the Principality are not subject to
European law. However, GTS-Monaco Access will have to comply with EU regulation
to the extent it does business in EU member states. The regulatory requirements
established by the EU create general guidelines under which the national
agencies of EU member states regulate. Accordingly, local laws and regulations
may differ significantly among these jurisdictions, and the interpretation and
enforcement of such laws and regulations may vary. Local rules are sometimes
based on the informal views of the local ministries which, in some cases, are
subject to influence by the local PTOs. In certain of the Company's existing and
target markets, there are laws and regulations which affect the number and types
of customers which the Company can address. For instance, certain countries may
and do require licenses for communication companies to interconnect to the
public network to originate traffic.
In addition, one of the services provided by GTS-Monaco Access is a form of
transit service, known in the industry as "re-filing." Re-filing is the practice
of routing traffic through a third country in order to take advantage of
disparities in settlement rates between different countries, allowing traffic to
a potential country to be treated as if it originated in the third country that
enjoys lower settlement rates with the destination country, thereby resulting in
lower overall costs on an end-to-end basis. Re-filing is prevalent in the
industry even though the practice is technically in contravention of ITU
regulations. In practice, because of the widespread non-observance of these
regulations, such a contravention normally does not give rise to specific legal
problems. However, their enforceability essentially depends on the status given
to ITU obligations by Member countries' domestic laws. Accordingly, there can be
no assurance that GTS-Monaco Access's re-filing services might not be disrupted
or be the subject of legal process at some time in the future. In such event,
within the EU a defense may be available that the ITU regulations are
anti-competitive and contravene the Treaty of Rome, although there can be no
certainty that such a defense would succeed.
COMPETITION
GTS-Monaco Access faces competition from consortia of telecommunications
operators, large PTOs and other international telephone operators with advanced
network infrastructures, access to large quantities of long-haul capacity and
established customer bases. PTOs currently providing large amounts of
international
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traffic have already established direct routes, transit arrangements and
correspondent relations and many have excess capacity that they resell in
competition with GTS-Monaco Access.
With the advent of deregulation in the Western European telecommunications
markets in 1998, opportunities for the establishment of international gateways
will likely develop in Europe and as a result competition in the market for
GTS-Monaco Access's services will increase. During the first quarter of 1998,
GTS intends to evaluate various locations in Europe for the establishment of
international hubs based upon prospective costs and the availability of call
routing at these locations. GTS plans to locate these prospective points of
presence in cities served by HER and to allow the termination of traffic through
HER. GTS Monaco Access may benefit from the establishment of these points of
presence by incurring reduced transmission expenses.
While GTS believes that GTS-Monaco Access will be able to compete
effectively in certain identified market segments because most of its targeted
customers are in new and fast growing markets and have not established long-term
relationships with international gateway providers, and because it has equal
access to advanced infrastructure and international fiber routes, potential
access to low cost transport from HER and an "independent" status that allows it
to service a worldwide range of potential customers. GTS intends continually to
review the competitiveness of GTS-Monaco Access with respect to its competitors.
CENTRAL EUROPE
In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company provides
outgoing voice services and operates an international gateway and a data
services network. In Hungary, GTS operates a VSAT network which GTS believes is
the largest VSAT network in Central Europe as measured by number of VSAT sites.
The Company has also signed an agreement to provide international data services
in Poland, subject to receipt of necessary governmental approvals. GTS's
strategy is to expand its service offerings as the regulatory environment
permits, leveraging its existing VSAT and international gateway infrastructure
where possible and providing a broad range of services to its target markets.
Hungary
GTS-Hungary. GTS-Hungary, a 99% owned subsidiary of GTS, is a leading
provider of customized data services offering high quality, reliable virtual
private network services to customers throughout Hungary and, through other GTS
affiliates, other countries in Central Europe. GTS-Hungary provides these
services through VSATs installed at customer sites throughout the country and a
microwave-based high speed overlay network for points in the Budapest
metropolitan area. Along with these data transmission services, GTS-Hungary
provides high quality customer service including (i) significant system
integration support in the initial implementation of the customers' networks and
in on-going expansion and improvements and (ii) a unique maintenance and
technical support service, which include "rapid response" service calls and
24-hour hub service operations support, which can be backed by financial
guarantees when required.
As of September 30, 1997, GTS-Hungary's VSAT network consisted of
approximately 935 owned and operated VSAT sites which the Company believes makes
it the largest VSAT-based network in Central Europe. GTS believes that its
choice of VSAT technology as a way of quickly deploying a full range of business
services nationwide will allow it to capture key customers and market segments.
Such positioning, the Company believes, will enable GTS-Hungary to expand its
service offerings as the Central European market matures and as regulatory
authorities further privatize and deregulate the telecommunications industry.
GTS-Hungary is undertaking a nationwide expansion of its microwave-based
Budapest overlay network. The expansion will increase GTS-Hungary's revenue base
in the region and provide opportunities to leverage further its other service
offerings. There can be no assurance, however, that the expansion will be
completed on a timely and commercially feasible basis.
The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 54% of GTS-Hungary's VSAT revenue for the nine months ended
September 30, 1997. GTS-Hungary has also
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targeted its VSAT network services to business customers in the domestic service
industry and other government organizations. Although GTS-Hungary continues to
diversify its revenue and customer base, the loss of the Hungarian state lottery
as a customer would have a material adverse effect on GTS-Hungary's business.
GTS-Hungary generally charges its data services customers a flat monthly
fee for a fixed amount of usage and usage-based fees for use above the
contractual amount. Customers are billed in Hungarian forints (indexed to U.S.
dollars) on a monthly basis. Pricing is generally determined for an individual
client based upon the size of traffic requirements. In general, GTS-Hungary's
strategy is to minimize the initial customer investment in order to lower the
barriers to purchase, while committing customers to long-term contracts.
GTS-Hungary's major competitors include BankNet, Hungaro-DigiTel and MATAV,
the Hungarian PTO, each of which operates a network with at least 200 VSAT
sites. MATAV offers a broad range of services and has recently targeted the
business sector that GTS serves. GTS believes that, while some of its
competitors have stronger financial resources, GTS-Hungary remains the leading
VSAT service provider in Hungary in terms of number of VSAT sites, the size and
quality of its infrastructure and the quality of its service. GTS also believes
it has distinguished itself from its competition by its superior customer
service.
Currently, all VSAT licenses in Hungary have been granted under temporary
telecommunications regulations. The temporary licenses prohibit connection to
public telecommunications networks or other international or domestic
data-transmitting systems. In December 1993, GTS received a temporary service
permit to provide data-transfer services utilizing a VSAT-based wireless
communications system throughout Hungary. In March 1997 the government issued
new telecommunications regulations which require all operations with temporary
licenses to apply for permanent licenses by the end of April 1997. GTS-Hungary
has submitted applications for the conversion of its temporary licenses to
permanent ones. While no assurances can be given, GTS expects permanent licenses
to be issued in due course. The failure to receive such licenses would have a
material adverse effect on the business of GTS-Hungary.
Neither GTS nor its partner in GTS-Hungary are obligated to fund operations
or capital expenditures of GTS-Hungary. Losses and profits of GTS-Hungary are
allocated to the partners in accordance with their ownership percentages, in
consideration of funds at risk. As of September 30, 1997, GTS had made equity
contributions of $9.5 million to GTS-Hungary, GTS' partner has not made any
equity contributions as of September 30, 1997. In addition, GTS-Hungary had
outstanding loans of $3.4 million to GTS as of September 30, 1997. See
"Management's Discussion and Analysis -- Accounting Methodology -- Profit and
Loss Accounting. Further, the joint venture does not have an expiration date.
EuroHivo. In addition to its network and data services, GTS also provides
nationwide paging services primarily to the retail consumer market through its
70% owned joint venture, EuroHivo. GTS has concluded that EuroHivo is not a core
business and is currently assessing offers to sell its interests in EuroHivo. In
connection with this anticipated divestiture, the Company wrote-off its
investment in EuroHivo in the third quarter of 1997. See "Management's
Discussion and Analysis -- Results of Operations -- Consolidated Ventures."
Czech Republic
The Czech Companies. The Czech Companies, which consist of two wholly owned
subsidiaries of GTS, offer the only alternative international telephony service
in the Czech Republic, as well as a full range of private data services,
delivered through a combination of a fully digital microwave overlay network and
an international satellite gateway in Prague and GTS-Hungary's VSAT network.
Through an intercompany arrangement with GTS-Hungary, the Czech Companies
provide all of the same VSAT services offered by GTS-Hungary. In addition, the
Czech Companies offer high-speed Internet access service and are among the
leading Internet access providers in the Czech Republic. The Czech Companies
seek to become the second carrier in the Czech Republic and are also targeting
opportunities in Slovakia, based upon the historic relationship between the
Czech and Slovak markets.
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The Czech Companies network consist of an earth station linked to
GTS-Monaco Access and to British Telecom, a series of point-to-point and
point-to-multipoint microwave connections providing dedicated access to the
buildings served by the Czech Companies and individual VSATs based on, and
controlled by, GTS-Hungary's hub in Budapest.
The Czech Companies target customers include real estate developers, hotels
and multinational companies which require international voice or data services
or Internet connectivity, where both GTS's own services and the services of GTS
partners are sold. The Czech Companies provide outgoing international voice
services and high-speed Internet access to large commercial buildings in Prague.
As of September 30, 1997, the Czech Companies had concluded agreements with
building owners to convert PABXs in 23 buildings in Prague. International voice
services are offered at prices similar to those of the Czech PTO. The Czech
market for VSAT services is extremely competitive, with prices at approximately
50% of those in Hungary for basic services. The Czech Companies plan to pursue
customers who require value-added services which may be offered at higher prices
and better margins.
The Czech Companies are licensed to provide international satellite and
domestic private voice and data services. They received their operating licenses
in 1994 and 1995 and began offering services in 1995. The licenses grant
permission to install and operate up to 150 earth stations and, upon
application, an additional 150 earth stations. The licenses currently prohibit
the provision of switched voice services and the interconnection to public
voice, telex and data networks and telecommunications networks of other
providers.
The Czech Companies are the only alternative international telephony
provider licensed in the Czech Republic. As such, their only competitor is SPT
Telecom, the Czech PTO. Should SPT decide to compete aggressively with the Czech
Companies, it has the ability to discount prices below those which could be
easily sustained by the Czech Companies. In data services, Telenor, GITY and
Nextel (a subsidiary of SPT Telecom) are the Czech Companies' three major
competitors for data services in the Czech Republic. GTS believes that its
experience in establishing VSAT services in the region and its emphasis on
integrated voice and data services provides the Czech Companies with a
competitive advantage. Additionally, GTS's transmission facilities and
infrastructure in Hungary and Monaco provide them with a relatively low cost
infrastructure and, as a consequence, greater pricing flexibility than their
competitors. With respect to Internet services, GTS believes that, although this
market consists of a large number of small providers and that SPT Telecom will
seek to enter this market, the dedicated, high-speed infrastructure that the
Czech Companies are installing will provide superior services to its customers.
ASIA
Chinese law generally prohibits foreign investment or participation in the
operation of telecommunications services, while Indian law requires foreign
telecommunications operators to conduct certain telecommunications businesses,
including basic switched telephony and cellular services, through joint ventures
that are at least 51% owned by Indian partners. GTS believes that these
restrictive regulations will eventually be liberalized and that its early entry
into these markets and its strong relationships with influential commercial
firms and with local, regional and national-level government entities will
provide it with a strong competitive advantage over competitors that await more
explicit regulatory regimes authorizing direct telecommunications investments.
China
GTS participates in the nationwide tourist industry VSAT network through
GTS China Investments LLC, a company in which GTS holds a 75% interest and an
affiliate of the Soros Foundations owns a 25% interest. See "Certain Related
Party Transactions." GTS China Investments LLC holds an indirect 63% interest in
Beijing Tianmu Satellite Communications Technology Co. Ltd. ("Beijing Tianmu"),
which provides technical, operational and financial support for the VSAT
network. In addition, through Shanghai V-Tech Telecommunications Systems Co.,
Ltd. ("V-Tech"), a venture in which GTS holds a 75% interest, the Company
provides financing, operational consulting, technical and engineering services
to a Shanghai-based VSAT network operator.
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With respect to V-Tech, in addition to the Company's initial equity
contribution of $3.75 million, GTS committed to fund up to an additional $3.0
million (all of which has been funded as of September 30, 1997). The joint
venture expires in April 2015, and profits and losses are allocated according to
ownership interests in consideration of funds at risk. See "Management's
Discussion and Analysis -- Accounting Methodology -- Profit and Loss
Accounting." GTS currently is evaluating adding additional partners to V-Tech
which may reduce GTS's ownership interest in V-Tech.
With respect to Beijing Tianmu, in addition to the Company's initial equity
contribution of $8.75 million, GTS is responsible for arranging additional
financing of up to $14.4 million, subject to the approval of the venture's Board
of Directors, the majority of members of which are elected by GTS. The joint
venture expires in March 2021, and profits and losses are allocated according to
ownership interests, in consideration of funds at risk. See "Management's
Discussion and Analysis -- Accounting Methodology -- Profit and Loss
Accounting."
India
In India, GTS is following the strategy it implemented in Moscow and is
currently pursuing in Central Europe, in which it initially penetrates the
telecommunications market by developing satellite-based international gateway
networks to provide telecommunications services to targeted business customers.
GTS's operations in India are conducted through C-Datacom International, Inc.
("CDI"), a wholly owned subsidiary which provides digital international private
line communications to and from India for multiple applications, including data
and voice. While not permitted to provide telephony services, CDI is currently
in the process of installing an international gateway switch adjacent to
GTS-Monaco Access's international gateway for the purpose of handling
international traffic.
EMPLOYEES
On September 30, 1997, GTS employed a total of 166 persons. On September
30, 1997, the joint ventures in which GTS participates employed approximately
1,400 persons. The Company believes its future success will depend on its
continued ability to attract and retain highly skilled and qualified employees.
The Company believes that its relations with its employees are good.
Although GTS's employees are not unionized, unions represent employees of
the Company's railroad partners in HER. Under the agreements contemplated
between HER and its railroad partners, some of these employees will be required
to construct and maintain certain portions of the HER network. There can be no
assurances that unionized employees of HER's partners will not experience labor
unrest.
PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional equipment
rooms will be leased as networks are expanded. GTS maintains regional
headquarters offices in Moscow and Budapest, as well as facilities in McLean,
Virginia and London. HER is headquartered just outside of Brussels, Belgium.
LITIGATION
In addition to routine legal proceedings incidental to the conduct of its
business, the Company, GTS-Hungaro and GTS-Hungary are named as defendants in an
action captioned USH Ventures and USH Telecom, L.L.C. v. Global TeleSystems
Group, Inc. and GTS-Hungaro, Inc., Civil Action No. 97C-08-86, commenced in
August 1997, which is currently pending in the Superior Court of the State of
Delaware in and for New Castle County. The complaint alleges breach of contract
and interference with a business relationship. While it is not possible at this
time to make a meaningful assessment of the outcome of this litigation, based
upon information currently available and upon consultation with counsel, the
Company does not believe that the outcome of this litigation will have a
material adverse effect upon the financial condition of the Company.
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MANAGEMENT
The directors, executive officers and key employees of the Company, their
positions and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Alan B. Slifka(1)(3)(4)(7).............. 68 Chairman of the Board of Directors
Gerald W. Thames(1)(6).................. 50 President, Chief Executive Officer and Director
Bruno d'Avanzo.......................... 56 Executive Vice President and Chief Operating
Officer
William H. Seippel...................... 41 Executive Vice President of Finance and Chief
Financial Officer
Jan Loeber.............................. 53 Senior Vice President -- HER
Raymond I. Marks........................ 51 Senior Vice President -- Asia
Stewart P. Reich........................ 53 Senior Vice President -- Russia
Louis T. Toth........................... 55 Senior Vice President -- Central Europe
Grier C. Raclin......................... 45 Senior Vice President, General Counsel and
Secretary
Eileen K. Sweeney....................... 46 Senior Vice President -- Human Resources
Kevin Power............................. 44 Managing Director -- GTS-Monaco Access
Gary Gladstein(2)(5).................... 52 Director
Michael A. Greeley(4)(6)................ 34 Director
Bernard McFadden(3)(7).................. 64 Director
Stewart J. Paperin(2)(3)(7)............. 49 Director
W. James Peet(1)(4)(6).................. 42 Director
Jean Salmona(3)(5)...................... 61 Director
Morris A. Sandler(2)(4)(5).............. 51 Director
Joel Schatz(2)(6)....................... 60 Director
Adam Solomon(2)(4)(5)................... 44 Director
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Finance Committee
(5) Term expires at annual meeting of stockholders in 1998
(6) Term expires at annual meeting of stockholders in 1999
(7) Term expires at annual meeting of stockholders in 2000
Biographical information on each of the foregoing officers follows:
Alan B. Slifka, Chairman of the Board of Directors. Mr. Slifka has served
as a director of GTS since 1990. Mr. Slifka is a New York investment banker and
the Managing Principal of Halcyon/Alan B. Slifka Management Company LLC, an
equity asset management firm specializing in nontraditional investments,
specifically corporate event investing. Previously, Mr. Slifka was a partner of
L.F. Rothschild, Unterberg, Towbin from 1961 to 1982. He is a director of Pall
Corporation and is active in other business, civic and philanthropic affairs as
founder, director or officer of numerous for-profit and not-for-profit
corporations and foundations. Mr. Slifka served as acting Chief Executive
Officer of GTS during most of 1993.
Gerald W. Thames, President, Chief Executive Officer and Director. Mr.
Thames joined GTS as Chief Executive Officer in February 1994, and has served as
a director of GTS since February 1994. From 1990 to 1994, Mr. Thames was
President and Chief Executive Officer for British Telecom North America and
Syncordia, a joint venture company focused on the international outsourcing
market. Mr. Thames has spent over 18 years in senior positions with
telecommunications companies, where he was responsible for developing start-up
telecommunications companies, including 15 years with AT&T, where he rose to the
position of General Manager of Network Services for the Northeast Region of AT&T
Communications.
Bruno d'Avanzo, Executive Vice President and Chief Operating Officer. Mr.
d'Avanzo joined GTS as Executive Vice President and Chief Operating Officer in
August 1996. From 1994 to 1996, Mr. d'Avanzo was Executive Vice President and
Chief Operating Officer of Intelsat, the largest telecommunications satellite
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operator in the world. From 1992 to 1994, Mr. d'Avanzo was a senior executive
with Olivetti Corporation, serving as Vice President and General
Manager -- Europe and as Vice President -- U.S., Canada and South America. Mr.
d'Avanzo also spent 15 years with Digital Equipment Corporation, a diversified
computer manufacturer where his last position was Vice President -- European
Sales and Marketing.
William H. Seippel, Executive Vice President of Finance and Chief Financial
Officer. Mr. Seippel joined GTS as Executive Vice President of Finance and Chief
Financial Officer in October 1996. From July 1992 to October 1996, Mr. Seippel
was Vice President -- Finance and Chief Financial Officer of Landmark Graphics
Corporation. From August 1990 to July 1992, Mr. Seippel was Director of Finance
for Covia, Inc., an affiliate of United Airlines. From April 1984 to August
1990, Mr. Seippel held the positions of Group Business Controller (1989 to
1990), Group Controller Sales/Marketing (1986 to 1989), and Product Line
Controller (1984 to 1986) with Digital Equipment Corporation, a diversified
computer manufacturer.
Jan Loeber, Senior Vice President -- HER. Mr. Loeber joined GTS in January
1995. From October 1992 to December 1994, Mr. Loeber was a Managing Director of
BT Securities Corporation. From April 1990 to September 1992, Mr. Loeber held
positions as Managing Director of Unitel Ltd. (now One 2 One) in the United
Kingdom, Group President of Nokia North America Inc., Vice President of ITT
Corporation, and Marketing and Product Management Director of ITT Europe. Mr.
Loeber also spent almost 10 years with AT&T, where his last position was
Executive Director, Bell Laboratories. Mr. Loeber has over 22 years of
experience in the telecommunications industry and an additional 9 years of
experience in information technology with the Pentagon, IBM and Chemical Bank of
New York.
Raymond I. Marks, Senior Vice President -- Asia. Mr. Marks joined GTS as
Senior Vice President -- Asia in July 1994. From October 1986 to June 1994, Mr.
Marks served as Vice President and General Manager of GTE Spacenet Corporation,
where he had overall responsibility for strategic planning, domestic and
international business development, creation of joint ventures and international
alliances, as well as the worldwide management of the marketing, sales and
technical support organizations. Mr. Marks has also served as Vice President for
the Digital Information Group for MCI Communications Corporation. Mr. Marks has
28 years of experience in the telecommunications and computer industries.
Stewart P. Reich, Senior Vice President -- Russia. Mr. Reich joined GTS as
President -- GTS Russia in September 1997. From September 1992 to August 1997,
Mr. Reich was President of UTEL, a joint venture of AT&T, Deutsche Telekom, PTT
Telecom (Netherlands), and Ukrtelecom (a Ukrainian telecommunications company)
which provides international and interregional telecommunications services in
Ukraine. From 1982 to 1992, Mr. Reich held various positions at AT&T where his
last position was Financial Manager, AT&T International Communications Switched
Services. Mr. Reich was also employed for 20 years with Western Electric Company
from 1961 to 1981.
Louis T. Toth, Senior Vice President -- Central Europe. Mr. Toth joined GTS
as Senior Vice President -- Central Europe in July 1993. From February 1987 to
July 1991, Mr. Toth served as President of Dynaforce Inc. and as Partner and
General Manager for the pan-European expansion of Andlinger & Company. Mr. Toth,
who is currently based in London, has 23 years of telecommunications experience
with ITT Corporation in Europe, Latin America and Asia.
Grier C. Raclin, Senior Vice President and General Counsel. Mr. Raclin
joined GTS as its Senior Vice President and General Counsel in September, 1997,
and was elected Secretary of the Company in December 1997. Prior to joining GTS,
Mr. Raclin served as Vice-Chairman and a Managing Partner of the Washington,
D.C. office of Gardner, Carton & Douglas, a 250-attorney, corporate law firm
based in Chicago, Illinois, where his practice was concentrated in the area of
international telecommunications. Mr. Raclin received his undergraduate and law
degrees from Northwestern University and attended the University of Chicago
School of Business Executive Program.
Eileen K. Sweeney, Senior Vice President -- Human Resources. Ms. Sweeney
joined GTS as Senior Vice President -- Human Resources in November, 1997. Prior
to joining GTS, Ms. Sweeney was President of Global Resource Associates, a
consulting company specializing in international human resource issues. Prior to
that time, Ms. Sweeney spent 10 years with ITT Corporation in a variety of human
resource management
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positions, including eight years based in Europe and in the Middle East. Ms.
Sweeney holds a Master's Degree in Business Administration from Simmons Graduate
School of Management in Boston.
Kevin Power, Managing Director -- GTS Monaco Access. Prior to joining GTS
Monaco Access in October 1995, Mr. Power was Vice President, Carrier Relations
for the Company beginning in November 1994, where he was responsible for
assisting and coordinating the carrier activities of the GTS group of companies.
In 1988, Mr. Power was one of a group of five people who started the commercial
operations of Orion Network Systems and he stayed with the company until the
launch of its first satellite in 1994. His last position there was Vice
President of Carrier Services. Prior to that, he held positions with INTELSAT,
National Economic Research Associates (NERA) and the U.S. Department of
Commerce.
Biographical data on each of the directors, other than Mr. Thames, are as
follows:
Gary Gladstein, Director. Mr. Gladstein has served as a director of GTS
since December 1990. Mr. Gladstein is a Managing Director of Soros Fund
Management, an investment advisory firm with which he has been associated since
1985. Mr. Gladstein is also a director of Crystal Oil, Jos. A. Bank Clothier,
Inversiones y Representaciones S.A., Cresud S.A., Emerging Dolphin Fund and
Argentina High Yield and Capital Appreciation Fund Ltd.
Michael A. Greeley, Director. Mr. Greeley has served as a director of GTS
since September 1996. Mr. Greeley is the Senior Vice President of GCC
Investments, Inc., the investment group of GC Companies, Inc. From June 1989 to
July 1994, Mr. Greeley was a Vice President at Wasserstein Perella & Co., Inc.,
an international investment bank, specializing in mergers and acquisitions and
corporate finance transactions. Mr. Greeley is also a director of Teletrac,
Inc., Crescent Communications and American Capital Access Holdings, LLC. By
contractual arrangement, GCC Investments, Inc. has the right to designate one
person for nomination to the Board of Directors as long as it holds not less
than two and one-half percent of the issued and outstanding shares of the Common
Stock on a fully diluted basis. Mr. Greeley is the designee of GCC Investments,
Inc. to the Board of Directors.
Bernard McFadden, Director. Mr. McFadden has served as a director of GTS
since February 1994. Mr. McFadden currently serves as an independent consultant
for GTS and is a GTS representative on the supervisory board of HER. Mr.
McFadden's career in international telecommunications includes 32 years with ITT
Corporation, where he served as President and Chief Executive Officer of ITT's
Telecom International Group, and a four and one-half year assignment as
President and Chief Operating Officer of Alcatel Trade International, S.A.
Stewart J. Paperin, Director. Mr. Paperin has served as a director of GTS
since March 1997. Mr. Paperin serves as Executive Vice President of The Open
Society Institute, a charitable foundation associated with George Soros. In
addition, he has served as the President of Capital Resource East since October
1993. Prior to that, Mr. Paperin was President of Brooke Group International,
from 1990 to 1993 where he was responsible for investments in the former Soviet
Union. Mr. Paperin also served as Chief Financial Officer of Western Union
Corporation from 1989 to 1990. Mr. Paperin serves as a director of the Board of
Penn Octane Corporation.
W. James Peet, Director. Mr. Peet has served as a director of GTS since
January 1996. Mr. Peet has been affiliated with The Chatterjee Group, an
investment firm, since 1991. Mr. Peet is a director of three public companies:
Viatel Global Communications, Phoenix Information Systems, and Primus
Telecommunications, Inc. and several private companies. Immediately prior to
joining The Chatterjee Group, Mr. Peet spent six years with McKinsey & Company.
By contractual arrangement, The Chatterjee Group has the right to designate one
person for nomination to the Board of Directors to serve a term of five years.
Mr. Peet is the designee of The Chatterjee Group to the Board of Directors.
Jean Salmona, Director. Mr. Salmona has served as a director of GTS since
March 1996. Since 1989, Mr. Salmona has been Chairman and Chief Executive
Officer of CESIA Consulting Group ("CESIA"), a consulting concern based in
France that specializes in information and communications systems and
technologies. Mr. Salmona is also Chairman and Director General, Data for
Development International Association, a nongovernmental organization with
consultative status to the United Nations Economic and
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Social Council; and a member of the board of directors of CESYS, a joint venture
between CESIA and COGEMA, the French State company which processes nuclear
waste.
Morris A. Sandler, Director. Mr. Sandler has served as a director of GTS
since 1990. Mr. Sandler has been a consultant to GTS since November 1995. Prior
to that, Mr. Sandler was Executive Vice President of GTS from February 1994 to
November 1995, and acting Chief Operating Officer from April 1993 to February
1994. From August 1990 to April, 1993, Mr. Sandler was an employee of Alan B.
Slifka and Company. Since November 1995, Mr. Sandler has been a principal of
Pennwood Capital Corporation, a venture capital investment and management firm.
He has served as director of Baltic International USA, Inc. since 1995.
Joel Schatz, Director. Mr. Schatz has served as a director of GTS since the
inception of the Company. Mr. Schatz was a founder of the Company and served as
its President from 1985 to 1991. Mr. Schatz is presently the Chairman and Chief
Executive Officer of Datafusion, Inc., a company developing software to
accelerate knowledge synthesis.
Adam Solomon, Director. Mr. Solomon has served as a director of the Company
since June 1995. Mr. Solomon is also Chairman of Shaker Investments, Inc., a
growth equity investment firm and Chairman of Signature International, L.P., a
venture/development firm whose initial focus is redeveloping existing
residential/golf communities, and a member of the board of directors of MetaSolv
Software, Inc. Prior to that, Mr. Solomon spent eleven years with E.M. Warburg,
Pincus & Co., Inc., where he was Managing Director from 1988 to 1992. While at
E.M. Warburg, Pincus & Co., Inc., Mr. Solomon served as a member of the board of
directors of LCI International, Inc., a regional long-distance carrier.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Prior to the completion of the Offerings, each director of GTS received an
annual director's fee of $10,000. In addition, each director of GTS who attended
any meetings of the Board of Directors was entitled to receive a director's fee
of $1,000 for each such meeting, and each director of GTS who attended a
committee meeting was entitled to a directors' fee of $750 for each such
committee meeting.
Upon completion of the Offerings, each director of GTS will receive an
annual directors' fee of $15,000. In addition, the fee for attending any meeting
of the Board of Directors will increase to $1,500 per meeting, except for
telephonic Board of Directors meetings of two hours or less, where the fee will
be decreased to $750 for each such meeting. Similarly, upon the completion of
the Offerings, each director who attends a committee meeting will be entitled to
a directors' fee of $1,000 per meeting, except for telephonic committee meetings
of a duration of two hours or less, for which a fee of $500 will be paid.
For the year ended December 31, 1996, the aggregate compensation paid by
the Company to its directors and executive officers for services in all
capacities was approximately $3.1 million.
GTS maintains the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan that permits directors to share in the growth of the value of
GTS through the grant and exercise of nonqualified stock options. See "-- Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan."
GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The purpose of the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") is to permit eligible non-employee
directors of GTS (each a "Non-Employee Director") to share in the growth of the
value of GTS through the grant and exercise of nonqualified stock options.
The total number of shares of Common Stock presently reserved and available
for delivery under the Directors' Plan is 375,000, subject to adjustment upon
certain changes in capitalization. Upon completion of the Offerings, an
additional 900,000 shares of Common Stock, totalling 1,275,000 shares, will be
reserved and available under the Directors' Plan. The Directors' Plan is
administered by the compensation committee of the
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Board of Directors (the "Committee"). Only directors of GTS who are not
employees of GTS or any subsidiary of GTS on the date on which an option is to
be granted are eligible to participate in the Directors' Plan on such date.
An option (a "Directors' Option") to purchase shares of Common Stock was
granted to each Non-Employee Director on the effective date of the Directors'
Plan and a Director's Option is granted to each new Non-Employee Director when
he or she is first elected or appointed to serve as a director of GTS. One-half
of the Directors' Options vests six months after the date of grant. An
additional one quarter become exercisable on the date six months following the
first annual meeting of GTS's shareholders to occur after such date of grant,
and the remaining one quarter shares become exercisable on the date six months
following the second annual meeting of GTS's shareholders to occur after such
date of grant. Prior to the completion of the Offerings, initial Directors'
Options represented 18,000 shares of Common Stock. After the completion of the
Offerings, an initial Directors' Option will represent 22,250 shares of Common
Stock. On the date of the third annual meeting of GTS's shareholders following
the grant of the initial Directors' Options to any Non-Employee Director,
provided that such Non-Employee Director remains an incumbent on such date, an
additional Directors' Option to purchase 13,500 shares of Common Stock is
granted to such Non-Employee Director. The second Directors' Options become
exercisable with respect to 4,500 shares on the date six months after the date
of grant, with respect to an additional 4,500 shares on the date six months
following the first annual meeting of GTS's shareholders to occur after such
date of grant, and with respect to the final 4,500 shares on the date six months
following the second annual meeting of GTS's shareholders to occur after such
date of grant. After the completion of the Offerings, on the date of each annual
meeting of GTS's shareholders, an additional Directors' Option to purchase 9,000
shares will be granted each year on the date of the Company's annual meeting to
the individuals who will serve as elected Non-employee Directors of the Company
during the next year.
Directors' Options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of Common Stock purchasable under a Directors' Option will be
equal to 100% of the fair market value of Common Stock on the date of grant.
Each Directors' Option will expire upon the earliest of (a) the tenth
anniversary of the date of grant, (b) one year after the Non-Employee Director
ceases to serve as a director of GTS due to death or disability, (except that,
in the case of disability, if the Non-Employee Director dies within that
one-year period, the Directors' Option is exercisable for a period of one year
from the date of death), (c) three months after the Non-Employee Director ceases
to serve as a director of GTS for any reason other than death or disability,
(except that, if the Non-Employee Director dies within that three-month period,
his or her Directors' Options are exercisable for a period of one year from the
date of such death), and (d) three months after the Non-Employee Director ceases
to be employed by GTS if such Non-Employee Director had become an employee of
GTS (except that, if the Non-Employee Director dies within that three-month
period, his or her Directors' Options are exercisable for a period of one year
from the date of such death). Each Directors' Option may be exercised in whole
or in part by giving written notice of exercise to GTS specifying the Directors'
Option to be exercised and the number of shares to be purchased. Such notice
must be accompanied by payment in full of the exercise price in cash or by
surrender of shares of Common Stock or a combination thereof. Directors' Options
granted under the Directors' Plan may not be sold, pledged, assigned or
otherwise disposed of in any manner other than by will or by the laws of descent
and distribution.
At the time of grant, the Board of Directors may provide in connection with
any grant made under the Directors' Plan that the shares of Common Stock
received as a result of such grant are subject to a right of first refusal by
GTS.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
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EXECUTIVE COMPENSATION
The following table sets forth each component of compensation paid or
awarded to, or earned by, the chief executive officer and the four most highly
compensated executive officers other than the chief executive officer serving as
of December 31, 1996 (collectively, the "Named Executive Officers") for the year
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
----------------------- -----------------------
RESTRICTED SECURITIES
PAID OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
POSITION ($) ($) ($) ($) (#) ($)(7)
------------------ -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Thames,.......... $325,000 $113,750 (1) -0- 112,500(5) 9,954
President and Chief
Executive Officer
Jan Loeber,................ 235,000 78,608 74,642(4) 30,000(8) 3.5(6) 12,986
Senior Vice President --
HER
Raymond I. Marks,.......... 230,091 46,200 (1) -0- 55,500(5) 13,788
Senior Vice President --
Asia
Henry A. Radzikowski,...... 208,750 42,000 226,060(2) -0- 55,500(5) 12,986
Senior Vice President and
Chief Executive
Officer -- CIS Operations
Louis T. Toth,............. 203,937 40,950 33,602(3) -0- 43,500(5) 13,004
Senior Vice President --
Central Europe
</TABLE>
- ---------------
(1) Perquisites and other personal benefits paid to the Named Executive Officer
during fiscal year 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.
(2) Mr. Radzikowski received a cost of living allowance totalling $96,000 during
fiscal year 1996. In addition, GTS paid approximately $122,376 in housing
expenses on behalf of Mr. Radzikowski. Mr. Radzikowski's successor as Chief
Executive Officer -- CIS and Eastern Europe Operations was Mr. Reich. Mr.
Radzikowski resigned in the second quarter of 1997.
(3) These amounts represent a cost of living allowance of $27,500 and paid home
leave of $6,102 paid to Mr. Toth during fiscal year 1996.
(4) Mr. Loeber received a cost of living allowance and paid home leave during
fiscal year 1996. HER provided Mr. Loeber with a tax equalization that
compensates him for the higher taxes he pays because he resides in Belgium
instead of the United States. Furthermore, HER provided Mr. Loeber with a
housing allowance equal to $31,836 per year (converted from Belgian Francs
to U.S. Dollars at an exchange rate of BF32.0392 = $1.00). In addition, HER
provides Mr. Loeber with the use of a company car.
(5) Stock options awarded under the 1992 Stock Option Plan.
(6) Stock options awarded under the GTS-Hermes Plan.
(7) Amounts hereunder represent premiums paid by GTS for $1,000,000 in term life
insurance for each Named Executive Officer and contributions by GTS under
the 401(k) Plan to each Named Executive Officer's account.
(8) Shares of restricted stock that vest in an amount of one-third each year for
three years beginning on January 2, 1997.
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THE GTS 401(k) PLAN
The GTS 401(k) Plan (the "401(k) Plan") is a defined contribution
retirement benefit plan that is qualified for favorable tax treatment under
Section 401 of the Code. All employees of GTS, including the Named Executive
Officers, who are at least 21 years of age and have completed the minimum
service requirement are eligible to participate in the 401(k) Plan. The 401(k)
Plan participants may defer pre-tax income by contributing to the plan up to the
maximum amount permitted by law. After-tax contributions are also permitted
under the 401(k) Plan. GTS matches 50% of each participant's pre-tax
contribution to the 401(k) Plan up to 5% of the participant's total
compensation. In addition, GTS may, in its sole discretion and in a
nondiscriminatory manner, contribute additional amounts as profit sharing to
each participant's account. The amounts that are deposited into each
participant's account are invested among various investment options according to
the direction of the participant. Each participant's pre-tax and after-tax
contributions are immediately vested and nonforfeitable. GTS's matching
contribution and profit sharing allocations to each participant's account do not
vest until the participant has completed three years of service with GTS, at
which time the matching contribution and profit sharing allocations become 100%
vested. Each participant is eligible to begin receiving benefits under the
401(k) Plan on the first day of the month coincident with or following the
attainment of normal retirement age. There is no provision for early retirement
benefits under the 401(k) Plan.
THE SFMT, INC. EQUITY COMPENSATION PLAN
The purpose of the SFMT, Inc. Equity Compensation Plan (the "Equity
Compensation Plan") is to attract, retain and motivate key employees, officers
and eligible independent contractors of GTS and to enable such individuals to
own Common Stock and to have a mutuality of interest with other shareholders of
GTS through the grant of restricted stock and other equity-based awards.
The total number of shares of Common Stock that may be issued or
transferred under the Equity Compensation Plan is four percent of the total
number of shares of Common Stock outstanding at the beginning of the calendar
year, subject to certain adjustments, which are described below. This threshold
number may be increased by the number of shares (a) that were issued under the
Equity Compensation Plan with respect to which no dividends were paid and (b)
that were subsequently forfeited, in accordance with the terms of the Equity
Compensation Plan.
The Equity Compensation Plan is administered by the Committee. The chief
executive officer of GTS has the authority to recommend the individuals to whom
awards will be granted, subject to approval by the Committee. The Committee has
full and binding authority to determine the fair market value of the Common
Stock and the number of shares included in any awards, to establish terms and
conditions of any award, to interpret the Equity Compensation Plan, to prescribe
rules relating to the Equity Compensation Plan and to make all other
determinations necessary to administer the Equity Compensation Plan. The
Committee may condition the vesting of restricted stock upon the attainment of
specified performance goals or such other factors as the Committee may determine
in its sole discretion. In the event that the Committee determines, in its sole
discretion, that an award of restricted stock would not be appropriate with
respect to any individual who has been recommended for an award by the chief
executive officer, the Committee has the authority to grant to any such
individual any other variety of equity-based compensation award, including, but
not limited to, phantom stock, phantom units, stock appreciation rights,
performance shares and performance units. The Committee does not, however, have
the authority to grant stock options pursuant to the Equity Compensation Plan.
Grants under the Equity Compensation Plan are determined by the Committee
in its sole discretion. For this reason, it is not possible to determine the
benefits or amounts that will be received by any individual employee or group of
employees in the future. The Equity Compensation Plan will remain effective
until November 14, 2004, unless earlier terminated by GTS. No restricted stock
may be granted under the Equity Compensation Plan on or after November 14, 2000.
During a specified period set by the Committee commencing with the date of
any restricted stock award, the participant is not permitted to sell, transfer,
pledge or otherwise encumber shares of restricted stock.
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Within these limits, the Committee, in its sole discretion, may provide for the
lapse of such restrictions or may accelerate or waive such restrictions in whole
or in part, based on service, performance and such other factors. Unless the
Committee specifically determines otherwise, a restricted stock award granted
under the Equity Compensation Plan vests one-third on the second anniversary of
the date of grant, one-third on the third anniversary of the date of grant and
one-third on the fourth anniversary of the date of grant.
The Committee may impose such other restrictions on shares of Common Stock
issued under the Equity Compensation Plan, including a right of first refusal by
GTS that requires the participant to offer GTS any shares that the participant
wishes to sell.
The Equity Compensation Plan provides that, in the event of a change to the
Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or exchange of
shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will preserve the value of outstanding
awards by making certain equitable adjustments in its discretion.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Equity Compensation Plan at any time, except that any such action will be
subject to the approval of GTS shareholders at the first annual meeting
following such action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
THE AMENDED AND RESTATED 1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS GROUP,
INC.
In 1992, the Board of Directors approved the adoption of the 1992 Stock
Option Plan of Global TeleSystems Group, Inc. (the "1992 Option Plan") for key
employees of GTS. The purpose of the 1992 Option Plan is to enable GTS to
attract and retain the best personnel for positions of substantial
responsibility, to provide additional incentives to employees of GTS and its
subsidiaries and to promote the success of the business of GTS and its
subsidiaries by providing certain employees with an ownership interest in the
Company.
The total number of shares of Common Stock that may be subject to options
granted under the 1992 Option Plan (the "1992 Options") is generally 18.5% of
the total number of shares of Common Stock outstanding at the beginning of the
calendar year.
The 1992 Option Plan is administered by the Committee, which must be
composed of not less than two members of the Board of Directors who are
"non-employee directors" within the meaning of Rule 16b-3 of the Exchange Act.
The Committee has full and binding authority to determine the fair market value
of the Common Stock, the exercise price of options to be granted, the persons to
whom and the times at which options will be granted and the number of shares to
be represented by each option. The Committee also has full and binding authority
to interpret the 1992 Option Plan, to prescribe rules relating to the 1992
Option Plan, to establish terms and conditions of each 1992 Option and to make
all other determinations necessary to administer the 1992 Option Plan.
The 1992 Option Plan will remain effective until November 14, 2004, unless
earlier terminated by GTS. Grants under the 1992 Option Plan are determined by
the Committee in its sole discretion. For this reason, it is not possible to
determine the benefits or amounts that will be received by any individual
employee or group of employees in the future.
The 1992 Option Plan authorizes the grant of both nonqualified options,
which are not qualified for special tax treatment, and incentive stock options
("ISOs"), which qualify for special federal income tax treatment under Section
422 of the Code. The exercise price per share of Common Stock issuable pursuant
to an ISO may not be less than 100% of the fair market value of Common Stock on
the date of grant. Unless otherwise specified in any respective option
agreement, a nonqualified 1992 Option will expire ten years and one day after
the date of grant and an ISO will expire ten years from the date of grant. Each
person granted 1992 Options shall be provided with an option agreement setting
forth the terms of each grant pursuant to the
96
<PAGE> 103
1992 Option Plan. Unless the Committee specifically determines otherwise, each
1992 Option vests one-third on each of the first three anniversaries of the date
of grant. The full purchase price of the shares must be paid, either in cash, by
delivery of previously owned shares, or by withholding of shares having a fair
market value equal to the 1992 Option exercise price or by such other method
approved by the Committee. Each 1992 Option expires (a) 30 days after the option
holder ceases to be an employee of GTS for any reason other than death,
disability or retirement, (b) one year from the date of death or disability of
an employee, or (c) 90 days following retirement of the employee. 1992 Options
may not be sold, pledged, assigned or otherwise disposed of in any manner other
than by will or by the laws of descent and distribution.
The Committee may impose such other restrictions on shares of Common Stock
issued under the 1992 Option Plan, including a right of first refusal by GTS. In
addition, if the amount of any payment under the 1992 Option Plan, either
separately or in combination with any other payment by GTS, would constitute an
excess parachute payment within the meaning of Section 280G of the Code, the
total payments payable under the 1992 Option Plan will be reduced in order to
maximize the amount received by the participant under the 1992 Option Plan in
combination with other payments by GTS.
The 1992 Option Plan provides that, in the event of a change to the Common
Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of shares or exchange
of shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will, in its discretion, preserve the
value of outstanding 1992 Option Plan awards by making certain equitable
adjustments.
The Board of Directors may amend, alter, suspend, discontinue, or terminate
the 1992 Option Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the first annual meeting following such
Board of Directors action if such shareholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which Common Stock may then be listed or quoted,
or if the Board of Directors determines in its discretion to seek such
shareholder approval.
THE GTS 1996 TOP TALENT RETENTION PROGRAM
GTS implemented the GTS 1996 Top Talent Retention Program (the "Program")
which, for 1996 only, alters the terms offered to certain employees under the
1992 Option Plan. Employees who are offered participation in the Program must
sign a "retention agreement," the terms of which are described below, in order
to receive any 1992 Options during 1996. The Program has been offered to
approximately 28 employees, and it provides that any 1992 Options granted to
such participants will vest as follows: (i) one-half of any 1992 Option granted
under the Program will vest at a rate of 25% per year beginning on the first
anniversary of the initial date of grant and (ii) the remaining portion of any
1992 Option granted under the Program will vest one-quarter according to the
achievement of performance revenue levels, and one-quarter according to the
achievement of price levels of Common Stock, provided that all options will vest
on the fifth anniversary of the date of grant regardless of whether such
performance revenue and pricing levels are attained.
97
<PAGE> 104
OPTION GRANTS IN THE LAST FISCAL YEAR -- 1992 STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE VALUE($)
---- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Gerald W. Thames........................ 112,500(1) 7.3 $10.27 3-30-06 $1,155,000
Henry A. Radzikowski.................... 55,500(1) 3.6 10.27 3-30-06 569,800
Louis T. Toth........................... 43,500(1) 2.8 10.27 3-30-06 446,400
Raymond I. Marks........................ 55,500(1) 3.6 10.27 3-30-06 569,800
Jan Loeber.............................. -- -- -- -- --
</TABLE>
- ---------------
(1) Stock options were awarded under the 1992 Stock Option Plan. Each option
vests one-third on each of the first three anniversaries of the date of
grant.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES -- 1992 STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#)(1) AT FY-END($)(2)
----------------------- ---------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ------------- -------------
<S> <C> <C>
Gerald W. Thames........................ 575,000/287,501 $5,538,540/$1,103,336
Henry A. Radzikowski.................... 89,801/310,100 857,883/ 2,679,717
Louis T. Toth........................... 186,549/122,601 1,883,386/ 788,677
Raymond I. Marks........................ 144,996/195,504 1,301,667/ 1,186,033
Jan Loeber.............................. -- --
</TABLE>
- ---------------
(1) No options were exercised during the year ended December 31, 1996.
(2) Based on $13.33 per share value of Common Stock as of December 31, 1996 less
the exercise price.
GTS-HERMES, INC. 1994 STOCK OPTION PLAN
The GTS-Hermes, Inc. 1994 Stock Option Plan (the "GTS Hermes Plan") was
adopted by the board of directors of GTS-Hermes, Inc. ("GTS-Hermes") in 1994 to
enable employees of GTS-Hermes and its subsidiaries, including HER, and
affiliates to participate in ownership of GTS-Hermes and to attract and retain
key employees of particular merit. The GTS-Hermes Plan provides for the award of
incentive stock options, nonqualified stock options and stock appreciation
rights. All employees of GTS-Hermes and its subsidiaries, including HER, and
affiliates are eligible to participate in the GTS-Hermes Plan.
The maximum number of shares authorized with respect to grants of awards
under the GTS-Hermes Plan in each calendar year is 6.5% of the shares of common
stock, par value $0.01 per share, of GTS-Hermes issued and outstanding, and the
aggregate number of shares of stock subject to the GTS-Hermes Plan is 13% of the
total shares of stock issued and outstanding. The GTS-Hermes Plan is
administered by a committee appointed by the board of directors of GTS-Hermes,
which has broad discretion to determine who shall receive awards under the
GTS-Hermes Plan and the characteristics of any award thereunder, including the
price, term and vesting of such award, and to interpret the terms of the
GTS-Hermes Plan and awards granted under the GTS-Hermes Plan. Stock appreciation
rights may not be awarded alone and may only be awarded in tandem with an option
grant.
The GTS-Hermes Plan provides that in the event of a change in control, as
defined under the GTS-Hermes Plan, any stock appreciation rights outstanding for
at least six months and any stock options awarded under the GTS-Hermes Plan not
previously exercisable and vested which have been held for at least six months
from the date of grant will become fully vested and exercisable at an adjusted
price to be determined
98
<PAGE> 105
according to the highest sales price per share paid in any transaction reported
or offer made at any time during the preceding 60 days as determined by the
committee.
The board of directors of GTS-Hermes may amend, alter or discontinue the
GTS-Hermes Plan at any time, provided that the rights of participants are not
impaired, except that shareholder approval is necessary for certain material
modifications.
In the fourth quarter of 1997, HER established a stock option plan (the
"New Plan") to replace the GTS-Hermes Plan for the purpose of incentivizing HER
key employees, in substantially similar form to the GTS-Hermes Plan. The
aggregate number of shares of HER stock subject to the New Plan is approximately
13% of the total shares of HER stock issued and outstanding including options.
HER issued 10,166 options in replacement of those outstanding under the
GTS-Hermes Plan as well as additional options to certain employees. The issuance
of these options will result in a non-cash charge of $3.7 million of which $2.6
million is expected to be recorded during the fourth quarter and the remaining
$1.1 million will be recognized principally ratably over fiscal 1998. The
GTS-Hermes Plan is intended to be terminated.
OPTION GRANTS IN THE LAST FISCAL YEAR -- GTS-HERMES PLAN(1)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED IN EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE 5% ($) 10% ($)
---- ---------- ------------ ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Jan Loeber(3)........................... 3.5 53.8 $57,148.86 2007 N/A N/A
</TABLE>
- ---------------
(1) Stock options are for GTS-Hermes stock pursuant to the GTS-Hermes Plan. Each
stock option vests one-third on each of the first three anniversaries of the
date of grant. HER established the New Plan to replace the GTS-Hermes Plan
during the fourth quarter of 1997. The New Plan, known as the Key Employee
Stock Option Plan of Hermes Europe Railtel B.V., is substantially similar to
the GTS-Hermes Plan. The options outstanding under the GTS-Hermes Plan were
cancelled and replaced by options under the New Plan.
(2) Due to the high exercise price of the options granted under the GTS-Hermes
Plan and the relatively low value of GTS-Hermes shares, GTS and GTS-Hermes
have agreed that it is reasonable to set the potential realizable value of
the options at zero with respect to the assumed annual rates of stock price
appreciation of 5% and 10% for the term of the options.
(3) In 1995, Jan Loeber was granted 3.5 shares.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-ENDED OPTION VALUES -- GTS-HERMES PLAN
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Jan Loeber.............................. 1.167/5.833 N/A
</TABLE>
- ---------------
(1) Due to the high exercise price of the options granted under the GTS-Hermes
Plan and the relatively low value of GTS-Hermes shares, GTS and GTS-Hermes
have agreed that it is reasonable to set the potential realizable value of
the options at zero with respect to the assumed annual rates of stock price
appreciation of 5% and 10% for the term of the options.
99
<PAGE> 106
EMPLOYMENT AGREEMENTS
GTS has executed employment agreements (together, the "Employment
Agreements") with all the Named Executive Officers. The agreements with Messrs.
Thames, Radzikowski and Marks include a three-year term of employment commencing
on April 1, 1996. Mr. Radzikowski resigned from the Company in the second
quarter of 1997. The agreements with Mr. Toth and Mr. Loeber include a two-year
term of employment commencing on April 1, 1996 and January 3, 1995,
respectively. All the Employment Agreements provide for the automatic renewal of
the term for additional one-year periods after the initial term unless written
notice of intent to terminate is provided by either party within a stated period
of between 120 days and six months prior to the renewal date. The salary of each
Named Executive Officer is reviewed yearly and may be increased at the sole
discretion of the Board of Directors. In addition to salary, each Named
Executive Officer is eligible for a performance-based annual bonus, to
participate in the GTS 1992 Stock Option Plan (with the exception of Mr. Loeber
whose employment agreement provides him with an option grant under the
GTS-Hermes Plan), to receive standard health and insurance benefits that are
provided to executives of GTS, to receive certain other fringe benefits and to
be reimbursed for all reasonable expenditures incurred in the execution of each
Named Executive Officer's respective duties. In addition, Mr. Loeber's
employment agreement provides him with 30,000 shares of restricted stock that
vest in an amount of one-third each year for three years beginning on January 2,
1997.
The performance-related bonuses are discretionary annual bonuses. Mr.
Loeber's bonus is based on a comparison of the projected to the actual
performance of HER during any given fiscal year. The maximum amount of Mr.
Loeber's bonus is a percentage of his salary that is determined by the Board of
Directors in its sole discretion. The bonus awards for Messrs. Thames, Marks and
Toth are based on the achievement of performance goals by a combination of both
GTS and the pertinent named Executive Officer and are determined each year by
the compensation committee. The amount of the performance-based bonuses awarded
to Messrs. Marks and Toth may equal up to 30% of the executive's salary for the
year. Mr. Thames may receive a performance-based bonus of up to 100% of his
salary for the year.
Each Employment Agreement may be terminated by GTS by giving notice of
intent to not extend the term of employment, for cause or as a result of the
Named Executive Officer's permanent disability. In the event that the employment
relationship is terminated due to the employee's disability or death or if GTS
provides notice of its intent not to renew the term of employment, GTS shall pay
to the Named Executive Officer or to the Named Executive Officer's estate, as
the case may be, the salary and bonus for the remaining portion of the fiscal
year in which the termination of employment occurs. In addition, if the Company
provides notice of its intent not to extend the term of employment, each Named
Executive Officer will receive assurances in an amount equal to his salary for
the greater of (a) the number of months or days in the notice period and (b) the
period during which the Named Executive Officer remains subject to the
restrictive covenants described below. If the Named Executive Officer is
terminated for cause or if he quits other than for the reasons stated above, he
shall not be entitled to any salary bonus or severance (other than accrued
salary).
Each Employment Agreement includes noncompetition and nonsolicitation
clauses that are effective during the term of employment and for a period of
from four months to one year thereafter. In addition, the Employment Agreements
include an unlimited covenant of confidentiality and nondisclosure. Any dispute
arising under an employment agreement must be resolved through arbitration,
except that each agreement also provides for specific performance and for a
court injunction in the event of a breach by the Named Executive Officer.
100
<PAGE> 107
CERTAIN RELATED PARTY TRANSACTIONS
Alan B. Slifka, the Chairman of the Board of Directors, owns an interest in
an office building in New York in which GTS leased office space until the
corporate headquarters were moved to McLean, Virginia on March 1, 1995. GTS
retains a small office space in New York City that is leased from Mr. Slifka on
a monthly basis, and the annual expense for 1996 was $40,600. Mr. Slifka also
has a consulting agreement with GTS pursuant to which he is paid consulting fees
of $100,000 per year.
Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 225,000 stock options
to purchase Common Stock that were granted in 1991 pursuant to a stock option
agreement that is not subject to any stock option plan. The options have an
exercise price of $0.533 per share and are fully vested. Any of the stock
options that remain unexercised after November 30, 2001 shall lapse and become
void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination.
In addition, Joel Schatz, a director of GTS, and Ms. Sandler, the wife of
Morris A. Sandler, a director of GTS were granted in 1991 stock options to
purchase Common Stock pursuant to stock option agreements that are not subject
to any stock option plan. Mr. Schatz holds 50,250 of such stock options to
purchase Common Stock with an exercise price of $0.533 per share. Mr. Schatz's
options are fully vested and any unexercised options he holds after November 4,
2001 shall lapse and become void. Generally, in the event that Mr. Schatz ceases
to be an employee or nonemployee director of GTS any of his unexercised stock
options shall lapse thirty days after such termination. The stock options held
by the spouse of Mr. Sandler were granted to Mr. Sandler in November 1991 and,
with the approval of the Board, were immediately assigned to his spouse, whom
the stand-alone stock option agreement names as the optionee. Pursuant to such
stock option agreement, the spouse of Mr. Sandler was granted 225,000 stock
options to purchase Common Stock at an exercise price of $.533 per share. The
options are fully vested and any unexercised options held after November 4, 2001
shall lapse and become void. Generally, in the event that Mr. Sandler ceases to
be an employee or nonemployee director of GTS, any of such unexercised stock
options shall lapse thirty days after such termination.
Bernard McFadden, Director, has a consulting agreement with GTS pursuant to
which he is paid $100,000 in consulting fees each year.
In August and September 1997, affiliates of George Soros and Mr. Slifka
purchased 319,149 and 57,015 shares of Common Stock, respectively, at a price of
$15.67 per share in the Company's private stock offering. In addition,
affiliates of Mr. Slifka purchased $2.9 million of Convertible Bonds in
September 1997. Pursuant to the terms of the indenture related to the
Convertible Bonds, the Convertible Bonds will be convertible into such shares of
Common Stock as is equal to the principal amount of such Convertible Bonds
divided by the applicable conversion price, which conversion price shall be
equal to the public offering price of the Common Stock in the Offerings. See
"Description of Certain Indebtedness."
Affiliates of Soros Fund Management purchased $40 million of notes from GTS
in 1996, which notes bear interest at 10% per annum, in partial consideration of
which (i) W. James Peet was appointed to the Board of Directors and (ii) the
affiliates received warrants to purchase 4,444,443 shares of Common Stock.
Together with their prior equity interests in GTS, these affiliates currently
hold, on a fully diluted basis (excluding shares underlying stock options), in
excess of 26.6% of the Company's Common Stock. In accordance with the terms of
the warrant agreement, the exercise price of the warrants was reduced from
$10.27 per share to $9.33 per share as the outstanding debt had not been repaid
prior to December 31, 1996. In addition, these affiliates collect a monitoring
fee of $40,000 per month, which they will continue to collect until the
consummation of the Offerings, at which point it will be reduced to $25,000.
Under certain agreements, these affiliates have the right to co-invest with GTS
in all of its new ventures throughout Asia, excluding countries in the former
Soviet Union, and pursuant to this right, one of these affiliates holds a 25%
interest in GTS China Investments LLC. See "Business -- Asia."
101
<PAGE> 108
Affiliates of Capital Research International purchased $30 million of notes
from GTS in 1996, which notes bear interest at 10% per annum, in partial
consideration of which it received warrants to purchase 3,333,333 shares of
Common Stock. In accordance with the terms of the warrant agreement, the
exercise price of the warrants was reduced from $10.27 per share to $9.33 per
share as the outstanding debt had not been repaid prior to December 31, 1996.
Jean Salmona, a director of GTS, is the Chairman and Chief Executive
Officer of CESIA. CESIA also provides consultancy services for CDI and for HER.
The Company paid $123,685 in 1996 and $0 in both 1995 and 1994 to CESIA for
consulting services related to CDI. In addition, HER paid $84,270 in 1996 and $0
in both 1995 and 1994 to CESIA for consulting services. Further, the Company
paid $2,314 and $5,843 to CESIA in 1996 and 1997, respectively, pursuant to the
purchase agreement with CESIA related to the CDI business.
Pursuant to a 1995 purchase agreement, the Company received its interest in
GTS-Vox Limited, the intermediate holding company of TCM, in exchange for a note
in the principal amount of $693,380 issued to the sellers and certain additional
consideration to its partners payable in the form of either cash or Common Stock
based upon its financial performance. The Company paid the note in 1996. On
January 17, 1997, the agreement was amended such that the consideration would
only be in the form of the issuance of Common Stock and as such, GTS is
obligated under these arrangements to issue up to a maximum of 1,121,640 shares
of Common Stock. In the first quarter of 1997, pursuant to this agreement the
Company issued 504,600 common shares, which was valued at the Company's current
fair market value of $13.33 per share. In addition, the Company was credited
37,480 shares of Common Stock under the amended agreement, for purposes of
applying against the 1,121,640 maximum number of shares of Common Stock, for the
Company's payment of its note to the sellers in 1996. Common Stock issued
pursuant to the agreement must be held for a minimum holding period. In certain
circumstances, if GTS's partners are unable to sell their shares of Common
Stock, GTS is obligated to assist in locating a purchaser for the Common Stock,
and, if unable to do so, to repurchase these shares. GTS's repurchase
obligations are at the following prices: (i) if shares of Common Stock are then
being publicly traded, at the average trading price of such shares for the 10
trading days preceding such repurchase or (ii) if shares of Common Stock are not
then publicly traded, at the price shares of Common Stock were most recently
offered to individual investors in a private placement, or, if no such private
placement has occurred within the three months preceding the repurchase of such
shares, at a price determined by an independent financial institution to be
agreed upon by GTS and the seller. As a result of their receipt of shares of
Common Stock in 1997, the sellers became shareholders of GTS.
GTS purchased its interest in PrimTelefone, the Company's cellular
operations in the Primorsky region of Russia, from Commstruct International,
B.V. ("CIBV") for $500,000 cash and 400,000 shares of Common Stock of the
Company, as a result of which CIBV became a stockholder of the Company. Pursuant
to the asset purchase agreement relating to the purchase by GTS of its interest
in PrimTelefone, CIBV has the right to have some or all of its shares of Common
Stock repurchased, which right will terminate on the date when the Company first
sells shares of Common Stock to the public pursuant to an effective registration
statement under the Securities Act, by GTS over a five-year period at the
current fair market value of such shares at the time of such repurchase.
Affiliates of Baring International Investment Management Limited
("Barings"), which affiliates consist primarily of investment funds and trusts,
are shareholders of the Company and Barings may designate a non-voting observer
to attend meetings of the Board of Directors of the Company. Barings' observer
status terminates upon the consummation of an initial public offering of the
Company's Common Stock. In April 1996, GTS entered into an agreement with First
NIS Regional Fund SICAF, an affiliate of Barings, to organize GTS Ukrainian
TeleSystems, L.L.C. (the "LLC"), a Delaware limited liability company 60% owned
by GTS, which in turn entered into a stock purchase agreement to acquire 49% of
all the ownership interests in Bancomsvyaz, a Ukrainian limited liability
company. See "Business -- Russia and the CIS." Such acquisition closed in May
1996. By contractual arrangement, Barings designates one member of the board of
directors of Bancomsvyaz. Barings funded $4.5 million to be applied towards the
LLC's purchase of the interest in Bancomsvyaz and for the LLC's $1.5 million
contribution to the registered capital of Bancomsvyaz. Prior to March 1, 1999,
Barings may put its initial investment to GTS for $4.5 million, plus accrued
interest at
102
<PAGE> 109
13.5% per annum, or, if GTS has consummated an initial public offering of its
Common Stock, may exercise an option to convert such investment into 438,311
shares of Common Stock at an exercise price of $10.27. In June 1997 the
agreement was amended, such that Barings funded an additional $4.1 million to be
applied toward Bancomsvyaz's capital expenditure and operating capital
requirements. On September 30, 2000, Barings may put that portion of its LLC
interest represented by the additional Barings investment to GTS for $4.1
million, or if GTS has consummated an initial public offering of its Common
Stock, may exercise an option to convert such additional investment into 275,000
Shares of Common Stock at an exercise price of $15.00.
103
<PAGE> 110
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
the Common Stock and rights to acquire Common Stock by (i) stockholders that
manage or own, either beneficially or of record, five percent or more of the
Common Stock of the Company, (ii) each of the Company's directors, (iii) each of
the Named Officers and (iv) all directors and executive officers of the Company
as a group as of December 31, 1997. For the purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares which
such 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 COMMON STOCK SHARES OF COMMON STOCK TO
BENEFICIALLY OWNED PRIOR TO BE BENEFICIALLY OWNED AFTER
THE STOCK OFFERINGS THE STOCK OFFERINGS
---------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) OWNED(1) OWNED(1)(2) OWNED(1)
------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
George Soros affiliates..................... 10,837,791(3) 25.8% 10,837,791(3) 20.4%
c/o Soros Fund Management
888 Seventh Avenue, 31st Floor
New York, NY 10106
Alan B. Slifka and affiliates............... 5,492,981(4) 14.5% 5,492,981(4) 11.2%
c/o Halcyon/Alan B. Slifka Management
Company LLC
477 Madison Avenue, 8th Floor
New York, NY 10022
Capital Research International.............. 5,347,620(5) 13.1% 5,347,620(5) 10.3%
c/o Capital Research International
25 Bedford Street
London WC2E England
Emerging Markets Management................. 2,767,046(6) 7.4% 2,767,046(6) 5.7%
1001 19th Street North, 16th Floor
Arlington, VA 22209
Morgan Stanley Asset Management............. 2,243,316(7) 6.0% 2,243,316(7) 4.6%
1221 Avenue of the Americas, 21st Floor
New York, NY 10020
Gary Gladstein.............................. 45,000(8) * 45,000 *
Bernard McFadden............................ 37,500 * 37,500 *
Michael A. Greeley.......................... 13,500(9) * 13,500 *
Stewart J. Paperin.......................... 9,000(8) * 9,000 *
W. James Peet............................... 13,500(8) * 13,500 *
Jean Salmona................................ 13,500 * 13,500 *
Morris A. Sandler........................... 351,000 * 351,000 *
Joel Schatz................................. 500,250 1.3% 500,250 1.0%
Adam Solomon................................ 25,500(10) * 25,500(10) *
Gerald W. Thames............................ 676,562 1.8% 676,562 1.4%
Jan Loeber.................................. 30,000(11) * 30,000(11) *
Raymond I. Marks............................ 246,940 * 246,940 *
Henry A. Radzikowski........................ 186,539 * 186,539 *
Louis T. Toth............................... 256,538 * 256,538 *
Other officers.............................. 197,051 * 197,051 *
All Directors and Executive Officers as a
group (21 persons)..................... 2,602,380 6.5% 2,602,380 5.1%
Total of above.............................. 29,291,134 29,291,134
Total shares on a fully diluted basis:...... 45,384,590 56,484,590
</TABLE>
104
<PAGE> 111
- ---------------
* Less than 1%
(1) The percentage of ownership is based upon 45,384,590 shares, comprised of
37,606,814 shares of Common Stock issued and outstanding, and warrants to
purchase 7,777,776 shares of Common Stock. Excluded from the calculation
are: 195,528 treasury shares; 6,322,173 shares of Common Stock issued to
employees under the Company's 1992 Option Plan, of which 2,796,111 are
vested at December 31, 1997; 759,000 options to purchase shares of Common
Stock issued to employees prior to the adoption of the Company's 1992
Option Plan and options issued pursuant to the Directors' Plan and Equity
Compensation Plan; and an option to convert a debt put right to 713,311
shares of Common Stock.
(2) Includes shares of Common Stock issuable upon the exercise of stock options
and stock warrants within 60 days of December 31, 1997.
(3) Comprised of 3,074,199 shares of Common Stock held by the Soros
Foundation-Hungary; 1,125,000 shares of Common Stock held by the Soros
Charitable Foundation; 319,149 shares of Common Stock held by Soros
Humanitarian Foundation; 1,125,000 shares and warrants to purchase
3,333,333 shares of Common Stock held by The Open Society Institute;
500,000 and 250,001 shares of Common Stock held by Winston Partners II LDC
and Winston Partners II LLC, respectively; warrants to purchase 370,371,
185,184 and 555,555 shares of Common Stock held by Winston Partners II LDC,
Winston Partners II LLC and Chatterjee Fund Management, respectively, all
of which are affiliates of George Soros. Information in the above table
excludes the 45,000, 9,000 and 13,500 shares of, and options for the
purchase of, Common Stock held by Gary Gladstein, Stewart J. Paperin and W.
James Peet, respectively, over which the George Soros affiliates disclaim
ownership.
(4) Includes 2,788,784 shares of Common Stock owned by Mr. Slifka, shares of
Common Stock held in trust for a minor child and options to purchase
225,000 shares of Common Stock; 2,563,041 shares of Common Stock owned by
various Halcyon Partnerships which are managed by Halcyon/Alan B. Slifka
Management Company LLC, of which Mr. Slifka is the Managing Principal and
over which Mr. Slifka disclaims beneficial ownership; 67,500 shares of
Common Stock held by GTS 1995 Partners, LP; 4,500 shares of Common Stock
held by Kevah Konner, a Principal of Halcyon/Alan B. Slifka Management
Company LLC; 19,656 shares of Common Stock held by John M. Bader, a
Principal of Halcyon/Alan B. Slifka Management Company LLC; and 49,500
shares of Common Stock owned by Randolph Slifka, Mr. Slifka's son, over all
of which Mr. Slifka disclaims beneficial ownership.
(5) Includes 2,014,287 shares of Common Stock and warrants to purchase
3,333,333 shares of Common Stock held by funds managed by affiliates of
Capital Research International.
(6) Shares of Common Stock held by funds managed by Emerging Markets
Management.
(7) Shares of Common Stock held by funds managed by Morgan Stanley Asset
Management.
(8) Excludes the shares of Common Stock held by the George Soros affiliates
over which Gary Gladstein, Stewart J. Paperin and W. James Peet disclaim
ownership.
(9) Excludes the 1,819,149 shares of Common Stock owned by Chestnut Hill
Telecom Inc., an affiliate of Michael A. Greeley, over which Mr. Greeley
disclaims ownership.
(10) Excludes 31,914 shares of Common Stock held in trust for a relative over
which Adam Solomon disclaims ownership.
(11) Includes 30,000 restricted shares of Common Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTES DUE 2005
Concurrently with the Stock Offerings, the Company is offering, pursuant to
a separate prospectus, $100 million of Notes. The Notes are expected to have the
following terms when issued. The Notes will mature in 2005 and will bear
interest, payable semi-annually, at a rate to be determined. The Indenture will
not provide for a sinking fund. The Notes will be subject to redemption at any
time on or after a date to be determined in 2002, at the option of the Company,
in whole or in part, in integral multiples of $1,000 principal amount at
declining redemption prices set forth in the Indenture. Notwithstanding the
foregoing, during the first three years after the date of the Indenture, the
Company will be permitted to redeem up to 33 1/3% of the aggregate principal
amount of the Notes with the net proceeds of any Public Equity Offerings (as
defined in the Indenture) or Strategic Equity Investments (as defined in the
Indenture) at a redemption price to be determined. The Company will place net
proceeds from the offering of the Notes representing funds that, together with
the proceeds from the investment thereof, will be sufficient to pay the first
four scheduled interest payments (but not additional interest) on the Notes,
into an escrow account (the "Escrow Account") to be held by the Trustee for the
benefit of the holders of the Notes. The Company will grant to the Trustee for
the benefit of the holders of the Notes, a first priority and exclusive security
interest in the Escrow Account and the proceeds thereof. Funds will be disbursed
from the Escrow Account for interest payments (but not additional interest) on
the Notes. Pending such disbursement, all funds contained in the Escrow Account
will be invested in Cash Equivalents (as defined in the Indenture).
Upon a Change of Control (as defined in the Indenture) of the Company, or
in the event of Asset Sales (as defined in the Indenture) in certain
circumstances, the Company will be required by the terms of the Indenture to
make an offer to purchase the outstanding Notes at a purchase price equal to
101% and 100%, respectively, of the principal amount thereof.
The indebtedness of the Company evidenced by the Notes will rank pari passu
in right of payment with all other existing and future unsubordinated
indebtedness of the Company and senior in right of payment to all existing and
future obligations of the Company expressly subordinated in right of payment to
the Notes. The Indenture will contain a number of covenants restricting the
operations of the Company and its Restricted Group Members (as defined in the
Indenture), including those restricting: the incurrence of indebtedness; the
making of restricted payments (in the form of the declaration or payment of
certain dividends or distributions, the purchase, redemption or other
acquisition of any capital stock of the Company, the voluntary prepayment of
pari passu or subordinated indebtedness and the making of certain investments,
loans and advances) unless no Default or Event of Default (each, as defined in
the Indenture) exists, its debt coverage ratio does not exceed a certain ratio
to be determined and such restricted payments do not exceed the Basket (as
defined in the Indenture); transactions with stockholders and affiliates; the
incurrence of liens; sale-leaseback transactions; issuances and sales of capital
stock of subsidiaries; the incurrence of guarantees by subsidiaries; dividend
and other payment restrictions affecting subsidiaries; consolidation, merger or
sale of substantially all of the Company's assets; and requiring the purchase of
Notes, at the option of the holder, upon the occurrence of a Change of Control
and certain Asset Sales.
The events of default under the Indenture will include provisions that are
typical of senior debt financings, including a cross-acceleration to a default
by the Company or any Restricted Group Member on any indebtedness that has an
aggregate principal amount in excess of certain levels. Upon the occurrence of
such an event of default, the trustee or the holders of not less than 25% in
principal amount at maturity of the outstanding Notes may immediately accelerate
the maturity of all the Notes as provided in the Indenture.
CHATTERJEE NOTES AND CAPITAL RESEARCH NOTES
In 1996, the Company issued $40 million of notes (the "Chatterjee Notes")
to the Chatterjee Group, an affiliate of George Soros. In connection with the
issuance of the Chatterjee Notes, the Chatterjee Group received warrants (the
"Chatterjee Warrants") to purchase 4,444,443 shares of Common Stock. The
Chatterjee Warrants were initially issued with an exercise price of $10.27 per
share, which exercise price was
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subsequently reduced to $9.33 per share in accordance with the terms of the
warrant agreement. In addition, The Chatterjee Group was granted the right to
appoint, and has appointed, one member to the Board of Directors and collects a
monitoring fee of $40,000 per month, which it will continue to collect until the
Company completes the Offering. The Chatterjee Group also has the right to
co-invest with GTS in all of its new ventures throughout Asia, excluding
countries in the former Soviet Union, and pursuant to this right has invested
and holds a 25% interest in GTS China Investments LLC. See "Business -- Asia."
The Chatterjee Notes bear interest at 10% per annum and the principal is payable
in 12 quarterly installments commencing April 1, 1998.
In 1996, the Company also issued $30 million of notes (the "Capital
Research Notes") to affiliates of Capital Research International. In connection
with the issuance of the Capital Research Notes, Capital Research International
received warrants (the "Capital Research Warrants") to purchase 3,333,333 shares
of Common Stock. The Capital Research Warrants were initially issued with an
exercise price of $10.27 per share, which exercise price was subsequently
reduced to $9.33 per share in accordance with of the warrant agreement. The
Capital Research Notes bear interest at 10% per annum and the principal is
payable in 12 quarterly installments commencing April 1, 1998.
Both the Chatterjee Notes and the Capital Research Notes impose significant
covenants on the Company which covenants, among other things, limit the ability
of the Company and its subsidiaries to incur debt and pay dividends and require
the Company to maintain certain financial ratios.
The Company intends to use a portion of the net proceeds of the Offerings
to repay the Chatterjee Notes and the Capital Research Notes.
CONVERTIBLE BONDS
The Company sold approximately $144.8 million bonds ("Convertible Bonds")
in the Convertible Bond Offering. The Convertible Bonds have a three year
maturity and are unsecured, senior subordinated obligations of the Company. The
Convertible Bonds are issued pursuant to an indenture containing certain
covenants for the benefit of the holders of the Convertible Bonds, including,
among other things, covenants limiting the incurrence of indebtedness,
restricted payments, liens, payment restrictions affecting certain subsidiaries
and joint ventures, transactions with affiliates, asset sales and mergers and
combinations. In the event of a change of control of the Company, holders of the
Convertible Bonds have the right to require GTS to purchase such holder's
Convertible Bonds at prices ranging from 106.5 percent of the principal amount
if the date of redemption occurs on or before June 30, 1998 to 121.0 percent of
the principal amount if the date of redemption occurs after June 30, 1999. The
Convertible Bonds bear interest payable semiannually at a stated rate of 8.75%
for the first year, 9.25% for the second year and 9.75% for the final year until
maturity on June 30, 2000. The Company has granted to the holders of the
Convertible Bonds certain rights with respect to the registration of the shares
of Common Stock issuable upon conversion of the Convertible Bonds.
Each Convertible Bond is convertible into such number of shares of Common
Stock as is equal to the principal amount of such Convertible Bond divided by
the applicable Conversion Price. The applicable Conversion Prices shall be
determined as follows: (i) where a Complying Public Equity Offering (as defined
herein) has not been preceded since the issuance of the Convertible Bonds by a
Non-Complying Equity Offering (as defined herein), the Conversion Price shall
equal the per share price to the public in the Complying Public Equity Offering,
provided, however, that a 7% or 15% discount will be given to Convertible Bond
holders from the per share price to the public if the Complying Public Equity
Offering occurs during the second or third year, respectively, from the date of
issuance of the Bonds; (ii) where a Complying Public Equity Offering has been
preceded by one or more Non-Complying Equity Offerings since the issuance of the
Convertible Bonds, the Conversion Price shall equal the lower of (a) the
dollar-weighted average conversion price for all of such Non-Complying Equity
Offerings and the Complying Public Equity Offering (as calculated for each such
offering at the gross per share offering price for the applicable offering,
provided, however, that a 7% or 15% discount will be included in the calculation
if the closing dates of such offerings occur during the second or third year,
respectively from the date of issuance of the Convertible Bonds) and (b) the
conversion price for the Complying Public Equity Offering (as calculated in (i)
above); (iii) where a
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Non-Complying Public Equity Offering of at least $50 million, which is not a
Complying Public Equity Offering solely by reason of the offering's failure to
satisfy the $100,000,000 offering size condition for a Complying Public Equity
Offering, has not been preceded by a Complying Public Equity Offering since the
issuance of the Bonds and has been preceded by one or more Non-Complying Equity
Offerings, the Conversion Price shall equal the lower of (a) the dollar-weighted
average conversion price for all of such Non-Complying Equity Offerings and the
Non-Complying Public Equity Offering (as calculated for each Non-Complying
Public Equity Offering at the per share offering price for the applicable
offering, provided, however, that a 7% or 15% discount will be included in the
calculation if the closing dates of such offerings occur during the second or
third year, respectively from the date of issuance of the Convertible Bonds) and
(b) the conversion price for the Non-Complying Public Equity Offering alone or
(iv) in the case of any other Non-Complying Equity Offering not provided for in
clause (iii) above, where no Complying Public Equity Offering has occurred since
the issuance of the Convertible Bonds, the Conversion Price shall equal the
lowest conversion price calculated for each Non-Complying Equity Offering (as
calculated for each such offering at the gross per share offering price
provided, however, that a 7% or 15% discount will be included in the calculation
if the closing dates of such offerings occur during the second or third year
from the date of issuance of the Convertible Bonds).
There shall be excluded from the calculation of the applicable Conversion
Price any private equity offerings of Common Stock (made pursuant to an
exemption from registration under the Securities Act) aggregating no more than
$100 million in gross proceeds if such offering or offerings are consummated on
or prior to December 31, 1997 and certain private sales of the Common Stock to a
strategic purchaser so long as there has occurred a Complying Public Equity
Offering or a Non-Complying Equity Offering.
Outstanding Convertible Bonds are, subject to certain conditions,
redeemable at the option of the Company on or after the second anniversary of a
Complying Public Equity Offering, at the principal amount thereof plus accrued
interest, if any. At maturity the Convertible Bonds will be redeemed at their
principal amount plus accrued interest; however, in the event that a Complying
Public Equity Offering has not occurred, outstanding Convertible Bonds will be
redeemed at 121% of their principal amount, plus accrued interest, if any.
A "Complying Public Equity Offering" means a public offering of Common
Stock where, immediately following completion thereof, (a) the following
conditions are met: (i) the Company has made public offerings of Common Stock
with a cumulative public offering price of at least $100,000,000 to an aggregate
of not less than 50 purchasers; (ii) the Common Stock has been listed or shall
be listed in connection with the offering on either the New York Stock Exchange,
the London Stock Exchange, the American Stock Exchange or the Nasdaq National
Market; and (iii) the Company shall have registered additional shares of Common
Stock from private offerings of Common Stock (made pursuant to an exemption from
registration under the Securities Act) with a market value of at least
$100,000,000 calculated using the offering price in the Complying Public Equity
Offering and (b) the aggregate number of shares of Common Stock sold thereby,
together with any Common Stock sold in any prior public offerings plus the
number of shares of Common Stock into which the Convertible Bonds may be
converted (calculated as if such conversion were to be effected on the date of
determination) does not exceed 50 percent of the total number of shares of
Common Stock outstanding on a fully diluted basis. A "Non-Complying Public
Equity Offering" means a public equity offering of Common Stock which satisfies
all of the conditions specified in (a) above, except that the cumulative public
offering price is less than $100,000,000. A "Non-Complying Equity Offering"
means (i) a private offering of Common Stock or (ii) a public offering of Common
Stock that is not a Complying Public Equity Offering.
HER NOTES
HER sold $265 million aggregate principal amount of 11 1/2% Senior Notes
due 2007 ("HER Notes") in August, 1997. The HER Notes have a ten year maturity
and are unsecured, senior obligations of HER. HER placed approximately $56.6
million of the net proceeds in escrow for the first two years' interest payments
on the HER Notes. The HER Notes were issued pursuant to an indenture containing
certain covenants for the benefit of the holders of HER Notes, including, among
other things, covenants limiting the incurrence of
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indebtedness, restricted payments, liens, payment restrictions affecting certain
subsidiaries and joint ventures, transactions with affiliates, assets sales and
mergers. The HER Notes are redeemable in whole or part, at the option of HER at
any time on or after August 15, 2002 at a price ranging from 105.75 percent to
100.0 percent of the principal amount.
A portion of the HER 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 HER 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 HER of at least $75 million. In the event of a
change of control of HER, holders of the HER Notes have the right to require HER
to purchase such holder's HER Notes at a price equal to 101% of the aggregate
principal amount.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 135,000,000 shares of
Common Stock, par value $0.10 per share, of which 37,606,814 shares were issued
and outstanding as of December 31, 1997, and 10,000,000 shares of preferred
stock, par value $0.0001 per share (the "Preferred Stock"), none of which is
outstanding. The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares issued by the Company does not
purport to be complete and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Certificate of Incorporation and
By-laws, and to the applicable provisions of the General Corporation Law of the
State of Delaware (the "DGCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for one share held of
record on all matters upon which shareholders have the right to vote. There are
no cumulative voting rights. All issued and outstanding shares of Common Stock
are, and the Offered Shares, when issued and paid for, will be, validly issued,
fully paid and non-assessable. Holders of Common Stock are entitled to such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available for that purpose. See "Dividend Policy." Upon
dissolution, holders of Common Stock are entitled to share pro rata in the
assets of the Company remaining after payment in full of all of its liabilities
and obligations, including payment of the liquidation preference, if any, of any
Preferred Stock then outstanding.
PREFERRED STOCK
The Board of Directors may authorize the issuance of one or more series of
Preferred Stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine, without further action by the stockholders of the
Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
Preferred Stock could result in a series of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, enjoy all the rights
appurtenant to the Common Stock. As of the date of the Offerings, the Company
has authorized 200,000 shares of Series A Junior Participating Preferred Stock,
par value $.0001 per share (the "Series A Preferred Stock"). No other series of
Preferred Stock has been authorized. There are no issued and outstanding shares
of Series A Preferred Stock and no such shares are being offered hereby. A Right
(as defined below) to purchase shares of Series A Preferred Stock, however, is
attached to each share of Common Stock pursuant to the Rights Agreement
discussed below. The Company has authorized 200,000 shares of Series A Preferred
Stock initially for issuance upon exercise of such Rights.
The Units (as defined herein) of Series A Preferred Stock that may be
acquired upon exercise of the Rights will be nonredeemable and subordinate to
any other shares of preferred stock that may be issued by the Company. Each Unit
of Series A Preferred Stock will have a minimum preferential quarterly dividend
of $.01 per Unit or any higher per share dividend declared on the Common Stock.
In the event of liquidation, the holder of a Unit of Series A Preferred Stock
will receive a preferred liquidation payment equal to the greater of $.01 per
Unit and the per share amount paid in respect of a share of Common Stock.
Each Unit of Series A Preferred Stock will have one vote, voting together
with the Common Stock. The holders of Units of Series A Preferred Stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Series A Preferred Stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each Unit of Series A Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
Common Stock. The rights of holders of the Series A Preferred Stock to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions. Because of
the nature of the Series A Preferred Stock's dividend, liquidation and voting
rights, the economic value of one Unit of Series A Preferred Stock that may be
acquired upon the exercise of each Right is expected to approximate the economic
value of one share of Common Stock.
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PRIOR PURCHASE AGREEMENTS
The Company and certain investors ("Prior Shareholders") have previously
entered into stock purchase agreements on (i) April 23, 1993 (the "1993 Stock
Purchase Agreement"), (ii) April 22, 1994 and June 17, 1994 (collectively, the
"1994 Stock Purchase Agreements"), (iii) a series of dates in 1995 (the "1995
Stock Purchase Agreements"), (iv) a series of dates in 1996 (the "1996 Stock
Purchase Agreements"), (v) a series of dates in 1997 (the "1997 Stock Purchase
Agreements" and, together with the 1993 Stock Purchase Agreement, the 1994 Stock
Purchase Agreements, the 1995 Stock Purchase Agreements and the 1996 Stock
Purchase Agreements, the "Prior Purchase Agreements"). The Prior Purchase
Agreements contain, among other things, certain registration and other rights
granted by the Company with respect to such Common Stock described below.
Registration Rights. Pursuant to the terms of the Prior Purchase
Agreements, Prior Shareholders holding an aggregate of 29,623,784 shares of
Common Stock are entitled to certain demand registration rights with respect to
the Common Stock held by them ("Demand Registration Rights") following the
consummation of the Offerings. In addition to the Demand Registration Rights,
Prior Shareholders are, subject to certain limitations, entitled to register
shares of Common Stock in connection with a registration statement prepared by
the Company to register its equity securities. Holders who purchased pursuant to
the 1993 Stock Purchase Agreement may also register their shares of Common Stock
in connection with a registered sale of Common Stock by a Major Shareholder (as
that term is defined in the 1993 Stock Purchase Agreement). All of the
registration rights of the Prior Shareholders are subject to certain conditions
and limitations described in the Prior Purchase Agreements.
Rights of First Refusal and Tag-Along Rights. Under the Prior Purchase
Agreements, Prior Shareholders have certain rights of first refusal to purchase
pro rata any issue of New Securities (as that term is defined in the Prior
Purchase Agreements) which the Company thereafter may from time to time propose
to issue and sell, other than in connection with certain types of transactions
and to certain types of excluded purchasers. Termination of such rights will
occur upon the earlier of the closing of an initial public offering pursuant to
an effective registration statement under the Act or, as to any Prior
Shareholder, when such Prior Shareholder no longer owns all the shares it
originally purchased.
The Prior Purchase Agreements further provide that, in the case of a sale
by the Major Shareholders as a group of all their Major Shareholders' Shares (as
those terms are defined in the Prior Purchase Agreements), holders under the
Prior Purchase Agreements may elect to participate in that sale as well.
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Section 145 further provides that a corporation similarly
may indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
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the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation provides that the Company's
Directors shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director provided, however, that such
exculpation from liabilities is not permitted with respect to liability arising
from items described in clauses (i) through (iv) in the preceding paragraph. The
Certificate and the Company's By-Laws further provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by the
DGCL.
The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Certain provisions of the Certificate
of Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest, although certain of such provisions in the By-laws are subject to
final approval by the Company's Board of Directors. Such provisions may also
adversely affect prevailing market prices for the Common Stock. See "Certain
Risk Factors -- Anti-Takeover Effects of Provisions of the Restated Certificate
of Incorporation and By-laws."
Classified Board of Directors and Related Provisions. The Certificate of
Incorporation provides that the Board of Directors of the Company be divided
into three classes of directors serving staggered three-year terms. The classes
of directors (designated Class I, Class II and Class III) shall be, as nearly as
possible, equal in number. Accordingly, one-third of the Company's Board of
Directors will be elected each year. The terms of the Initial Class I directors
shall terminate on the date of the 1998 annual meeting of stockholders; the term
of the initial Class II directors shall terminate on the date of the 1999 annual
meeting of stockholders; and the term of the initial Class III directors shall
terminate on the date of the 2000 annual meeting of stockholders. At each annual
meeting of stockholders beginning in 1998, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. The classified board provision may prevent a party who acquires control of
a majority of the outstanding voting stock of the Company from obtaining control
of the Board of Directors until the second annual shareholders meeting following
the date such party obtains the controlling interest.
Subject to the rights of the holders of any series of Preferred Stock or
any other class of capital stock of the Company (other than the Common Stock)
then outstanding, directors may only be removed for cause by a majority vote of
the holders of capital stock of the Company issued and outstanding and entitled
to vote generally in the election of directors, voting together as a single
class.
No Shareholder Action by Written Consent; Special Meetings. Subject to
filing applicable amendments to the Certificate of Incorporation with the
Secretary of State of the State of Delaware, the Certificate of Incorporation
prohibits shareholders from taking action by written consent in lieu of an
annual or special meeting, and thus shareholders may take action at an annual
or special meeting called in accordance with the By-laws. The By-laws provide
that special meetings of shareholders may only be called only by the Chairman
of the Board of Directors, the Chief Executive Officer or a majority of the
Board of
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Directors. Special meetings may not be called by the shareholders, except as
permitted by the Shareholder Rights By-law described below.
Amendments to the Certificate of Incorporation. The provisions of the
Certificate of Incorporation described above may not be amended, altered,
changed or repealed without the affirmative vote of the holders of at least 75%
of the shares of capital stock of the Company issued and outstanding and
entitled to vote.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder,
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
In addition, the Company's Certificate of Incorporation grants the Board of
Directors of the Company the authority to issue up to 10,000,000 shares of
preferred stock in one or more series and to determine the rights, voting
powers, dividend rate, conversion rights, redemption price, liquidation
preference and other terms of such preferred stock without any further vote or
action by the stockholders. The foregoing provisions of Section 203 of the DGCL
and the Company's Certificate of Incorporation, and any issuance of preferred
stock with voting or conversion rights, may adversely affect the voting power of
the holders of Common Stock and may have the effect of delaying or preventing a
change of control of the Company or adversely affect the market price of the
Company's Common Stock.
SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
Shareholder Rights Plan. The Company is planning to enter into a Rights
Agreement (the "Rights Agreement") immediately prior to the closings of the
Stock Offerings. In connection with the Rights Agreement, the Board of Directors
of the Company will declare a distribution of one right (a "Right") for each
outstanding share of Common Stock, each share of Common Stock offered hereby and
each share of Common Stock issued (including shares distributed from treasury)
by the Company thereafter and prior to the Distribution Date (as defined below).
Each Right will entitle the registered holder, subject to the terms of the
Rights Agreement, to purchase from the Company one one-thousandth of a share (a
"Unit") of Series A Preferred Stock at a purchase price of $75 per Unit, subject
to adjustment.
Initially, the Rights will attach to all certificates representing shares
of outstanding Common Stock, and no separate Rights Certificates will be
distributed. The Rights will separate from the Common Stock and the
"Distribution Date" will occur upon the earlier of (i) 10 days following a
public announcement (the date of such announcement being the "Stock Acquisition
Date") that a person or group of affiliated or associated persons (other than
the Company, any subsidiary of the Company or any employee benefit plan of the
Company or such subsidiary) (an "Acquiring Person") has acquired, obtained the
right to acquire, or otherwise obtained beneficial ownership of 15% or more of
the then outstanding shares of Common Stock and (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person becomes an Acquiring Person) following the commencement
of a tender offer or exchange offer that would result in a person or group
beneficially owning 15% or more of the then outstanding shares of Common Stock.
George Soros and his affiliates and Alan B. Slifka and his affiliates are
excluded
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from the definition of "Acquiring Person" under the Rights Agreement unless such
persons increase the aggregate percentage of their ownership interest in the
Company to 20%.
Until the Distribution Date, (i) the Rights will be evidenced by Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after date of
consummation of the Offerings (also including shares distributed from treasury)
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates representing outstanding
Common Stock will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates.
The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights Agreement
unless earlier redeemed by the Company as described below.
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of Common Stock shall remain outstanding,
(ii) a Person becomes an Acquiring Persons, (iii) an Acquiring Person engages in
one or more "self-dealing" transactions as set forth in the Rights Agreement or
(iv) during such time as there is an Acquiring Person, an event occurs which
results in such Acquiring Person's ownership interest being increased by more
than 1% (e.g., by means of a recapitalization), then, in each such case, each
holder of a Right (other than such Acquiring Person) will thereafter have the
right to receive, upon exercise, Units of Series A Preferred Stock (or, in
certain circumstances, Common Stock, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the Right. The
exercise price is the Purchase Price multiplied by the number of Units of Series
A Preferred Stock issuable upon exercise of a Right prior to the events
described in this paragraph.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
and the Company is not the surviving corporation (other than a merger described
in the preceding paragraph), (ii) any Person consolidates or merges with the
Company and all or part of the Common Stock is converted or exchanged for
securities, cash or property of any other Person or (iii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(other than an Acquiring Person) shall thereafter have the right to receive,
upon exercise, common stock of the ultimate parent of the Acquiring Person
having a value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of Units of Series A Preferred
Stock issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A Preferred Stock,
(ii) if holders of the Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or convertible securities at
less than the current market price of the Series A Preferred Stock or (iii) upon
the distribution to the holder of the Series A Preferred Stock of evidences of
indebtedness, cash or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
At any time until ten business days following the Stock Acquisition Date,
either (i) 75% of the Company's Board of Directors or (ii) a majority of the
Company's Board of Directors and a majority of the Continuing Directors (as
defined below), may redeem the Rights in whole, but not in part, at a nominal
price. Immediately upon the action of a majority of the Company's Board of
Directors ordering the redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive such redemption
price. As used in the Rights Agreement, a Continuing Director means any person
(other than an Acquiring Person or an affiliate or associate of an Acquiring
Person or a representative of an Acquiring Person or of any such affiliate or
associate) who was a director prior to the date of the Rights Agreement and any
person (other than an Acquiring Person or an affiliate or associate of an
Acquiring Person or a representative of an Acquiring Person or of any such
affiliate or associate) nominated for selection or elected to the Board of
Directors pursuant to the approval of a majority of the Continuing Directors.
At its option, either (i) 75% of the Company's Board of Directors or (ii) a
majority of the Company's Board of Directors and a majority of the Continuing
Directors, may exchange each Right for (i) one Unit of
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Series A Preferred Stock or (ii) such number of Units of Series A Preferred
Stock as will equal the spread between the market price of each Unit to be
issued and the purchase price of such Unit set forth in the Rights Agreement.
Any of the provisions of the Rights Agreement may be amended upon the
approval of either (i) 75% of the Company's Board of Directors or (ii) a
majority of the Company's Board of Directors and a majority of Continuing
Directors without the approval of the holders of Common Stock, at any time
prior to the Distribution Date. After the Distribution Date, the provisions of
the Rights Agreement may be amended upon the approval of either (i) 75% of the
Company's Board of Directors or (ii) a majority of the Company's Board of
Directors and a majority of Continuing Directors in order to cure any
ambiguity, defect or inconsistency, to make changes which do not adversely
affect the interests of holders of Rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all the Company's outstanding shares of Common Stock for
cash or Marketable Securities (as defined below) at a price that is at least 40
percent greater than the average closing price of such shares on the principal
exchange on which such shares are listed during the 30 days prior to the date on
which such offer is first published or sent to security holders (the "Offer
Date") and the Board of Directors opposes such offer, the holders of more than
50% of the outstanding shares of Common Stock may, at any time subsequent to the
date that is nine calendar months after the Offer Date, call a special meeting
of the stockholders, notwithstanding the provisions described in "-- Certain
Certificate and By-Law Provisions -- No Shareholder Action by Written Consent;
Special Meetings," at which meeting stockholders may be asked to vote upon a
proposal to request that the Board of Directors amend the Rights Agreement to
exempt such offer from the terms of the Rights Agreement; provided, however, if
prior to the expiration of such nine-month period, the Board of Directors
determines that it is in the best interests of the shareholders to undertake
efforts to sell the Company, such period shall be extended as long as the Board
of Directors continues its efforts to solicit, evaluate and negotiate
alternative bids to acquire the Company. If the proposal to amend the Rights
Agreement is approved by a vote of 70% of the votes cast for or against such
proposal at such meeting of stockholders at which a quorum is present, the Board
of Directors shall amend the Rights Agreement to exempt such offer from its
terms no later than 60 days after the date of such stockholders' meeting. The
foregoing provisions of the By-Laws have been approved in principle by the Board
of Directors and, once formally adopted, may only be amended or repealed by a
stockholder vote.
"Marketable Securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.
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SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1997, after giving effect to the Stock Offerings, there
would have been 48,706,814 shares of Common Stock outstanding, (i) assuming no
exercise of the Underwriters' over-allotment options and (ii) excluding (x)
11,258,886 shares for which outstanding warrants and vested options are
exercisable, (y) 713,311 shares reserved for issuance upon exercise of a put
right and (z) 8,044,444 shares into which the Convertible Bonds are convertible
(assuming an initial public offering price of $18.00 per share).
Of the 48,706,814 outstanding shares, (i) the 11,100,000 shares registered
in the Stock Offerings will be freely tradable without restriction under the
Securities Act (except that any shares purchased in the Stock Offerings by
"affiliates" of the Company may generally be resold only in compliance with
applicable provisions of Rule 144, as described below) and (ii) 9,430,629
additional shares may be resold under Rule 144 without restriction under the
Securities Act (subject to the lock-up agreements described below). Beginning 90
days after the date of this Prospectus, an additional 19,650 shares may be
resold under Rule 144 without restriction under the Securities Act and an
additional 25,164,324 shares may be resold under Rule 144 subject to the volume
and manner limitations therein (in each case, subject to the lock-up agreements
described below).
In addition, the Company will cause to become effective, (i) a registration
statement on Form S-1 covering the resale of the shares of Common Stock into
which the Convertible Bonds are convertible and (ii) a registration statement on
Form S-8 covering the resale of shares of Common Stock issued to employees,
officers and directors of the Company pursuant to employee benefit plans.
Holders of approximately 29,623,784 shares of Common Stock and warrants to
purchase 7,777,776 shares of Common Stock, and an affiliate of the Company with
an option with respect to 438,311 shares of Common Stock, have certain demand
and piggy-back registration rights.
Prior to the Stock Offering, there has been no established market for the
Common Stock and no predictions can be made about the effect, if any, that
future sales of Common Stock or the availability of the Common Stock for sale
would have on the market price for the Common Stock. Sales of large numbers of
shares of Common Stock in the public market pursuant to Rule 144 or pursuant to
an effective registration statement under the Securities Act, or the perception
that sales could occur, may have an adverse effect on the market price for the
Common Stock.
The Company and its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to (i) grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other agreement or transaction that transfers, in whole or in
part, the economic consequences of ownership of the Common Stock without the
prior written consent of Merrill Lynch, on behalf of the Underwriters, for a
period of 180 days after the date of this Prospectus. See "Underwriting." The
lock-up agreements cover more than 93% of the shares of Common Stock outstanding
as of December 31, 1997.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are required to be aggregated) who has been deemed to have owned shares of an
issuer for at least one year, including an "affiliate," is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding number of shares of such class or the
average weekly trading volume in composite trading in all national securities
exchanges during the four calendar weeks preceding the filing of the required
notice of such sale. A person (or persons whose shares of the Company are
required to be aggregated) who is not deemed an affiliate of an issuer at the
time of the sale and for at least three months prior to the sale and who has
owned shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above. Affiliates
continue to be subject to such limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, such issuer.
The Stock Offerings will constitute a Complying Public Equity Offering
under the terms of the Convertible Bonds. As a result, the Convertible Bonds
will be convertible into Common Stock at any time and from time to time
following the completion of the Stock Offerings. Assuming a public offering
price of $18.00 per share, the Convertible Bonds initially will be convertible
into 8,044,444 shares of Common Stock. See "Description of Certain
Indebtedness."
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. STOCKHOLDERS
The following is a summary of the principal United States federal income
and estate tax considerations with respect to the ownership and disposition of
shares of Common Stock by "Non-U.S. Holders." This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations thereunder and administrative and judicial interpretations
thereof (all as currently in effect and all of which are subject to change,
possibly with retroactive effect). This summary does not address all United
States federal income and estate tax consequences that may be relevant to a
non-U.S. Holder in light of its particular circumstances or to certain Non-U.S.
Holders that may be subject to special treatment under United States federal
income tax laws, such as banks, insurance companies, tax-exempt entities and
certain United States expatriates. Furthermore, the following discussion does
not discuss any aspects of foreign, state or local taxation. As used herein, the
term "Non-U.S. Holder" means a holder of Common Stock that for U.S. federal
income tax purposes is not (i) a citizen or individual resident of the United
States; (ii) a corporation or partnership 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 United States federal income tax regardless of
its source; or (iv) a trust if both: (A) a court within the United States is
able to exercise primary supervision over the administration of the trust and
(B) one or more United States persons have the authority to control all
substantial decisions of the trust. EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF OWNING AND DISPOSING OF SHARES OF COMMON STOCK, AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER
TAXING JURISDICTION.
DIVIDENDS
Dividends that are paid by a U.S. corporation to a Non-U.S. Holder and that
are not effectively connected with a trade or business carried on by such
Non-U.S. Holder in the United States (or, if one or more of certain tax treaties
apply, are attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder) generally are subject to a 30% U.S.
withholding tax. An exemption from such withholding exists with respect to
dividends paid to Non-U.S. Holders by a U.S. corporation (an "80/20 company") if
at least 80% of the gross income derived by such corporation (either directly or
through certain of its subsidiaries) during the applicable testing period is
"active foreign business income," as defined in section 861 of the Code. Under
the provisions of the Code applicable to 80/20 companies, the proportion of an
80/20 company's dividends equal to such company's total gross income from
foreign sources over its total gross income is exempt from U.S. withholding tax.
At present, the Company believes that it qualifies as an 80/20 company. However,
the 80% active foreign business income test is applied on a periodic basis, and
operations and business plans of the Company may change in subsequent taxable
years. Therefore, no assurances can be made regarding the Company's future
status as an 80/20 company. If, for any period or periods, the Company fails to
satisfy the requirements applicable to an 80/20 company, the withholding agent
generally would be required to withhold tax from all distributions paid on the
Common Stock regardless of the Company's earnings and profits. Holders could,
however, apply for refunds if such Common Stock's share of the Company's
earnings and profits is less than the amount of the distributions. Additionally,
the rate of withholding may be reduced to the extent provided by a tax treaty
between the United States and the country of which the Non-U.S. Holder is a
resident for tax purposes.
In order to claim the benefit of an applicable tax treaty rate, a
Non-United States Holder may have to file with the Company or its dividend
paying agent an exemption or reduced treaty rate certificate or letter in
accordance with the terms of such treaty. Under United States Treasury
regulations currently in effect, for purposes of determining whether tax is to
be withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume that dividends paid to the address
in a foreign country are paid to a resident of such country absent knowledge
that such presumption is not warranted (the "address rule"). However, on October
6, 1997, the U.S. Treasury Department issued final regulations on withholding of
income tax payments to foreign persons, effective January 1, 1999, which will
abolish the address rule.
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Effective January 1, 1999, a Non-United States Holder seeking a reduced rate of
withholding under an income tax treaty would generally be required to provide to
the Company a valid Internal Revenue Service Form W-8 certifying that such
Non-United States Holder is entitled to benefits under an income tax treaty. The
final regulations also provide special rules for determining whether, for
purposes of assessing the applicability of an income tax treaty, dividends paid
to a Non-United States Holder that is an entity should be treated as being paid
to the entity itself or to the persons holding an interest in that entity. A
Non-United States Holder who is eligible for a reduced withholding rate may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for a refund with the Internal Revenue Service.
In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business with the United States or, if an
income tax treaty applies, attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% (or such lower rate as may be specified by an applicable
treaty) of the Non-United States corporation's "effectively connected earnings
and profits," subject to certain adjustments.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. Federal
income tax with respect to gain realized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of such Non-United States Holder in the U.S., (ii) in the case of
certain Non-United States Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
U.S. for 183 or more days in the taxable year of the disposition and either (a)
such individuals have a "tax home" (as defined for United States Federal income
tax purposes) in the U.S., or (b) the gain is attributable to an office or other
fixed place of business maintained by such individuals in the U.S. (iii) the
Non-United States Holder is subject to tax, pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates whose loss of U.S. citizenship
has as one of its principal purposes the avoidance of U.S. taxes, or (iv) under
certain circumstances if the Company is or has been during certain time periods
a "United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code and, assuming that the Common Stock is regularly
traded on an established securities market for tax purposes, the Non-United
States Holder held, directly or indirectly, at any time within the five-year
period preceding such disposition more than 5% of the outstanding Common Stock.
The Company is not, and does not anticipate becoming, a United States real
property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under the United States Treasury regulations, the Company must report
annually to the Internal Revenue Service and to each Non-United States Holder
the amount of dividends paid to such holder and any tax withheld with respect to
such dividends. These information reporting requirements apply regardless of
whether withholding is required because the dividends were effectively connected
with a trade or business in the United States of the Non-United States Holder or
withholding was reduced or eliminated by an applicable income tax treaty. Copies
of the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the Non-United
States Holder is a resident under the provisions of an applicable income tax
treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, under final United States
Treasury regulations, effective as of January 1, 1999, a Non-United States
Holder will generally be subject to United States withholding tax at a 31% rate,
unless certain certification procedures (or, in the case of payments made
outside
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the United States with respect to an offshore account, certain documentary
evidence procedures) are satisfied, directly or through a foreign intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
The payment of the proceeds of the disposition of Common Stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a Non-United Sates broker. However, information reporting requirements
(but probably, prior to January 1, 1999, not backup withholding) will apply to a
payment of disposition proceeds outside the U.S. if (A) the payment is made
through an office outside the U.S. of a broker that is either (i) a U.S. person,
(ii) a foreign person which derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the U.S., (iii) a "controlled
foreign corporation" for U.S. Federal income tax purposes, or (iv) effective
January 1, 1999, but probably not prior to such date, a foreign broker that is
(1) a foreign partnership, one or more of whose partners are U.S. persons who,
in the aggregate hold more than 50% of the income or capital interest in the
partnership at any time during its tax year, or (2) a foreign partnership
engaged at any time during its tax year in the conduct of a trade or business in
the United States, and (B) the broker fails to maintain documentary evidence
that the holder is a Non-United States Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
FEDERAL ESTATE TAX
An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
JURISDICTION.
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UNDERWRITING
Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company and each of the underwriters
named below (the "U.S. Underwriters") and concurrently with the sale of
2,220,000 shares of Common Stock to the International Managers (as defined
below), the Company has agreed to sell to each of the U.S. Underwriters, and
each of the U.S. Underwriters for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities
Corporation, UBS Securities LLC, Lehman Brothers Inc. and Furman Selz LLC are
acting as representatives (the "U.S. Representatives"), has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
UBS Securities LLC..........................................
Lehman Brothers Inc.........................................
Furman Selz LLC.............................................
---------
Total......................................... 8,880,000
=========
</TABLE>
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, UBS
Limited, Donaldson, Lufkin & Jenrette International, Lehman Brothers
International (Europe) and Baring Brothers Limited (as agent for ING Bank N.V.)
are acting as representatives (the "International Representatives"). Subject to
the terms and conditions set forth in the International Purchase Agreement, and
concurrently with the sale of 8,880,000 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers severally
have agreed to purchase, an aggregate of 2,220,000 shares of Common Stock. The
initial public offering price per share and the underwriting discount per share
of Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
The Company has appointed Merrill Lynch & Co. as Global Coordinator and UBS
Securities LLC as Co-Global Coordinator of the Stock Offerings. Merrill Lynch &
Co. is the bookrunner of the Stock Offerings.
The U.S. Underwriters and the International Managers have entered into an
Intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price set forth on the cover page of this Prospectus, less an amount not greater
than the selling concession. Under the terms of the
120
<PAGE> 127
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to U.S. persons or
Canadian persons or to persons they believe intend to resell to U.S. persons or
Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 180
days after the date of this Prospectus. In addition, certain stockholders have
agreed not to make any demand for or exercise any rights with respect to the
registration of Common Stock and have waived all rights (including demand and
"piggyback" registration rights) to register securities owned by them for such
180 day period and rights to purchase additional shares of Common Stock in
connection with the Offerings. See "Shares Eligible for Future Sale."
The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
1,332,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may exercise this option only to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that the
U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
Common Stock proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. The Company has also granted an option to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an additional 333,000 shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to U.S.
Underwriters.
Prior to the Stock Offerings, there has been no public market for the
Common Stock. The initial public offering price for the Common Stock has been
determined through negotiations between the Company and the U.S.
Representatives. Among the factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are the financial
and operating history and condition of the Company, an assessment of the
Company's business and financial prospects, the Company's management, the
prospects for the industry in which the Company operates and the recent market
prices of securities of companies in industries similar to that of the Company.
The initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the offering made hereby at or above the initial public
offering price.
121
<PAGE> 128
The Company has agreed to indemnify the several U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Stock Offerings, (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus), the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
Neither the Company nor any of the Underwriters makes any representation or
prediction, however, as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transaction or
that such transactions, once commenced, will not be discontinued without notice.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "GTSG." The
EASDAQ Market Authority has approved an application for admission to trading on
EASDAQ of the Common Stock under the symbol "GTSG".
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch and UBS
Securities LLC are the underwriters of the Notes Offering.
Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
122
<PAGE> 129
EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1995 and September 30, 1997, and for each of the three
years in the period ended December 31, 1996 and the nine months ended September
30, 1997, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young, LLP, independent auditors, as set forth in their
report appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of EDN Sovintel as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration Statement, have been audited
by Ernst & Young (CIS) Ltd., independent auditors as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Hermes Europe Railtel B.V. as of
December 31, 1996 and 1995 and September 30, 1997, and for each of the three
years in the period ended December 31, 1996 and the nine months ended September
30, 1997, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young Reviseurs d'Entreprises S.C.C., independent auditors,
as set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
123
<PAGE> 130
INDEX TO FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS GROUP, INC.
YEAR END AND NINE MONTH 1997 FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997.................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996 and for the nine months
ended September 30, 1996 and 1997......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996 and for the nine months
ended September 30, 1996 and 1997......................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995, and 1996 and for the
nine months ended September 30, 1996 and 1997............. F-6
Notes to Consolidated Financial Statements.................. F-7
EDN SOVINTEL
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors.................................................. F-27
Balance Sheets as of December 31, 1996 and 1995............. F-28
Statements of Income and Retained Earnings for the years
ended December 31, 1996, 1995, and 1994................... F-29
Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994...................................... F-30
Notes to Financial Statements............................... F-31
THIRD QUARTER FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1996 and
September 30, 1997........................................ F-40
Condensed Statements of Operations for the nine months ended
September 30, 1996 and 1997............................... F-41
Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and 1997............................... F-42
Notes to Condensed Financial Statements..................... F-43
HERMES EUROPE RAILTEL B.V.
YEAR END AND NINE MONTH 1997 FINANCIAL STATEMENTS
Report of Ernst & Young Reviseurs d'Entreprises S.C.C.,
Independent Auditors...................................... F-46
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997.................................... F-47
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997......................... F-48
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997......................... F-49
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 and 1997............. F-50
Notes to Consolidated Financial Statements.................. F-51
</TABLE>
F-1
<PAGE> 131
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Global TeleSystems Group, Inc.
We have audited the accompanying consolidated balance sheets of Global
TeleSystems Group, Inc. as of December 31, 1995 and 1996 and September 30, 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, 1996 and for the nine months ended September 30, 1997. 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 generally accepted auditing
standards. 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 Global
TeleSystems Group, Inc. at December 31, 1995 and 1996 and September 30, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 and for the nine months
ended September 30, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Washington, DC
December 16, 1997
F-2
<PAGE> 132
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents................................. $ 9,044 $ 57,874 $ 366,841
Accounts receivable, less allowance for doubtful accounts
of $30, $782 and $2,588 at December 31, 1995, December
31, 1996 and September 30, 1997, respectively........... 2,972 8,920 13,498
Restricted cash........................................... -- 13,627 30,404
Prepaid expenses.......................................... 1,932 2,537 3,324
Other assets.............................................. 4,189 2,187 6,118
-------- --------- ---------
Total current assets................................ 18,137 85,145 420,185
Notes receivable............................................ 84 209 238
Property and equipment, net................................. 29,523 35,463 69,051
Investments in and advances to ventures..................... 56,153 104,459 84,068
Goodwill and intangible assets, net of accumulated
amortization of $1,983, $3,916, and $7,672 at December 31,
1995 and 1996 and September 30, 1997, respectively........ 8,681 9,548 44,864
Restricted cash............................................. 3,043 2,554 29,382
-------- --------- ---------
Total Assets........................................ $115,621 $ 237,378 $ 647,788
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 8,705 $ 6,761 $ 10,883
Accrued compensation...................................... 2,339 3,151 5,070
Interest payable.......................................... -- 213 6,557
Other accrued expenses.................................... 6,029 5,086 12,000
Related party debt maturing within one year............... 9,481 4,947 11,760
Debt maturing within one year............................. 5,099 16,261 14,815
Other current liabilities................................. 957 2,040 5,731
-------- --------- ---------
Total current liabilities........................... 32,610 38,459 66,816
Related party long-term debt, less current portion.......... -- 59,079 64,715
Long-term debt, less current portion........................ 12,874 5,260 411,192
Taxes and other non-current liabilities..................... 9,542 14,664 14,898
-------- --------- ---------
Total Liabilities................................... 55,026 117,462 557,621
Commitments and contingencies
Minority interest........................................... 1,936 1,915 20,275
Common stock, subject to repurchase (325,000 shares
outstanding at December 31, 1995 and 1996 and 797,100
shares outstanding at September 30, 1997)................. 3,337 4,333 12,489
Shareholders' Equity
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding)................ -- -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 26,204,759, 34,589,106, and 37,606,814
shares issued and outstanding, net of 75,000, 116,639
and 195,528 shares of treasury stock at December 31,
1995 and 1996 and September 30, 1997, respectively)..... 2,620 3,459 3,761
Additional paid-in capital................................ 112,144 238,268 274,433
Cumulative translation adjustment......................... (1,535) (2,161) (7,021)
Accumulated deficit....................................... (57,907) (125,898) (213,770)
-------- --------- ---------
Total Shareholders' Equity.......................... 55,322 113,668 57,403
-------- --------- ---------
Total Liabilities and Shareholders' Equity.......... $115,621 $ 237,378 $ 647,788
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 133
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Telecommunication and other
services....................... $ 1,295 $ 5,979 $ 19,210 $ 12,474 $ 26,547
Equipment sales................... 1,173 2,433 4,907 2,165 3,669
-------- -------- -------- -------- --------
2,468 8,412 24,117 14,639 30,216
Operating costs and expenses:
Cost of revenues:
Telecommunication and other
services..................... 1,474 8,150 14,741 11,231 25,169
Equipment sales................ 971 246 4,200 1,650 3,183
Selling, general and
administrative................. 12,228 37,291 47,940 31,552 46,203
Depreciation and amortization..... 658 3,491 4,165 3,661 4,404
Non-income taxes.................. -- 234 850 512 1,452
-------- -------- -------- -------- --------
15,331 49,412 71,896 48,606 80,411
Write-off of venture-related
assets......................... -- -- -- 1,673
Equity in losses of ventures...... 135 7,871 10,150 6,999 18,234
-------- -------- -------- -------- --------
Loss from operations................ (12,998) (48,871) (57,929) (40,966) (70,102)
Other income/(expense):
Other non-operating income........ -- 10,270 -- --
Interest income................... 1,189 2,177 3,569 1,546 5,278
Interest expense.................. (100) (728) (11,122) (7,262) (21,086)
Foreign currency losses........... (99) (685) (1,176) (819) (1,094)
-------- -------- -------- -------- --------
990 11,034 (8,729) (6,535) (16,902)
-------- -------- -------- -------- --------
Net loss before income taxes and
minority interest................. (12,008) (37,837) (66,658) (47,501) (87,004)
Income taxes........................ -- 2,565 1,360 977 1,838
-------- -------- -------- -------- --------
Net loss before minority interest... (12,008) (40,402) (68,018) (48,478) (88,842)
Minority interest................... 23 2 27 5 970
-------- -------- -------- -------- --------
Net loss............................ $(11,985) $(40,400) $(67,991) $(48,473) $(87,872)
======== ======== ======== ======== ========
Net loss per share.................. $ (0.69) $ (1.61) $ (2.22) $ (1.69) $ (2.37)
======== ======== ======== ======== ========
Weighted average common shares
outstanding....................... 17,263 25,128 30,578 28,736 37,144
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 134
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -----------------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net loss.................................. $(11,985) $(40,400) $(67,991) $(48,473) $(87,872)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 576 3,721 7,444 6,094 9,173
Amortization of discount on note
payable............................... -- -- 3,598 2,502 3,665
Equity in losses of ventures, net of
dividends received.................... 135 7,871 11,123 6,999 18,234
Deferred interest....................... -- -- 6,583 4,386 8,142
Write-off of venture-related assets..... -- -- -- -- 1,673
Non-cash compensation................... -- -- -- -- 3,390
Minority interest....................... (23) (2) (27) (970)
Other................................... 115 2,577 1,342 1,047 2,325
Changes in assets and liabilities,
excluding effects of acquisitions and
ventures:
Accounts receivable................... (36) (1,557) (6,996) (3,965) (5,723)
Prepaid expenses...................... -- (438) (605) (960) 4,387
Accounts payable and accrued
expenses........................... 4,224 12,820 (1,694) (2,062) 7,386
Other changes in assets and
liabilities........................ (7,615) 9,474 8,207 2,608 (2,743)
-------- -------- -------- -------- --------
Net cash used in operating activities....... (14,609) (5,934) (39,016) (31,824) (38,933)
Investing Activities
Investments in and advances to ventures... (14,213) (45,102) (54,932) (34,187) (2,157)
Purchases of property and equipment....... (6,580) (24,324) (12,195) (10,088) (13,861)
Restricted cash........................... (500) (2,543) (13,138) (853) (55,813)
Acquisitions, net of cash acquired........ -- (1,871) -- 1,050
Goodwill and other intangibles............ -- (6,181) (487) (1,807) (2,196)
Other investing activities................ -- 2,069 (125) (1,104) (30)
-------- -------- -------- -------- --------
Net cash used in investing activities....... (21,293) (77,952) (80,877) (48,039) (73,007)
Financing Activities
Proceeds from debt........................ -- 23,325 63,599 62,360 415,986
Payment of debt issue costs............... -- (779) (2,777) (582) (24,178)
Net proceeds from issuance of common
stock................................... 62,108 42,175 107,775 95,002 36,527
Other financing activities................ (190) (750) -- 118 (557)
-------- -------- -------- -------- --------
Net cash provided by financing activities... 61,918 63,971 168,597 156,898 427,778
Effect of exchange rate changes on cash and
cash equivalents.......................... (22) (676) 126 425 (6,871)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 25,994 (20,591) 48,830 77,460 308,967
Cash and cash equivalents at beginning of
period.................................... 3,641 29,635 9,044 9,044 57,874
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period.................................... $ 29,635 $ 9,044 $ 57,874 $ 86,504 $366,841
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 135
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
---------------- PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
------- ------ ---------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 9,230 $ 923 $ 9,406 $ (122) $ (5,522) $ 4,685
Proceeds from the sale of
common stock, net of
expenses of $3,649....... 11,501 1,150 60,932 -- -- 62,082
Translation adjustment...... -- -- -- (124) -- (124)
Net loss.................... -- -- -- -- (11,985) (11,985)
Other....................... 50 5 21 -- -- 26
------- ------ -------- ------- --------- --------
Balance at December 31,
1994........................ 20,781 2,078 70,359 (246) (17,507) 54,684
Proceeds from the sale of
common stock, net of
expenses of $3,680....... 5,091 509 41,629 -- -- 42,138
Translation adjustment...... -- -- -- (1,289) -- (1,289)
Net loss.................... -- -- -- -- (40,400) (40,400)
Other....................... 333 33 156 -- -- 189
------- ------ -------- ------- --------- --------
Balance at December 31,
1995........................ 26,205 2,620 112,144 (1,535) (57,907) 55,322
Proceeds from the sale of
common stock, net of
expenses of $3,567....... 8,349 835 106,909 -- -- 107,744
Issuance of 7,223 warrants
in connection with debt
financing................ -- -- 20,184 -- -- 20,184
Translation adjustment...... -- -- -- (626) -- (626)
Net loss.................... -- -- -- -- (67,991) (67,991)
Other....................... 35 4 (969) -- -- (965)
------- ------ -------- ------- --------- --------
Balance at December 31,
1996........................ 34,589 3,459 238,268 (2,161) (125,898) 113,668
Proceeds from the sale of
common stock, net of
expenses of $2,683....... 2,503 250 36,277 -- -- 36,527
Translation adjustment...... -- -- -- (4,860) -- (4,860)
Net loss.................... -- -- -- -- (87,872) (87,872)
Other....................... 515 52 (112) -- -- (60)
------- ------ -------- ------- --------- --------
Balance at September 30,
1997........................ 37,607 $3,761 $274,433 $(7,021) $(213,770) $57,403
======= ====== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 136
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS OPERATIONS
Global TeleSystems Group, Inc. ("GTS" or the "Company"), is a provider of a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers through its operation of
voice and data networks, international gateways, local access and cellular
networks and the provision of various value-added services in the Commonwealth
of Independent States ("CIS"), primarily Russia, Central Europe, and India and
China ("Asia"). The Company, through two of its ventures, is also building a new
infrastructure for transporting international voice, data and video traffic for
other carriers throughout Western Europe and for worldwide international voice,
data and video traffic that either originates or terminates in, or transits
through, Western Europe. See further discussion of the Company's business
operations within Note 3, "Investments In and Advances to Ventures," and Note
14, "Segment Information and Certain Geographical Data."
Certain of the Company's ventures are in the early stages of operations in
the telecommunications industry. The Company's businesses are developing
rapidly; some are in countries with an emerging economy, which by nature have an
uncertain economic, political and regulatory environment. The general risks of
operating businesses in the CIS and other developing countries include the
possibility for rapid change in government policies, economic conditions, the
tax regime and foreign currency regulations.
The ultimate recoverability of the Company's investments in and advances to
ventures is dependent on many factors including, but not limited to, the
economies of the countries in which it does business; the ability of the Company
to maintain the necessary telecommunications licenses; and the ability of the
Company to obtain sufficient financing to continue to meet its capital and
operational commitments.
Management recognizes that the Company must generate additional capital
resources in order to continue its operations and meet its new development
initiatives. The Company is currently pursuing various equity and debt financing
sources and has entered into substantive negotiations with financial
institutions in order to obtain further debt and equity financing. The Company
has also retained independent consultants to assist it in identifying other
entities interested in entering into strategic partnerships relative to its
telecommunications properties and new development initiatives. If the Company is
not successful in closing debt or equity financing, the Company may be required
to curtail new development initiatives, sell certain assets or a combination of
these actions.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wholly-owned subsidiaries and majority owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of super majority voting conditions or other
governmentally imposed uncertainties so severe that they prevent the Company
from obtaining unilateral control of the venture. If the Company has little
ability to exercise significant influence over a venture, the venture is
accounted for by the cost method. All significant intercompany accounts and
transactions are eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recognized have been recovered.
F-7
<PAGE> 137
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying unaudited, consolidated financial data presented in the
Statements of Operations and the Statements of Cash Flows for the nine months
ended September 30, 1996 have been derived from the Company's financial records
and contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the results of operations and cash flows for the
period indicated.
Reclassifications
Certain reclassifications have been made to the 1994, 1995 and 1996
consolidated financial statements in order to conform to the 1997 presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The Company
had $3.0 million, $16.2 million and $59.8 million of restricted cash at December
31, 1995 and 1996, and September 30, 1997, respectively. The restricted cash is
primarily related to cash held in escrow for interest payments.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated lives ranging from five to fifteen years
for telecommunications equipment and three to five years for furniture, fixtures
and equipment and other property. Construction in process reflects amounts
incurred for the configuration and build-out of telecommunications equipment and
telecommunications equipment not yet placed into service. Maintenance and
repairs are charged to expense as incurred.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses and is being amortized on a
straight-line basis over their estimated useful lives ranging from three to ten
years. Intangible assets, principally telecommunications service contracts,
licenses and deferred financing costs, are amortized on a straight-line basis
over the lesser of their estimated useful lives, generally three to fifteen
years, or their contractual term. 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 intangible assets.
Long-Lived Assets
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 flows 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. During the years ended December 31, 1995 and 1996, the Company's
analyses indicated that
F-8
<PAGE> 138
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
there was not an impairment of its long-lived assets. During the nine months
ended September 30, 1997, the Company's analyses indicated that there was an
impairment of its long-lived assets. Accordingly, the Company recorded a
write-down of long-lived assets associated with the investment in the Asia and
Central Europe regions (see Note 3, "Investments in and Advances to Ventures").
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. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
permanently reinvested in those operations.
Foreign Currency Translation
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation." In most instances, the local currency is
considered the functional currency for the Company's subsidiaries and ventures,
except for operations in the CIS where the U.S. dollar has been designated as
the functional currency. Assets and liabilities of these subsidiaries and
ventures 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 the cumulative translation
adjustment, a separate component of shareholders' equity. Gains and losses from
foreign currency transactions of these subsidiaries and ventures are included in
the operations of the subsidiary or venture.
For those ventures operating in the CIS, the temporal method for
translating assets and liabilities is used. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the operations of the subsidiaries and
ventures.
Revenue Recognition
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that will be neither billed nor collected.
Revenue from service or consulting contracts is accounted for when the services
are provided. Equipment sales revenue is generally recognized upon shipment of
the equipment. Billings received in advance of service being performed are
deferred and recognized as revenue as the service is performed.
Net Loss Per Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock, common stock options and common stock warrants issued at
prices below the initial offering price during the twelve months immediately
preceding the contemplated initial filing of the registration statement relating
to the initial public offering ("IPO") have been included in the computation of
net loss per share as if they were outstanding for all periods presented (using
the treasury method assuming repurchase of common stock at the estimated IPO
price). Other shares issuable upon the exercise of common stock options and
warrants have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. Subsequent to the Company's IPO, common stock
options and warrants under the treasury stock method will be included to the
extent they are dilutive.
F-9
<PAGE> 139
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share. SFAS No. 128 establishes a different method of
computing net income (loss) per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128,
the Company will be required to present both basic net income (loss) per share
and diluted net income (loss) per share. The impact of SFAS No. 128 on the
calculation of net income (loss) per share is not expected to be material. The
Company plans to adopt SFAS No. 128 in its year ended December 31, 1997, and at
that time all historical net income (loss) per share data presented will be
restated to conform to the provisions of SFAS No. 128.
Fair Value of Financial Instruments
The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates their fair value.
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 and
notes receivable. The Company maintains most of its cash and cash equivalents in
one high-quality U.S. financial institution. 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. The
Company provides allowances for potential credit losses when necessary.
The Company does not now hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results from operations could be adversely affected by
fluctuations in foreign currency exchange rates.
Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
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" ("APB No.
25"). The Company has elected to account for its stock-based compensation in
accordance with the provisions of APB No. 25 and will present 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> 140
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES
The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 49% to 80%. The Company has no investments in ventures
that are accounted for by the cost method.
The components of the Company's investments in and advances to ventures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in net assets acquired..................... $18,664 $41,105 $30,954
Excess of investment cost over equity in net
assets acquired net of amortization of $1.7
million, $4.3 million and $4.1 million at
December 31, 1995 and 1996, and September 30,
1997, respectively.............................. 8,577 11,288 8,285
Accumulated (losses) earnings recognized.......... (6,267) (13,840) 10,321
Dividends......................................... -- (973) (2,793)
Cash advances and other........................... 35,179 66,879 37,301
------- -------- -------
Total investments in and advances to ventures..... $56,153 $104,459 $84,068
======= ======== =======
</TABLE>
In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."
The Company has financed the operating and investing cash flow requirements
of several of its ventures, in the form of cash advances. The Company
anticipates that these ventures will generate sufficient cash inflows for the
repayment of the cash advances, as their businesses mature. Also, due to the
long-term nature of the anticipated repayment period and the potential risk
associated with the repatriation of the cash advances, the Company has
aggregated its investments in and cash advances to the ventures.
The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.
Investment Recoverability
The Company periodically evaluates the recoverability of their equity
investments, in accordance with APB No. 18 "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures which is the lowest
level of cash flow information available. As of September 30, 1997, the Company
recorded a write-off of approximately $5.4 million which represented the net
balance of certain investments in and advances to ventures located in Asia
(primarily Beijing Tianmu and V-Tech) and Central Europe (Eurohivo) which were
stated in excess of their net realizable value. The entire net balance of these
investments in and advances to ventures was written-off based on the fact that
these ventures project overall negative cash flows for the foreseeable future.
The ventures projected future operations deterioated during 1997 as a result of
problems dealing with one of its partners, the inability of the ventures to
develop markets for its services, and technical problems. The components of
the charge, which was classified as equity in losses of ventures, were as
follows:
<TABLE>
<S> <C>
Equity in net assets acquired............................... $ 17,093
Excess of investment cost over equity in net assets
acquired.................................................. 593
Accumulated (losses) recognized............................. (23,253)
Dividends................................................... --
Cash advances and other..................................... 10,921
--------
Net write-off as of September 30, 1997...................... $ 5,354
========
</TABLE>
F-11
<PAGE> 141
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the write-off detailed above the Company included in its
accumulated (losses) approximately $14.4 million of losses (of the
$14.4 million, approximately $13.5 million related to the write-off of advances
to several Chinese owned operating telecommunications companies to which the
Company provides technical and financial assistance and $0.9 million related to
the write-off of inventories, receivables, and other assets) which represented
the Company's share of asset write-offs recorded by certain of the Company's
equity method investments in Asia during the nine months ended September 30,
1997. Such write-offs, for the same reasons mentioned in the previous
paragrah, were recorded by the Company's equity method investments pursuant
to SFAS No. 121. This amount is included in the $(23.3) million accumulated
(losses) detailed above. Additionally, during the nine months ended
September 30, 1997 the Company recorded a charge of $1.7 million in order to
write-off certain holding company assets associated with the ventures located in
Asia and Central Europe. This charge has been included as a separate line item
in the Company's statement of operations.
Hermes Europe Railtel B.V. ("HER") Recapitalization
During the nine months ended September 30, 1997, HER recapitalized its
equity structure and amended its existing shareholder agreement. In connection
with the HER recapitalization the Company contributed approximately $51.8
million and converted existing note receivables of approximately $28.4 million
in exchange for an additional 29% equity interest in HER. As a result of the
recapitalization and amended shareholder agreement, the Company obtained
unilateral control over HER. As such, HER has been consolidated into the
Company's financial statements effective July 6, 1997, the effective date of the
recapitalization. The Company recognized approximately $8.7 of goodwill in
connection with the recapitalization. As a result of the Company's loss
recognition policy, the consolidation of HER did not have a material impact on
the Company's historical financial position or operating results and thus no pro
forma information is disclosed herein.
As of September 30, 1997, the consolidation of HER resulted in reductions
of $72.9 million, $10 million, and $4.6 million in the equity in net assets
acquired, excess of investment cost over equity in net assets acquired, and cash
advances and other, respectively. Additionally, as of September 30, 1997 the
consolidation of HER had a $21.4 million favorable impact on the accumulated
(losses) earnings recognized.
Changes in the Investments in and Advances to Ventures
The changes in the investments in and advances to ventures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, at beginning of period................... $13,841 $ 56,153 $104,459
Equity in net assets acquired..................... 13,888 22,441 79,825
Excess of investment cost over equity in net
assets acquired................................. 5,646 5,288 10,187
Dividends......................................... -- (973) (1,820)
Cash advances (repayments) and other.............. 30,649 31,700 (14,024)
Effect of consolidating equity method company..... -- -- (76,325)
------- -------- --------
50,183 58,456 (2,157)
Equity ownership in losses........................ (4,224) (3,122) (10,066)
Excess losses recognized over amount attributable
to ownership interest........................... (2,709) (4,451) (10,434)
Amortization of excess of investment cost over
equity in net assets acquired................... (938) (2,577) (2,610)
Loss in value that is other than temporary........ -- -- (5,354)
Effect of consolidating equity method company..... -- -- 10,230
------- -------- --------
(7,871) (10,150) (18,234)
------- -------- --------
Balance, at end of period......................... $56,153 $104,459 $ 84,068
======= ======== ========
</TABLE>
F-12
<PAGE> 142
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 1997, the significant investments accounted for under
the equity method and the percentage interest owned consist of the following:
<TABLE>
<CAPTION>
EQUITY OWNED SUBSIDIARIES OWNERSHIP %
------------------------- -----------
<S> <C>
EDN Sovintel................................................ 50%
Sovam Teleport.............................................. 67%
GTS Ukrainian TeleSystems, L.L.C. (holds a 49% interest in
Bancomsvyaz).............................................. 60%
GTS Vox Limited............................................. 52.64%
TeleRoss Ventures - 13 joint ventures in various regions in
the CIS................................................... 50%
Vostok Ventures - 11 joint ventures in various regions in
the CIS................................................... 50-70%
PrimTelefone................................................ 50%
GTS Monaco Access S.A.M..................................... 50%
</TABLE>
In connection with a purchase of a venture during 1995, the Company is
required to pay additional consideration through 1998, either in cash or shares
of the Company's common stock, based on the actual earnings of the venture.
During the first quarter of 1997, the purchase agreement related to acquiring
this venture was amended and notes payable of $5.2 million were replaced and
additional consideration was paid by the issuance of 504,600 shares of the
Company's common stock valued at $13.33 per share. Further, the agreement was
modified such that the remaining consideration would only be in the form of the
issuance of the Company's common stock. The Company's maximum obligation
pursuant to this agreement is to issue 1,121,640 shares of common stock. The
Company will recognize any additional consideration paid under this agreement as
goodwill.
During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or
713,311 shares of the Company's common stock. This amount has been included in
"Other financing agreements" (see Note 5, "Debt Obligations").
The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1995 and 1996 and September 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
MAJORITY OWNED 50% OR LESS OWNED TOTAL EQUITY METHOD
EQUITY METHOD ENTITIES VENTURES VENTURES VENTURES
---------------------- -------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue............................... $ 4,966 $49,085 $54,051
Gross margin.......................... 1,096 19,944 21,040
Net loss.............................. (5,156) (1,224) (6,380)
Equity in net losses.................. (5,136) (1,797) (6,933)
Current assets........................ 5,188 27,074 32,262
Total assets.......................... 17,343 79,486 96,829
Current liabilities................... 9,214 38,411 47,625
Total liabilities..................... 14,395 54,734 69,129
Net assets............................ 2,948 24,752 27,700
Ownership interest in equity in net
assets.............................. 2,595 12,511 15,106
</TABLE>
F-13
<PAGE> 143
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
MAJORITY OWNED 50% OR LESS OWNED TOTAL EQUITY METHOD
EQUITY METHOD ENTITIES VENTURES VENTURES VENTURES
---------------------- -------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue............................... $36,202 $107,270 $143,472
Gross margin.......................... 17,109 45,937 63,046
Net income (loss)..................... 3,240 (8,460) (5,220)
Equity in net losses.................. (1,091) (6,482) (7,573)
Current assets........................ 27,293 50,689 77,982
Total assets.......................... 48,174 146,483 194,657
Current liabilities................... 19,416 68,474 87,890
Total liabilities..................... 24,987 102,332 127,319
Net assets............................ 23,187 44,151 67,338
Ownership interest in equity in net
assets.............................. 14,912 19,513 34,425
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------
MAJORITY OWNED 50% OR LESS OWNED TOTAL EQUITY METHOD
EQUITY METHOD ENTITIES VENTURES VENTURES VENTURES
---------------------- -------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue............................... $34,421 $124,585 $159,006
Gross margin.......................... 21,004 50,307 71,311
Net (loss) income..................... (13,373) 9,693 (3,680)
Equity in net losses.................. (13,275) 2,702 (10,573)
Current assets........................ 20,562 56,056 76,618
Total assets.......................... 33,977 156,001 189,978
Current liabilities................... 15,233 61,052 76,285
Total liabilities..................... 27,940 87,843 115,783
Net assets............................ 6,037 68,158 74,195
Ownership interest in equity in net
assets.............................. 7,475 42,848 50,323
</TABLE>
NOTE 4: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable consists of:
Trade accounts receivable........................ $ 1,026 $ 6,769 $11,851
Value added taxes receivable..................... 1,082 1,971 3,230
Other receivables................................ 894 962 1,005
------- ------- -------
3,002 9,702 16,086
Less: allowance for doubtful accounts......... 30 782 2,588
------- ------- -------
Total accounts receivable, net........... $ 2,972 $ 8,920 $13,498
======= ======= =======
Property and equipment consists of:
Telecommunications equipment..................... $ 9,296 $28,302 $42,360
Furniture, fixtures and equipment................ 4,111 5,877 9,947
Other property................................... 658 837 1,791
Construction in process.......................... 17,555 7,009 28,087
------- ------- -------
31,620 42,025 82,185
Less: accumulated depreciation................ 2,097 6,562 13,134
------- ------- -------
Total property and equipment, net........ $29,523 $35,463 $69,051
======= ======= =======
</TABLE>
F-14
<PAGE> 144
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior notes of HER, due August 15, 2007 at 11.5%
interest payable semiannually.................... $ -- $ -- $265,000
Senior subordinated convertible bonds, due June 30,
2000 at an effective interest rate of 15%, and a
stated rate of 8.75% - 9.75% payable
semiannually..................................... -- -- 144,787
Related party debt obligations, with principal
payments beginning April 1, 1998 and maturing on
March 31, 2001 at 10% interest, net of
unamortized discount for 7,778 warrants issued... -- 59,079 68,820
Other financing agreements......................... 27,454 26,468 23,875
------- ------- --------
27,454 85,547 502,482
Less: debt maturing within one year.............. 14,580 21,208 26,575
------- ------- --------
Total long-term debt..................... $12,874 $64,339 $475,907
======= ======= ========
</TABLE>
In the third quarter of 1997, HER 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 subsidiary with interest payable
semiannually at a rate of 11.5%. Approximately $56.6 million of the net proceeds
of the offering of the Senior Notes is being held in escrow for the first four
semiannual interest payments commencing in 1998. HER may redeem the Senior
Notes, in whole or in part, any time on or after August 15, 2007 at specific
redemption prices. HER 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 of HER with gross proceeds of at least $75 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. Pursuant to the covenants in the offering, HER has filed a Form S-4
registration statement with the Securities and Exchange Commission to exchange
registered senior notes, with the same terms and conditions as the Senior Notes,
for the Senior Notes.
In July 1997, the Company issued aggregate principal amount $144.8 million
of senior subordinated convertible bonds (the "Bonds") due June 30, 2000. The
Bonds constitute direct, unsecured senior subordinated indebtedness after
existing debt of $82.7 million. Upon completion of a complying public equity
offering as defined in the Bond agreement (an "Offering") or in certain other
circumstances as defined in the Bond agreement, the Bonds may be converted at
the option of the holders from time to time, in whole or in part, prior to the
close of business on June 30, 2000, into shares of the Company's common stock,
par value $0.10 per share. The Bonds will be convertible into such number of
shares of the Company's common stock as is equal to the principal amount of such
Bonds divided by the applicable conversion price, which conversion price shall
be equal to the public offering price of the Company's common stock in the
Offering. The Bonds bear interest payable semiannually at a stated rate of 8.75%
for the first year, 9.25% for the second year and 9.75% for the final year. In
the event of an Offering, the interest rate will remain at the interest rate
prevailing at the time of the Offering until maturity. In the event that an
Offering has not occurred by the maturity date, the Bonds will be redeemed at
121% of their principal amount. As a result of the redemption factor, interest
expense is being accreted at an annual effective rate of 15%.
F-15
<PAGE> 145
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company entered into long-term obligations ("Debt
Obligations"), totaling $70.0 million, with lenders (the "Lenders"). The Lenders
are affiliated with and are considered related parties to the Company, as a
result of their ownership of the Company's common stock (see Note 12, "Related
Party Transactions"). The Debt Obligations require principal payments beginning
in the third year, to maturity in the fifth year. The Debt Obligations bear an
interest rate of 10.0% and require interest payments beginning in the first
fiscal quarter subsequent to the date of issuance. At the Company's discretion,
the initial interest accrued until the first principal payment can be deferred
until maturity. Upon commencement of principal payments, the Company is
obligated to make concurrent interest payments. Further, in connection with the
Debt Obligations, the Company issued 7,777,776 warrants, valued at $20.7
million, to purchase the Company's common stock. The initial valuation of the
warrants considered the probable reduction of the exercise price. In accordance
with the terms of the warrant agreement, the exercise price of the warrants was
reduced from $10.27 per share to $9.33 per share, as the outstanding debt had
not been repaid prior to December 31, 1996. The warrants may be exercised up to
six years after the date of the relevant agreements. Upon the consummation of
these Debt Obligations, the Company repaid in full the outstanding $9.5 million
interim financing ("Interim Financing") balance outstanding at December 31,
1995, and the 555,555 warrants associated with the interim financing were
canceled. The Company entered into the $10.0 million Interim Financing in
December 1995 in order to provide the Company sufficient working capital to meet
its contractual obligations, until a larger dollar amount and longer-term
maturity debt could be finalized between the Company and the Lenders. The
Company is subject to certain restrictive covenants pursuant to these Debt
Obligations, including restrictions on the payment of dividends and indebtedness
to affiliated ventures.
Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at prevailing negotiated market rates.
Aggregate maturities of long-term debt, as of September 30, 1997, are as
follows: 1998 -- $26.6 million, 1999 -- $25.8 million, 2000 -- $173.9 million,
2001 -- $24.4 million and $265.2 million thereafter.
The Company paid interest of $0.1 million, $0.7 million, $0.2 million and
$0.8 million in 1994, 1995, 1996, and the nine months ended September 30, 1997,
respectively. The Company incurred interest expense of $11.1 million and $21.1
million in 1996 and the nine months ended September 30, 1997, respectively, and
would have recorded $56.2 million and $33.0 million in additional interest
expense in 1996 and the nine months ended September 30, 1997, had the Senior
Notes and Bonds been outstanding on January 1, 1996.
NOTE 6: SHAREHOLDERS' EQUITY
Common Stock
The following table summarizes the Company's equity private placements for
the periods ending:
<TABLE>
<CAPTION>
SHARES ISSUED SHARE PRICE NET PROCEEDS
------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
December 31, 1994............................. 11,499,869 $4.67 - 6.67 $ 62,082
December 31, 1995............................. 5,090,876 9.00 42,138
December 31, 1996............................. 8,348,532 13.33 107,744
September 30, 1997............................ 2,502,686 15.67 36,527
</TABLE>
During 1995, the Company issued 400,000 shares of common stock to an
independent third party in connection with the purchase of an interest in a
venture within the CIS region. At the discretion of the holder of these shares,
the Company is obligated to repurchase these shares at the prevailing fair
market value of the Company's common stock on the date of repurchase. During
1995, the Company repurchased 75,000 shares at $10.00 per share and the
repurchased shares became treasury stock. In March 1997, the Company repurchased
32,500 shares at $13.33 per share, and these shares became treasury stock. The
Company will be required to repurchase the remaining shares on an equal basis
over the next three years. During 1997, the
F-16
<PAGE> 146
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company issued 504,600 shares of common stock pursuant to a purchase agreement
with a seller for a portion of their interest in a venture within the CIS
region. Pursuant to the purchase agreement, the Company is obligated to assist
the seller in locating a purchaser for the common stock, and if unable to do so,
to repurchase the issued common stock. Additionally, the Company has accreted
the value of the outstanding common stock subject to repurchase (325,000 shares
on December 31, 1995 and 1996 and 797,100 shares at September 30, 1997), to the
fair value of the Company's common stock as of December 31, 1995 and 1996 and
September 30, 1997 ($10.27, 13.33 and $15.67 per share, respectively).
During 1996, the Company entered into the Debt Obligations totaling $70.0
million with the Lenders. In connection with the Debt Obligations, the Company
issued 7,777,776 warrants to purchase common stock at $10.27 per share. The
exercise price of the warrants was automatically reduced to $9.33 per share as
of December 31, 1996, because the Debt Obligations remained outstanding. The
initial valuation of the warrants considered the probable reduction of the
exercise price. The warrants expire during the first and second quarters of
2002.
The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.
The Company has reserved 14,819,867 shares of common stock for issuance
upon conversion of the exercise of outstanding and future stock options,
warrants and common stock put rights.
Preferred Stock
As of December 31, 1995 and 1996 and September 30, 1997, there were
10,000,000 shares of $0.0001 par value preferred stock authorized, with rights
and preferences to be determined by the Board of Directors. As of December 31,
1995 and 1996 and September 30, 1997, no shares of preferred stock had been
issued.
NOTE 7: STOCK OPTION PLANS
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 years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997 would have been approximately $40.9 million, $69.4
million, and $91.3 million, respectively. The fair value of options granted
during 1995 and 1996 are estimated as $2.19 and $2.93 per share, respectively,
on the date of grant using the minimum value option pricing model with the
following assumptions: dividend yield 0%, risk free interest rate of 5.50% for
1995 and 6.13% for 1996, and an expected life of five years. The fair value of
options granted during the nine months ended September 30, 1997 are estimated as
$7.02 per share, on the date of grant using the Black Scholes option valuation
model with the following assumptions: dividend yield 0%, risk free interest rate
of 5.74%, an expected life of five years, and an expected volatility of .50. The
Company determined its volatility factor with assistance of an investment
banker, based on peer group public companies.
The Company maintains the 1992 Stock Option Plan, the Non-Employee
Directors Stock Option Plan and the GTS Equity Compensation Plan (the "Option
Plans"). As of September 30, 1997, the maximum number of shares of common stock
available for grant under the Option Plans was 8,157,549. All options granted
under the Option Plans are at exercise prices that are at least equal to the
fair market value of common stock at the date of grant. Generally, all options
granted under the Option Plans vest over a three-year period from the date of
grant and expire ten years from the date of grant.
F-17
<PAGE> 147
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADDITIONAL INFORMATION WITH RESPECT TO STOCK OPTION ACTIVITY IS SUMMARIZED AS
FOLLOWS:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ --------------------
1994 1995 1996 1997
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 417,000 $2.25 2,431,800 $3.65 3,422,399 $ 5.56 4,869,360 $ 7.31
Options granted........ 2,014,800 3.94 1,210,800 9.04 1,612,962 11.10 1,407,996 13.85
Options exercised...... - - (28,001) 4.46 (56,498) 6.70 (89,312) 6.34
Options canceled or
expired.............. - - (192,200) 3.57 (109,503) 8.73 (378,264) 6.65
--------- ----- --------- ----- --------- ------ --------- ------
Outstanding at end of
year................. 2,431,800 $3.65 3,422,399 $5.56 4,869,360 $ 7.31 5,809,780 $ 8.95
========= ===== ========= ===== ========= ====== ========= ======
Options exercisable at
year-end............. 353,965 $2.54 995,617 $3.59 1,992,236 $ 4.65 2,759,906 $ 5.78
</TABLE>
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
At September 30, 1997:
$1.42 to $2.75........................ 1,446,000 6 $ 2.69 1,371,000 $ 2.68
$4.67 to $9.00........................ 1,270,650 7 7.88 888,527 7.77
$10.00 to $15.67...................... 3,093,130 8 12.32 500,379 10.71
--------- ---------
5,809,780 7 $ 8.95 2,759,906 $ 5.78
========= =========
</TABLE>
In addition, prior to the establishment of the Option Plans, certain
options were granted in 1991 to certain key employees and former employees to
purchase 1,172,250 shares of the Company's common stock at an exercise price of
$0.53 per share. All options were granted at an exercise price equal to the fair
value of the underlying common stock at the date of grant. The options vested in
equal increments over a three-year period. During 1993, 603,000 of the options
were canceled and in 1994, 50,250 options were exercised, leaving 519,000 fully
vested options outstanding at December 31, 1995 and 1996 and September 30, 1997.
Certain of the Company's subsidiaries and ventures have stock option plans,
or similar agreements, in place or in the process of being implemented for key
officers and employees. The ownership dilution caused by such plans is not
expected to be significant. During the fourth quarter of 1997, one of the
Company's consolidated subsidiaries issued options that will result in a
non-cash charge of approximately $3.7 million of which $2.6 million is expected
to be recorded during the fourth quarter and the remaining $1.1 million will be
recognized principally ratably over fiscal 1998.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such, participants may defer pretax
income in accordance with federal income tax limitations. The Company provides a
50.0% matching contribution on the first 5.0% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest 100% after three
years of service. The Company's expense under the Savings Plan was less
F-18
<PAGE> 148
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than $0.1 million, $0.1 million, $0.2 million and $0.2 million for the years
ended December 31, 1994, 1995 and 1996, and the nine months ended September 30,
1997, respectively. The Company made no discretionary (non-matching)
contributions in 1994, 1995, 1996 or in the nine months ended September 30,
1997.
HER established a pension plan in 1995 that covers all HER employees upon
twenty-five years of age and at least one year of service. HER has entered into
an insurance arrangement (an annuity contract) whereby an insurance provider has
undertaken a legal obligation to provide specific benefits to participants in
return for a fixed premium. As such, HER no longer bears any financial risk for
its pension plan.
NOTE 9: OTHER NON-OPERATING INCOME
Favorably affecting the 1995 results was the non-recurring $10.3 million
gain the Company recognized as a result of its cash settlement of certain claims
with a third party in 1995.
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
PERIOD ENDED, 1994 1995 1996 1997
------------- ------------ ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Pretax loss:
Domestic......................... $ (8,996) $(22,398) $(41,554) $(41,991)
Foreign.......................... (2,989) (15,437) (25,077) (45,013)
-------- -------- -------- --------
$(11,985) $(37,835) $(66,631) $(87,004)
======== ======== ======== ========
</TABLE>
For the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, the Company recorded $2.6 million, $1.4 million and $1.8
million, respectively, in income tax expense that related exclusively to its
current provision for foreign taxes. The Company did not have income tax expense
for 1994.
The reconciliation of the U.S. statutory federal tax rate of 34.0% to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------------ ------------------ ------------------
PERIOD ENDED, AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes at U.S. statutory
rates..................... $(12,865) 34.0% $(22,655) 34.0% $(29,581) 34.0%
Foreign operating losses
generating no tax
benefit................... 6,550 (17.3) 8,526 (12.8) 15,304 (17.6)
Domestic operating losses
generating no tax
benefit................... 6,315 (16.7) 14,129 (21.2) 14,277 (16.4)
Other -- net................ 2,565 (6.8) 1,360 (2.1) 1,838 (2.1)
-------- ----- -------- ----- -------- -----
$ 2,565 (6.8)% $ 1,360 (2.1)% $ 1,838 (2.1)%
======== ===== ======== ===== ======== =====
</TABLE>
F-19
<PAGE> 149
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are recorded based 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 and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 10,106 $ 20,720 $ 31,440
Other deferred tax assets.................... 245 1,326 3,304
-------- -------- --------
Total deferred tax asset....................... 10,351 22,046 34,744
Deferred tax liability......................... 724 1,161 2,267
-------- -------- --------
Net deferred tax asset......................... 9,627 20,885 32,477
Less: valuation allowance.................... (9,627) (20,885) (32,477)
-------- -------- --------
Total................................ $ -- $ -- $ --
======== ======== ========
</TABLE>
As of September 30, 1997, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $92.5 million expiring in
fiscal years 2003 through 2012. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards will be subject to an annual limitation.
The Company's investment in EDN Sovintel is treated for U.S. tax purposes
as a partnership and, therefore, the Company's share of EDN Sovintel's income or
loss flows through to the Company's consolidated federal income tax return on a
current basis. Undistributed earnings of the Company's other foreign investments
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes, or foreign withholding taxes has been made.
Upon distribution of those earnings, the Company would be subject to foreign
withholding taxes and U.S. income taxes (subject to reduction for foreign tax
credits).
Certain ventures in the CIS and Hungary are operating under tax holidays
granted by the local governments. Tax holidays are for periods ranging from up
to five years to several years after achieving profitability under local tax
regulations. In addition to these tax holidays, certain of the Company's foreign
ventures have foreign tax loss carryforwards in excess of $50.0 million. The
Company's financial statements do not reflect any provision for benefits that
might be associated with such loss carryforwards.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Operating Leases
Operating lease commitments are primarily for office space and equipment.
Rental expense aggregated $0.7 million, $2.0 million, $2.2 million and $2.3
million for the years ended December 31, 1994, 1995, and 1996, and the nine
months ended September 30, 1997, respectively.
Future minimum lease payments under these non-cancelable operating leases
with terms of one year or more, as of September 30, 1997, are as follows:
1998 -- $3.5 million, 1999 -- $2.7 million, 2000 -- $1.5 million, 2001 -- $1.0
million, 2002 -- $0.4 million and thereafter -- $1.0 million.
Other Commitments and Contingencies
As of September 30, 1997, the Company purchased the remaining interest in
one of its subsidiaries within the CIS region for $5.2 million, which was paid
in October 1997. Furthermore, the Company is required to pay additional
consideration of a minimum of $2.4 million if certain revenue levels are met,
certain other
F-20
<PAGE> 150
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
events occur or if neither has occurred, on April 1, 1999. The purchase price
and consideration have been allocated to net assets based on the fair value at
the date of acquisition. The excess of the purchase price over the fair value of
the net assets acquired was $5.9 million, which has been recorded as goodwill
and is being amortized on a straight-line basis over five years.
The Company had no significant commitments to its ventures for future
contract obligations as of September 30, 1997.
In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its
non-consolidated ventures. The total amount guaranteed at September 30, 1997 was
approximately $15.3 million. In addition, certain ventures are currently
negotiating other financing instruments in which the Company will guarantee upon
perfection of the obligations.
Major Customers
In 1995, the Company had one major customer, a foreign governmental agency
in Central Europe, representing $2.7 million, or 32.1%, of total revenue. In
1996, the Company had two major customers, a foreign governmental agency in
Central Europe and a customer in the CIS, representing $3.8 million, or 15.8%,
of total revenue and $2.6 million, or 10.8%, of total revenue, respectively. For
the nine months ended September 30, 1997, the Company had one major customer, a
foreign governmental agency in Central Europe, representing $3.1 million, or
10.3%, of total revenue.
Tax Matters
The taxation system in Russia ("Russian Taxes") is evolving as the central
government transforms itself from a command to a market oriented economy. The
Russian Federation has introduced and continues to introduce new tax and royalty
laws and related regulations. These laws and regulations are not always clearly
written and their interpretation is subject to the opinions of the local tax
inspectors, Central Bank officials and the Ministry of Finance. Instances of
inconsistent opinions between local, regional and federal tax authorities and
between the Central Bank and Ministry of Finance are not unusual.
The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
Russian Taxes, the Company's Russian Taxes may be in excess of the estimated
amount expensed to date and accrued at December 31, 1995 and 1996 and September
30, 1997. It is the opinion of management that the ultimate resolution of the
Company's Russian Tax liability, to the extent not previously provided for, will
not have a material effect on the financial condition of the Company. However,
depending on the amount and timing of an unfavorable resolution of this
contingency, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
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
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
F-21
<PAGE> 151
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in all pending litigation, 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 12: RELATED PARTY TRANSACTIONS
As discussed within Note 5, "Debt Obligations," the Company entered into an
Interim Financing agreement and Debt Obligations during 1995 and 1996,
respectively, with the Lenders. The Lenders are shareholders of the Company. As
part of these transactions, the Company provided one of the Lenders with the
opportunity, at its discretion, to co-invest with the Company in all of the
Company's new ventures within the Asia region.
During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or
713,310 shares of the Company's common stock. This amount has been included in
"Other financing agreements" (see Note 5, "Debt Obligations").
The Company has entered into certain consulting agreements with directors
of the Company and paid $0.1 million, $0.2 million, $0.2 million and $0.3
million in 1994, 1995, 1996, and the nine months ended September 30, 1997,
respectively, pursuant to those agreements.
The Company had notes receivable due from employees aggregating $0.2
million, $0.1 million and less than $0.1 million as of December 31, 1995 and
1996, and September 30, 1997, respectively, with no single amount due from any
individual in excess of $0.1 million.
The Company derived revenue from affiliates of $3.3 million and $3.1
million in 1996 and the nine months ended September 30, 1997, respectively.
There was no significant revenue earned from affiliate sales in 1995 and 1994.
F-22
<PAGE> 152
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $0.1 million, $0.7 million, $0.2 million and
$0.8 million in 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively. The following table summarizes non-cash investing and financing
activities for the Company:
<TABLE>
<CAPTION>
PERIOD ENDED
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Purchase of additional interest in Western Europe region
subsidiary with conversion of debt to equity............. $ -- $9,139
Line of credit issued as payment on note payable and
reclassification of restricted cash...................... -- 7,887
Purchase of the remaining interest of a CIS region
subsidiary with a note payable........................... -- 5,249
Conversion of a note payable to stock as additional
consideration in relation to purchase of interest in a
CIS region subsidiary.................................... 4,497 4,250
Note payable issued for additional capital infusion in CIS
region subsidiary........................................ 4,500 4,125
Additional consideration due in relation to purchase of the
remaining interest in a CIS region subsidiary............ -- 2,443
Contribution of fixed asset for the stock of a Western
Europe region subsidiary................................. -- 1,989
Compensatory stock options................................. -- 3,390
Accretion of stock......................................... 996 1,860
Additional consideration due in relation to purchase of
interest in a CIS region subsidiary...................... -- 1,528
</TABLE>
No significant non-cash investing activities were incurred for the years
ended December 31, 1994 and 1995.
F-23
<PAGE> 153
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA
The Company operates predominantly in a single industry segment, the
telecommunications industry. The industry consists of a wide range of
telecommunications services to international business customers, including long
distance voice and data services and electronic messaging services. The
following tables present consolidated financial information by geographic area
for 1994, 1995, 1996 and the nine months ended September 30, 1997. Transfers
between geographic areas were not considered material for disclosure purposes.
<TABLE>
<CAPTION>
CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Total revenue.................. $ -- $ -- $ 1,295 $ -- $ 1,173 $ 2,468
Gross margin................... -- -- (179) -- 202 23
Operating loss................. (546) (1,802) (1,122) -- (9,528) (12,998)
Net loss....................... (423) (939) (1,661) -- (8,962) (11,985)
Identifiable assets............ 2,173 15,423 9,297 -- 35,064 61,957
Liabilities.................... -- 3,921 6,501 -- (3,157) 7,265
Net assets..................... 2,173 11,502 2,796 -- 38,221 54,692
Year Ended December 31, 1995
Total revenue.................. $ 179 $ 3,838 $ 4,361 $ 140 $ (106) $ 8,412
Gross margin................... (318) (949) 1,380 9 (106) 16
Operating loss................. (5,469) (16,681) (6,312) (4,831) (15,578) (48,871)
Net loss....................... (5,452) (19,415) (7,091) (4,771) (3,671) (40,400)
Identifiable assets............ 5,898 73,816 15,639 9,167 11,101 115,621
Liabilities.................... 11,766 78,440 26,834 13,936 (75,950) 55,026
Net (liabilities)/assets....... (5,868) (4,624) (11,195) (4,769) 87,051 60,595
Year Ended December 31, 1996
Total revenue.................. $ -- $ 12,696 $ 9,355 $ 1,561 $ 505 $ 24,117
Gross margin................... -- 811 3,292 652 421 5,176
Operating loss................. (10,679) (14,608) (4,651) (5,057) (22,934) (57,929)
Net loss....................... (10,700) (15,572) (5,295) (4,951) (31,473) (67,991)
Identifiable assets............ 19,607 96,773 17,339 14,973 88,686 237,378
Liabilities.................... 35,728 116,961 33,826 24,753 (93,806) 117,462
Net (liabilities)/assets....... (16,121) (20,188) (16,487) (9,780) 182,492 119,916
Nine Months Ended September 30,
1997
Total revenue.................. $ 2,262 $ 17,786 $ 9,460 $ 556 $ 152 $ 30,216
Gross margin................... (3,231) 1,325 3,724 (105) 151 1,864
Operating loss................. (16,382) (6,198) (5,042) (25,456) (17,024) (70,102)
Net loss....................... (17,329) (7,853) (6,776) (25,400) (30,514) (87,872)
Identifiable assets............ 359,499 101,976 16,637 (6,919) 176,595 647,788
Liabilities.................... 333,906 128,360 41,067 16,984 37,304 557,621
Net (liabilities)/assets....... 25,593 (26,384) (24,430) (23,903) 139,291 90,167
</TABLE>
NOTE 15: SUBSEQUENT EVENTS
Financing Transactions
In connection with the purchase of certain equipment and services for
certain cellular ventures within the CIS region, the Company entered into a
credit agreement with a bank totaling up to $30.7 million in 1996.
F-24
<PAGE> 154
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to September 30, 1997, certain conditions precedent were finalized
which allowed funding under the facility. Initial loans of $7.5 million were
incurred at an initial interest rate based on the Eurodollar rate, with
principal and interest payments due semiannually beginning June 15, 1998 through
December 15, 2002. The initial interest rate was 6.04%, which is reset
semiannually.
Contractual Commitments
Subsequent to September 30, 1997, a subsidiary of the Company entered into
contractual commitments to lease fiber 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 $98.0 million. The commitments have expected lease terms
of three to twenty years with options for renewal rights of five additional
years. As of September 30, 1997, the subsidiary made prepayments of
approximately $6.4 million related to the above leases.
Equity Transactions
On December 1, 1997, the Company filed an amendment to its Certificate of
Incorporation to reflect an increase in the authorized common shares from
60,000,000 to 135,000,000; a 3 for 2 common share stock split, 1 1/2 common
shares for every common share issued and outstanding; and an increase in the par
value of its authorized common shares from $0.0001 to $.10, on a post-split
basis. Accordingly, the Company has presented share and per share data on a
restated basis to give effect to the increase in authorized common shares, the
stock split and the increase in par value for its capital stock.
F-25
<PAGE> 155
EDN SOVINTEL
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
F-26
<PAGE> 156
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Owners
EDN Sovintel
We have audited the accompanying balance sheets of EDN Sovintel as of
December 31, 1996 and 1995, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. 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 of America. 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 financial position of EDN Sovintel at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in period ended December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the financial statements of the Company at December
31, 1996, 1995 and 1994 and for each of the three years ended December 31, 1996,
not presented herewith, prepared in compliance with the regulations for
bookkeeping and accounting for income tax and statutory reporting purposes in
the Russian Federation on which we expect to report separately for the 1996
audited financial statements and have reported separately for the 1995 and 1994
financial statements. The significant differences between the accounting
principles applied for preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2, "Basis of Presentation."
Ernst & Young (CIS) Ltd.
Moscow, Russia
February 21, 1997
F-27
<PAGE> 157
EDN SOVINTEL
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,606 $ 3,094
Cash deposit with related party........................... 476
Accounts receivable, net of allowances.................... 15,329 7,400
Due from affiliates....................................... 1,879 1,196
Inventories............................................... 1,749 938
Prepaid expenses and other assets......................... 2,328 1,540
------- -------
Total current assets.............................. 25,367 14,168
Property and equipment, net................................. 27,709 21,349
Deferred expenses........................................... 1,080 1,215
------- -------
Total assets...................................... $54,156 $36,732
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note due shareholder...................................... $ 5,700 $ 5,500
Trade payables............................................ 8,382 8,761
Accrued liabilities and other payables.................... 1,130 701
Taxes accrued or payable.................................. 1,086 1,019
Amounts due to shareholder and affiliates................. 5,703 2,664
Current portion of amount due to partner in commercial
venture................................................ 1,350
Current portion of long-term debt......................... 694
------- -------
Total current liabilities......................... 23,351 19,339
Amount due to partner in commercial venture................. 1,350
Commitments and contingencies
Shareholders' equity:
Capital contributions..................................... 2,000 2,000
Retained earnings......................................... 28,805 14,043
------- -------
Total shareholders' equity........................ 30,805 16,043
------- -------
Total liabilities and shareholders' equity........ $54,156 $36,732
======= =======
</TABLE>
See accompanying notes.
F-28
<PAGE> 158
EDN SOVINTEL
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues, net:
Service revenues.......................................... $63,488 $29,920 $19,674
Installation revenues..................................... 9,312 12,981
Product sales............................................. 2,240 1,391 1,054
------- ------- -------
75,040 44,292 20,728
------- ------- -------
Cost of revenues:
Service costs............................................. 37,884 18,545 11,814
Cost of installation...................................... 4,656 6,491
Cost of products.......................................... 1,370 1,211 705
------- ------- -------
43,910 26,247 12,519
------- ------- -------
Gross profit................................................ 31,130 18,045 8,209
Selling, general and administrative expenses................ 10,291 7,145 4,644
Interest expense............................................ 638 703 612
Interest income............................................. (87) (59) (24)
Other loss (income)......................................... 120 (98) (113)
Foreign exchange loss on net monetary items................. 252 112 467
------- ------- -------
Income before taxes......................................... 19,916 10,242 2,623
Income taxes................................................ 5,154 2,594
------- ------- -------
Net income.................................................. 14,762 7,648 2,623
Retained earnings, beginning of year........................ 14,043 6,395 3,772
------- ------- -------
Retained earnings, end of year.............................. $28,805 $14,043 $ 6,395
======= ======= =======
</TABLE>
See accompanying notes.
F-29
<PAGE> 159
EDN SOVINTEL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Operating activities
Net income................................................ $ 14,762 $ 7,648 $ 2,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,638 2,448 1,929
Provision for doubtful accounts........................ 678 132 303
Write-off of accounts receivable....................... (147) (492)
Write-down of network equipment and inventories........ 100 196 170
Foreign exchange loss.................................. 252 112 467
Changes in operating assets and liabilities:
Accounts receivable, net of allowances................. (8,460) (2,759) (358)
Due from affiliates.................................... (683) (1,011) (172)
Inventories............................................ (911) (309) 77
Advances to related party.............................. (376)
Prepaid expenses and other assets...................... (1,054) (307) (712)
Trade payables......................................... (193) 2,983 2,176
Accrued liabilities and other payables................. 429 586 (591)
Taxes accrued or payable............................... 207 876
Amounts due to shareholder and affiliates.............. 3,039 2,165 499
Other.................................................. (132)
-------- ------- -------
Net cash provided by operating activities......... 11,657 12,268 5,903
Investing activities -- Purchases of and advances for
property and equipment.................................... (9,863) (9,259) (5,729)
Financing activities
Borrowings from shareholder............................... 11,300 11,888 2,883
Repayments to shareholder................................. (11,100) (9,271)
Repayments of long-term debt.............................. (694) (3,979) (3,979)
Increase in cash deposited with related party............. (476)
-------- ------- -------
Net cash used in financing activities............. (970) (1,362) (1,096)
Effect of exchange rate changes on cash and cash
equivalents............................................... (312) (220)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 512 1,647 (1,142)
Cash and cash equivalents at beginning of year.............. 3,094 1,447 2,589
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,606 $ 3,094 $ 1,447
======== ======= =======
</TABLE>
See accompanying notes.
F-30
<PAGE> 160
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN TABLES EXPRESSED IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
EDN Sovintel (the "Company") was created in August 1990 to design,
construct, and operate a telecommunications network in Moscow. This network
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies. Telecommunications services
are subject to local licensing. The Company's license for international,
intercity and local calls was most recently renewed on November 4, 1996 and is
valid until January 5, 2000. The Company received a license for leased lines on
September 20, 1996 valid for 5 years. The Company began operating in December
1991, providing services under long-term contracts payable in US dollars.
The Company initially registered as a limited liability Russian-American
joint venture. The venture re-registered as a limited liability Russian company
in October 1992. The Company is fifty-percent owned by Open Joint Stock Company
"Rostelecom", an intercity and long-distance carrier which is 51% owned by the
Russian Government, and fifty-percent owned by Sovinet, a US general
partnership, owned by two wholly-owned Global TeleSystems Group, Inc. ("GTS")
subsidiaries.
2. BASIS OF PRESENTATION
The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). The principal adjustments are related to foreign currency
translation, and depreciation and valuation of property and equipment.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements, in conformity with US GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Accordingly, transactions and balances not already measured in US
dollars (primarily Russian roubles) have been remeasured into US dollars in
accordance with the relevant provisions of US Financial Accounting Standard
("FAS") No. 52, "Foreign Currency Translation".
Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
The rouble is not a convertible currency outside the territory of Russia.
Within Russia its official exchange rates were determined principally through
trading on Moscow Interbank Currency Exchange ("MICEX") until May 17, 1996.
Although MICEX rates did occasionally diverge from market rates, they were
generally considered to be a reasonable approximation. Beginning May 17, 1996,
official exchange rates
F-31
<PAGE> 161
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
were determined daily by the Central Bank of Russia ("CBR") and are generally
considered to be a reasonable approximation of market rates. The translation of
rouble denominated assets and liabilities into US dollars for the purpose of
these financial statements does not indicate that the Company could realize or
settle in US dollars the reported values of the assets and liabilities.
Likewise, it does not indicate that the Company could return or distribute the
reported US dollar values of capital and retained earnings to its shareholders.
The exchange rate used for translation purposes is the CBR rate as of
December 31, 1996 and the MICEX rate as of December 31, 1995 and 1994. The rates
at December 31, 1996, 1995 and 1994 for one US dollar were RUR 5,560, RUR 4,640
and RUR 3,550, respectively. At February 21, 1997, the CBR rate had changed to
RUR 5,665. The effect of this devaluation of the rouble on monetary assets and
liabilities has not been determined.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in the bank.
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates their fair value. Accounts receivable are shown in the balance
sheet net of an allowance for uncollectible accounts of $900,000 and $369,000 at
December 31, 1996 and 1995, respectively.
Inventories
Inventories consist of telecommunications equipment held for resale and are
stated at the lower of cost or market. Cost is computed on a weighted average
basis.
Property and Equipment
Property and equipment are recorded at their historical cost. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Network equipment....................................... 10 years
Other property and equipment............................ 3-5 years
</TABLE>
There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
Deferred Expenses
Deferred expenses represent the Company's interest in the historical cost
of network equipment owned by MTU Inform, a partner in a commercial venture
(Note 8). These expenses are amortized over the equipment's useful life of 10
years.
Revenue Recognition and Taxes on Revenue
Service revenues from telecommunication traffic and periodic fixed fees are
recognized in the period in which the traffic occurs or the fixed fee earned.
Installation revenues represent connection fees and are recognized in the period
of installation. Product sales are recognized in the period in which the
products are shipped to customers. Revenues are stated net of any value-added
taxes ("VAT") charged to customers. Certain other taxes on revenues were charged
at rates ranging from 1.5% to 4.0% over the three year period ending December
31, 1996 and amounted to $2,792,000, $1,166,000 and $336,000 in 1996, 1995 and
1994, respectively, and are charged to selling, general and administrative
expenses.
F-32
<PAGE> 162
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Advertising
The Company expenses the cost of advertising as incurred. Advertising
expenses for the years ended December 31, 1996, 1995 and 1994 were $512,000,
$395,000 and $270,000, respectively, and are included in selling, general and
administrative expenses.
Investment Incentive Deductions
Russian legislation allows for certain additional tax deductions related to
new asset investments. These deductions are accounted for as a reduction to
current income taxes in the year in which they arise.
Income Taxes
The Company computes and records income taxes in accordance with FAS No.
109, "Accounting for Income Taxes".
Government Pension Funds
The Company contributes to the Russian Federation state pension fund,
social fund, medical insurance fund, unemployment charters and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 41.0% and 40.0%
for 1996, 1995 and 1994, respectively.
Fair Value of Financial Instruments
The fair value of financial instruments included in current assets and
liabilities is considered to be the carrying value.
Comparative figures
Certain of the 1995 comparative figures have been reclassified to conform
to the presentation adopted in the current year.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Network equipment........................................... $31,251 $20,875
Other property and equipment................................ 3,108 2,740
------- -------
34,359 23,615
Accumulated depreciation and amortization................... (9,380) (5,877)
Construction-in-progress.................................... 1,796 1,539
Network equipment and advances for network equipment not yet
in service................................................ 934 2,072
------- -------
Net book value.............................................. $27,709 $21,349
======= =======
</TABLE>
Total depreciation and amortization expense on property and equipment for
1996, 1995 and 1994 was $3,503,000, $2,253,000 and $1,720,000, respectively.
F-33
<PAGE> 163
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The Russian Federation was the only tax jurisdiction in which the Company's
income was taxed. The income tax expense reported in the accompanying statements
of operations for the years ended December 31, 1996, 1995 and 1994 represents
the provision for taxes currently payable.
The following is a reconciliation of the tax basis and book basis of the
taxable income reported in the Russian statutory financial statements to the
income before taxes reported in the accompanying financial statements presented
in accordance with US GAAP for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Taxable income (loss) reported for
Russian tax purposes.................. $14,726 $ 7,411 $
Investment incentive deductions....... 9,030 7,220
Tax loss carry-forwards utilized...... 113
Net permanent difference related to
revenues and expenses incurred in
the ordinary course of business
which are not assessable or
deductible for Russian tax
purposes........................... (1,174) (2,595) (948)
------- ------- ------
Russian income (loss) before taxes...... 22,695 12,036 (948)
Adjustments to present financial
statements in accordance with US GAAP:
Reversal of excess depreciation due to
statutory revaluations............. (1,497) (293) (285)
Depreciation rate differences......... (424) (236) (98)
Allowances for uncollectible
accounts........................... 369 (132) (129)
Inventory allowance................... (100) (249) (29)
Accrual of deductible expenses........ (2,437) (1,339) (659)
Accrual of revenue.................... 1,093 19
Foreign exchange differences.......... 280 1,425 5,665
Other non-deductible accruals......... (63) (989) (894)
------- ------- ------
Income before taxes under US GAAP....... $19,916 $10,242 $2,623
======= ======= ======
</TABLE>
The Company operated under a two-year income tax holiday in 1994 and 1993.
As such, no Russian tax calculations or tax filings were made or reported.
A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax expense computed on financial
income taxes at statutory tax rate of
35% for 1996 and 1995 and 38% for
1994.................................. $ 6,970 $ 3,585 $ 997
Tax effect of permanent differences:
Investment incentive deductions....... (3,161) (2,594)
Tax loss carryforwards utilized....... (40)
Other permanent differences........... 411 805 360
Adjustments made to compute income
before taxes for US GAAP financial
reporting.......................... 813 555 (1,548)
Temporary differences not recognised as
measured by the change in the
valuation allowance................... 161 243 191
------- ------- -------
Income tax expense reported in the
financial statements.................. $ 5,154 $ 2,594 $
======= ======= =======
</TABLE>
F-34
<PAGE> 164
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciation............................................. $ 300 $ 151 $ 74
Inventory write-downs and allowances..................... 235 147 11
Accrual of expenses...................................... 898 469 284
Accrual of revenue....................................... (383) (7)
Allowance for uncollectible accounts..................... 129 277
------- ----- -----
Deferred tax assets........................................ 1,050 889 646
Valuation allowance for deferred tax assets................ (1,050) (889) (646)
------- ----- -----
Net deferred tax assets.................................... $ -- $ -- $ --
======= ===== =====
</TABLE>
For financial reporting purposes, a valuation allowance has been recognised
to reflect management's estimate of the deferred tax assets that are less likely
than not to be realized. Management's estimate of the recoverability of the
deferred tax assets is based on the Company's limited history of profitable
operations as well as the uncertainties surrounding the tax and legal systems in
Russia (see Note 11).
Unexpired tax loss carryforwards at December 31, 1996 amount to $113,000
and is available in and expires in 1997.
The Company paid Russian profits tax of $5,849,000 and $2,660,000 in 1996
and 1995, respectively, and no taxes in 1994.
6. NOTE DUE TO SHAREHOLDER AND LONG-TERM DEBT
In October 1995, the Company entered into a $5,000,000 credit facility with
Sovinet, one of the Company's shareholders. It was subsequently increased to
$7,000,000. In January of 1997, this facility was repaid and on January 16,
1997, a new six-month facility was established with GTS Finance, Inc. for
$7,000,000. The loan bears interest at a rate equal to the then current six
month LIBOR rate (5.6% as of December 31, 1996) plus 5.0 percent per annum. As
of December 31, 1996 and 1995, the outstanding borrowings under this agreement
were $5,700,000 and $5,500,000, respectively.
In April 1991, the Company entered into a $5,300,000 credit facility with
Barclays Bank PLC and International Moscow Bank. This loan was fully repaid
during 1996.
The Company believes that the carrying value of the above loans approximate
their fair values.
The Company paid interest of $403,000, $576,000 and $472,000 in 1996, 1995
and 1994, respectively.
F-35
<PAGE> 165
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY
The Company's capital structure as specified in its charter capital
document as of December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Registered capital in Russian roubles:
Rostelecom............................ 600,000 600,000
Sovinet............................... 600,000 600,000
---------- ----------
1,200,000 1,200,000
========== ==========
Historical value of the Company's
capital in US dollars................. $ 2,000 $ 2,000
========== ==========
</TABLE>
As a Russian limited liability company, the Company has no capital stock;
rather, it has only contributed and locally registered capital in accordance
with its charter. As such, no earnings per share data are presented in these
financial statements.
Retained earnings available for distribution at December 31, 1996 amounted
to 84 billion roubles or approximately $15,108,000 at applicable year-end
exchange rates.
8. RELATED PARTY TRANSACTIONS
Transactions and balances with Rostelecom (one of the Company's
shareholders) and its affiliates were, as of and for the years ending December
31, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Sales................................... $1,525 $ 62
Telecommunication lease and traffic
costs................................. 4,586 1,506 $410
Amounts due to shareholder and
affiliates............................ 656 460
Cash deposit with related party......... 476
</TABLE>
At the request of Rostelecom, a shareholder, the Company placed a deposit
of 2.65 billion roubles in August 1996 with a Russian bank related to this
shareholder. The bank deposit agreement states a deposit term of one year. The
deposit earns interest quarterly at a rate of 15% per annum plus any devaluation
losses against the US dollar up to a maximum of 4.8% per quarter. Management is
aware that the deposited amount collateralizes certain obligations of the
shareholder.
Transactions and balances with Sovinet (one of the Company's shareholders),
GTS and affiliates were, as of and for the years ending December 31, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales................................... $3,115 $1,041 $ 172
Management service fees and
reimbursements of expenses of
expatriate staff...................... 927 2,062 499
Balances due under credit facility...... 5,700 5,500 2,883
Interest expense........................ 626 461 65
Amounts due from affiliates............. 1,879 1,196 185
Amounts due to shareholder and
affiliates............................ 5,047 2,204 499
</TABLE>
F-36
<PAGE> 166
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Transactions and balances with MTU Inform, an entity with which the Company
entered into a commercial agreement to co-develop and operate a "258" phone
exchange were, as of and for the years ending December 31, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ----
<S> <C> <C> <C>
Telecommunication settlement and rent
expense............................... $15,889 $10,491
Balances in trade payables.............. 1,237 2,184
Balance of amount due to partner in
commercial venture.................... 1,350 1,350
Balances in prepaid expenses and other
assets................................ $376
</TABLE>
The Company also has an interest in the cost of the related network
equipment owned by MTU Inform, which is reflected in the balance sheet as
deferred expenses.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash deposits and trade accounts
receivables. The Company deposits its available cash with several Russian
financial institutions. The Company's sales and accounts receivable are made to
and due from a variety of international and Russian business customers. As of
December 31, 1996, two customers accounted for 17% and 16% of revenues and 25%
and 10% of accounts receivable, respectively. As of December 31, 1995, these
same two customers accounted for 1% and 14% of revenues and 10% and 11% of
accounts receivable, respectively. The Company did not have significant
activities with these customers during 1994. However, during 1994, a different
customer accounted for 14% of revenues. The Company has no other significant
concentrations of credit risk.
10. COMMITMENTS
The Company has several cancelable operating leases for office and
warehouse space and telecommunications lines with terms ranging from one to five
years.
Total rent expense for 1996, 1995 and 1994 was $2,123,000, $1,068,000 and
$1,058,000, respectively.
11. CONTINGENCIES
The tax and legal systems in Russia are evolving as Russia and its central
government transform from a command to a market oriented economy. The Russian
Federation has and continues to introduce laws, decrees and related regulations.
These laws, decrees and regulations are not always clearly written and are, at
times, conflicting. In addition, their interpretation is subject to the opinions
of a variety of local, regional and federal tax inspectors, Central Bank
officials and the Ministry of Finance. Instances of inconsistent opinions among
and between these authorities are not unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amount expensed to date and accrued at December
31, 1996. It is the opinion of management, that the ultimate resolution of the
Company's Russian tax liability and potential loss contingencies, to the extent
not previously provided for, will not have a material effect on the financial
condition of the Company. However, depending on the amount and timing of an
unfavorable resolution of this contingency, it is possible that the Company's
future results of operations or cash flows could be materially affected in a
particular period.
F-37
<PAGE> 167
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. CONTINGENCIES -- (CONTINUED)
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation, tax regulations, cancellations or non-renewal of license
rights, and expropriation of property. The Company does not believe that these
contingencies, as related to its operations, are any more significant than those
of similar enterprises in Russia.
F-38
<PAGE> 168
EDN SOVINTEL
CONDENSED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER OF 1997
(UNAUDITED)
F-39
<PAGE> 169
EDN SOVINTEL
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 3,606 $ 6,041
Accounts receivable, less allowance for doubtful accounts
of $900 and $1,477 at December 31, 1996 and September
30, 1997............................................... 15,329 14,779
Restricted cash........................................... 476 492
Due from affiliated companies............................. 1,879 2,267
Inventory................................................. 1,749 2,836
Deferred tax asset........................................ -- 665
Prepaid expenses and other assets......................... 2,328 4,544
------- -------
Total current assets.............................. 25,367 31,624
Property and equipment, net of accumulated depreciation of
$9,380 and $13,197 at December 31, 1996 and September 30,
1997...................................................... 27,709 35,344
Deferred expenses........................................... 1,080 958
------- -------
TOTAL ASSETS...................................... $54,156 $67,926
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 8,382 $ 8,492
Accrued expenses.......................................... 2,216 4,043
Due to affiliated companies............................... 5,703 5,572
Note payable to shareholder............................... 5,700 3,449
Taxes and other liabilities............................... 1,350 1,350
------- -------
TOTAL LIABILITIES................................. 23,351 22,906
Commitments and contingencies
SHAREHOLDERS' EQUITY
Contributed capital......................................... 2,000 2,000
Retained earnings........................................... 28,805 43,020
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 30,805 45,020
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $54,156 $67,926
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 170
EDN SOVINTEL
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues, net:.............................................. 51,977 82,029
Cost of revenues:........................................... 30,613 51,048
------- -------
Gross margin.............................................. 21,364 30,981
Operating expenses:
Selling, general and administrative....................... 4,619 8,175
Depreciation and amortization............................. 320 452
Non-income taxes.......................................... 2,372 3,697
------- -------
Total operating expenses.......................... 7,311 12,324
Income from operations...................................... 14,053 18,657
Other (expense) income:
Interest income........................................... 36 176
Interest expense.......................................... (481) (447)
Foreign currency losses................................... (170) (87)
------- -------
(615) (358)
Net income before taxes..................................... 13,438 18,299
Income taxes................................................ 3,916 4,084
------- -------
Net income.................................................. $ 9,522 $14,215
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 171
EDN SOVINTEL
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 9,522 $ 14,215
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,397 3,817
Provision for doubtful accounts........................... (550) (577)
Income tax benefit........................................ -- (665)
Changes in assets and liabilities:
Accounts receivable.................................... (5,991) 1,126
Inventory.............................................. (507) (1,087)
Prepaid expenses and other assets...................... (1,352) (2,216)
Accounts payable and accrued expenses.................. 3,620 1,937
------- --------
Net cash provided by operating activities................... 7,139 16,550
INVESTING ACTIVITIES
Purchases of property and equipment....................... (6,938) (11,329)
Restricted cash........................................... (40) (16)
------- --------
Net cash used in investing activities....................... (6,978) (11,345)
FINANCING ACTIVITIES
Borrowing on (repayment of) shareholder note, net......... 278 (2,251)
Repayment of debt......................................... (694) --
Due to affiliated companies, net.......................... 832 (519)
------- --------
Net cash provided by (used in) financing activities......... 416 (2,770)
------- --------
Net increase in cash and cash equivalents................... 577 2,435
Cash and cash equivalents at beginning of period............ 3,094 3,606
------- --------
Cash and cash equivalents at end of period.................. $ 3,671 $ 6,041
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 172
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel (the "Company") contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's financial position as of December 31, 1996 and September 30, 1997, and
the results of operations and cash flows for the periods indicated.
The Company was established in August 1990 to design, construct and operate
a telecommunications network in Moscow. This network provides worldwide
communications services, principally to major hotels, business offices and
mobile communication companies. Telecommunications services are subject to local
licensing. The Company's license for international, intercity and local calls
was most recently renewed on November 4, 1996 and is valid until January 5,
2000. The Company began operating in December 1991, providing services under
long-term contracts payable in U.S. dollars.
The Company initially registered as a limited liability Russian-American
joint venture. The venture re-registered as a limited liability Russian company
in October 1992. The Company is 50.0% owned by Sovinet, a U.S. general
partnership that is owned by two wholly-owned subsidiaries of Global TeleSystems
Group, Inc. ("GTS"); and the Company is 50.0% owned by Open Joint Stock Company
"Rostelecom," an intercity and long-distance carrier that is 51.0% owned by the
Russian Government.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded; however,
other adjustments may have been required had an audit been performed. It is
suggested that these financial statements be read in conjunction with the
Company's 1996 audited financial statements and the notes related thereto. The
results of operations for the nine months ended September 30, 1997 may not be
indicative of the operating results for the full year.
The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America. The principal adjustments are related to foreign currency translation,
and depreciation and valuation of property and equipment.
2. DEBT OBLIGATIONS
In October 1995, the Company entered into a $5.0 million credit facility
with Sovinet, one of the Company's shareholders. It was subsequently increased
to $7.0 million. In January 1997, this facility was repaid, and on January 16,
1997 a new six-month facility was established with GTS Finance, Inc., a wholly-
owned subsidiary of GTS, for $7.0 million, of which $5.8 million was drawn upon.
The new facility was subsequently repaid in June 1997, and on June 23, 1997, a
new six-month facility was established with GTS Finance, Inc. for $7.0 million,
with a remaining balance of $3.4 million at September 30, 1997. The loan bears
interest at a rate equal to the then current six-month LIBOR rate, approximately
5.6%, plus 5.0% per annum.
3. CONTINGENCIES
The tax and legal system in Russia are evolving as Russia and its central
government transform from a command to a market-oriented economy. The Russian
Federation has and continues to introduce laws, decrees and related regulations.
These laws, decrees and regulations are not always clearly written and are, at
times, conflicting. In addition, their interpretation is subject to the opinions
of a variety of local, regional and
F-43
<PAGE> 173
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
federal tax inspectors, Central Bank officials and the Ministry of Finance.
Instances of inconsistent opinions among and between these authorities are not
unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amount expensed to date and accrued at
September 30, 1997. It is the opinion of management that the ultimate resolution
of the Company's Russian tax liability and potential loss contingencies, to the
extent not previously provided for, will not have a material effect on the
financial condition of the Company. However, depending on the amount and timing
of an unfavorable resolution of this contingency, it is possible that the
Company's future results of operations or cash flows could be materially
affected in a particular period.
The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation, tax regulations, cancellations or non-renewal
of license rights, and expropriation of property. The Company does not believe
that these contingencies, as related to its operations, are any more significant
than those of similar enterprises in Russia.
F-44
<PAGE> 174
HERMES EUROPE RAILTEL B.V.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
F-45
<PAGE> 175
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, 1995 and 1996 and September 30, 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, 1996 and for
the nine months ended September 30, 1997. 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, 1995 and 1996 and September 30, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles
in the United States.
Ernst & Young Reviseurs d'Entreprises
S.C.C.
Represented by
L. SWOLFS
Partner
Brussels, Belgium
December 23, 1997
F-46
<PAGE> 176
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 5,784 $ 2,013 $237,541
Restricted cash..................................... -- 3,840 29,155
Accounts receivable................................. -- 84 479
Due from affiliated companies....................... 67 491 672
Other assets........................................ 579 1,100 1,843
-------- -------- --------
Total current assets............................. 6,430 7,528 269,690
Property and equipment, net........................... 4,671 20,303 36,593
Deferred financing costs, net......................... -- -- 12,842
Restricted cash....................................... -- -- 27,877
-------- -------- --------
Total Assets..................................... $ 11,101 $ 27,831 $347,002
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............... $ 4,659 $ 8,476 $ 15,138
Due to affiliated companies......................... 2,117 3,344 1,251
Deferred income..................................... -- 24 1,577
Other current liabilities........................... -- 8 599
Debt maturing within one year....................... 9 63 52
-------- -------- --------
Total current liabilities........................ 6,785 11,915 18,617
Long-term debt, less current portion.................. 10 499 265,401
-------- -------- --------
Total Liabilities................................ 6,795 12,414 284,018
Commitments and contingencies
Shareholders' loans................................... 8,353 34,863 --
SHAREHOLDERS' EQUITY
Common stock, 1,000 guilders par value (305 shares
authorized and 80 shares issued and outstanding
at December 31, 1995 and 1996; 297,000 shares
authorized and 190,468 shares issued and
outstanding at September 30, 1997)............... 45 45 96,757
Additional paid-in capital.......................... 2,884 2,884 7,513
Cumulative translation adjustment................... (254) 316 (2,920)
Accumulated deficit................................. (6,722) (22,691) (38,366)
-------- -------- --------
Total Shareholders' Equity....................... (4,047) (19,446) 62,984
-------- -------- --------
Total Liabilities and Shareholders' Equity....... $ 11,101 $ 27,831 $347,002
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 177
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................... $ -- $ -- $ 48 $ -- $ 2,262
----- ------- -------- -------- --------
Operating costs and expenses:
Cost of revenues............. -- -- 4,694 3,442 5,989
Selling, general and
administrative............ 183 6,637 10,552 7,329 10,177
----- ------- -------- -------- --------
183 6,637 15,246 10,771 16,166
----- ------- -------- -------- --------
Loss from operations........... (183) (6,637) (15,198) (10,771) (13,904)
Other income/(expense):
Interest income.............. 18 125 508 428 2,729
Interest expense............. -- (9) (153) (5) (4,593)
Foreign currency (losses)
gains..................... (55) 19 (1,126) (774) 93
----- ------- -------- -------- --------
(37) 135 (771) (351) (1,771)
----- ------- -------- -------- --------
Net loss before income taxes... (220) (6,502) (15,969) (11,122) (15,675)
Income taxes................... -- -- -- -- --
----- ------- -------- -------- --------
Net loss....................... $(220) $(6,502) $(15,969) $(11,122) $(15,675)
===== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 178
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................... $ (220) $ (6,502) $(15,969) (11,122) $(15,675)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................ 5 11 683 387 1,862
Deferred interest............. -- -- 130 -- --
Changes in assets and
liabilities:
Accounts receivable......... -- -- (87) -- (414)
Deposits.................... -- (16) (627) (628) 319
Accounts payable and accrued
expenses................. 89 4,364 4,336 4,625 7,871
Other changes in assets and
liabilities.............. (41) (512) (6) (1,705) 234
-------- -------- -------- -------- --------
Net cash used in operating
activities....................... (167) (2,655) (11,540) (8,443) (5,803)
INVESTING ACTIVITIES
Purchases of property and
equipment..................... (52) (4,405) (16,807) (12,834) (19,316)
Restricted cash.................. -- -- (3,974) (6,883) (54,860)
-------- -------- -------- -------- --------
Net cash used in investing
activities....................... (52) (4,405) (20,781) (19,717) (74,176)
FINANCING ACTIVITIES
Proceeds from debt............... -- 19 564 583 270,849
Payment of debt issue costs...... -- -- -- -- (13,238)
Net proceeds from issuance of
common stock.................. 1,028 1,732 -- -- 52,015
Proceeds from shareholders'
loans......................... -- 7,942 27,358 25,305 13,311
Due to affiliated companies,
net........................... -- 1,951 1,002 351 (1,964)
-------- -------- -------- -------- --------
Net cash provided by financing
activities....................... 1,028 11,644 28,924 26,239 320,973
Effect of exchange rate changes on
cash and cash equivalents........ 58 333 (374) (404) (5,466)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents................. 867 4,917 (3,771) (2,325) 235,528
Cash and cash equivalents at
beginning of period.............. -- 867 5,784 5,784 2,013
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period........................... $ 867 $ 5,784 $ 2,013 $ 3,459 $237,541
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 179
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
----------------- PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
------- ------- ---------- ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993............ 40 $ 21 $ -- $ -- $ -- $ 21
Proceeds from the sale of common
stock................................. 21 11 996 -- -- 1,007
Translation adjustment.................. -- -- -- 58 -- 58
Net loss................................ -- -- -- -- (220) (220)
------- ------- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1994............ 61 32 996 58 (220) 866
Proceeds from the sale of common
stock................................. 19 13 1,886 -- -- 1,901
Translation adjustment.................. -- -- -- (312) -- (312)
Net loss................................ -- -- -- -- (6,502) (6,502)
------- ------- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1995............ 80 45 2,884 (254) (6,722) (4,047)
Translation adjustment.................. -- -- -- 570 -- 570
Net loss................................ -- -- -- -- (15,969) (15,969)
------- ------- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1996............ 80 45 2,884 316 (22,691) (19,446)
Recapitalization, net of tax............ 190,388 96,712 4,629 -- -- 101,341
Translation adjustment.................. -- -- -- (3,236) -- (3,236)
Net loss................................ -- -- -- -- (15,675) (15,675)
------- ------- ------ ------- -------- --------
BALANCE AT SEPTEMBER 30, 1997........... 190,468 $96,757 $7,513 $(2,920) $(38,366) $ 62,984
======= ======= ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 180
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS OPERATIONS
Hermes Europe Railtel B.V. (the "Company") intends to become the leading
pan-European carriers' carrier by constructing and operating a managed,
seamless, fiber optic, pan-European network, and providing high quality
trans-border transmission services to telecommunications carriers across Europe.
In an effort to generate sufficient capital resources to continue its
buildout of the network and sustain working capital requirements, the Company
undertook a recapitalization (the "Recapitalization") during the first quarter
of 1997, which was completed in September 1997. Prior to the recapitalization,
the Company was 50% owned by HIT Rail B.V. ("HIT Rail"), a consortium of eleven
European railway companies, and 50% owned by GTS-Hermes, Inc. ("GTS-Hermes"), a
U.S. holding company that is a wholly-owned subsidiary of Global TeleSystems
Group, Inc., a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers through its
operations of voice and data networks, international gateways, local access and
cellular networks and the provision of various value-added services, in markets
outside the United States.
Pursuant to the Recapitalization, the Company offered to GTS-Hermes, HIT
Rail and the eleven individual members of the HIT Rail consortium the right to
subscribe to additional common stock of the Company. GTS-Hermes and two of the
members of HIT Rail, Societe Nationale des Chemins de Fer Belges S.A. de Droit
Public/Nationale Maatschappij der Belgische Spoorwegen N.V. ("NMBS") and AB Swed
Carrier ("Swed Carrier"), exercised their rights, while HIT Rail and the nine
remaining members of HIT Rail declined to participate.
As a result of the finalization of the Recapitalization, total shareholder
loans of ECU 39.4 million (approximately $48.5 million) from, collectively,
GTS-Hermes, HIT Rail, NMBS and Swed Carrier were transferred into equity.
Additionally, GTS-Hermes contributed ECU 46.0 million (approximately $51.8
million) and NMBS contributed a ten-year fiber optic cable lease with a fair
value of ECU 1.8 million (approximately $2.0 million).
The ownership of the Company as a result of the Recapitalization is as
follows:
<TABLE>
<CAPTION>
SHARES OWNERSHIP %
------ -----------
<S> <C> <C>
GTS-Hermes.............................................. 150,632 79.1%
HIT Rail................................................ 24,047 12.6
NMBS.................................................... 11,424 6.0
Swed Carrier............................................ 4,365 2.3
------- ------
Total.............................................. 190,468 100.0%
======= ======
</TABLE>
In an additional effort to obtain capital resources, the Company completed
a debt offering in August 1997 that raised $265.0 million (see Note 4, "Debt
Obligations").
The Company was a development stage enterprise through December 31, 1996.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of Hermes Europe Railtel
B.V., its Belgian branch and of Hermes Europe Railtel N.V. All significant
intercompany accounts and transactions are eliminated upon consolidation.
The accompanying unaudited, consolidated financial data presented in the
Statements of Operations and the Statements of Cash Flows for the nine months
ended September 30, 1996 have been derived from the
F-51
<PAGE> 181
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's financial records and contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the results of operations
and cash flows for the period indicated.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements in order to conform to the 1997 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The Company
had $3.8 million and $57.0 million of restricted cash at December 31, 1996, and
September 30, 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 is calculated on a
straight-line basis over the estimated lives ranging from ten to fifteen years
for fiber optic cable, five years for telecommunications equipment and five to
ten years for furniture, fixtures and equipment and other property. A
substantial part of the costs includes construction in process, which is
currently related to the configuration and buildout of the network, and these
costs primarily consist of labor. 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.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized on a straight-line basis over the
lesser of their estimated useful lives or their contractual term, generally 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
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 analyses for the years ended December 31, 1995 and 1996,
and the nine months ended September 30, 1997, the Company determined that there
was not an impairment of its long-lived assets.
F-52
<PAGE> 182
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 accounting records of the Dutch B.V. company are maintained in Dutch
guilders. The accounting records of the Belgian branch and the Belgian N.V.
company are maintained in Belgian francs. The functional currency for the
Company has been determined to be the Belgian franc. Therefore, the Dutch
guilder statements have been remeasured into Belgian franc equivalents,
consolidated with the Belgian branch and Belgian N.V. statements and then
translated into U.S. dollar equivalents for the purpose of preparing the
accompanying financial statement in accordance with accounting principles
generally accepted in the United States.
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation." 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 the cumulative translation adjustment, a separate
component of shareholders' equity. Gains and losses from foreign currency
transactions are included in the 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. Amounts billed in advance are deferred and recognized as the
service is performed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates their fair value.
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, 1995 and 1996, the Company maintained most of its
cash and cash equivalents in high quality European financial institutions. At
September 30, 1997, the Company maintained most of its cash and cash equivalents
in high quality U.S. 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.
The Company does not now hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results from operations could be adversely affected by
fluctuations in foreign currency exchange rates.
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-53
<PAGE> 183
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Other assets consist of:
Deposits................................. $ 17 $ 606 $ 219
VAT receivable........................... 272 402 871
Interest receivable...................... -- -- 412
Other assets............................. 290 92 341
----------- ------------- ---------------
Total other assets......................... $ 579 $ 1,100 $ 1,843
=========== ============= ===============
Property and equipment, net consists of:
Construction in process.................. $ 3,879 $ 12,981 $ 25,541
Telecommunications equipment in
service............................... -- 4,947 7,790
Fiber.................................... -- -- 2,363
Furniture, fixtures and equipment........ 807 2,507 2,503
Leasehold improvements................... 2 543 703
----------- ------------- ---------------
4,688 20,978 38,900
Less: accumulated depreciation....... 17 675 2,307
----------- ------------- ---------------
Total property and equipment, net.......... $ 4,671 $ 20,303 $ 36,593
=========== ============= ===============
Accounts payable and accrued expenses
consist of:
Trade accounts payable................... $ 2,225 $ 5,445 $ 6,594
Accrued interest......................... -- 10 3,785
Accrued salaries and bonuses............. 668 1,150 1,941
Accrued consulting expense............... 471 152 996
Accrued vacation expense................. 110 774 901
Other.................................... 1,185 945 921
----------- ------------- ---------------
Total accounts payable and accrued
expenses................................. $ 4,659 $ 8,476 15,138
=========== ============= ===============
</TABLE>
NOTE 4. DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior notes, due August 15, 2007 at 11.5%
interest payable semiannually............ $ -- $ -- $ 265,000
Other financing agreements................. 19 562 453
----------- ------------- ---------------
Total debt outstanding..................... 19 562 265,453
Less: debt maturing within one year...... 9 63 52
----------- ------------- ---------------
Total long-term debt....................... $ 10 $ 499 $ 265,401
=========== ============= ===============
</TABLE>
F-54
<PAGE> 184
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. DEBT OBLIGATIONS (CONTINUED)
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 are being held 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. Pursuant to the covenants in the offering, the Company has filed an
S-4 registration statement with the Securities Exchange Commission to exchange
registered senior notes, with the same terms and conditions as the Senior Notes,
for the Senior Notes.
On a pro forma basis, assuming the Senior Notes had been outstanding as of
January 1, 1996, the Company's net loss would have been $47.7 million and $35.9
million for 1996 and for the nine months ended September 30, 1997, respectively,
as a result of interest expense of $30.5 million and $19.3 million and
amortization expense of $1.3 million and $1.0 million related to amortizing
$12.9 million of deferred financing fees over the term of the Senior Notes, for
1996 and for the nine months ended September 30, 1997, respectively.
Aggregate maturities of long-term debt, as of September 30, 1997, are as
follows: 1998 -- $0.05 million, 1999 -- $0.05 million, 2000 -- $0.06 million,
2001 -- $0.06 million, 2002 -- $0.07 million, and $265.2 million thereafter.
NOTE 5. EMPLOYEE BENEFITS
The Company established a 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 annuity contract,
with an insurance company for the provision of a group insurance policy (the
"Policy"). Under the Policy, the insurance provider has undertaken a legal
obligation to provide specified benefits to participants in return for a fixed
premium; accordingly, the Company no longer bears any financial risk. 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. 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.
The Company's pension costs for 1995, 1996 and the nine months ended
September 30, 1997 were $0.05 million, $0.4 million and $0.2 million,
respectively.
NOTE 6. STOCK OPTION PLANS
GTS - HERMES
The Company's parent company, GTS - Hermes, maintained the GTS - Hermes,
Inc. 1994 Stock Option Plan (the GTS - Hermes Plan) for the sole benefit of the
employees of the Company and GTS - Hermes, Inc., through September 30, 1997. As
of September 30, 1997, 12.0 options were outstanding with a weighted average
exercise price of $197,752 and 4.5 of the options were exercisable. The
accounting for the GTS - Hermes Plan resulted in an insignificant amount of
compensation expense in FY 1995, 1996 and the nine months ended September 30,
1997.
F-55
<PAGE> 185
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCK OPTION PLANS (CONTINUED)
HERMES EUROPE RAILTEL B.V.
Subsequent to the third quarter of 1997, the Company finalized the
establishment of a stock option plan (the "Plan"). The maximum number of shares
of common stock available for grant under the Plan is 24,760. The terms and
conditions of the Plan are substantially similar to the existing stock option
plan maintained by the Company's parent, GTS - Hermes as described above. The
Company intends to account for the Plan in accordance with APB No. 25.
During the fourth quarter of 1997, in connection with the adoption of the
Plan, the Company issued 10,166 options in replacement of those outstanding
under the GTS - Hermes Plan as well as additional options to certain employees.
The options that were granted have exercise prices ranging from $83 to $2,888
per share of HER common stock. All options granted vest no later than 3 years
after the grant date; however, 6,244 options will be vested at December 31,
1997. Further, the issuance of these options will result in a non-cash charge of
approximately $3.7 million of which $2.6 million is expected to be recorded
during the fourth quarter and the remaining $1.1 million will be recognized
principally ratably over fiscal 1998.
NOTE 7. INCOME TAXES
The components of loss before income taxes were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ---------------
1994 1995 1996 1997
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Pretax loss:
Domestic (the Netherlands)... $ (95) $ (422) $ (608) $ (209)
Foreign...................... (125) (6,080) (15,361) (15,466)
--------- ------------- --------------- ---------------
$ (220) $ (6,502) $ (15,969) $ (15,675)
========= ============= =============== ===============
</TABLE>
No current income taxes are due, as the Company incurred losses due to the
start-up activities in the Belgian branch and the Company.
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, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.... $ 3,919 $ 11,729 $ 16,700
--------------- --------------- ---------------
Total deferred tax asset................. 3,919 11,729 16,700
Less: valuation allowance.......... (3,919) (11,729) (16,700)
--------------- --------------- ---------------
Total.................................... $ -- $ -- $ --
=============== =============== ===============
</TABLE>
As of September 30, 1997, the Company had net operating loss carryforwards
for Belgian and Dutch income tax purposes of approximately $41.6 million, which
are recoverable from profits for an unlimited period of time,
F-56
<PAGE> 186
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
related to the Recapitalization for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
<S> <C>
Transfer of shareholders' loans to equity............. $ 48,491
Contribution of fiber optic cable lease............... 1,989
Unpaid capital duty tax............................... 591
</TABLE>
There were no significant non-cash activities in 1994, 1995 or 1996.
The Company paid interest of $0.02 million, $0.01 million and $0.7 million
in 1996, 1995 and for the nine months ended September 30, 1997, respectively.
The Company did not pay interest in 1994.
NOTE 9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating lease commitments are primarily for office space and car rental.
The office lease has a term of nine years, expiring on June 30, 2005, with an
option to cancel January 1, 2002 upon the payment of certain penalties. In
addition, the Company received a reduction in annual expense during the first
three years of the lease. This reduction is being amortized over the first six
years of the lease, using a straight-line method. On April 29, 1997, the Company
entered into a lease for a second office building, with annual payments of
0.4 million beginning in October 1997 and expiring on June 30, 2005.
Rental expense aggregated approximately $0.5 million, $0.7 million and $0.7
million for the years ended December 31, 1996 and 1995, and the nine months
ended September 30, 1997, respectively. The Company did not have rent expense in
1994.
Future minimum lease payments under these non-cancelable operating leases
with terms of one year or more, as of September 30, 1997, are as follows:
1998 -- $1.4 million, 1999 -- $1.4 million, 2000 -- $1.2 million, 2001 -- $0.9
million, 2002 -- $0.4 million and $1.0 million thereafter.
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 10. RELATED PARTY TRANSACTIONS
The Company received financing through shareholders' loan transactions
provided by Hit Rail, GTS-Hermes, NMBS, and Swed Carrier. The components of the
Company's shareholders' loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Hit Rail.......................................... $6,425 $13,999
GTS-Hermes........................................ 1,928 20,864
------ -------
Total shareholders' loans.................... $8,353 $34,863
====== =======
</TABLE>
F-57
<PAGE> 187
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
All shareholder loans outstanding were converted into equity prior to
September 30, 1997 (See Note 1, "Nature of Business Operations").
NOTE 11. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company entered into contractual
commitments to lease fiber 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
$98.0 million. The commitments have expected lease terms of three to twenty
years with options for renewal rights of five additional years. As of September
30, 1997, the Company made prepayments of approximately $6.4 million related to
the above leases.
F-58
<PAGE> 188
EXHIBIT A
GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS
Accounting Rate Mechanism (ARM) -- The current system of bilateral
settlement agreements between PTOs under which tariffs for cross-border
pan-European-switched voice traffic are determined.
Add-drop multiplexer (ADM) -- A multiplexer which controls cross connect
between individual circuits by software, permitting dynamic cross connect of
individual 64 kbps circuits within an E-1 line.
AMPS -- Advanced Mobile Phone System; the cellular mobile telephone system
based on analog technology that is now used in U.S. systems. Each AMPS cell can
handle 832 simultaneous conversations.
Asynchronous Transfer Mode (ATM) -- A switching and transmission technology
that is one of general class of packet technologies that relay traffic by way of
an address contained within the first five bits of a 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.
Bps -- Bits per second; the basic measuring unit of speed in a digital
transmission system; the number of bits that a transmission facility can convey
between a sending location and a receiving location in one second.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The information-carrying capability of a transmission medium
is measured by its bandwidth, which is the relative range of frequencies that
can be passed without distortion by such medium. Bandwidth is measured in Hertz,
but may also be expressed as the number of bits that can be transmitted per
second.
Capacity -- Refers to transmission.
Carrier -- A provider of communications transmission services by fiber,
wire, or radio.
CCIT -- International Telegraph and Telephone Consultative Committee.
Closed User Group -- A group of customers with some affiliation with one
another and which are treated for regulatory purposes as not being the public.
Competitive Local Telecommunications Provider -- A company that provides
its customers with an alternative to the local telephone company for local
transport of private line, special access and transport of switched access
telecommunications services. Competitive Local Telecommunications Providers are
also referred to in the industry as alternative local telecommunications service
providers (ALTS), Competitive Access Providers (CAPs) and Competitive Local
Exchange Carriers (CLECs).
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).
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.
E1 -- Data transmission rate of approximately 2 Mbps.
E3 -- Data transmission rate of approximately 34 Mbps.
Electrosviaz -- regional telephone company.
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<PAGE> 189
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.
ERMES -- A standard for a pan-European radio message system sponsored by
the EC.
Eutelsat -- European Telecommunications Satellite Organization; an
international satellite organization in which members of the European Union hold
an 88% combined investment.
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.
Gbps -- Gigabits per second, which is a measurement of speed for digital
signal transmission expressed in billions of bits per second.
Gateway -- A network element interconnecting two otherwise incompatible
networks, network nodes, subnetworks or devices; performs a protocol conversion
operation across a wide spectrum of communications functions.
GSM -- Global System for Mobile Communications, formerly known as Groupe
Speciale Mobile. GSM began as a pan-European standard for digital cellular
systems. The name was changed to reflect the fact that the standard has been
adopted by several countries in Asia.
Hertz -- The unit for measuring the frequency with which an electromagnetic
signal cycles through the zero-value state between lowest and highest states.
One Hz (Hertz) equals one cycle per second. kHz (kilohertz) stands for thousands
of Hertz; MHz (megahertz) stands for millions of Hertz.
Inmarsat -- The International Maritime Satellite service, which provides
mobile communications to ships at sea, aircraft in flight and vehicles on the
road.
Intelsat -- International Telecommunications Satellite Organization; a
worldwide consortium of national satellite communications organizations.
Interconnect -- Connection of a telecommunications device of service to the
PSTN.
Interconnection -- Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
International Simple Resale -- Refers to the wholesale purchase of IPLCs
from facilities-based carriers and the reselling of such capacity to customers
for switched telephone service.
IPLC -- International Private Leased Circuits.
ISDN (Integrated Services Digital Network) -- ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications. ISDN's
combined voice and data networking capabilities reduce costs for end users and
result in more efficient use of available facilities. ISDN combines standards
for highly flexible customer to network signaling with both voice and data
within a common facility.
ITU -- International Telecommunications Union; a United Nations treaty
organization whose purpose is to accredit international telecommunications
standards. ITU signatories can turn ITU-approved standards into law through
international treaties such as the treaties governing use of the radio spectrum
for international satellite telecommunications and broadcasting.
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<PAGE> 190
Kbps -- Kilobits per second, which is a measurement of speed for digital
signal transmission expressed in thousands of bits per second.
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.
Local Loop -- The local loop is that portion of the local telephone network
that connects the customer's premises to the local exchange provider's central
office or switching center. This includes all the facilities starting from the
customer premise interface which connects to the inside wiring and equipment at
the customer premise to a terminating point within the switching wire center.
Mbps -- Megabits per second, which is a measurement of speed for digital
signal transmission expressed in millions of bits per second.
MGTS -- Moscow city telephone network.
Multiplexing -- The use of some means to inter-leave narrow-band or
slow-speed data from multiple sources in order to make use of a wide-band or
high-speed channel.
NMT -- Acronym for Nordic Mobile Telephone System, a cellular standard
widely used in Northern Europe.
Nodes -- Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
PBX/PABX (private branch exchange/private automatic branch exchange) -- A
customer operated switch on customer premises, typically used by large
businesses with multiple telephone lines.
Plesiochronous Digital Hierarchy (PDH) -- A method of controlling the
timing between transmission and switching systems that is not synchronized but
rather relies on highly accurate clocks to minimize the slip rates between
switching nodes.
POCSAG (Postal Office Code Standard Advisory Group) -- A lower-cost paging
technology which can be transmitted on ERMES frequency.
Points of Presence (POPs) -- 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.
PSTN -- Public switched telecommunications network.
PTT/PTO -- Postal, Telegraph and Telephone agency/Public Telephony
Operators; a government authority or agency that operates the public
telecommunications network, and sets standards and policies. PTTs/PTOs are
agencies in charge of telecommunications services in many countries, under
direct supervision of the national government.
Redundant Electronics -- Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.
Regeneration/amplifier -- Devices which automatically re-transmit or boost
signals on an out-bound circuit.
Route Kilometers -- The number of kilometers along which fiber optic cables
are installed.
Route Mile -- The number of miles along which fiber optic cables are
installed.
SDH -- Synchronous Digital Hierarchy; the international standard for
ultra-high-speed broadband fiber-optic, digital transmission networks that use
equipment from many different manufacturers and carry a variety
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<PAGE> 191
of services. The basic communications channel of SDH is a 155.52 Mbps
transmission channel that is multiplexed upward.
STM-1 -- Data transmission rate of approximately 155 Mbps.
STM-4 -- Data transmission rate of approximately 622 Mbps.
STM-16 -- Data transmission of approximately 2,488 Mbps.
STM-64 -- Data transmission rate of approximately 9,952 Mbps.
Switch -- A mechanical or electronic device that opens or closes circuits
or selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users.
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.
TCP/IP -- Transmission Control Protocol/Internet Protocol; an "open"
standard operating and interface protocol for federal government local area
networks that use devices from multiple vendors. TCP/IP, first developed by the
U.S. Defense Department, has been adopted by some academic and business
institutions who deal regularly with the federal government.
Trunk -- A telephone circuit with a switch at both ends. A trunk may
connect two central office switches, or two PBXs, or a PBX and a central office
switch.
VSAT -- Very Small Aperture Terminal; a satellite communications technology
that employs frequencies in the Ku band or C band and very small receiving
dishes. VSAT systems employ satellite transponders; the receiving dishes may be
leased or owned by the VSAT user.
Wavelength Division Multiplexing (WDM) -- A multiplexing technique allowing
multiple different signals to be carried simultaneously on a fiber by allocating
resources according to frequency on non-overlapping frequency bands.
X.25 -- A CCITT standard governing the interface between data terminals and
data circuit termination equipment for terminals on packet-switched data
networks.
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<PAGE> 192
EXHIBIT B
SUPPLEMENTAL EASDAQ INFORMATION
APPROVAL BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE
This Prospectus has been approved by the Belgian Banking and Finance
Commission ("Commissie voor bet Banken Financiewezen/Commission Bancaire et
Financiere") ("BFC") on January 27, 1998 in accordance with Article 29ter.
sec. 1. par.1 of Royal Decree No. 185 of July 9, 1935 and Article 11 of the
Royal Degree of 31 October, 1991 on the publication of prospectuses in
connection with public issues of securities. The approval of this Prospectus by
the BFC does not imply any judgement as to the appropriateness of the quality of
this Offering or the Offer Shares nor of the situation of the Company. The
notice prescribed by Article 29, sec. 1 of the Royal Decree No. 185 will appear
in the financial press on or prior to Februry 4, 1998.
On December 22, 1997, an application was made for the admission of the
Common Stock to trading on EASDAQ under the symbol "GTSG." Admission to EASDAQ
is subject to certain adequacy and liquidity requirements determined by the
EASDAQ Market Authority. Companies applying for admission to trading on EASDAQ
are required to publish relevant financial and other information regularly and
to keep the public informed of all events likely to affect the market price of
their securities. Price sensitive information is made available to investors in
Europe through the EASDAQ Reuters Regulatory Company Reporting System and
international information vendors.
The documents referred to above will also be made available to Belgian
investors upon prior written request addressed to the principal executive office
of the Company.
PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION
The Company, represented by Mr. William H. Seippel, Chief Financial
Officer, takes responsibility for the contents of this Prospectus.
The Company, having made all reasonable inquiries, accepts responsibility
for, and confirms that this Prospectus contains all information with regard to
the Company and the Common Stock that is material in the context of the offering
and sale of the Common Stock, that the information contained in this Prospectus
is true and correct in all material respects and is not misleading, that the
opinions and intentions of the Company expressed herein are honestly held and
that there are no other facts the omission of which makes this Prospectus as a
whole or any of such information or the expression of any such opinions or
intentions materially misleading.
Global TeleSystems Group, Inc.
by William H. Seippel
Chief Financial Officer
THE CLEARING SYSTEMS
INTERSETTLE
Transactions executed on EASDAQ will be settled by delivery through
INTERSETTLE. INTERSETTLE holds securities for its direct participants, which
include banks, securities brokers and dealers, other professional intermediaries
and foreign depositories, and facilitates the clearance and settlement of
securities transactions between INTERSETTLE participants through electronic
book-entry changes in the accounts of INTERSETTLE participants. Book-entry
settlement is mandatory for all financial instruments traded on EASDAQ. Physical
certificates cannot be used to settle a market transaction. Investors must hold
a securities account with a financial institution which directly or indirectly
has access to INTERSETTLE's clearing and settlement system. INTERSETTLE conducts
a real-time gross payment system in connection with its clearance operation,
payments being made simultaneously with the book-entry transfers between
securities accounts.
B-1
<PAGE> 193
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organization, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. DTC
agrees with and represents to its participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law.
TRANSFERS BETWEEN INTERSETTLE AND DTC PARTICIPANTS
Common Stock will be held through DTC. Common Stock held directly or
indirectly by INTERSETTLE participants will be registered on the books of DTC in
the name of the nominee company of Brown Brothers Harriman, acting as custodian
for INTERSETTLE.
Transfers of Common Stock will be effected in the following manner:
(i) transfers of Common Stock between INTERSETTLE participants will be
effected in accordance with procedures established for this purpose by
INTERSETTLE;
(ii) transfer of Common Stock between DTC participants will be effected in
accordance with procedures established for the purpose by DTC; and
(iii) transfers of Common Stock between INTERSETTLE participants and DTC
participants will be effected by an increase or a reduction of the
quantity of Common Stock held in INTERSETTLE's account at
.
Investors should inquire with the financial intermediary with whom the
investor has opened a securities account for the purpose of holding and trading
Common Stock, as to the cost of such trading as well as the terms and conditions
on which the financial service of the Common Stock will be delivered by such
financial intermediary.
The Common Stock has the following identification number:
.
The clearing costs, if any, will be at the cost of the investors. Investors
are requested to inform themselves about such costs.
POSSIBILITY OF SHARE REPURCHASES
The Company is not prohibited by its Certificate of Incorporation, By-laws
or Delaware General Corporation Law from repurchasing or otherwise acquiring
outstanding shares of Common Stock and, accordingly, the Company may exercise
its right to repurchase Common Stock.
AUTHORIZATION OF INCREASE IN AUTHORIZED CAPITAL OF THE COMPANY; AUTHORIZATION OF
THE ISSUANCE OF COMMON STOCK IN THE STOCK OFFERINGS
Effective December 1, 1997, the Board of Directors and stockholders of the
Company approved amendments to the Certificate of Incorporation which (i)
increased the authorized number of shares of capital stock to 145,000,000 (of
which 135,000,000 shares are Common Stock and 10,000,000 shares are preferred
stock) and (ii) effected a 3-for-2 stock split of all then-outstanding shares of
the Company's Common Stock. In addition, the Board of Directors of the Company
has adopted a resolution approving the offering and issuance of 11,100,000
shares of Common Stock in the Stock Offerings.
B-2
<PAGE> 194
TAXATION OF BELGIAN INVESTORS
The following generally summarizes the material Belgian tax consequences of
the sequisition, ownership and disposition of Common Stock. It is based on the
tax laws applicable in Belgium and France as in effect at the date of this
Prospectus, and is subject to changes in Belgium and French law, including
changes that could have retroactive effect. The following summary does not take
into account or discuss the tax laws of any country other than Belgium and
France nor does it take into account the individual circumstances of each
investor. The summary uses the term "Eligible Belgian Holders" to refer to
beneficial owners of Common Stock who hold directly less than 10% of the share
capital of the Company and whose ownership of such Common Stock is not
attributable to a permanent establishment or a fixed base in France, are
considered residents of Belgium for purposes of the income tax convention
between Belgium and France dated March 10, 1964 (the "Belgian-French Treaty")
and are fully entitled to benefits under the Belgian-French Treaty.
There are currently no procedures available for Holders of Common Stock
that are not U.S. residents to claim or receive from the French tax authorities
any tax treaty benefits in respect of dividends (including payment of avoir
fiscal and availability of a reduced withholding tax rate) that a Holder may be
entitled to receive pursuant to the Belgian-French Treaty.
Prospective Belgian Investors in Common Stock are advised to consult their
own tax advisers as to the Belgian and other tax consequences of the
acquisition, ownership and disposition of Common Stock.
TAXATION OF DIVIDENDS ON COMMON STOCK
French tax considerations
Dividends paid to non-residents of France generally are subject to French
withholding tax at a 25% rate and are not eligible for the benefit of the avoir
fiscal (a tax credit available to French residents equal to 50% of the amount of
dividends received from French companies such as the Company). However, under
the Belgian-French Treaty, Eligible Belgian Holders can claim the benefit of a
reduced withholding tax rate on dividends of 15%.
An individual Eligible Belgian Holder generally will also be entitled to
receive a payment of the avoir fiscal, after deduction of withholding tax of
15%. This payment will not be made available to such individual Eligible Belgian
Holder until after the close of the calendar year in which the dividend was paid
and only upon receipt by the French tax authorities of a claim made by the
individual Eligible Belgian Holder for such payment in accordance with the
procedure set forth below.
A Belgian company that is an Eligible Belgian Holder under the
Belgian-French Treaty (a "Belgian Resident Company") will not benefit from the
refund of the avoir fiscal but will be entitled to obtain from the French tax
authorities a refund of any precompte paid in cash in respect of such dividends
less the 15% French withholding tax. Amounts distributed as dividends by French
companies out of profits which have been taxed at the ordinary corporate income
tax rate or which have been earned and taxed more than five years before the
distribution and which give rise to the avoir fiscal are subject to a
"precompte" or prepayment by such companies. The precompte is paid by the
distributing company to the French tax authorities and is equal to one-half of
the nominal dividend distributed.
Dividends paid to an individual Eligible Belgian Holder will be subject to
the reduced withholding tax rate of 15% at the time the dividend is paid if (i)
such holder duly completes and provides the French tax authorities with French
Treasury Form 5200 RFI Belgique (the "Form") duly certified by the Belgian tax
authorities before the date of payment of the relevant dividend, or (ii) if
completion of the Form is not possible prior to the payment of dividends, such
holder duly completes and provides the French tax authorities with a simplified
certificate (the "Certificate") duly certified by the Belgian tax authorities
stating that (a) such holder is a Belgian resident as defined pursuant to the
provisions of the Belgian-French Treaty, (b) such holder's ownership of the
Common Stock is not effectively connected with a permanent establishment or
fixed base in France, and (c) such holder meets all the requirements of the
Belgian-French Treaty for obtaining the benefit of the reduced rate of
withholding tax and the right to payment of the French avoir fiscal. For
example, the Company pays a dividend of 100, an individual Eligible Belgian
Holder will initially receive
B-3
<PAGE> 195
85, but will be entitled to an additional payment of 42.50, consisting of the
avoir fiscal of 50, less a 15% withholding tax on that amount (equal to 7.5).
Dividends paid to an individual Eligible Belgian Holder that has not filed a
completed Form or Certificate before the dividend payment date will be subject
to French withholding tax at the rate of 25%. Such a holder may claim a refund
of the excess withholding tax and the avoir fiscal by completing and providing
the French tax authorities with the Form before December 31st of the calendar
year following the year during which the dividend is paid.
Dividends paid to a Belgian Resident Company will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if such holder duly
completes and provides the French tax authorities with French Treasury 5207 RF2
Belgique form before the date of payment of the relevant dividend duly certified
by the Belgian tax authorities. Dividends paid to such Belgian Resident Company
that has not filed a completed form before the dividend payment date will be
subject to French withholding tax at the rate of 25%. Such a holder may claim a
refund of the excess withholding tax by completing and providing the French tax
authorities with such 5207 RF2 Belgique form before December 31st of the
calendar year following the year during which the dividend is paid. The claim
for refund of the precompte is made on the form RF 5207 RF2 Belgique referred to
above.
Belgian withholding tax
Dividends distributed on Common Stock are subject in Belgium to a
withholding tax at the rate of 25%, when paid or attributed through a
professional intermediary in Belgium. However, no dividend withholding tax is
due if the Eligible Belgian Holder is a company subject to Belgian corporate
income tax.
In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle, due.
However, where the Eligible Belgian Holder is a Belgian resident entity subject
to the legal entities tax (e.g. a pension fund), the Holder itself has to pay
the dividend withholding tax at the rate of 25%.
In certain cases the above-mentioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies in particular to (i) dividends
distributed on shares publicly issued after January 1, 1994 and (ii) dividends
distributed on shares that have been privately issued after January 1, 1994 in
exchange for cash contributions, provided the shares are registered or bearer
shares placed in open custody to a financial institution in Belgium as of the
date of their issuance. This reduced rate should in principle also apply to
dividends on shares issued by the Company. The Company may however irrevocably
reject the application of the reduced withholding tax rate.
Income tax for Belgian resident individuals
In the hands of an Eligible Belgian Holder who is an individual holding
Common Stock as a private investment, the Belgian dividend withholding tax is a
final tax and the dividends need not be reported in the individual's annual
income tax return. If no withholding tax has been levied (i.e. in case of
payment or attribution outside Belgium), the individual has to report the
dividends in his tax return. Such Holder will be taxed at the separate rate of
25%, to be increased with a municipal surcharge (varying, as a rule, from 6% to
9%).
In the hands of an individual Eligible Belgian Holder whose holding of
Common Stock is effectively connected with a business, the dividends are taxable
at the ordinary rates for business income (i.e. varying from 25% to 55% to be
increased with the municipal surcharge and a crisis contribution of 3% of the
tax due). Any Belgium withholding tax is creditable against the final income tax
due, provided that the Holder has the full ownership of the Common Stock at the
time of payment of the dividends.
Income tax for Belgian Resident Companies
Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40.17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due).
B-4
<PAGE> 196
However, provided that the dividends benefit from the so-called
"dividend-received deduction", only 5% of the dividends received will be
taxable. In order to benefit from the deduction, the Company must not fall
within one of the categories which are expressly excluded from the "dividend
received deduction" (e.g. tax haven companies) and the beneficiary should hold,
at the time of payment of the dividends, a participation of at least 5% in the
Company or a participation which has a acquisition value of at least BEF 50
million.
Any Belgian dividend withholding tax can, in principle, be credited against
the company's final income tax, provided that the company has the full ownership
of the shares at the time of payment or attribution of the dividends and
provided that the dividend distribution does not entail a reduction in value or
capital loss on the Shares.
Income tax for Belgian resident entities subject to the Belgian legal entities
tax (pension funds, etc.)
The Belgian dividend withholding tax is a final tax.
CAPITAL GAINS TAXATION
French tax considerations
In general, a Belgian holder who is a resident of Belgium under the
Belgian-French Treaty will not be subject to French tax on any capital gain
derived from the sale or exchange of Common Stock, unless the gain is
attributable to a permanent establishment or fixed place of business maintained
by the holder in France.
Belgian tax considerations
Individual Eligible Belgian Holders holding the Common Stock as a private
investment and entities subject to legal entities tax are not subject to the
Belgian capital gains taxation on the disposal of the Common Stock.
Individual Eligible Belgian Holders may, however, be subject to a 33% tax
(to be increased with the municipal surcharge and the crisis contribution) if
the capital gain is deemed to be "speculative."
Individual Eligible Belgian Holders whose holding of Common Stock is
effectively connected with a business are taxable at the ordinary rates on any
capital gains realized on the disposal of Common Stock.
Belgian resident companies are not subject to capital gains taxation
provided that the dividends received on the shares qualify for the "dividend
received deduction" (except for the minimum holding requirement).
FRENCH ESTATE AND GIFT TAX
Under the estate tax convention between Belgium and France, a transfer of
Common Stock by reason of the death of an individual Eligible Belgian Holder
entitled to benefits under that convention will not be subject to French
inheritance tax, unless the decedent was domiciled in France at the time of his
or her death.
With respect to French gift tax, reference is made to "French
Taxation -- Estate and Gift Tax" in this Prospectus.
FRENCH WEALTH TAX
The French wealth tax (impot de solidare sur la fortune) does not apply to
an Eligible Belgian Holder.
BELGIAN INDIRECT TAXES
Stamp tax on securities transactions
In principle, a stamp tax is levied upon the subscription of shares of
Common Stock and the purchase and sale in Belgium of Common Stock through a
professional intermediary. The rate applicable to subscriptions of new shares of
Common Stock is 0.35% but there is a limit of BEF 10,000 per transaction. The
rate applicable for secondary sales and purchases in Belgium of Common Stock
through a professional intermediary is 0.17% but there is a limit of BEF 10,000
per transaction.
B-5
<PAGE> 197
An exemption is available to professional intermediaries (e.g. credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident holder of Common
Stock who is acting for his own account will also be entitled to an exemption
from this stamp tax, provided that he delivers to the issuer or the professional
intermediary in Belgium, as the case may be, an affidavit confirming his
non-resident status in Belgium.
Tax on delivery of bearer securities
A tax is levied upon the physical delivery of Common Stock pursuant to
their subscription or their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of Common Stock pursuant to
a withdrawal of these Common Stock from "open custody."
The tax is due, at the rate of 0.2%, on the sums payable by the subscriber
or the acquiror in case of subscription or acquisition or the sales value of the
Common Stock, as estimated by the custodian in case of withdrawal from "open
custody."
However, an exemption is available for deliveries to recognized
professional intermediaries (such as credit institutions) acting for their own
account. An exemption is also available for delivery of Common Stock, which are
held in "open custody", to a non-resident.
B-6
<PAGE> 198
[MAP OF EUROPE]
<PAGE> 199
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDER-WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK 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 SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 10
Use of Proceeds........................ 25
Dividend Policy........................ 25
Dilution............................... 26
Capitalization......................... 27
Selected Historical Consolidated
Financial Data....................... 28
Supplemental Information -- Selected
Historical Financial Data............ 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 30
Business............................... 42
Management............................. 89
Executive Compensation and Other
Information.......................... 92
Certain Related Party Transactions..... 101
Principal Stockholders................. 104
Description of Certain Indebtedness.... 106
Description of Capital Stock........... 110
Shares Eligible for Future Sale........ 116
Certain United States Federal Tax
Consequences to Non-U.S.
Stockholders......................... 117
Underwriting........................... 120
Legal Matters.......................... 122
Experts................................ 123
Index to Financial Statements.......... F-1
Exhibit A -- Glossary of
Telecommunications Industry Terms.... A-1
Exhibit B -- Supplemental EASDAQ
Information.......................... B-1
</TABLE>
-----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
11,100,000 SHARES
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
LEHMAN BROTHERS
FURMAN SELZ
, 1998
======================================================
<PAGE> 200
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 3, 1998
PROSPECTUS
11,100,000 SHARES
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
---------------------
All of the shares of Common Stock, par value $.10 per share (the "Common
Stock"), offered hereby are being offered by Global TeleSystems Group, Inc. (the
"Company"). Of the 11,100,000 shares of Common Stock offered hereby, 2,220,000
shares are being offered outside the United States and Canada (the
"International Offering") and 8,880,000 shares are being offered in the United
States and Canada (the "U.S. Offering" and, together with the International
Offering, the "Stock Offerings"). The initial offering price per share and the
underwriting discount per share will be identical for both Stock Offerings. See
"Underwriting."
The Company has also filed a registration statement with respect to the
offering of $100 million of Senior Notes due 2005 (the "Notes"), and such
offering (the "Notes Offering" and, together with the Stock Offerings, the
"Offerings") will be made by a separate prospectus. Consummation of both the
Notes Offering and the Stock Offerings are conditioned upon the consummation of
the other.
Prior to the Stock Offerings, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price per
share of Common Stock will be between $17.00 and $19.00. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "GTSG." The
European Association of Securities Dealers Automated Quotation ("EASDAQ") Market
authority has approved an application for admission to trading on EASDAQ of the
Common Stock under the symbol "GTSG." Prior to the Stock Offerings, there has
been no public market for the shares of Common Stock on EASDAQ, and there can be
no assurance that any such market will develop after the closing of the Stock
Offerings or that, if developed, it will be sustained.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters (as defined
herein) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,014,000.
(3) The Company has granted to the International Managers (as defined herein)
and the U.S. Underwriters (as defined herein) options, exercisable within 30
days of the date hereof, to purchase up to an additional 333,000 and
1,332,000 additional shares of Common Stock, respectively, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
---------------------
MERRILL LYNCH & CO. IS THE BOOKRUNNER OF THE STOCK OFFERINGS.
---------------------
<TABLE>
<S> <C>
GLOBAL COORDINATOR CO-GLOBAL COORDINATOR
MERRILL LYNCH & CO. UBS SECURITIES
</TABLE>
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
---------------------
MERRILL LYNCH INTERNATIONAL UBS LIMITED
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
LEHMAN BROTHERS
ING BARINGS
---------------------
The date of this Prospectus is , 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 201
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
UNDERWRITING
Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement") among the Company and each of
the underwriters named below (the "International Managers") and concurrently
with the sale of 8,880,000 shares of Common Stock to the U.S. Underwriters (as
defined below), the Company has agreed to sell to each of the International
Managers, and each of the International Managers for whom Merrill Lynch
International ("Merrill Lynch"), UBS Limited, Donaldson, Lufkin & Jenrette
International, Lehman Brothers International (Europe) and Baring Brothers
Limited (as agent for ING Bank N.V.) are acting as representatives (the
"International Representatives"), has severally agreed to purchase from the
Company, the number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Merrill Lynch International.................................
UBS Limited ................................................
Donaldson, Lufkin & Jenrette International .................
Lehman Brothers International (Europe) .....................
Baring Brothers Limited (as agent for ING Bank N.V.) .......
---------
Total.......................................... 2,220,000
=========
</TABLE>
The Company has also entered into a U.S. purchase agreement (the "U.S.
purchase agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, UBS Securities LLC, Lehman
Brothers Inc. and Furman Selz LLC are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 2,220,000 shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase, an aggregate of 8,880,000 shares
of Common Stock. The initial public offering price per share and the
underwriting discount per share of Common Stock are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
In each Purchase Agreement, the several International Managers and the
several U.S. Underwriters, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
The Company has appointed Merrill Lynch & Co. as Global Coordinator and UBS
Securities LLC as Co-Global Coordinator of the Stock Offerings. Merrill Lynch &
Co. is the bookrunner of the Stock Offerings.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price set forth on the cover page of this Prospectus, less an amount not greater
than the selling concession. Under the terms of the Intersyndicate Agreement,
the U.S. Underwriters and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, and the International Managers
and any dealer to whom they sell shares of Common Stock will not offer to sell
or sell shares of Common Stock to U.S. persons or Canadian persons or to persons
they believe intend to resell to
<PAGE> 202
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
U.S. persons or Canadian persons, except, in each case, for transactions
pursuant to the Intersyndicate Agreement.
The International Representatives have advised the Company that the
International Managers propose initially to offer the shares of Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share of Common Stock. The International Managers may
allow, and such dealers may allow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock, or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 180
days after the date of this Prospectus. In addition, certain stockholders have
agreed not to make any demand for or exercise any rights with respect to the
registration of Common Stock and have waived all rights (including demand and
"piggyback" registration rights) to register securities owned by them for such
180 day period and rights to purchase additional shares of Common Stock in
connection with the Offerings. See "Shares Eligible for Future Sale."
The Company has granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 333,000 additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. The
Company has also granted an option to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an additional
1,332,000 shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to International Managers.
Prior to the Stock Offerings, there has been no public market for the
Common Stock. The initial public offering price for the Common Stock has been
determined through negotiations between the Company and the U.S.
Representatives. Among the factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are the financial
and operating history and condition of the Company, an assessment of the
Company's business and financial prospects, the Company's management, the
prospects for the industry in which the Company operates and the recent market
prices of securities of companies in industries similar to that of the Company.
The initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the offering made hereby at or above the initial public
offering price.
The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Stock Offerings, (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus), the
<PAGE> 203
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
U.S. Representatives may reduce that short position by purchasing Common Stock
in the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
Neither the Company nor any of the U.S. Underwriters makes any
representation or prediction, however, as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transaction or that
such transactions, once commenced, will not be discontinued without notice.
Each International Manager agrees that (a) it has not offered or sold and,
for a period of six months following consummation of the Stock Offerings, will
not offer or sell any shares of Common Stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute an offer
to the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (b) it has complied with and will comply with all
applicable provisions of the Public Offers of Securities Regulations 1995 and
the Financial Services Act 1986 with respect to anything done by it in relation
to the Common Stock in, from, or otherwise involving the United Kingdom and (c)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue or sale of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or to a person to whom the document may otherwise lawfully be issued or passed
on.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance under the symbol "GTSG."
Application has been made for the admission of the Common Stock to EASDAQ under
the symbol "GTSG."
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch and UBS
Securities LLC are the underwriters of the Notes Offering.
Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1995 and September 30, 1997, and for each of the three
years in the period ended December 31, 1996 and the nine months ended September
30, 1997, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young, LLP, independent auditors, as set forth in their
report appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of EDN Sovintel as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration
<PAGE> 204
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
Statement, have been audited by Ernst & Young (CIS) Ltd., independent auditors
as set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Hermes Europe Railtel B.V. as of
December 31, 1996 and 1995 and September 30, 1997, and for each of the three
years in the period ended December 31, 1996 and the nine months ended September
30, 1997, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young Reviseurs d'Entreprises S.C.C., independent auditors,
as set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
<PAGE> 205
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE (CONTINUED)
EXECUTIVE OFFICE OF THE COMPANY
GLOBAL TELESYSTEMS GROUP, INC.
1751 Pinnacle Drive
McLean, Virginia 22102
INDEPENDENT AUDITORS
ERNST & YOUNG, LLP
1225 Connecticut Ave., NW
Washington, D.C. 20036
LEGAL ADVISERS
to the Company
SHEARMAN & STERLING
599 Lexington Avenue
New York, New York 10022-6069
as to CIS law
COUDERT BROTHERS
1627 I Street, N.W.
Washington, D.C. 20006
to the Underwriters
CAHILL GORDON & REINDEL
80 Pine Street
New York, New York 10005
REGISTRAR AND PRINCIPAL PAYING AND TRANSFER AGENT
THE BANK OF NEW YORK
One Wall Street
New York, New York 10286
<PAGE> 206
INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK 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 SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 10
Use of Proceeds........................ 25
Dividend Policy........................ 25
Dilution............................... 26
Capitalization......................... 27
Selected Historical Consolidated
Financial Data....................... 28
Supplemental Information -- Selected
Historical Financial Data............ 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 30
Business............................... 42
Management............................. 89
Executive Compensation and Other
Information.......................... 92
Certain Related Party Transactions..... 101
Principal Stockholders................. 104
Description of Certain Indebtedness.... 106
Description of Capital Stock........... 110
Shares Eligible for Future Sale........ 116
Certain United States Federal Tax
Consequences to Non-U.S.
Stockholders......................... 117
Underwriting........................... 120
Legal Matters.......................... 122
Experts................................ 123
Index to Financial Statements.......... F-1
Exhibit A -- Glossary of
Telecommunications Industry Terms.... A-1
Exhibit B -- Supplemental EASDAQ
Information.......................... B-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
11,100,000 SHARES
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH INTERNATIONAL
UBS LIMITED
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
LEHMAN BROTHERS
ING BARINGS
, 1998
======================================================
<PAGE> 207
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, to be borne by the Company in connection
with the offering of the securities being hereby registered.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
SEC Registration Fee........................................ $ 70,000
NASD Filing Fee............................................. 23,500
Nasdaq National Market Listing Fee.......................... 49,000
Blue Sky Fees and Expenses.................................. 10,000
Transfer Agent and Registrar Fees........................... 10,000
Accounting Fees and Expenses................................ 200,000
Legal Fees and Expenses..................................... 200,000
Printing and Mailing Expenses............................... 350,000
Miscellaneous............................................... 101,500
----------
TOTAL............................................. $1,014,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company's Directors shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a
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<PAGE> 208
director provided, however, that such exculpation from liabilities is not
permitted with respect to liability arising from items described in clauses (i)
through (iv) in the preceding paragraph. The Certificate and the Company's
By-Laws further provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL.
The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The foregoing reflects a 3-for-2 common stock split and an increase in the
par value per share of common stock to $0.10 effective December 1997.
Within the past three years the Company issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:
On March 13, 1995, the Company issued 400,000 shares of common stock, par
value $0.10 per share, pursuant to a stock purchase agreement. The shares were
issued to CIBV Liquidating B.V., a closed company with limited liability
organized under the laws of the Netherlands in exchange for the Company's
interest in PrimTelefone. No underwriter or underwriting discount was involved
in the offering. Exemption from registration was claimed under Section 4(2) of
the Securities Act regarding transactions by an issuer not involving any public
offering.
On June 21, 1995, the Company issued 5,090,876 shares of common stock, par
value $0.10 per share, at a purchase price of $9.00 per share, for an aggregate
offering price of $45.8 million, pursuant to a stock purchase agreement. In
addition to (i) certain investment funds and (ii) certain individual private
investors, these shares were issued to certain members of management and various
entities affiliated with certain members of management. No underwriter or
underwriting discount was involved in the offering. Exemption from registration
was claimed under Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering.
On January 19, 1996, and June 6, 1996, the Company granted affiliates of
George Soros an aggregate of 4,444,443 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $10.27
per share. The exercise price of the warrants was automatically reduced to $9.33
per share as of December 31, 1996 because the debt obligations remained
outstanding. The warrants were issued in connection with the Company's issuance
for cash of $40 million of notes to affiliates of George Soros, which notes bear
interest at a rate of 10% per annum and mature on March 3, 2001. No underwriter
or underwriting discount was involved in the offering. Exemption from
registration was claimed under Section 4(2) of the Securities Act regarding
transactions by an issuer not involving any public offering.
On February 2, 1996, the Company granted affiliates of Capital Research
International an aggregate of 3,333,333 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $10.27
per share. The exercise price of the warrants was automatically reduced to $9.33
per share as of December 31, 1996 because the debt obligations remained
outstanding. The warrants were issued in connection with the Company's issuance
for cash of $30 million of notes to affiliates of Capital Research
International, which notes bear interest at a rate of 10% per annum and mature
on March 31, 2001. No underwriter or underwriting discount was involved in the
offering. Exemption from registration was claimed under Section 4(2) of the
Securities Act regarding transactions by an issuer not involving any public
offering.
On July 23, 1996, July 31, 1996, August 8, 1996, August 22, 1996 and
September 12, 1996 the Company issued an aggregate of 8,348,532 shares of common
stock, par value $0.10 per share, at a purchase price of $13.33 per share, for
an aggregate offering price of $111 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.
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<PAGE> 209
On July 14, 1997 and July 31, 1997, the Company issued an aggregate
$141,295,000 of its Senior Subordinated Convertible Bonds due 2000, convertible
into the common stock, par value $0.10 per share, at a purchase price of 100%,
pursuant to a subscription agreement. UBS Securities LLC, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch & Co. acted as managers in the
offering and the aggregate discount was $5,651,800. The securities were sold to
a limited number of qualified institutional buyers as defined in Rule 144A under
the Securities Act and to non-U.S. persons outside the United States. Exemption
from registration was claimed under Rule 144A and Regulation S of the Securities
Act.
On August 15, 1997, August 29, 1997 and September 5, 1997, the Company
issued an aggregate 2,502,686 shares of common stock, par value $0.10 per share,
at a purchase price of $15.67 per share, for an aggregate offering price of
$39.2 million, pursuant to a stock purchase agreement. In addition to (i)
certain investment funds and (ii) certain individual private investors, these
shares were issued to certain members of management and various entities
affiliated with certain members of management. Exemption from registration was
claimed under Section 4(2) of the Securities Act regarding transactions by an
issuer not involving any public offering.
On August 29, 1997, the Company issued $3.5 million of its Senior
Subordinated Convertible Bonds due 2000, convertible into the common stock, par
value $0.10 per share, at a purchase price of 100%. In addition to (i) certain
investment funds and (ii) certain individual private investors, these shares
were issued to certain members of management and various entities affiliated
with certain members of management. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.
ITEM 16. EXHIBITS
(a) Exhibits:
The following is a list of exhibits filed as a part of this registration
statement.
<TABLE>
<CAPTION>
<C> <C> <S>
1.1* -- Form of U.S. Purchase Agreement
1.2* -- Form of International Purchase Agreement
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed with
the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of Incorporation
of SFMT, Inc., filed with the Delaware Secretary of State on
January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of Incorporation
of SFMT, Inc., filed with the Delaware Secretary of State on
February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of Incorporation
of Global TeleSystems Group, Inc., filed with the Delaware
Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of Incorporation
of Global TeleSystems Group, Inc., filed with the Delaware
Secretary of State on December 1, 1997
3.9* -- Form of Amended and Restated By-laws of Global TeleSystems
Group, Inc. (supersedes By-laws of SFMT, Inc. filed as
Exhibit 3.7)
4.1* -- Form of Specimen Stock Certificate for Common Stock of the
Registrant
4.2** -- Indenture dated as of July 14, 1997 between the Company and
The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes Europe
Railtel B.V. and The Bank of New York (including the form of
11 1/2% Senior Note due 2007 as an exhibit thereto)
</TABLE>
II-3
<PAGE> 210
<TABLE>
<CAPTION>
<C> <C> <S>
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin &
Jenrette Securities Corporation, UBS Securities LLC, and
Lehman Brothers, Inc.
4.6* -- Form of Rights Agreement between Global TeleSystems Group,
Inc. and The Bank of New York, as Rights Agent
5.1* -- Form of Opinion of Shearman & Sterling respecting the Common
Stock registered hereby
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society Institute
and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5*** -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between Global
TeleSystems Group, Inc., The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996 (see
Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 25, 1996
</TABLE>
II-4
<PAGE> 211
<TABLE>
<CAPTION>
<C> <C> <S>
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated December 30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated May 13, 1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 20, 1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 11, 1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 21, 1997
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated August 14, 1997
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 29, 1997
10.9** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets Growth
Fund, Inc.
10.11*** -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Capital
International Emerging Markets Funds
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds
10.14** -- Global TeleSystems Group, Inc. Non-Employee Directors' Stock
Option Plan
10.15** -- GTS-Hermes, Inc. 1994 Stock Option Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1, 1995
10.17** -- Employment Agreement dated as of January 1995 between SFMT,
Inc. and Jan Loeber
10.18** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Louis Toth
10.19** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Gerald W. Thames
10.20** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Raymond J. Marks
10.21** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Henry Radzikowski
10.22** -- SFMT, Inc. Equity Compensation Plan
10.23** -- Form of Non-Statutory Stock Option Agreement
10.24** -- Amended and Restated 1992 Stock Option Plan of Global
TeleSystems Group Inc. dated as of January 16, 1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
</TABLE>
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<PAGE> 212
<TABLE>
<CAPTION>
<C> <C> <S>
10.26** -- Agreement on the Creation and Functions of the Joint Venture
of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global Telesystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of Commercial
Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint Venture
Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and Erik
Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB Swed
Carrier (incorporated by reference to Exhibit 10.1 to the
Hermes Europe Railtel B.V.'s Registration Statement on Form
S-4 (File No. 333-37719) filed on December 11, 1997)
(supersedes the Amended and Restated Shareholders' Agreement
filed as Exhibit 10.31 to this Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23, 1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc., and
Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability Company
between SFMT-Czech, Inc. and B&H s.r.o., dated July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and SSTIC,
dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications Technology
Co., Ltd, amended, by and between China International Travel
Service Telecom Co., Ltd. and American China Investment
Corporation, dated March 27, 1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc., dated
March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and Cesia
S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B. Slifka,
dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group, Inc.
and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
11.1** -- Statement regarding computation of per share earnings
21.1** -- List of Subsidiaries of the Registrant
23.1* -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1)
23.2* -- Consent of Ernst & Young LLP, Ernst & Young (CIS) Ltd., and
Ernst & Young Reviseurs d'Entreprises S.C.C.
23.3** -- Report of Ernst & Young LLP
24.1** -- Powers of Attorney (included on signature page to this
registration statement)
27.1** -- Financial Data Schedule extracted from 12/31/96 audited
financial statements
27.2** -- Financial Data Schedule extracted from 9/30/97 audited
financial statements
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
II-6
<PAGE> 213
(b) Financial Statements and Schedules:
(1) Financial Statements
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 Company has furnished Schedule II -- Valuation and Qualifying Accounts
on page S-1 of the Registration Statement. The other 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 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised 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 by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the forms of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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 to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-7
<PAGE> 214
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, Commonwealth of Virginia, on this 2nd day of
February, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ GRIER C. RACLIN
----------------------------------
Name: Grier C. Raclin
Title: Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated on the 2nd day of February, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD W. THAMES* President, Chief Executive Officer February 2, 1998
- ----------------------------------------------------- and Director (principal
Gerald W. Thames executive officer)
/s/ WILLIAM H. SEIPPEL Executive Vice President of February 2, 1998
- ----------------------------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)
/s/ ALAN B. SLIFKA* Chairman of the Board of Directors February 2, 1998
- -----------------------------------------------------
Alan B. Slifka
/s/ GARY GLADSTEIN* Director February 2, 1998
- -----------------------------------------------------
Gary Gladstein
/s/ MICHAEL GREELEY* Director February 2, 1998
- -----------------------------------------------------
Michael Greeley
/s/ BERNARD MCFADDEN* Director February 2, 1998
- -----------------------------------------------------
Bernard McFadden
</TABLE>
II-8
<PAGE> 215
<TABLE>
<C> <S> <C>
/s/ STEWART J. PAPERIN* Director February 2, 1998
- -----------------------------------------------------
Stewart J. Paperin
/s/ W. JAMES PEET* Director February 2, 1998
- -----------------------------------------------------
W. James Peet
/s/ JEAN SALMONA* Director February 2, 1998
- -----------------------------------------------------
Jean Salmona
/s/ MORRIS A. SANDLER* Director February 2, 1998
- -----------------------------------------------------
Morris A. Sandler
/s/ JOEL SCHATZ* Director February 2, 1998
- -----------------------------------------------------
Joel Schatz
/s/ ADAM SOLOMON* Director February 2, 1998
- -----------------------------------------------------
Adam Solomon
*By: /s/ WILLIAM H. SEIPPEL
------------------------------------------------
Name: William H. Seippel
Attorney-in-fact
</TABLE>
II-9
<PAGE> 216
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
========================================================================================================
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts at
12/31/94.............................. 0 0
Allowance for doubtful accounts at
12/31/95.............................. 0 30 30
Allowance for doubtful accounts at
12/31/96.............................. 30 752 782
Allowance for doubtful accounts at
9/30/97............................... 782 1,806 2,588
</TABLE>
S-1
<PAGE> 217
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
1.1* -- Form of U.S. Purchase Agreement.............................
1.2* -- Form of International Purchase Agreement....................
3.1** -- Certificate of Incorporation of SFMT, Inc. .................
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993.......................
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed with
the Delaware Secretary of State on November 3, 1993.........
3.4** -- Certificate of Amendment to the Certificate of Incorporation
of SFMT, Inc., filed with the Delaware Secretary of State on
January 12, 1995 ...........................................
3.5** -- Certificate of Amendment to the Certificate of Incorporation
of SFMT, Inc., filed with the Delaware Secretary of State on
February 22, 1995 ..........................................
3.6** -- Certificate of Amendment to the Certificate of Incorporation
of Global TeleSystems Group, Inc., filed with the Delaware
Secretary of State on October 16, 1996......................
3.7** -- By-laws of SFMT, Inc. ......................................
3.8** -- Certificate of Amendment to the Certificate of Incorporation
of Global TeleSystems Group, Inc., filed with the Delaware
Secretary of State on December 1, 1997......................
3.9* -- Form of Amended and Restated By-laws of Global TeleSystems
Group, Inc. (supersedes By-laws of SFMT, Inc. filed as
Exhibit 3.7)................................................
4.1* -- Form of Specimen Stock Certificate for Common Stock of the
Registrant .................................................
4.2** -- Indenture dated as of July 14, 1997 between the Company and
The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto) ...................................................
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC. .......................................................
4.4** -- Indenture dated as of August 19, 1997 between Hermes Europe
Railtel B.V. and The Bank of New York (including the form of
11 1/2% Senior Note due 2007 as an exhibit thereto) ........
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin &
Jenrette Securities Corporation, UBS Securities LLC, and
Lehman Brothers, Inc. ......................................
4.6* -- Form of Rights Agreement between Global TeleSystems Group,
Inc. and The Bank of New York, as Rights Agent..............
5.1* -- Form of Opinion of Shearman & Sterling respecting the Common
Stock registered hereby.....................................
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P. .............
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996..........................................
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996..........................................
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996.........................................
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996 ...................................
</TABLE>
<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997.........................................
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997.........................................
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997....................................
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P. .....
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society Institute
and Chatterjee Fund Management, L.P. .......................
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P. .............
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC.................
10.7** -- Warrant Agreement, dated as of June 6, 1996, between Global
TeleSystems Group, Inc., The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC.................
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc. ..................................
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996 (see
Exhibit No. 10.1(b))........................................
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996......
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 25, 1996.....
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 10,
1996........................................................
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 16,
1996........................................................
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated December 30,
1996........................................................
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated May 13, 1997......
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 20, 1997.....
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 11, 1997.....
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 21, 1997.....
</TABLE>
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated August 14, 1997...
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 29,
1997........................................................
10.9** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc. ..................................
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets Growth
Fund, Inc. .................................................
10.11 -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Capital
International Emerging Markets Funds........................
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds......................................
10.14** -- Global TeleSystems Group, Inc. Non-Employee Directors' Stock
Option Plan.................................................
10.15** -- GTS-Hermes, Inc. 1994 Stock Option Plan.....................
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995........................................................
10.17** -- Employment Agreement dated as of January 1995 between SFMT,
Inc. and Jan Loeber.........................................
10.18** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Louis Toth..................................
10.19** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Gerald W. Thames............................
10.20** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Raymond J. Marks............................
10.21** -- Employment Agreement dated as of April 1996 between GTS
Group, Inc. and Henry Radzikowski...........................
10.22** -- SFMT, Inc. Equity Compensation Plan.........................
10.23** -- Form of Non-Statutory Stock Option Agreement................
10.24** -- Amended and Restated 1992 Stock Option Plan of Global
TeleSystems Group Inc. dated as of January 16, 1997.........
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant................................................
10.26** -- Agreement on the Creation and Functions of the Joint Venture
of EDN Sovintel, dated June 18, 1990........................
10.27** -- Stock Purchase Agreement among Global Telesystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995............
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of Commercial
Organizations, dated May 30, 1996...........................
10.29** -- Agreement on the Creation and Functions of the Joint Venture
Sovam Teleport, dated May 26, 1992..........................
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and Erik
Jennes, dated July 6, 1995..................................
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997................
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB Swed
Carrier (incorporated by reference to Exhibit 10.1 to the
Hermes Europe Railtel B.V.'s Registration Statement on Form
S-4 (File No. 333-37719) filed on December 11, 1997)
(supersedes the Amended and Restated Shareholders' Agreement
filed as Exhibit 10.31 to this Registration Statement)......
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995....................................
</TABLE>
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993........................................................
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc., and
Microsystem Telecom Rt., dated August 5, 1994...............
10.35** -- Agreement on the Establishment of Limited Liability Company
between SFMT-Czech, Inc. and B&H s.r.o., dated July 12,
1994........................................................
10.36** -- Formation of the Equity Joint Venture between GTS and SSTIC,
dated April 12, 1995........................................
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications Technology
Co., Ltd, amended, by and between China International Travel
Service Telecom Co., Ltd. and American China Investment
Corporation, dated March 27, 1996...........................
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc., dated
March 28, 1996..............................................
10.39** -- Agreement between Global TeleSystems Group, Inc. and Cesia
S.A., dated June 21, 1997...................................
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B. Slifka,
dated March 1, 1994.........................................
10.41** -- Consulting Agreement between Global TeleSystems Group, Inc.
and Bernard J. McFadden, dated August 15, 1996..............
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997...........................
11.1** -- Statement regarding computation of per share earnings.......
21.1** -- List of Subsidiaries of the Registrant .....................
23.1* -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1) ...........................
23.2* -- Consent of Ernst & Young LLP, Ernst & Young (CIS) Ltd., and
Ernst & Young Reviseurs d'Entreprises S.C.C. ...............
23.3** -- Report of Ernst & Young LLP
24.1** -- Powers of Attorney (included on signature page to this
registration statement).....................................
27.1** -- Financial Data Schedule extracted from 12/31/96 audited
financial statements........................................
27.2** -- Financial Data Schedule extracted from 9/30/97 audited
financial statements........................................
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
<PAGE> 1
================================================================================
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
8,880,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: February [ ], 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
U.S. PURCHASE AGREEMENT................................................... 1
SECTION 1. Representations and Warranties.............................. 4
(a) Representations and Warranties by the Company.......... 4
(i) Compliance with Registration Requirements...... 4
(ii) Independent Accountants........................ 5
(iii) Financial Statements........................... 5
(iv) No Material Adverse Change in Business......... 6
(v) Good Standing of the Company................... 6
(vi) Good Standing of Subsidiaries.................. 7
(vii) Capitalization................................. 7
(viii) Authorization of Agreement..................... 8
(ix) Authorization and Description of Securities.... 8
(x) Absence of Defaults and Conflicts.............. 8
(xi) Absence of Labor Dispute....................... 9
(xii) Absence of Proceedings......................... 9
(xiii) Accuracy of Exhibits........................... 10
(xiv) Possession of Intellectual Property............ 10
(xv) Absence of Further Requirements................ 10
(xvi) Possession of Licenses and Permits............. 11
(xvii) Title to Property.............................. 11
(xviii) Compliance with Cuba Act....................... 12
(xix) Investment Company Act......................... 12
(xx) Environmental Laws............................. 12
(xxi) Registration Rights............................ 13
(b) Officer's Certificates................................. 13
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing............. 13
(a) Initial Securities..................................... 13
(b) Option Securities...................................... 13
(c) Payment................................................ 14
(d) Denominations; Registration............................ 15
SECTION 3. Covenants of the Company.................................... 15
(a) Compliance with Securities
Regulations and Commission Requests.................... 15
(b) Filing of Amendments................................... 16
(c) Delivery of Registration Statements.................... 16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(d) Delivery of Prospectuses.............................. 16
(e) Continued Compliance with Securities Laws............. 16
(f) Rule 158.............................................. 17
(g) Use of Proceeds....................................... 17
(h) Listing............................................... 17
(i) Restriction on Sale of Securities..................... 18
(j) Reporting Requirements................................ 18
(k) Compliance with Rule 463.............................. 18
SECTION 4. Payment of Expenses........................................ 18
(a) Expenses.............................................. 18
(b) Termination of Agreement.............................. 19
SECTION 5. Conditions of U.S. Underwriters' Obligations............... 19
(a) Effectiveness of Registration Statement............... 19
(b) Opinion of Counsel for Company........................ 20
(c) Opinion of Counsel for U.S. Underwriters.............. 20
(d) Officers' Certificate................................. 20
(e) Accountant's Comfort Letter........................... 21
(f) Bring-down Comfort Letter............................. 21
(g) Approval of Listing................................... 21
(h) No Objection.......................................... 21
(i) Lock-up Agreements.................................... 21
(j) Purchase of Initial International Securities.......... 22
(k) Notes Offering........................................ 22
(l) Conditions to Purchase of U.S.
Option Securities.................................... 22
(m) Additional Documents.................................. 23
(n) Termination of Agreement.............................. 23
SECTION 6. Indemnification............................................ 23
(a) Indemnification of U.S. Underwriters.................. 24
(b) Indemnification of Company,
Directors and Officers............................... 25
(c) Actions against Parties; Notification................. 25
(d) Settlement without Consent if
Failure to Reimburse................................. 26
SECTION 7. Contribution................................................ 27
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery........................................... 28
SECTION 9. Termination of Agreement.................................... 29
(a) Termination; General................................... 29
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(b) Liabilities.......................................... 29
SECTION 10. Default by One or More of the U.S. Underwriters........... 29
SECTION 11. Notices................................................... 30
SECTION 12. Parties................................................... 31
SECTION 13. GOVERNING LAW AND TIME.................................... 31
SECTION 14. Effect of Headings........................................ 31
SCHEDULES
Schedule A - List of Underwriters................................... Sch A-1
Schedule B - Pricing Information.................................... Sch B-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Special Counsel.......... A-1-1
Exhibit A-2 - Form of Opinion of Company's Counsel.................. A-2-1
Exhibit B - Form of Lock-up Letter................................ B-1
</TABLE>
-iii-
<PAGE> 5
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
8,880,000 Shares of Common Stock
(Par Value $.10 Per Share)
U.S. PURCHASE AGREEMENT
February , 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
UBS Securities LLC
Lehman Brothers Inc.
Furman Selz LLC
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters
named in Schedule A hereto (collectively, the "U.S. Underwriters", which term
shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, Donaldson, Lufkin & Jenrette
Securities Corporation, UBS Securities LLC, Lehman Brothers Inc. and Furman
Selz LLC are acting as representatives (in such capacity, the "U.S.
Representatives"), with respect to the issue and sale by the Company and the
purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.10 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the U.S. Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 1,332,000 additional shares of Common Stock to cover over-allotments,
if any. The aforesaid 8,880,000 shares of Common Stock (the "Initial U.S.
Securities") to be purchased by the U.S. Underwriters and all or any part of
the 1,332,000 shares of Common Stock subject to the
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option described in Section 2(b) hereof (the "U.S. Option Securities") are
hereinafter called, collectively, the "U.S. Securities."
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of 2,220,000 shares
of Common Stock (the "Initial International Securities") through arrangements
with certain underwriters outside the United States and Canada (the
"International Managers") for which Merrill Lynch International, UBS Limited,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and
ING Bank N.V. are acting as the international representatives (collectively,
the "International Representatives") and the grant by the Company to the
International Managers, acting severally and not jointly, of an option to
purchase all or any part of the International Managers' pro rata portion of up
to 333,000 additional shares of Common Stock solely to cover over-allotments,
if any (the "International Option Securities" and, together with the U.S.
Option Securities, the "Option Securities"). The Initial International
Securities and the International Option Securities are hereinafter called the
"International Securities." It is understood that the Company is not obligated
to sell, and the U.S. Underwriters are not obligated to purchase, any Initial
U.S. Securities unless all of the Initial International Securities are
contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co. (in such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
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The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-36555) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). Two forms of prospectus are to be used in connection with the offering
and sale of the Securities: one relating to the U.S. Securities (the "Form of
U.S. Prospectus") and one relating to the International Securities (the "Form
of International Prospectus"). The Form of International Prospectus is
identical to the Form of U.S. Prospectus, except for the front cover and back
cover pages and the information under the caption "Underwriting." The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement
at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and
Form of International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto, at the time it became effective and including
the Rule 430A Information and the Rule 434 Information, as applicable, is
herein called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as
the "Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
The final Form of U.S. Prospectus and the final Form of International
Prospectus in the forms first furnished to the Underwriters for use in
connection with the offering of the Securities are herein called the "U.S.
Prospectus" and the "International Prospectus," respectively, and collectively,
the "Prospectuses." If
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Rule 434 is relied on, the terms "U.S. Prospectus" and "International
Prospectus" shall refer to the preliminary U.S. Prospectus dated December 30,
1997 and preliminary International Prospectus dated December 30, 1997,
respectively, each together with the applicable Term Sheet and all references in
this Agreement to the date of such Prospectuses shall mean the date of the
applicable Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the U.S. Prospectus, the
International Prospectus or any Term Sheet or any amendment or supplement to any
of the foregoing shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR").
Contemporaneously with the offering of the Securities, the Company will be
offering $[100] million of Senior Notes due 2005 (the "Notes Offering").
Consummation of both the Notes Offering and the offering of the Common Stock
are conditioned upon the consummation of the other.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each U.S.
Underwriter, as follows:
(i) Compliance with Registration Requirements. The Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act and no proceedings for that purpose have been instituted
or are pending or, to the knowledge of the Company, are contemplated by the
Commission, and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement and any
post-effective amendments thereto became effective and at the Closing
Time (and, if any U.S. Option Securities are purchased, at the Date of
Delivery), the Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not and
will not contain an untrue statement of a material fact or omit to state
a material
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fact required to be stated therein or necessary to make the statements
therein not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectuses shall not be "materially
different," as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of any U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement or the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and each preliminary prospectus
and the Prospectuses delivered to the Underwriters for use in connection
with this offering was identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectuses, together with the related schedules
and notes, present fairly the financial position of the entities to which they
relate as of the dates indicated and their respective results of operations,
stockholders' equity and cash flows for the periods specified; said financial
statements
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have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in the
Prospectuses present fairly the information shown therein and, in the case of
the consolidated financial data therein, have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement, and in the case of the combined financial data therein,
have been compiled from financial statements prepared on a basis consistent with
that of the audited financial statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement (at the
time it became effective), except as otherwise stated therein (at the time it
became effective), (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries (as defined below)
considered as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of Delaware and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this Agreement;
and the Company is duly qualified as a foreign corporation to transact business
and is in good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good
standing would not, singly or in the aggregate, result in a Material Adverse
Effect.
<PAGE> 11
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(vi) Good Standing of Subsidiaries. Each "significant subsidiary"
of the Company (as such term is defined in Rule 1-02 of Regulation S-X) and all
entities in which the Company has a direct or indirect majority equity interest
or voting power (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized (to the extent applicable) and is validly existing as a
corporation, general partnership, limited partnership, limited liability
company, closed joint stock company, or similar entity in good standing (to the
extent applicable) under the laws of the jurisdiction of its organization, has
organizational power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses and is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not, singly or in the
aggregate, result in a Material Adverse Effect; except as otherwise disclosed in
the Registration Statement, all of the issued and outstanding capital stock or
other ownership interests of each such Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable (to the extent applicable) and
is owned by the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of capital stock or other ownership interests of any
Subsidiary was issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary. The only subsidiaries of the Company are (a)
the subsidiaries listed on Exhibit 21 to the Registration Statement and (b)
certain other subsidiaries which, considered in the aggregate as a single
Subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02
of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or pursuant
to the exercise of convertible securities or options referred to in the
Prospectuses). The shares of issued and outstanding capital stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; none of the outstanding
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shares of capital stock of the Company was issued in violation of the preemptive
or other similar rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to
be purchased by the U.S. Underwriters and the International Managers from the
Company have been duly authorized for issuance and sale to the U.S. Underwriters
pursuant to this Agreement and the International Managers pursuant to the
International Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to this Agreement and the International Purchase
Agreement, respectively, against payment of the consideration set forth herein
and the International Purchase Agreement, respectively, will be validly issued,
fully paid and non-assessable; the Common Stock conforms in all material
respects to all statements relating thereto contained in the Prospectuses and
such description conforms to the rights set forth in the instruments defining
the same; no holder of the Securities will be subject to personal liability by
reason of being such a holder; and the issuance of the Securities is not subject
to the preemptive or other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its Ventures (as defined below) is in violation of its charter or by-laws (or
equivalent constitutive documents) or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Company or any of its
Ventures is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any Venture is subject
(collectively, "Agreements and Instruments") except for such defaults that would
not, singly or in the aggregate, result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the International
Purchase Agreement and the consummation of the transactions contemplated in this
Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectuses under
the
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caption "Use of Proceeds") and compliance by the Company with its obligations
under this Agreement and the International Purchase Agreement have been duly
authorized by all necessary corporate action and do not and will not, whether
with or without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Venture pursuant
to, the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws (or equivalent constitutive documents) of the Company
or any Venture or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any Venture or any
of their assets, properties or operations. As used herein, (a) "Ventures" means
all entities in which the Company has a direct or indirect greater than 25%
equity interest or voting power and (b) a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such indebtedness
by the Company or any Venture.
(xi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any Venture exists or, to the knowledge of the Company, is
threatened, and the Company is not aware of any existing or threatened labor
disturbance by the employees of any of its or any Venture's principal suppliers,
manufacturers, customers or contractors, which, in either case, may reasonably
be expected to, singly or in the aggregate, result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental agency
or body, domestic or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any Venture, which is required
to be disclosed in the Registration Statement (other than as disclosed therein),
or which, singly or in the aggregate, might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to materially
and adversely affect the properties or
<PAGE> 14
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assets of the Company or any Venture or the consummation of the transactions
contemplated in this Agreement and the International Purchase Agreement or the
performance by the Company of its obligations hereunder or thereunder; the
aggregate of all pending legal or governmental proceedings to which the Company
or any Venture is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, singly or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so described
and filed as required.
(xiv) Possession of Intellectual Property. The Company and the
Ventures own or possess, or can acquire on reasonable terms, adequate patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names or
other intellectual property (collectively, "Intellectual Property") necessary to
carry on the business now operated by them, except to the extent the failure to
so own, possess or be able to acquire would not result in a Material Adverse
Effect, and neither the Company nor any Venture has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or inadequate
to protect the interest of the Company or any Venture therein, and which
infringement or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would result
in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities under this
Agreement and the International Purchase Agreement or the consummation of the
transactions contemplated
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by this Agreement and the International Purchase Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933 Act
Regulations and foreign or state securities or blue sky laws.
(xvi) Possession of Licenses and Permits. Except as otherwise
disclosed in the Registration Statement, the Company and the Ventures possess
such material permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them; the Company and the Ventures are in compliance
with the terms and conditions of all such Governmental Licenses, except where
the failure so to comply would not, singly or in the aggregate, result in a
Material Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses or
the failure of such Governmental Licenses to be in full force and effect would
not have a Material Adverse Effect; and neither the Company nor any Venture has
received any notice of proceedings relating to the revocation or modification of
any such Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) Title to Property. The Company and the Ventures have good and
marketable title to all real property owned by the Company and the Ventures and
good title to all other properties owned by them, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the Prospectuses or
(b) do not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made of such
property by the Company or any Venture; and all of the leases and subleases
material to the business of the Company and the Ventures, considered as one
enterprise, and under which the Company or any Venture holds properties
described in the Prospectuses, are in full force and effect, and neither the
Company nor any Venture has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any Venture
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company or such Venture to the continued
possession of the leased or subleased premises under any such lease or sublease.
<PAGE> 16
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(xviii) Compliance with Cuba Act. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section 517.075
of the Florida statutes, and the rules and regulations thereunder (collectively,
the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. Neither the Company nor any of its
Subsidiaries is, nor upon the issuance and sale of the Securities as herein
contemplated and the application of the net proceeds therefrom as described in
the Prospectuses will be, an "investment company" or an entity "controlled" by
an "investment company" as such terms are defined in the Investment Company Act
of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any Venture is in violation
of any federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order, consent,
decree or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened release
of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and the Ventures have all permits,
authorizations and approvals required under any applicable Environmental Laws
and are each in compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any Ventures and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company
<PAGE> 17
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or any Ventures relating to Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the Prospectuses,
there are no persons with registration rights or other similar rights to have
any securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any Ventures delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company herein to each U.S. Underwriter as
to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial Securities. The Company agrees to sell to each U.S.
Underwriter, severally and not jointly, and on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, each U.S. Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter, plus any additional number of Initial U.S. Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, the Company hereby grants an option
to the U.S. Underwriters, severally and not jointly, to purchase up to an
additional 1,332,000 shares of Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial U.S. Securities but not
payable on the U.S. Option Securities. The option hereby granted will expire
30 days after the date hereof and may be exercised not more than two times in
whole or in part only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Initial U.S.
Securities upon notice by the Global Coordinator to the Company setting forth
the number of U.S. Option Securities as to which the several U.S. Underwriters
are then exercising the option and the time and date of payment and delivery
for such U.S. Option Securities. Any such time and date of delivery for the
U.S. Option Securities (a "Date of Delivery")
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shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the U.S. Option Securities, each of the U.S. Underwriters,
acting severally and not jointly, on the basis of the representations and
warranties of the Company contained herein and subject to the terms and
conditions herein set forth, will purchase that proportion of the total number
of U.S. Option Securities then being purchased which the number of Initial U.S.
Securities set forth in Schedule A opposite the name of such U.S. Underwriter
bears to the total number of Initial U.S. Securities, subject in each case to
such adjustments as the Global Coordinator in its discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial Securities
shall be made at the offices of Cahill Gordon & Reindel, 80 Pine Street, New
York, New York 10005 or at such other place as shall be agreed upon by the
Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on the date
hereof) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for such
U.S. Option Securities shall be made at the above-mentioned offices, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
on each Date of Delivery as specified in the notice from the Global Coordinator
to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter
<PAGE> 19
-15-
whose funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such U.S.
Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates for the
Initial U.S. Securities and the U.S. Option Securities, if any, will be made
available for examination and packaging by the U.S. Representatives in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectuses or for additional information,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
<PAGE> 20
-16-
(b) Filing of Amendments. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectuses,
will furnish the Global Coordinator with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Global Coordinator
or counsel for the U.S. Underwriters shall reasonably object within three
Business Days after being furnished such documents.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the U.S. Representatives and counsel for the U.S. Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the U.S. Representatives,
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the U.S.
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company
will furnish to each U.S. Underwriter, without charge, during the period when
the U.S. Prospectus is required to be delivered under the 1933 Act or the
Securities Exchange of 1934 (the "1934 Act"), such number of copies of the U.S.
Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably
request. The U.S. Prospectus and any amendments or supplements thereto
furnished to the U.S. Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations
<PAGE> 21
-17-
so as to permit the completion of the distribution of the Securities as
contemplated in this Agreement, the International Purchase Agreement and the
Prospectuses. If at any time when a prospectus is required by the 1933 Act to
be delivered in connection with sales of the Securities, any event shall occur
or condition shall exist as a result of which it is necessary, in the reasonable
opinion of counsel for the U.S. Underwriters or for the Company, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectuses will not include any untrue statements of a material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the reasonable opinion
of any such counsel, at any such time to amend the Registration Statement or
amend or supplement any Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements, and
the Company will furnish to the U.S. Underwriters such number of copies of such
amendment or supplement as the U.S. Underwriters may reasonably request.
(f) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(g) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds."
(h) Listing. The Company will use its best efforts to effect the
admission of the Securities on the European Association of Securities Dealers
Automated Quotation ("EASDAQ") system and comply with the requirements of such
exchange to maintain such listing. The Company will use its best efforts to
effect and maintain the quotation of the Securities on the Nasdaq National
Market and will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market of companies that have securities that
are traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
<PAGE> 22
-18-
(i) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of the Securities hereunder and under
the International Purchase Agreement, (B) the issuance of any shares of Common
Stock by the Company upon the exercise of options or warrants or the conversion
of securities outstanding on the date hereof and referred to in the
Prospectuses or (C) the purchase or acquisition of shares of Common Stock
pursuant to contracts entered into prior to the date hereof and referred to in
the Prospectus.
(j) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act and rules and regulations of the Commission thereunder within the
time periods referred to therein.
(k) Compliance with Rule 463. The Company will comply with Rule 463 of
the 1933 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or
other duties payable upon the
<PAGE> 23
-19-
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the International
Managers, (iv) the fees and disbursements of the Company's counsel, accountants
and other advisors, (v) the printing and delivery to the Underwriters of copies
of each preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vi) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(vii) the fees and expenses of any transfer agent or registrar for the
Securities, (viii) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (ix) the fees and expenses incurred in
connection with the listing of the Securities on EASDAQ and inclusion of the
Securities in the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses reasonably incurred by the U.S. Underwriters in
connection with this Agreement or the offering of the Securities contemplated
hereunder, including the reasonable fees and disbursements of counsel and
special counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof and in certificates of any officer of the Company or any
subsidiary of the Company delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission
<PAGE> 24
-20-
in accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of each of Shearman & Sterling, counsel for the Company,
Grier Raclin, Senior Vice President and General Counsel of the Company,
Coudert Brothers, special counsel for the Company and special regulatory
counsel for Hermes Europe Railtel B.V., Visil Kisil & Partners, special
Ukranian counsel to Bancomsvyaz, and Somodeco, counsel and regulatory
counsel to GTS Monaco Access S.A.M., each in form and substance
satisfactory to counsel for the U.S. Underwriters, together with signed
or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibits A-1 through A-__ hereto.
(c) Opinion of Counsel for U.S. Underwriters. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as
of Closing Time, of each of Cahill Gordon & Reindel, counsel for the U.S.
Underwriters, and Clifford Chance, special Russian counsel to the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters as to such matters as are
reasonably requested by the Representatives.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the U.S. Representatives shall have received a
certificate of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company, dated as
of Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time,
<PAGE> 25
-21-
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of such officer,
are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the U.S. Representatives shall have received from Ernst &
Young a letter dated such date, in form and substance satisfactory to the
U.S. Representatives, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Ernst & Young a letter, dated as of Closing Time,
to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business
days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on EASDAQ, subject only to official notice
of issuance. At Closing Time, the Securities shall have been approved
for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by holders of shares of Common Stock,
warrants, options or other rights to purchase or acquire shares of Common
Stock or other securities convertible or exchangeable into Common Stock
(other than the Company's Convertible Bonds due 2000 (the "Convertible
Bonds")) representing
<PAGE> 26
-22-
not less than 93% of the outstanding Common Stock (excluding the effect of
the Convertible Bonds).
(j) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the
Initial U.S. Securities under this Agreement, the International Managers
shall have purchased the Initial International Securities under the
International Purchase Agreement.
(k) Notes Offering. Contemporaneously with the purchase by the
Underwriters of the Securities under this Agreement, the Company shall
have consummated the Notes Offering.
(l) Conditions to Purchase of U.S. Option Securities. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary
of the Company hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the U.S. Representatives
shall have received:
(i) Officers' Certificate. A certificate, dated such Date
of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at the
Closing Time pursuant to Section 5(d) hereof remains true and
correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion, dated as of such Date of Delivery, of each of counsels
listed in Section 5(b), each in form and substance satisfactory
to counsel for the U.S. Underwriters, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section
5(b) hereof.
(iii) Opinion of Counsel for U.S. Underwriters. The favorable
opinion of Cahill Gordon & Reindel, counsel for the U.S.
Underwriters and Clifford Chance, special counsel to the U.S.
<PAGE> 27
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(c)
hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst & Young, in
form and substance satisfactory to the U.S. Representatives and
dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the U.S. Representatives
pursuant to Section 5(f) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished
with such documents and opinions as they may reasonably request for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any of
the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and
substance to the U.S. Representatives and counsel for the U.S.
Underwriters.
(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of U.S. Option Securities on a Date of Delivery which is after
the Closing Time, the obligations of the several U.S. Underwriters to
purchase the relevant Option Securities, may be terminated by the U.S.
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
<PAGE> 28
-24-
(a) Indemnification of U.S. Underwriters. The Company agrees to
indemnify and hold harmless each U.S. Underwriter and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or the
Prospectuses (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent that
any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of any U.S. Underwriter through the U.S. Representatives
<PAGE> 29
-25-
expressly for use in the Registration Statement (or any amendment or supplement
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the U.S. Prospectus (or any
amendment or supplement thereto); provided, further the Company will not be
liable to any Underwriter with respect to any preliminary prospectus to the
extent that any such loss, liability, claim, damage or expense of such
Underwriter results from the fact that such Underwriter sold Securities to a
person as to whom it shall be established in the related proceedings that there
was not sent or given, at or prior to the written confirmation of such sale, a
copy of the Prospectus (or of the Prospectus as then amended or supplemented if
the Company shall have furnished such Underwriter with such amendment or
supplement thereto prior to the written confirmation of such sale), if such
delivery was required by the Act, and such loss, liability, claim, damage or
expense results from an untrue statement or omission of a material fact
contained in such preliminary prospectus that was completely corrected in the
Prospectus (or of the Prospectus as then amended or supplemented if the Company
shall have furnished such Underwriter with such amendment or supplement thereto
prior to the written confirmation of such sale).
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a) of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment or supplement thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
U.S. prospectus or the U.S. Prospectus (or any amendment or supplement thereto)
in reliance upon and in conformity with written information furnished to the
Company by such U.S. Underwriter through the U.S. Representatives expressly for
use in the Registration Statement (or any amendment or supplement thereto) or
such preliminary prospectus or the U.S. Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced
<PAGE> 30
-26-
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 6(a) above, counsel to the indemnified
parties shall be selected by Merrill Lynch, and, in the case of parties
indemnified pursuant to Section 6(b) above, counsel to the indemnified parties
shall be selected by the Company. An indemnifying party may participate at its
own expense in the defense of any such action; provided, however, that counsel
to the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have
<PAGE> 31
-27-
reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
U.S. Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
U.S. Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet, bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.
The relative fault of the Company on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to
<PAGE> 32
-28-
this Section 7 were determined by pro rata allocation (even if the U.S.
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this Section 7. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 7 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any Venture submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on
<PAGE> 33
-29-
behalf of any U.S. Underwriter or controlling person, or by or on behalf of the
Company, and shall survive delivery of the Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the U.S.
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission, or EASDAQ,
Luxembourg Stock Exchange or the Nasdaq National Market, or if trading generally
on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
or more of the U.S. Underwriters shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the U.S.
<PAGE> 34
-30-
Representatives shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting U.S. Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the U.S. Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to
sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the U.S. Underwriters to purchase and the Company to sell the relevant U.S.
Option Securities, as the case may be, either the U.S. Representatives or the
Company shall have the right to postpone Closing Time or the relevant Date of
Delivery, as the case may be, for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "U.S.
Underwriter" includes any person substituted for a U.S. Underwriter under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be
<PAGE> 35
-31-
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the U.S. Underwriters shall be directed to the
U.S. Representatives c/o Merrill Lynch & Co., Merrill Lynch Pierce, Fenner &
Smith Incorporated at North Tower, World Financial Center, New York, New York
10281-1201, attention of Robert Kramer; and notices to the Company shall be
directed to it at 1751 Pinnacle Drive, North Tower - 12th Floor, McLean, VA
22102, attention of William H. Seippel.
SECTION 12. Parties. This Agreement shall each inure to the benefit
of and be binding upon the U.S. Underwriters and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the U.S. Underwriters and the Company and their respective successors and
the controlling persons and officers and directors referred to in Sections 6 and
7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the U.S. Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any U.S. Underwriter shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE> 36
-32-
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
GLOBAL TELESYSTEMS GROUP, INC.
By
-------------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
UBS SECURITIES LLC
LEHMAN BROTHERS INC.
FURMAN SELZ LLC
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-----------------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
<PAGE> 37
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
- ------------------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation.........
UBS Securities LLC..........................................
Lehman Brothers Inc.........................................
Furman Selz LLC.............................................
--------------
Total....................................................... 8,880,000
==============
</TABLE>
Schedule A-1
<PAGE> 38
SCHEDULE B
GLOBAL TELESYSTEMS GROUP, INC.
Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the U.S. Securities to be paid
by the several U.S. Underwriters shall be $__________, being an amount
equal to the initial public offering price set forth above less
$__________per share; provided that the purchase price per share for any
U.S. Option Securities purchased upon the exercise of the over-allotment
option described in Section 2(b) shall be reduced by an amount per share
equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities.
Schedule B-1
<PAGE> 39
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
A-1-1
<PAGE> 40
Exhibit A-2
FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
A-2-1
<PAGE> 41
Exhibit B
, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
UBS SECURITIES LLC
LEHMAN BROTHERS INC.
FURMAN SELZ LLC
c/o Merrill Lynch & Co.
Merrill, Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
United States of America
as U.S. Representatives of the several Underwriters to be named in
the within-mentioned Purchase Agreements
Re: Agreement not to sell or otherwise dispose of securities of
Global TeleSystems Group, Inc.
Ladies and Gentlemen:
The undersigned, a stockholder of Global TeleSystems Group, Inc. (the
"Company"), understands that the Company has filed a registration statement on
Form S-1 with the Securities and Exchange Commission in connection with the
initial public offering (the "Offering") of shares of Common Stock ("Shares") of
the Company. The undersigned further understands that the Company proposes to
enter into a U.S. purchase agreement (the "U.S. Purchase Agreement") with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson,
Lufkin & Jenrette Securities Corporation, UBS Securities LLC, Lehman Brothers
Inc. and Furman Selz LLC (the "U.S. Representatives"), on behalf of the U.S.
underwriters (collectively, the "U.S. Underwriters"), and a separate
international purchase agreement (the "International Purchase Agreement";
together with the U.S.
B-1
<PAGE> 42
Purchase Agreement, the "Purchase Agreements") with Merrill Lynch International,
UBS Limited, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and ING Bank N.V. (the "International Representatives") on behalf
of the international managers (collectively, the "International Managers", and,
together with the U.S. Underwriters, the "Underwriters"), in connection with the
Offering.
In recognition of the benefit that such Offering will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and in order to induce the Company and the Underwriters to enter into the
respective Purchase Agreements and to proceed with the Offering, the
undersigned hereby agrees, that, should the Offering be consummated, for a
period of 180 days after the date of the Purchase Agreements relating to the
Offering, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any Shares or any securities convertible into or
exchangeable or exercisable for any Shares, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of disposition or request the filing of any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of Shares, whether any such
swap transaction is to be settled by delivery of the Shares or other
securities, in cash or otherwise.
Sincerely,
Name of Stockholder:
-----------------------------------
(Print)
Signature:
-----------------------------------
By:
(if not natural person)
B-2
<PAGE> 1
================================================================================
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
2,220,000 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: February [ ], 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
INTERNATIONAL PURCHASE AGREEMENT..................................................... 1
SECTION 1. Representations and Warranties.......................................... 4
(a) Representations and Warranties by the Company.................... 4
(i) Compliance with Registration Requirements................... 4
(ii) Independent Accountants..................................... 5
(iii) Financial Statements........................................ 5
(iv) No Material Adverse Change in Business...................... 6
(v) Good Standing of the Company................................ 6
(vi) Good Standing of Subsidiaries............................... 6
(vii) Capitalization.............................................. 7
(viii) Authorization of Agreement.................................. 7
(ix) Authorization and Description of Securities................. 8
(x) Absence of Defaults and Conflicts........................... 8
(xi) Absence of Labor Dispute.................................... 9
(xii) Absence of Proceedings...................................... 9
(xiii) Accuracy of Exhibits........................................ 10
(xiv) Possession of Intellectual Property......................... 10
(xv) Absence of Further Requirements............................. 10
(xvi) Possession of Licenses and Permits.......................... 10
(xvii) Title to Property........................................... 11
(xviii) Compliance with Cuba Act.................................... 11
(xix) Investment Company Act...................................... 11
(xx) Environmental Laws.......................................... 12
(xxi) Registration Rights......................................... 12
(b) Officer's Certificates........................................... 12
SECTION 2. Sale and Delivery to International Managers; Closing.................... 13
(a) Initial Securities............................................... 13
(b) Option Securities................................................ 13
(c) Payment.......................................................... 14
(d) Denominations; Registration...................................... 14
SECTION 3. Covenants of the Company................................................ 15
(a) Compliance with Securities Regulations and Commission Requests... 15
(b) Filing of Amendments............................................. 15
(c) Delivery of Registration Statements.............................. 16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(d) Delivery of Prospectuses....................................... 16
(e) Continued Compliance with Securities Laws...................... 16
(f) Rule 158....................................................... 17
(g) Use of Proceeds................................................ 17
(h) Listing........................................................ 17
(i) Restriction on Sale of Securities.............................. 17
(j) Reporting Requirements......................................... 18
(k) Compliance with Rule 463....................................... 18
SECTION 4. Payment of Expenses................................................... 18
(a) Expenses....................................................... 18
(b) Termination of Agreement....................................... 19
SECTION 5. Conditions of International Managers Obligations...................... 19
(a) Effectiveness of Registration Statement........................ 19
(b) Opinion of Counsel for Company................................. 19
(c) Opinion of Counsel for International Managers.................. 20
(d) Officers' Certificate.......................................... 20
(e) Accountant's Comfort Letter.................................... 20
(f) Bring-down Comfort Letter...................................... 21
(g) Approval of Listing............................................ 21
(h) No Objection................................................... 21
(i) Lock-up Agreements............................................. 21
(j) Purchase of Initial U.S. Securities............................ 21
(k) Notes Offering................................................. 22
(l) Conditions to Purchase of International Option Securities...... 22
(i) Officers' Certificate..................................... 22
(ii) Opinion of Counsel for Company............................ 22
(iii) Opinion of Counsel for International Managers............. 22
(iv) Bring-down Comfort Letter................................. 22
(m) Additional Documents........................................... 23
(n) Termination of Agreement....................................... 23
SECTION 6. Indemnification....................................................... 23
(a) Indemnification of International Managers...................... 23
(b) Indemnification of Company, Directors and Officers............. 25
(c) Actions against Parties; Notification.......................... 25
(d) Settlement without Consent if Failure to Reimburse............. 26
SECTION 7. Contribution........................................................... 26
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........ 28
SECTION 9. Termination of Agreement.............................................. 28
(a) Termination; General........................................... 28
(b) Liabilities.................................................... 29
SECTION 10. Default by One or More of the International Managers.................. 29
SECTION 11. Notices............................................................... 30
SECTION 12. Parties............................................................... 30
SECTION 13. GOVERNING LAW AND TIME................................................ 31
SECTION 14. Effect of Headings.................................................... 31
SCHEDULES
Schedule A - List of Underwriters......................................... Sch A-1
Schedule B - Pricing Information.......................................... Sch B-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Special Counsel................ A-1-1
Exhibit A-2 - Form of Opinion of Company's Counsel........................ A-2-1
Exhibit B - Form of Lock-up Letter...................................... B-1
</TABLE>
-iii-
<PAGE> 5
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
2,220,000 Shares of Common Stock
(Par Value $.10 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
February , 1998
MERRILL LYNCH INTERNATIONAL
Donaldson, Lufkin & Jenrette International
UBS Limited
Lehman Brothers International (Europe)
Baring Brothers Limited (as agent for
ING Bank N.V.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Place
London EC2Y 9LY
England
Ladies and Gentlemen:
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch International ("Merrill Lynch") and
each of the other international underwriters named in Schedule A hereto
(collectively, the "International Managers", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for whom
Merrill Lynch, Donaldson, Lufkin & Jenrette International, UBS Limited, Lehman
Brothers International (Europe) and Baring Brothers Limited (as agent for ING
Bank N.V.) are acting as representatives (in such capacity, the "Lead
Managers"), with respect to the issue and sale by the Company and the purchase
by the International Managers, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.10 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the International Managers, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 333,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 2,220,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the 333,000 shares of Common Stock subject to the option described in Section
2(b) hereof
<PAGE> 6
-2-
(the "International Option Securities") are hereinafter called, collectively,
the "International Securities."
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 8,880,000 shares of Common Stock
(the "Initial U.S. Securities") through arrangements with certain underwriters
in the United States and Canada (the "U.S. Underwriters") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. And Furman Selz
LLC. are acting as representatives (collectively, the "U.S. Representatives")
and the grant by the Company to the U.S. Underwriters, acting severally and not
jointly, of an option to purchase all or any part of the U.S. Underwriters' pro
rata portion of up to 1,332,000 additional shares of Common Stock solely to
cover over-allotments, if any (the "U.S. Option Securities" and, together with
the International Option Securities, the "Option Securities"). The Initial
U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S.
Securities." It is understood that the Company is not obligated to sell, and
the International Managers are not obligated to purchase, any Initial
International Securities unless all of the Initial U.S. Securities are
contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters," the Initial International Securities
and the Initial U.S. Securities are hereinafter collectively called the
"Initial Securities," and the International Securities, and the U.S. Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make a
public offering of the International Securities as soon as the Lead Managers
deem advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement
<PAGE> 7
-3-
on Form S-1 (No. 333-36555) covering the registration of the Securities under
the Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus or prospectuses. Promptly after execution and delivery of
this Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933
Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to
be used in connection with the offering and sale of the Securities: one
relating to the International Securities (the "Form of International
Prospectus") and one relating to the U.S. Securities (the "Form of U.S.
Prospectus"). The Form of International Prospectus is identical to the Form of
U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting." The information included in any
such prospectus or in any such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became effective
(a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of
International Prospectus and the final Form of U.S. Prospectus in the forms
first furnished to the Underwriters for use in connection with the offering of
the Securities are herein called the "International Prospectus" and the "U.S.
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "International Prospectus" and "U.S. Prospectus" shall
refer to the preliminary International
<PAGE> 8
-4-
Prospectus dated December 30, 1997 and preliminary U.S. Prospectus dated
December 30, 1997, respectively, each together with the applicable Term Sheet
and all references in this Agreement to the date of such Prospectuses shall mean
the date of the applicable Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
International Prospectus, the U.S. Prospectus or any Term Sheet or any amendment
or supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
Contemporaneously with the offering of the Securities, the Company will be
offering $[100] million of Senior Notes due 2005 (the "Notes Offering").
Consummation of both the Notes Offering and the offering of the Common Stock
are conditioned upon the consummation of the other.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each International Manager as of the date hereof, as
of the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each
International Manager, as follows:
(i) Compliance with Registration Requirements. The Registration
Statement has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement has been issued under the 1933
Act and no proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement and any
post-effective amendments thereto became effective and at the Closing
Time (and, if any International Option Securities are purchased, at the
Date of Delivery), the Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. Neither of the
Prospectuses nor any amendments or supplements thereto, at
<PAGE> 9
-5-
the time the Prospectuses or any amendments or supplements thereto were
issued and at the Closing Time (and, if any International Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectuses shall not be "materially
different," as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
International Manager through the Lead Managers expressly for use in the
Registration Statement or the International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and each preliminary prospectus and the
Prospectuses delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectuses, together with the related schedules
and notes, present fairly the financial position of the entities to which they
relate as of the dates indicated and their respective results of operations,
stockholders' equity and cash flows for the periods specified; said financial
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved.
<PAGE> 10
-6-
The supporting schedules included in the Registration Statement present fairly
in accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in the
Prospectuses present fairly the information shown therein and, in the case of
the consolidated financial data therein, have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement, and in the case of the combined financial data therein,
have been compiled from financial statements prepared on a basis consistent with
that of the audited financial statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement (at the
time it became effective), except as otherwise stated therein (at the time it
became effective), (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries (as defined below)
considered as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of Delaware and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this Agreement;
and the Company is duly qualified as a foreign corporation to transact business
and is in good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good
standing would not, singly or in the aggregate, result in a Material Adverse
Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
the Company (as such term is defined in Rule 1-02 of Regulation S-X) and all
entities in which the Company has a direct or indirect majority equity interest
<PAGE> 11
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or voting power (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized (to the extent applicable) and is validly existing as a
corporation, general partnership, limited partnership, limited liability
company, closed joint stock company, or similar entity in good standing (to the
extent applicable) under the laws of the jurisdiction of its organization, has
organizational power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses and is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not, singly or in the
aggregate, result in a Material Adverse Effect; except as otherwise disclosed in
the Registration Statement, all of the issued and outstanding capital stock or
other ownership interests of each such Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable (to the extent applicable) and
is owned by the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of capital stock or other ownership interests of any
Subsidiary was issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary. The only subsidiaries of the Company are (a)
the subsidiaries listed on Exhibit 21 to the Registration Statement and (b)
certain other subsidiaries which, considered in the aggregate as a single
Subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02
of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column entitled
"Actual" under the caption "Capitalization" (except for subsequent issuances,
if any, pursuant to this Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities or options referred to in the Prospectuses).
The shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; none
of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any securityholder of
the Company.
(viii) Authorization of Agreement. This Agreement and the U.S. Purchase
Agreement have been duly authorized, executed and delivered by the Company.
<PAGE> 12
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(ix) Authorization and Description of Securities. The Securities to
be purchased by the International Managers and the U.S. Underwriters from the
Company have been duly authorized for issuance and sale to the International
Managers pursuant to this Agreement and the U.S. Underwriters pursuant to the
U.S. Purchase Agreement, respectively, and, when issued and delivered by the
Company pursuant to this Agreement and the U.S. Purchase Agreement,
respectively, against payment of the consideration set forth herein and the U.S.
Purchase Agreement, respectively, will be validly issued, fully paid and
non-assessable; the Common Stock conforms in all material respects to all
statements relating thereto contained in the Prospectuses and such description
conforms to the rights set forth in the instruments defining the same; no holder
of the Securities will be subject to personal liability by reason of being such
a holder; and the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its Ventures (as defined below) is in violation of its charter or by-laws (or
equivalent constitutive documents) or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Company or any of its
Ventures is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any Venture is subject
(collectively, "Agreements and Instruments") except for such defaults that would
not, singly or in the aggregate, result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the U.S. Purchase
Agreement and the consummation of the transactions contemplated in this
Agreement, the U.S. Purchase Agreement and in the Registration Statement
(including the issuance and sale of the Securities and the use of the proceeds
from the sale of the Securities as described in the Prospectuses under the
caption "Use of Proceeds") and compliance by the Company with its obligations
under this Agreement and the U.S. Purchase Agreement have been duly authorized
by all necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below) under,
or result in the creation or imposition of any lien, charge or
<PAGE> 13
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encumbrance upon any property or assets of the Company or any Venture pursuant
to, the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws (or equivalent constitutive documents) of the Company
or any Venture or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any Venture or any
of their assets, properties or operations. As used herein, (a) "Ventures" means
all entities in which the Company has a direct or indirect greater than 25%
equity interest or voting power and (b) a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such indebtedness
by the Company or any Venture.
(xi) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any Venture exists or, to the knowledge of the Company, is
threatened, and the Company is not aware of any existing or threatened labor
disturbance by the employees of any of its or any Venture's principal suppliers,
manufacturers, customers or contractors, which, in either case, may reasonably
be expected to, singly or in the aggregate, result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental agency
or body, domestic or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any Venture, which is required
to be disclosed in the Registration Statement (other than as disclosed
therein), or which, singly or in the aggregate, might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets of the Company or any
Venture or the consummation of the transactions contemplated in this Agreement
and the U.S. Purchase Agreement or the performance by the Company of its
obligations hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any Venture is a party or of
which any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine litigation
incidental to the business, singly or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
<PAGE> 14
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(xiii) Accuracy of Exhibits. There are no contracts or documents which
are required to be described in the Registration Statement or the Prospectuses
or to be filed as exhibits thereto which have not been so described and filed
as required.
(xiv) Possession of Intellectual Property. The Company and the
Ventures own or possess, or can acquire on reasonable terms, adequate patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names or
other intellectual property (collectively, "Intellectual Property") necessary to
carry on the business now operated by them, except to the extent the failure to
so own, possess or be able to acquire would not result in a Material Adverse
Effect, and neither the Company nor any Venture has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or inadequate
to protect the interest of the Company or any Venture therein, and which
infringement or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would result
in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities under this
Agreement and the U.S. Purchase Agreement or the consummation of the
transactions contemplated by this Agreement and the U.S. Purchase Agreement,
except such as have been already obtained or as may be required under the 1933
Act or the 1933 Act Regulations and foreign or state securities or blue sky
laws.
(xvi) Possession of Licenses and Permits. Except as otherwise
disclosed in the Registration Statement, the Company and the Ventures possess
such material permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them; the Company and the Ventures are in compliance
with the terms and conditions of all such Governmental Licenses, except where
the failure so to
<PAGE> 15
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comply would not, singly or in the aggregate, result in a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and effect,
except when the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a Material
Adverse Effect; and neither the Company nor any Venture has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect.
(xvii) Title to Property. The Company and the Ventures have good and
marketable title to all real property owned by the Company and the Ventures and
good title to all other properties owned by them, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the Prospectuses
or (b) do not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made of such
property by the Company or any Venture; and all of the leases and subleases
material to the business of the Company and the Ventures, considered as one
enterprise, and under which the Company or any Venture holds properties
described in the Prospectuses, are in full force and effect, and neither the
Company nor any Venture has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any Venture
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company or such Venture to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section 517.075
of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. Neither the Company nor any of its
Subsidiaries is, nor upon the issuance and sale of the Securities as herein
contemplated and the application of the net proceeds therefrom as described in
the Prospectuses will be, an "investment company" or an entity "controlled" by
an "investment company" as such terms are defined in the Investment Company Act
of 1940, as amended (the "1940 Act").
<PAGE> 16
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(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any Venture is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and
the Ventures have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative, regulatory
or judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any Ventures and (D) there are no
events or circumstances that might reasonably be expected to form the basis of
an order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the Company
or any Ventures relating to Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the Prospectuses,
there are no persons with registration rights or other similar rights to have
any securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any Ventures delivered to the Global Coordinator, the Lead Managers
or to counsel for the International Managers shall be deemed a representation
and warranty by the Company herein to each International Manager as to the
matters covered thereby.
<PAGE> 17
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SECTION 2. Sale and Delivery to International Managers; Closing
(a) Initial Securities. The Company agrees to sell to each International
Managers, severally and not jointly, and on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, each International Manager, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial International Securities set forth in Schedule A opposite the
name of such International Manager, plus any additional number of Initial
International Securities which such International Manager may become obligated
to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, the Company hereby grants an option
to the International Managers, severally and not jointly, to purchase up to an
additional 333,000 shares of Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial International Securities but
not payable on the International Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised not more than
two times in whole or in part only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial International Securities upon notice by the Global Coordinator to the
Company setting forth the number of International Option Securities as to which
the several International Managers are then exercising the option and the time
and date of payment and delivery for such International Option Securities. Any
such time and date of delivery for the International Option Securities (a "Date
of Delivery") shall be determined by the Global Coordinator, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, on the basis
of the representations and warranties of the Company contained herein and
subject to the terms and conditions herein set forth, will purchase that
proportion of the total number of International Option Securities then being
purchased which the number of Initial International Securities set forth in
Schedule A opposite the name of such International Underwriter bears to the
total number of Initial International Securities, subject in each case to such
adjustments as the
<PAGE> 18
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Global Coordinator in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial Securities
shall be made at the offices of Cahill Gordon & Reindel, 80 Pine Street, New
York, New York 10005 or at such other place as shall be agreed upon by the
Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on the date
hereof) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for such International Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in
the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company. It is understood
that each International Manager has authorized the Lead Manager, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial International Securities and the International Option
Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by
the Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates
<PAGE> 19
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for the Initial International Securities and the International Option
Securities, if any, will be made available for examination and packaging by the
Lead Managers in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectuses or for additional information,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectuses,
will furnish the Global Coordinator with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Global Coordinator
or counsel for the International Managers shall reasonably object within three
Business Days after being furnished such documents.
<PAGE> 20
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(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Lead Managers and counsel for the International Managers,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Lead Managers, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the International
Managers. The copies of the Registration Statement and each amendment thereto
furnished to the International Managers will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each International Manager, without charge,
during the period when the International Prospectus is required to be delivered
under the 1933 Act or the Securities Exchange of 1934 (the "1934 Act"), such
number of copies of the International Prospectus (as amended or supplemented)
as such International Manager may reasonably request. The International
Prospectus and any amendments or supplements thereto furnished to the
International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion
of the distribution of the Securities as contemplated in this Agreement, the
U.S. Purchase Agreement and the Prospectuses. If at any time when a prospectus
is required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the reasonable opinion of counsel for the International
Managers or for the Company, to amend the Registration Statement or amend or
supplement any Prospectus in order that the Prospectuses will not include any
untrue statements of a material fact or
<PAGE> 21
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omit to state a material fact necessary in order to make the statements therein
not misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the reasonable opinion
of any such counsel, at any such time to amend the Registration Statement or
amend or supplement any Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements, and
the Company will furnish to the International Managers such number of copies of
such amendment or supplement as the International Managers may reasonably
request.
(f) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(g) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds."
(h) Listing. The Company will use its best efforts to effect the
admission of the Securities on the European Association of Securities Dealers
Automated Quotation ("EASDAQ") system and comply with the requirements of such
exchange to maintain such listing. The Company will use its best efforts to
effect and maintain the quotation of the Securities on the Nasdaq National
Market and will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market of companies that have securities that
are traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(i) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any
<PAGE> 22
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transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of the Securities hereunder and under
the U.S. Purchase Agreement, (B) the issuance of any shares of Common Stock by
the Company upon the exercise of options or warrants or the conversion of
securities outstanding on the date hereof and referred to in the Prospectuses or
(C) the purchase or acquisition of shares of Common Stock pursuant to contracts
entered into prior to the date hereof and referred to in the Prospectus.
(j) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act and rules and regulations of the Commission thereunder within the
time periods referred to therein.
(k) Compliance with Rule 463. The Company will comply with Rule 463 of
the 1933 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the U.S. Underwriters
and the International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vi) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (vii) the fees and expenses of any transfer
agent or registrar for the Securities, (viii) the filing fees incident to, and
the
<PAGE> 23
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reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities and (ix) the fees and
expenses incurred in connection with the listing of the Securities on EASDAQ and
inclusion of the Securities in the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the Lead Managers for all of their
out-of-pocket expenses reasonably incurred by the International Managers in
connection with this Agreement or the offering of the Securities contemplated
hereunder, including the reasonable fees and disbursements of counsel and
special counsel for the International Managers.
SECTION 5. Conditions of International Managers Obligations.
The obligations of the several International Managers hereunder are subject to
the accuracy of the representations and warranties of the Company contained in
Section 1 hereof and in certificates of any officer of the Company or any
subsidiary of the Company delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the International Managers. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Lead
Managers shall have received the favorable opinion, dated as of Closing
Time, of each of Shearman &
<PAGE> 24
-20-
Sterling, counsel for the Company, Grier Raclin, Senior Vice President and
General Counsel of the Company, Coudert Brothers, special counsel for the
Company and special regulatory counsel for Hermes Europe Railtel B.V.,
Chenko Didkovskiy & Partners, special Ukranian counsel to Bancomsvyaz, and
Somodeco, counsel and regulatory counsel to GTS Monaco Access S.A.M., each
in form and substance satisfactory to counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other U.S. Underwriters to the effect set forth in Exhibits A-1 through
A-__ hereto.
(c) Opinion of Counsel for International Managers. At Closing
Time, the Lead Managers shall have received the favorable opinion, dated
as of Closing Time, of each of Cahill Gordon & Reindel, counsel for the
International Managers, and Clifford Chance, special Russian counsel to
the International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers as to such
matters as are reasonably requested by the Lead Managers.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the Lead Managers shall have received a
certificate of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of such officer, are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Lead Managers shall have
<PAGE> 25
-21-
received from Ernst & Young a letter dated such date, in form and
substance satisfactory to the Lead Managers, together with signed or
reproduced copies of such letter for each of the other International
Managers containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in
the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Lead Managers
shall have received from Ernst & Young a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business
days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on EASDAQ, subject only to official notice
of issuance. At Closing Time, the Securities shall have been approved
for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Underwriters shall have received an agreement substantially in the form
of Exhibit B hereto signed by holders of shares of Common Stock,
warrants, options or other rights to purchase or acquire shares of Common
Stock or other securities convertible or exchangeable into Common Stock
(other than the Company's Convertible Bonds due 2000 (the "Convertible
Bonds")) representing not less than 93% of the outstanding Common Stock
(excluding the effect of the Convertible Bonds).
(j) Purchase of Initial U.S. Securities. Contemporaneously with
the purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Representatives shall have
purchased the Initial U.S. Securities under the U.S. Purchase Agreement.
<PAGE> 26
-22-
(k) Notes Offering. Contemporaneously with the purchase by the
Underwriters of the Securities under this Agreement, the Company shall
have consummated the Notes Offering.
(l) Conditions to Purchase of International Option Securities. In
the event that the International Managers exercise their option provided
in Section 2(b) hereof to purchase all or any portion of the
International Option Securities, the representations and warranties of
the Company contained herein and the statements in any certificates
furnished by the Company or any subsidiary of the Company hereunder shall
be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Lead Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(d) hereof remains true and correct as of such
Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion,
dated as of such Date of Delivery, of each of counsels listed in
Section 5(b), each in form and substance satisfactory to counsel
for the Lead Managers, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for International Managers. The
favorable opinion of Cahill Gordon & Reindel, counsel for the
International Managers and Clifford Chance, special counsel to the
International Managers, dated such Date of Delivery, relating to
the International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required
by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst & Young,
in form and substance satisfactory to the Lead Managers and dated
such Date of Delivery, substantially in the same form and substance
as the letter furnished to the Lead Managers pursuant to
<PAGE> 27
-23-
Section 5(f) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the International Managers shall have been
furnished with such documents and opinions as they may reasonably request
for the purpose of enabling them to pass upon the issuance and sale of
the Securities as herein contemplated, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment
of any of the conditions, herein contained; and all proceedings taken by
the Company in connection with the issuance and sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and
substance to the Lead Managers and counsel for the International
Managers.
(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of International Option Securities on a Date of Delivery which
is after the Closing Time, the obligations of the several International
Managers to purchase the relevant Option Securities, may be terminated by
the Lead Managers by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. The Company agrees to
indemnify and hold harmless each International Manager and each person, if any,
who controls any International Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or the omission or alleged omission
<PAGE> 28
-24-
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact included in any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including the
fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred
in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent that
any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of any International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment or supplement thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the International Prospectus (or
any amendment or supplement thereto); provided, further the Company will not be
liable to any International Manager with respect to any preliminary prospectus
to the extent that any such loss, liability, claim, damage or expense of such
International Manager results from the fact that such International Manager
sold Securities to a person as to whom it shall be established in the related
proceedings that there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the
<PAGE> 29
-25-
Prospectus (or of the Prospectus as then amended or supplemented if the Company
shall have furnished such International Manager with such amendment or
supplement thereto prior to the written confirmation of such sale), if such
delivery was required by the Act, and such loss, liability, claim, damage or
expense results from an untrue statement or omission of a material fact
contained in such preliminary prospectus that was completely corrected in the
Prospectus (or of the Prospectus as then amended or supplemented if the Company
shall have furnished such International Manager with such amendment or
supplement thereto prior to the written confirmation of such sale).
(b) Indemnification of Company, Directors and Officers. Each
International Manager severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment or supplement thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary International prospectus or the International Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such International Manager
through the Lead Managers expressly for use in the Registration Statement (or
any amendment or supplement thereto) or such preliminary prospectus or the
International Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve
such indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying
<PAGE> 30
-26-
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company
<PAGE> 31
-27-
on the one hand and the International Managers on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by
<PAGE> 32
-28-
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue or alleged untrue statement or omission or
alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Manager has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any Venture submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Lead Manager or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Lead Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as
<PAGE> 33
-29-
of which information is given in the International Prospectus, any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business, or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Lead Managers,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission, or EASDAQ, Luxembourg Stock
Exchange or the Nasdaq National Market, or if trading generally on the American
Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market
has been suspended or materially limited, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices have been required, by any
of said exchanges or by such system or by order of the Commission, the NASD or
any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the International Managers. If
one or more of the International Managers shall fail at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the International
Managers shall have the right, within 24 hours thereafter, to make arrangements
for one or more of the non-defaulting International Managers, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the International Managers shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of International Securities to be
<PAGE> 34
-30-
purchased on such date, each of the non-defaulting International Managers
shall be obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of International Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the International Managers to purchase and of the
Company to sell the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting International Managers.
No action taken pursuant to this Section shall relieve any defaulting
International Managers from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers c/o Merrill Lynch
at North Tower, World Financial Center, New York, New York 10281-1201, attention
of Robert Kramer; and notices to the Company shall be directed to it at 1751
Pinnacle Drive, North Tower - 12th Floor, McLean, VA 22102, attention of William
H. Seippel.
SECTION 12. Parties. This Agreement shall each inure to the benefit
of and be binding upon the International Managers and the Company and their
respective successors.
<PAGE> 35
-31-
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the International
Managers and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the International Managers and the Company and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
International Managers shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers and the Company in accordance with its terms.
<PAGE> 36
-32-
Very truly yours,
GLOBAL TELESYSTEMS GROUP, INC.
By
------------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
UBS LIMITED
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
BARING BROTHERS LIMITED (as agent for
ING BANK N.V.)
By: MERRILL LYNCH INTERNATIONAL
By
---------------------------------------
Authorized Signatory
For themselves and as Lead Managers of the other International Managers named
in Schedule A hereto.
<PAGE> 37
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of International Manager Securities
- ----------------------------- ----------
<S> <C>
Merrill Lynch International.......................
Donaldson, Lufkin & Jenrette International........
UBS Limited.......................................
Lehman Brothers International (Europe)............
Baring Brothers (as agent for ING Bank N.V.)......
Names of Co-Lead Managers
- -------------------------
Total............................................. 2,220,000
=========
</TABLE>
Schedule A-1
<PAGE> 38
SCHEDULE B
GLOBAL TELESYSTEMS GROUP, INC.
Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the International Securities to
be paid by the several International Managers shall be $__________, being
an amount equal to the initial public offering price set forth above less
$__________ per share; provided that the purchase price per share for any
International Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an
amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial International Securities but not
payable on the International Option Securities.
Schedule B-1
<PAGE> 39
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
A-1-1
<PAGE> 40
Exhibit A-2
FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
A-2-1
<PAGE> 41
Exhibit B
, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
UBS SECURITIES LLC
LEHMAN BROTHERS INC.
FURMAN SELZ LLC
c/o Merrill Lynch & Co.
Merrill, Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
United States of America
as U.S. Representatives of the several Underwriters to be named in
the within-mentioned Purchase Agreements
Re: Agreement not to sell or otherwise dispose of securities of
Global TeleSystems Group, Inc.
Ladies and Gentlemen:
The undersigned, a stockholder of Global TeleSystems Group, Inc. (the
"Company"), understands that the Company has filed a registration statement on
Form S-1 with the Securities and Exchange Commission in connection with the
initial public offering (the "Offering") of shares of Common Stock ("Shares")
of the Company. The undersigned further understands that the Company proposes
to enter into a U.S. purchase agreement (the "U.S. Purchase Agreement") with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Donaldson, Lufkin & Jenrette Securities Corporation, UBS Securities LLC, Lehman
Brothers Inc. and Furman Selz LLC (the "U.S. Representatives"), on behalf of
the U.S. underwriters (collectively, the "U.S. Underwriters"), and a separate
international purchase agreement (the "International Purchase Agreement";
together with the U.S.
B-1
<PAGE> 42
Purchase Agreement, the "Purchase Agreements") with Merrill Lynch
International, UBS Limited, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc. and ING Bank N.V. (the "International
Representatives") on behalf of the international managers (collectively, the
"International Managers", and, together with the U.S. Underwriters, the
"Underwriters"), in connection with the Offering.
In recognition of the benefit that such Offering will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and in order to induce the Company and the Underwriters to enter into the
respective Purchase Agreements and to proceed with the Offering, the
undersigned hereby agrees, that, should the Offering be consummated, for a
period of 180 days after the date of the Purchase Agreements relating to the
Offering, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any Shares or any securities convertible into or
exchangeable or exercisable for any Shares, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of disposition or request the filing of any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of Shares, whether any such
swap transaction is to be settled by delivery of the Shares or other
securities, in cash or otherwise.
Sincerely,
Name of Stockholder:
----------------------------------
(Print)
Signature:
----------------------------------
By:
(if not natural person)
B-2
<PAGE> 1
EXHIBIT 3.9
STOCK
FORM OF
AMENDED AND RESTATED BY-LAWS
OF
GLOBAL TELESYSTEMS GROUP, INC.
(A Delaware Corporation)
(As of February 4, 1998)
ARTICLE I
OFFICES
Section 1. The registered office of Global TeleSystems Group, Inc.
(the "Corporation") in the state of Delaware shall be in the city of Dover,
county of Kent, and the name of the resident agent in charge thereof is
National Corporate Research, Ltd.
Section 2. The Corporation may also have offices at such other
places, both within and without the state of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place within or without the state of Delaware
as may be fixed from time to time by the Board of Directors and stated in the
notice of meeting or in the duly executed waiver of notice thereof.
<PAGE> 2
Section 2. Annual meetings of stockholders shall be held on such date
and at such time as may be fixed from time to time by the Board of Directors
and stated in the notice of meeting or in a duly executed waiver of notice
thereof, at which the stockholders shall elect, by a plurality vote, or such
other vote as may be required by the provisions of any agreement among the
stockholders of the Corporation, a class of the Board of Directors in
accordance with Article Eleventh of the Corporation's Certificate of
Incorporation, as it may be amended from time to time (the "Certificate of
Incorporation"), and transact such other business as may properly be brought
before the meeting
Section 3. Special meetings of stockholders may be held at such time
and place within or without the state of Delaware as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 4. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, Article II, Section 6 of the
By-laws, or by the Certificate of Incorporation, may only be called by the
Board of Directors, the Chairman of the Board of Directors or the Chief
Executive Officer.
Section 5. Written notice of every meeting of stockholders, stating
the purpose or purposes to which the meeting is called, the date and time and
the place where it is to be held and, if the list of stockholders required by
Section 7, Article IX is not to be at such place at least ten days prior to the
meeting, the place where such list will be, shall be served, not less than ten
nor more than sixty days before the meeting, either personally or by mail, upon
each stockholder entitled to vote at such meeting and upon each stockholder of
record who, by reason of any action proposed at such meeting, would be entitled
to have his or her stock appraised if such action were taken, If mailed, such
notice shall be deemed given when deposited in the mail directed to a
stockholder at his or her address as it shall appear on the books of the
Corporation unless he or she shall have filed with the Secretary of the
Corporation a written request that notices intended for such stockholder be
mailed to some other address, in which case it shall be mailed to the address
designated in such request. The attendance of any stockholder at a meeting, in
person or by proxy, shall constitute a waiver of notice by such stockholder,
except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 6. (a) If a fully financed tender offer is made publicly to
purchase all the Corporation's outstanding shares of common stock, par value
$.10 ("Common Stock") for cash or Marketable Securities (as defined below) at a
price that is at least forty percent (40%) greater than the average closing
price of such shares on the principal exchange on which such shares are listed
during the thirty (30) days prior to the date on which such offer is first
published or sent to security holders (the "Offer Date"), and the Corporation's
Board of Directors opposes such offer, the holders
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of more than fifty percent (50%) of the outstanding shares of Common Stock may,
at any time subsequent to the date that is nine (9) calendar months after the
Offer Date, call a special meeting of the stockholders, notwithstanding
anything contained in Article II, Section 4 of the By-Laws, at which meeting
stockholders may be asked to vote upon a proposal to request that the Board of
Directors amend the Rights Agreement between the Corporation and The Bank of
New York, as Rights Agent, dated as of February 2, 1998 (the "Rights
Agreement") to exempt such offer from the terms of the Rights Agreement;
provided that, if prior to the expiration of such nine-month period, the Board
of Directors determines that it is in the best interests of the shareholders to
undertake efforts to sell the Corporation, such period shall be extended for as
long as the Board of Directors continues its efforts to solicit, evaluate
and/or negotiate alternative bids to acquire the Corporation. If the proposal
to amend the Rights Agreement as described herein is approved by a vote of
seventy percent (70%) of the votes cast for or against such proposal at such
meeting of the stockholders at which a quorum is present, the Board of
Directors shall amend the Rights Agreement to exempt such offer from its terms
no later than 60 days after the date of such stockholders' meeting. This
Section may only be amended or repealed by a stockholder vote pursuant to
Article III, Section 2 of the By-Laws.
(b) "Marketable Securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.
ARTICLE III
QUORUM AND VOTING OF STOCK
Section 1. The holders of a majority of the shares of stock issued
and outstanding and entitled to vote, represented in person or by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, or by the Certificate of
Incorporation of the Corporation, or by the provisions of any agreement among
the stockholders of the Corporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
present in person or represented by proxy shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as original
notified. Notice of the adjourned meeting shall be given when required by law.
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Section 2. If a quorum is present, the affirmative vote of a majority
of the shares of stock represented at the meeting shall be the act of the
stockholders, unless the vote of a greater or lesser number of shares of stock
is required by law, or the Certificate of Incorporation of the Corporation, or
pursuant to Article II, Section 2 above, or pursuant to Article II, Section 6
above, or pursuant to the provisions of any agreement of the Stockholders of
the Corporation. Cumulative voting shall not be allowed.
Section 3. Each outstanding share of stock having voting power shall
be entitled to one vote on each matter submitted to a vote at a meeting of the
stockholders. A stockholder may vote either in person or by proxy executed in
writing by the stockholder or by his or her duly authorized attorney-in-fact.
Section 4. The Board of Directors in advance of any stockholders'
meeting may appoint one or more inspectors to act at the meeting or any
adjournment thereof. If inspectors are not so appointed, the person presiding
at a stockholders' meeting may, and, on the request of any stockholder entitled
to vote thereat, shall, appoint one or more inspectors. In case any person
appointed as inspector fails to appear or act, the vacancy may be filled by the
Board of Directors in advance of the meeting or at the meeting by the person
presiding thereat. Each inspector, before entering upon the discharge of his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his or her ability.
ARTICLE IV
DIRECTORS
Section 1. The Board of Directors of the Corporation shall consist of
eleven members. The number of directors constituting the entire Board of
Directors may be changed from time to time by resolution adopted by the Board
of Directors or the stockholders, provided no decrease made in such number
shall shorten the term of any incumbent director.
Section 2. Directors shall be at least eighteen years of age and need
not be residents of the state of Delaware nor stockholders of the Corporation.
The directors, other than the first Board of Directors, shall be elected at the
annual meeting of the stockholders pursuant to statute and as provided in the
Certificate of Incorporation.
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Section 3. Subject to the provisions of any agreement among the
stockholders of the Corporation, any or all of the directors may be removed for
cause (as defined by applicable law), at any time by the vote of a majority of
the stockholders entitled to vote upon the election of directors at a special
meeting of stockholders called for that purpose.
Section 4. Subject to the provisions of any agreement among the
stockholders of the Corporation, vacancies and newly created directorships
resulting from an increase in the authorized number of directors may be filled
in accordance with the Certificate of Incorporation.
Section 5. The business affairs of the Corporation shall be managed
by its Board of Directors, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation of the Corporation or by these By-laws
directed or required to be exercised or done by the stockholders.
Section 6. The directors may keep the books of the Corporation,
except such as are required by law to be kept within the state of Delaware,
outside the state of Delaware, at such place or places as they may from time to
time determine.
Section 7. The Board of Directors, by the affirmative vote of a
majority of the directors, or such other number of directors required pursuant
to the provisions of any agreement among the stockholders, then in office, and
irrespective of any personal interest of any of its members, shall have
authority to establish reasonable compensation of all directors for services to
the Corporation as directors, officers or otherwise.
Section 8. The directors may close the stock transfer books for a
period not exceeding twenty (20) days prior to stockholders' meetings or
payment of dividends or for such other reasons as they may see fit.
ARTICLE V
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Meetings of the Board of Directors, regular or special,
may be held either within or without the state of Delaware, at such places as
the Board of Directors may from time to time determine.
Section 2. Regular meetings of the Board of Directors may be held
without notice at such time as the Board of Directors may from time to time
determine. Special meetings of the Board of Directors shall be held whenever
called at the direction of the President or any of the directors then
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<PAGE> 6
in office. The Secretary or some other officer or director of the Corporation
shall give notice to each director of the time and place of each special
meeting by mailing the same at least five days before the meeting or
telecopying or telephoning the same not later than one day before the meeting,
at the residence address of each director or at such director's usual place of
business, or such shorter time as may be permitted by the General Corporation
Law of the State of Delaware and by the Certificate of Incorporation of the
Corporation. Special meetings of the Board of Directors shall be held at such
place, within or without the State of Delaware, as shall be provided in the
notice for the meeting.
Section 3. Notice of a meeting need not be given to any director who
submits a signed waiver of notice, whether before or after the meeting, or who
attends the meeting without protesting prior thereto or at its commencement,
the lack of notice. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.
Section 4. A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business unless a greater or lesser
number is required by law or by the Certificate of Incorporation of the
Corporation. The vote of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors, unless
the vote of a greater number is required by law or by the Certificate of
Incorporation of the Corporation or a larger number of directors shall be
required under the provisions of any agreement among the stockholders. If a
quorum shall not be present at any meeting of directors, the directors present
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 5. Any action required or permitted to be taken by the Board
of Directors, or any committee thereof, may be taken without a meeting if all
members of the Board of Directors, or the committee, consent thereto in writing
and the writing or writings are filed with the minutes of the proceedings of
the Board of Directors or the committee.
Section 6. Any one or more members of the Board of Directors, or any
committee thereof, may participate in a meeting of such Board of Directors or
committee by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
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ARTICLE VI
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. The Board of Directors, by a resolution passed by a vote
of a majority of the whole Board, may appoint an Executive Committee and such
other committees, each consisting of one or more directors. To the extent
permitted by law and as directed by resolutions adopted by the Board of
Directors from time to time, the Executive Committee shall have and exercise
the powers of the Board of Directors, during the intervals between meetings of
the Board of Directors, in the management of the property, business and affairs
of the Corporation.
ARTICLE VII
NOTICES
Section 1. Whenever, under statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any director or
stockholder, such notice may be given in writing, either personally or by
courier, facsimile or telegram or by mail, addressed to such director or
stockholder, at his or her address as it appears on the records of the
Corporation, with postage thereon prepaid, in which case such notice shall be
deemed to be given at the time when the same shall be deposited in the United
States Mail.
Section 2. Whenever any notice or a meeting is required to be given
under statute, the provisions of the Certificate of Incorporation or these
By-laws, a waiver thereof in writing signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be
deemed equivalent to the giving of such notice. Neither the business to be
transacted at nor the purpose of the meeting need be specified in any written
waiver of notice.
ARTICLE VIII
OFFICERS
Section 1. The officers of the Corporation shall be appointed by the
Board of Directors and shall be a President, one or more Executive Vice
Presidents, Senior Vice Presidents, or Vice Presidents, a Treasurer and a
Secretary. The Board of Directors may also appoint one or more Assistant
Secretaries and Assistant Treasurers.
Section 2. The Board of Directors, at its first meeting after each
annual meeting of stockholders, shall appoint a President, one or more
Executive Vice Presidents, Senior Vice Presidents, or Vice Presidents, a
Treasurer and a Secretary, none of whom need to be a member of the Board of
Directors. Any two or more offices may be held by the same person, except that
there shall always be two persons who hold offices which entitle them to sign
instruments and stock certificates.
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Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board of Directors.
Section 4. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors or by a committee thereof.
Section 5. The officers of the Corporation, unless removed by the
Board of Directors as herein provided, shall hold office until their successors
are chosen and qualify or until their earlier death, resignation or removal.
Any officer elected or appointed by the Board of Directors may be removed at
any time, with or without cause, by the affirmative vote of a majority of the
Board of Directors. Any officer may resign his or her office at any time upon
written notice to the Corporation. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
Section 6. In the event of the absence of any officer of the
Corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may at any time or from time to time
delegate all or any part of the powers or duties of any officer to any other
officer or officers or to any director or directors.
PRESIDENT
Section 7. The President shall be the chief executive officer of the
Corporation and as such shall exercise such authority and control over the
affairs of the Corporation, subject to the control of the Board of Directors,
as are implied by the position of chief executive officer. The President shall
preside at all meetings of the Board of Directors and stockholders of the
Corporation and shall perform such other duties as may be assigned to the
President by the Board of Directors.
VICE PRESIDENTS
Section 8. If there shall be appointed one or more Executive Vice
Presidents, Senior Vice Presidents, or Vice Presidents, each officer shall
perform such duties and have such powers as may be prescribed by the Board of
Directors or the President, under whose supervision he, she or they shall be.
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THE SECRETARY AND ASSISTANT SECRETARIES
Section 9. The Secretary shall record all the proceedings of the
meetings of the stockholders and of the Board of Directors in a book to be kept
for that purpose. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision he or she shall be. The
Secretary shall have custody of the corporate seal of the Corporation and the
Secretary, or an Assistant Secretary, shall have authority to affix the same to
any instrument requiring it and, when so affixed, it may be attested by his or
her signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature.
Section 10. The Assistant Secretary or, if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors.
Section 12. The Treasurer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings, or when the Board of Directors so requires, an account of
all his or her transactions as Treasurer and of the financial condition of the
Corporation.
Section 13. If required by the Board of Directors, the Treasurer
shall give the Corporation a bond in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of the office and for the restoration to the Corporation, in case
of the Treasurer's death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever kind in his
or her possession or under his or her control belonging to the Corporation.
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Section 14. The Assistant Treasurer, or, if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
ARTICLE IX
CERTIFICATE FOR SHARES
Section 1. Every holder of shares of stock in the Corporation shall
be entitled to have a certificate certifying the number of shares owned by such
holder in the Corporation. Each such certificate shall be numbered and entered
in the books of the Corporation as they are issued. They shall exhibit the
holder's name and the number of shares and shall be signed by the Chairman,
President, Executive Vice President, Senior Vice President or any Vice
President and by the Secretary or any Assistant Secretary or the Treasurer or
an Assistant Treasurer of the Corporation and may be sealed with the seal of
the Corporation or a facsimile thereof. When the Corporation is authorized to
issue shares of more than one class, there shall be set forth upon the face or
back of the certificate a statement that the Corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designation, relative rights, preferences, and limitations of the shares of
each class authorized to be issued, and, if the Corporation is authorized to
issue any class of preferred shares in series, the designation, relative
rights, preferences and limitations of each such series so far as the same have
been fixed and the authority of the Board of Directors to designate and fix the
relative rights, preferences and limitations of other series.
Section 2. The signatures of the officers of the Corporation upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Corporation itself or an
employee of the Corporation. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer at the
date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors or an officer of the Corporation
may direct a new certificate or certificates to be issued in place of any
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificates has been lost or destroyed. When authorizing such issue of a
new certificate, the Board of Directors or an officer of the Corporation, in
its or such officer's
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discretion and as a condition precedent to the issuance thereof, may prescribed
such terms and conditions as it deems expedient, and may require such
indemnities as it deems adequate, to protect the Corporation from any claims
that may be made against it with respect to any such certificate alleged to
have been lost or destroyed.
TRANSFERS OF SHARES
Section 4. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto, and
the old certificate canceled and the transaction recorded upon the books of the
Corporation.
FIXING RECORD DATE
Section 5. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or for the purpose of determining stockholders entitled to receive payment of
any dividend or the allotment of any rights, or for the purpose of any other
action, the Board of Directors shall fix, in advance, a date as the record date
for any such determination of stockholders in compliance with the General
Corporation Laws of the State of Delaware When a determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, unless the Board of Directors fixes a
new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends and to vote as such owner, and shall be entitled to hold
liable for calls and assessments a person registered on its books as the owner,
and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
LIST OF STOCKHOLDERS
Section 7. A list of stockholders as of the record date, certified by
the corporate officer responsible for its preparation or by a transfer agent,
shall be produced at any meeting upon the
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request thereat or prior thereto of any stockholder. If the right to vote at
any meeting is challenged, the inspectors of election, or person presiding
thereat, shall require such list of stockholders to be produced as evidence of
the right of the persons challenged to vote at such meeting and all persons who
appear from such list to be stockholders entitled to vote thereat may vote at
such meeting.
ARTICLE X
INDEMNIFICATION
Section 1. Any and every person made a party to any action, suit or
proceeding by reason of the fact that such person, his or her testator or
intestate, is or was a director, officer, employee or agent of this
Corporation, or of any corporation, partnership, joint venture, trust or other
enterprise which he or she served as such at the request of this Corporation,
shall be indemnified by the Corporation, to the fullest extent permissible
under the laws of the state of Delaware, against any and all reasonable
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and necessarily incurred by such person connection with the
defense of any such action, suit or proceedings. Such right of indemnification
shall not be deemed exclusive of any other rights to which such person may be
entitled apart from this provision. The Board of Directors is authorized to
provide for the discharge of the Corporation's responsibilities under this
Article by way of insurance or any other feasible and proper means.
ARTICLE XI
GENERAL PROVISIONS
DIVIDENDS
Section 1. Subject to the provisions of the Certificate of
Incorporation relating thereto, if any, dividends may be declared by the Board
of Directors at any regular or special meeting, pursuant to law. Dividends may
be paid in cash, in shares of the capital stock or in the Corporation's bonds
or its property, including the shares or bonds of other corporations, subject
to any provisions of law and of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall deem to be in the best interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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CHECKS
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the word "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
ARTICLE XII
AMENDMENTS
These By-laws may be amended or repealed or new By-laws may be adopted
by the stockholders entitled to vote or by the Board of Directors.
* * *
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EXHIBIT 4.1
CUSIP NO. 37936U104
GLOBAL TELESYSTEMS GROUP, INC.
TOTAL AUTHORIZED ISSUE 145,000,000 SHARES
SEE REVERSE FOR
CERTAIN DEFINITIONS
135,000,000 SHARES PAR VALUE $.10 EACH 10,000,000 SHARES PAR VALUE $.0001 EACH
COMMON STOCK PREFERRED STOCK
THE CORPORATION WILL FURNISH TO EACH STOCKHOLDER WHO SO REQUESTS THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
THIS IS TO CERTIFY THAT IS THE OWNER OF
---------------------------------------
- ------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
GLOBAL TELESYSTEMS GROUP, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this Certificate properly
endorsed. WITNESS, the seal of the Corporation and the signatures of its duly
authorized officers.
DATED
<PAGE> 2
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement, dated as of February 2,
1998 (the "Rights Agreement"), between Global TeleSystems Group, Inc.
(the "Company") and The Bank of New York, as Rights Agent (the "Rights
Agent"), the terms of which are hereby incorporated herein by reference and a
copy of which is on file at the principal office of the stock transfer
administration office of the Rights Agent. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement), whether currently held by or on behalf of
such Person or by any subsequent holder, may become null and void.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -...... Custodian .......
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act .........................
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list
</TABLE>
For value received ______________ hereby sell, assign and transfer unto
<TABLE>
<S> <C>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
___________________________________________________________________________________________
___________________________________________________________________________________________
____________________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
__________________________________________________________________________________ Attorney
to transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated ________________________ 19___
In presence of
________________________________________
________________________________
</TABLE>
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
GLOBAL TELESYSTEMS GROUP, INC.
and
THE BANK OF NEW YORK
Rights Agent
Rights Agreement
Dated as of February 2, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3. Issue of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates . . . . . . . . . . . . . . . . . . . 10
SECTION 7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 10. Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 12. Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 15. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 17. Rights Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 3
ii
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 23. Redemption and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 24. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 25. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 26. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 27. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 28. Determinations and Actions by the Board of Directors, etc. . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 29. Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 30. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 31. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 32. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 33. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 34. Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of February 2, 1998 (this
"Agreement"), between Global TeleSystems Group, Inc., a Delaware corporation
(the "Company"), and The Bank of New York, a New York Trust company (the "Rights
Agent").
WHEREAS, on December 5, 1997 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared, effective
as of the date of entering into this Agreement, a distribution of one Right
(each, a "Right") for each share of Common Stock, par value $1.00 per share, of
the Company (the "Company Common Stock") outstanding at the Close of Business
(as defined below) on [ ], 1998 (the "Record Date"), and has
authorized the issuance of one Right (as such number may hereinafter be adjusted
pursuant hereto) for each share of Company Common Stock issued between the
Record Date (whether originally issued or delivered from the Company's treasury)
and, except as otherwise provided in Section 22, the Distribution Date, each
Right initially representing the right to purchase upon the terms and subject to
the conditions hereinafter set forth one Unit (as defined below) of Series A
Preferred Stock (as defined below);
WHEREAS, the Company desires to set forth certain terms and
conditions governing the Rights; and
WHEREAS, the Company desires to appoint the Rights Agent to
act as rights agent hereunder, in accordance with the terms and conditions
hereof;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
SECTION 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or
which, alone or together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of 15% or more of the shares of
Company Common Stock then outstanding, but shall not include (w) the
Company, any Subsidiary of the Company, any employee benefit plan
maintained by the Company or any of its Subsidiaries or any trustee or
fiduciary with respect to such plan acting in such capacity, (x) any
such Person who has become and is such a Beneficial Owner solely
because (A) of a change in the aggregate number of shares of the
Company Common Stock since the last date on which such Person acquired
Beneficial Ownership of any shares of the Company Common Stock or (B)
it acquired such Beneficial Ownership in the good faith belief that
such acquisition would not (1) cause such Beneficial Ownership to be
equal to or exceed 15% of the shares of the Company Common Stock then
<PAGE> 5
2
outstanding and such Person relied in good faith in computing the
percentage of its Beneficial Ownership on publicly filed reports or
documents of the Company that are inaccurate or out-of-date or (2)
otherwise cause a Distribution Date or the adjustment provided for in
Section 11(a)(ii) to occur, (y) George Soros and his Affiliates,
unless Mr. Soros and his Affiliates become the Beneficial Owner of 20%
or more of the shares of the Company's Common Stock then outstanding,
or (z) Alan B. Slifka and his Affiliates, unless Mr. Slifka and his
Affiliates become the Beneficial Owner of 20% or more of the shares of
the Company's Common Stock then outstanding. Notwithstanding clause
(B)(2) of the prior sentence, if any Person that is not an Acquiring
Person due to such clause (B)(2) does not reduce its percentage of
Beneficial Ownership of the Company Common Stock to less than 15% by
the Close of Business on the fifth Business Day after notice from the
Company (the date of notice being the first day) that such person's
Beneficial Ownership of the Company Common Stock so equals to or
exceeds 15%, such Person shall at the end of such five Business Day
period, become an Acquiring Person (and such clause (B)(2) shall no
longer apply to such Person). For purposes of this definition, the
determination whether any Person acted in "good faith" shall be
conclusively determined by the Board of Directors of the Company,
acting by a vote of those directors of the Company whose approval
would be required to redeem the Rights under Section 23.
(b) "Adjustment Shares" has the meaning set forth in
Section 11(a)(ii).
(c) "Adjustment Spread" has the meaning set forth in
Section 34(a)(ii).
(d) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the Exchange Act
Regulations as in effect on the date of this Agreement.
(e) A Person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "beneficially own", and shall be deemed to have
"Beneficial Ownership" of, any securities:
(i) of which such Person or any of such Person's
Affiliates or Associates is considered to be a "beneficial
owner" under Rule 13d-3 of the Exchange Act Regulations as in
effect on the date of this Agreement; provided, however, that
a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own", or to have "Beneficial Ownership" of, any
securities under this subparagraph (i) as a result of an
agreement, arrangement or understanding to vote such
securities if such agreement, arrangement or understanding (A)
arises solely from a revocable proxy given in response to a
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange Act
and the Exchange Act Regulations,
<PAGE> 6
3
and (B) is not reportable by such Person on Schedule 13D under
the Exchange Act (or any comparable or successor report);
(ii) that are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
of such other Person) with which such Person (or any of such
Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for
the purpose of acquiring, holding, voting (except pursuant to
a revocable proxy as described in the proviso to subparagraph
(i) of this paragraph (c)) or disposing of such securities; or
(iii) that such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the
right to acquire (whether such right is exercisable
immediately or only after the passage of time or upon the
satisfaction of conditions) pursuant to any agreement,
arrangement or understanding (whether or not in writing) or
upon the exercise of conversion rights, exchange rights,
rights, warrants or options, or otherwise;
provided, however, that under this paragraph (e) a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own, or to have
"Beneficial Ownership" of, (A) securities tendered pursuant to a
tender or exchange offer made in accordance with Exchange Act
Regulations by such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange, (B) securities that may be issued upon exercise of Rights at
any time prior to the occurrence of a Triggering Event or (C)
securities that may be issued upon exercise of Rights from and after
the occurrence of a Triggering Event, which Rights were acquired by
such Person or any of such Person's Affiliates or Associates prior to
the Distribution Date or pursuant to Section 3(c) or Section 22 or
pursuant to Section 11(a)(i) in connection with an adjustment made
with respect to any such Rights.
(f) "Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in The City of
New York are authorized or obligated by law or executive order to
close.
(g) "Close of Business" on any given date shall mean 5:00
P.M., New York City time, on such date; provided, however, that if
such date is not a Business Day it shall mean 5:00 P.M., New York City
time, on the next succeeding Business Day.
(h) "Common Stock" of any Person other than the Company
shall mean the capital stock of such Person with the greatest voting
power, or, if such Person shall
<PAGE> 7
4
have no capital stock, the equity securities or other equity interest
having power to control or direct the management of such Person.
(i) "Company" has the meaning set forth in the preamble
to this Agreement.
(j) "Company Common Stock" has the meaning set forth in
the recitals to this Agreement.
(k) "Continuing Director" shall mean a member of the
Board of Directors of the Company who is not an Acquiring Person or an
Affiliate or Associate of an Acquiring Person or a representative or
nominee of an Acquiring Person or of any such Affiliate or Associate,
and who either (i) was a member of the Board of Directors of the
Company prior to the date of this Agreement or (ii) subsequently
became a member of the Board of Directors of the Company and whose
election or nomination for election is approved or recommended by a
vote of a majority of the Board of Directors of the Company, which
majority includes a majority of the Continuing Directors then on the
Board of Directors.
(l) "Current Value" has the meaning set forth in Section
11(a)(iii).
(m) "Depositary Agent" has the meaning set forth in
Section 7(c).
(n) "Distribution Date" has the meaning set forth in
Section 3(a).
(o) "Equivalent Preferred Stock" has the meaning set
forth in Section 11(b).
(p) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(q) "Exchange Act Regulations" shall mean the General
Rules and Regulations under the Exchange Act.
(r) "Expiration Date" has the meaning set forth in
Section 7(a).
(s) "Final Expiration Date" has the meaning set forth in
Section 7(a).
(t) "Person" shall mean any individual, partnership,
limited liability company, firm, corporation, association, trust,
unincorporated organization or other entity, as well as any syndicate
or group deemed to be a person under Section 14(d)(2) of the Exchange
Act.
<PAGE> 8
5
(u) "Preferred Stock" shall mean the Series A Preferred
Stock, par value $1.00 per share, of the Company having the voting
powers, designation, preferences and relative, participating, optional
or other special rights and qualifications, limitations and
restrictions described in the Certificate of Designations set forth as
Exhibit C hereto.
(v) "preferred stock equivalents" has the meaning
specified in Section 11(a)(iii).
(w) "Principal Party" has the meaning set forth in
Section 13(b).
(x) "Purchase Price" has the meaning set forth in
Section 7(b).
(y) "Record Date" has the meaning set forth in the
recitals to this Agreement.
(aa) "Redemption Price" has the meaning set forth in
Section 23(a).
(bb) "Registered Common Stock" has the meaning set forth
in Section 13(b)(ii).
(cc) "Registration Date" has the meaning set forth in
Section 9(c).
(dd) "Registration Statement" has the meaning set forth in
Section 9(c).
(ee) "Right" has the meaning set forth in the recitals to
this Agreement.
(ff) "Rights Agent" has the meaning set forth in the
preamble to this Agreement.
(gg) "Rights Certificate" has the meaning set forth in
Section 3(a).
(hh) "Rights Dividend Declaration Date" has the meaning
set forth in the recitals to this Agreement.
(ii) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii)(A), (B) or (C).
(jj) "Section 11(a)(iii) Trigger Date" has the meaning set
forth in Section 11(a)(iii).
<PAGE> 9
6
(kk) "Section 13 Event" shall mean any event described in
clause (x), (y) or (z) of Section 13(a).
(ll) "Section 34(a)(i) Exchange Ratio" has the meaning set
forth in Section 34(a)(i).
(mm) "Section 34(a)(ii) Exchange Ratio" has the meaning
set forth in Section 34(a)(ii).
(nn) "Securities Act" shall mean the Securities Act of
1933, as amended.
(oo) "Spread" has the meaning set forth in Section
11(a)(iii).
(pp) "Stock Acquisition Date" shall mean the first date of
public announcement (including, without limitation, the filing of any
report pursuant to Section 13(d) of the Exchange Act) by the Company
or an Acquiring Person that an Acquiring Person has become such.
(qq) "Subsidiary" shall mean, with reference to any
Person, any other Person of which an amount of voting securities or
equity interests sufficient to elect at least a majority of the
directors or equivalent governing body of such other Person is
beneficially owned, directly or indirectly, by such Person, or
otherwise controlled by such first-mentioned Person.
(rr) "Summary of Rights" has the meaning set forth in
Section 3(b).
(ss) "Trading Day" has the meaning set forth in
Section 11(d)(i).
(tt) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
(uu) "Unit" has the meaning set forth in Section 7(b).
SECTION 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. With the consent of the Rights Agent, the Company may from time
to time appoint such Co-Rights Agents as it may deem necessary or desirable.
SECTION 3. Issue of Rights Certificates. (a) Until the
earlier of (i) the Close of Business on the tenth day after the Stock
Acquisition Date and (ii) the Close of Business on the tenth Business Day (or
such later date as may be approved, prior to such
<PAGE> 10
7
time as any Person becomes an Acquiring Person (1) by 75% of the Company's
Board of Directors or (2) by a majority of the Company's Board of Directors and
a majority of the Continuing Directors then in office provided that at the time
of such action there are then in office not less than two Continuing Directors,
and of which the Company will give the Rights Agent prompt written notice)
after the date that a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan maintained by
the Company or any of its Subsidiaries or any trustee or fiduciary with respect
to such plan acting in such capacity) is first published or sent or given
within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any
successor rule, if upon consummation thereof such Person would be the
Beneficial Owner of 15% or more of the shares of Company Common Stock then
outstanding (the earlier of (i) and (ii) above being the "Distribution Date"),
(x) the Rights will be evidenced (subject to the provisions of paragraph (b) of
this Section 3) by the certificates for shares of Company Common Stock
registered in the names of the holders of shares of Company Common Stock as of
and subsequent to the Record Date (which certificates for shares of Company
Common Stock shall be deemed also to be certificates for Rights) and not by
separate certificates, and (y) the Rights will be transferable only in
connection with the transfer of the underlying shares of Company Common Stock
(including a transfer to the Company). As soon as practicable after the
Distribution Date, the Rights Agent will send by first-class, insured, postage
prepaid mail, to each record holder of shares of Company Common Stock as of the
Close of Business on the Distribution Date, at the address of such holder shown
on the records of the Company, one or more rights certificates, in
substantially the form of Exhibit A hereto (the "Rights Certificates"),
evidencing one Right for each share of Company Common Stock so held, subject to
adjustment as provided herein. In the event that an adjustment in the number
of Rights per share of Company Common Stock has been made pursuant to Section
11(p), at the time of distribution of the Rights Certificates, the Company may
make the necessary and appropriate rounding adjustments (in accordance with
Section 14(a)) so that Rights Certificates evidencing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As
of and after the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.
(b) As promptly as practicable following the Record Date,
the Company will send a copy of a Summary of Rights to Purchase Preferred
Stock, in a form that may be appended to certificates that evidence shares of
Company Common Stock, in substantially the form attached hereto as Exhibit B
(the "Summary of Rights"), by first-class, postage prepaid mail, to each record
holder of shares of Company Common Stock as of the Close of Business on the
Record Date, at the address of such holder shown on the records of the Company.
(c) Rights shall, without any further action, be issued
in respect of all shares of Company Common Stock that are issued (including any
shares of Company Common Stock held in treasury) after the Record Date but
prior to the earlier of the
<PAGE> 11
8
Distribution Date and the Expiration Date. Certificates evidencing such shares
of Company Common Stock issued after the Record Date shall bear the following
legend:
"This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights Agreement, dated
as of February [__], 1998 (the "Rights Agreement"), between Global
TeleSystems Group, Inc. (the "Company") and The Bank of new York (the
"Rights Agent"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal office of
the stock transfer administration office of the Rights Agent. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer
be evidenced by this certificate. The Company will mail to the holder
of this certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in
the Rights Agreement, Rights issued to, or held by, any Person who is,
was or becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent
holder, may become null and void."
With respect to certificates evidencing shares of Company
Common Stock (whether or not such certificates include the foregoing legend or
have appended to them the Summary of Rights), until the earlier of the
Distribution Date and the Expiration Date, the Rights associated with the
shares of Company Common Stock evidenced by such certificates shall be
evidenced by such certificates alone and registered holders of the shares of
Company Common Stock shall also be the registered holders of the associated
Rights, and the transfer of any of such certificates shall also constitute the
transfer of the Rights associated with the shares of Company Common Stock
evidenced by such certificates.
SECTION 4. Form of Rights Certificates. (a) The Rights
Certificates (and the forms of election to purchase, assignment and certificate
to be printed on the reverse thereof) shall each be substantially in the form
set forth in Exhibit A hereto and may have such marks of identification or
designation and such legends, summaries or endorsements printed thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any applicable law or any
rule or regulation thereunder or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed or to conform to
usage. Subject to the provisions of Section 11 and Section 22, the Rights
Certificates, whenever distributed, shall be dated as of the Record Date and on
their face shall entitle the holders thereof to purchase such number of Units
of Preferred Stock as shall be set forth therein at the price set forth
therein, but the amount and type of securities, cash or other assets that may
be acquired upon
<PAGE> 12
9
the exercise of each Right and the Purchase Price thereof shall be subject to
adjustment as provided herein.
(b) Any Rights Certificate issued pursuant hereto that
evidences Rights beneficially owned by: (i) an Acquiring Person or any
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) that becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) that becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
that receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person (or any such Associate or Affiliate)
to holders of equity interests in such Acquiring Person (or such Associate or
Affiliate) or to any Person with whom such Acquiring Person (or such Associate
or Affiliate) has any continuing agreement, arrangement or understanding
regarding either the transferred Rights, shares of Company Common Stock or the
Company or (B) a transfer that either (1) 75% of the Company's Board of
Directors or (2) a majority of the Company's Board of Directors and a majority
of the Continuing Directors, has determined to be part of a plan, arrangement
or understanding that has as a primary purpose or effect the avoidance of
Section 7(e), shall, upon the written direction of either (1) 75% of the
Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors, contain (to the extent
feasible) the following legend:
"The Rights evidenced by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights
Certificate and the Rights evidenced hereby may become null and void
in the circumstances specified in Section 7(e) of such Agreement."
SECTION 5. Countersignature and Registration. (a) Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, the President or one of its Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any one or more of these officers on the Rights
Certificates may be manual or facsimile. Rights Certificates bearing the
manual or facsimile signatures of the individuals who were at any time the
proper officers of the Company shall bind the Company, notwithstanding that
such individuals or any of them have ceased to hold such offices prior to the
countersignature of such Rights Certificates or did not hold such offices at
the date of such Rights Certificates. No Rights Certificate shall be entitled
to any benefit under this Agreement or be valid for any purpose unless there
appears on such Rights Certificate a countersignature duly executed by the
Rights Agent by manual signature of an authorized signatory, and such
countersignature upon any Rights Certificate
<PAGE> 13
10
shall be conclusive evidence, and the only evidence, that such Rights
Certificate has been duly countersigned as required hereunder.
(b) Following the Distribution Date, the Rights Agent
will keep or cause to be kept, at its office designated for surrender of Rights
Certificates upon exercise or transfer, books for registration and transfer of
the Rights Certificates issued hereunder. Such books shall show the name and
address of each holder of the Rights Certificates, the number of Rights
evidenced on its face by each Rights Certificate and the date of each Rights
Certificate.
SECTION 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 4(b), 7(e) and 14, at any time after
the Close of Business on the Distribution Date, and at or prior to the Close of
Business on the Expiration Date, any Rights Certificate or Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Certificates, entitling the registered holder to purchase a like number of
Units of Preferred Stock (or, following a Triggering Event, other securities,
cash or other assets, as the case may be) as the Rights Certificate or
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Certificates shall make such request in writing delivered to the
Rights Agent, and shall surrender the Rights Certificate or Certificates to be
transferred, split up, combined or exchanged at the office of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any
such surrendered Rights Certificate until the registered holder shall have
completed and executed the certificate set forth in the form of assignment on
the reverse side of such Rights Certificate and shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) of the Rights evidenced by such Rights Certificate or
Affiliates or Associates thereof as the Company shall reasonably request;
whereupon the Rights Agent shall, subject to the provisions of Sections 4(b),
7(e) and 14, countersign and deliver to the Person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Rights Certificates.
(b) If a Rights Certificate shall be mutilated,
destroyed, lost or stolen, upon request by the registered holder of the Rights
evidenced thereby and upon payment to the Company and the Rights Agent of all
reasonable expenses incident thereto, there shall be issued, in exchange for
and upon cancellation of the mutilated Rights Certificate, or in substitution
for the lost, stolen or destroyed Rights Certificate, a new Rights Certificate,
in substantially the form of the prior Rights Certificate, of like tenor and
evidencing the equivalent number of Rights, but, in the case of loss, theft or
destruction, only upon receipt
<PAGE> 14
11
of evidence satisfactory to the Company and the Rights Agent of such loss,
theft or destruction of such Rights Certificate and, if requested by the
Company or the Rights Agent, indemnity also satisfactory to it.
SECTION 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights. (a) Prior to the earlier of (i) the Close of Business on the
tenth anniversary hereof (the "Final Expiration Date") and (ii) the time at
which the Rights are redeemed as provided in Section 23 (the earlier of (i) and
(ii) being the "Expiration Date"), the registered holder of any Rights
Certificate may, subject to the provisions of Sections 7(e) and 9(c), exercise
the Rights evidenced thereby in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the aggregate Purchase Price (as
hereinafter defined) for the number of Units of Preferred Stock (or, following
a Triggering Event, other securities, cash or other assets, as the case may be)
for which such surrendered Rights are then exercisable.
(b) The purchase price for each one one-thousandth of a
share (each such one one-thousandth of a share being a "Unit") of Preferred
Stock upon exercise of Rights shall be $75.00, subject to adjustment from time
to time as provided in Sections 11 and 13(a) (such purchase price, as so
adjusted, being the "Purchase Price"), and shall be payable in accordance with
paragraph (c) below.
(c) As promptly as practicable following the occurrence
of the Distribution Date, the Company shall deposit with a corporation in good
standing organized under the laws of the United States or any State of the
United States, that is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination by
federal or state authority (such institution being the "Depositary Agent"),
certificates evidencing the shares of Preferred Stock that may be acquired upon
exercise of the Rights and shall cause such Depositary Agent to enter into an
agreement pursuant to which the Depositary Agent shall issue receipts
evidencing interests in the shares of Preferred Stock so deposited. Upon
receipt of a Rights Certificate evidencing exercisable Rights, with the form of
election to purchase and the certificate duly executed, accompanied by payment,
with respect to each Right so exercised, of the Purchase Price for the Units of
Preferred Stock (or, following a Triggering Event, other securities, cash or
other assets, as the case may be) to be purchased thereby as set forth below
and an amount equal to any applicable transfer tax or evidence satisfactory to
the Company of payment of such tax, the Rights Agent shall, subject to Section
20(k), thereupon promptly (i) requisition from the Depositary Agent depositary
receipts evidencing such number of Units of Preferred Stock as are to be
purchased and the Company will direct the Depositary Agent to comply with such
request, (ii) requisition from the Company the amount of cash, if any, to be
paid in lieu of fractional shares in accordance with Section 14, (iii) after
receipt of such depositary receipts, cause the
<PAGE> 15
12
same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder, and (iv) after receipt thereof, deliver such cash, if any, to or
upon the order of the registered holder of such Rights Certificate. In the
event that the Company is obligated to issue Company Common Stock, other
securities of the Company, pay cash and/or distribute other property pursuant
to Section 11(a), the Company will make all arrangements necessary so that such
Company Common Stock, other securities, cash and/or other property are
available for distribution by the Rights Agent, if and when appropriate.
Subject to Section 34, the payment of the Purchase Price (as such amount may be
reduced pursuant to Section 11(a)(iii)) may be made in cash or by certified or
bank check payable to the order of the Company, or by wire transfer of
immediately available funds to the account of the Company (provided that notice
of such wire transfer shall be given by the holder of the related Right to the
Rights Agent).
(d) In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of any Section 11(a)(ii) Event or
Section 13 Event, any Rights beneficially owned by (i) an Acquiring Person or
an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) that becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) that becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
that receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person (or any such Associate or Affiliate)
to holders of equity interests in such Acquiring Person (or such Associate or
Affiliate) or to any Person with whom such Acquiring Person (or such Associate
or Affiliate) has any continuing agreement, arrangement or understanding
regarding the transferred Rights, shares of Company Common Stock or the Company
or (B) a transfer that either (1) 75% of the Company's Board of Directors or
(2) a majority of the Company's Board of Directors and a majority of the
Continuing Directors, has determined to be part of a plan, arrangement or
understanding that has as a primary purpose or effect the avoidance of this
Section 7(e), shall be null and void without any further action, and no holder
of such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to ensure that the provisions of this Section 7(e)
and Section 4(b) are complied with, but shall have no liability to any holder
of Rights or any other Person as a result of its failure to make any
determination under this Section 7(e) or Section 4(b) with respect to an
Acquiring Person or its Affiliates, Associates or transferees.
<PAGE> 16
13
(f) Notwithstanding anything in this Agreement or any
Rights Certificate to the contrary, neither the Rights Agent nor the Company
shall be obligated to undertake any action with respect to a registered holder
upon the occurrence of any purported exercise by such registered holder unless
such registered holder shall have (i) completed and executed the certificate
following the form of election to purchase set forth on the reverse side of the
Rights Certificate surrendered for such exercise and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) of the Rights evidenced by such Rights Certificate or
Affiliates or Associates thereof as the Company shall reasonably request.
SECTION 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the
Company or any of its agents, be delivered to the Rights Agent for cancellation
or in cancelled form, or, if surrendered to the Rights Agent, shall be
cancelled by it, and no Rights Certificates shall be issued in lieu thereof
except as expressly permitted by this Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any Rights Certificates acquired by the Company otherwise
than upon the exercise thereof. The Rights Agent shall deliver all cancelled
Rights Certificates to the Company, or shall, at the written request of the
Company, destroy such cancelled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
SECTION 9. Reservation and Availability of Capital Stock.
(a) The Company shall at all times prior to the Expiration Date cause to be
reserved and kept available, out of its authorized and unissued shares of
Preferred Stock, the number of shares of Preferred Stock that, as provided in
this Agreement, will be sufficient to permit the exercise in full of all
outstanding Rights. Upon the occurrence of any events resulting in an increase
in the aggregate number of shares of Preferred Stock (or other equity
securities of the Company) issuable upon exercise of all outstanding Rights
above the number then reserved, the Company shall make appropriate increases in
the number of shares so reserved.
(b) If the shares of Preferred Stock to be issued and
delivered upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall during the period from the Distribution
Date through the Expiration Date use its best efforts to cause all securities
reserved for such issuance to be listed on such exchange upon official notice
of issuance upon such exercise.
(c) The Company shall use its best efforts (i) as soon as
practicable following the occurrence of a Section 11(a)(ii) Event and a
determination by the Company in accordance with Section 11(a)(iii) of the
consideration to be delivered by the Company upon exercise of the Rights or, if
so required by law, as soon as practicable following the Distribution Date
(such date being the "Registration Date"), to file a registration statement on
<PAGE> 17
14
an appropriate form under the Securities Act with respect to the securities
that may be acquired upon exercise of the Rights (the "Registration
Statement"), (ii) to cause the Registration Statement to become effective as
soon as practicable after such filing, (iii) to cause the Registration
Statement to continue to be effective (and to include a prospectus complying
with the requirements of the Securities Act) until the earlier of (A) the date
as of which the Rights are no longer exercisable for the securities covered by
the Registration Statement and (B) the Expiration Date and (iv) to take as soon
as practicable following the Registration Date such action as may be required
to ensure that any acquisition of securities upon exercise of the Rights
complies with any applicable state securities or "blue sky" laws. If the
Registration Statement does not become effective prior to the close of business
on the 45th Business Day following the occurrence of a Section 11(a)(ii) Event,
the Company shall, unless otherwise determined by either (1) 75% of the
Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors, on the 46th Business Day
following the occurrence of such Section 11(a)(ii) Event, be obligated to
exercise the option described in Section 34.
(d) The Company shall take such action as may be
necessary to ensure that all shares of Preferred Stock (and, following the
occurrence of a Triggering Event, any other securities that may be delivered
upon exercise of Rights) shall be, at the time of delivery of the certificates
or depositary receipts for such securities, duly and validly authorized and
issued and fully paid and non-assessable.
(e) The Company shall pay any documentary, stamp or
transfer tax imposed in connection with the issuance or delivery of the Rights
Certificates or upon the exercise of Rights; provided, however, the Company
shall not be required to pay any such tax imposed in connection with the
issuance or delivery of Units of Preferred Stock, or any certificates or
depositary receipts for such Units of Preferred Stock (or, following the
occurrence of a Triggering Event, any other securities, cash or assets, as the
case may be) to any person other than the registered holder of the Rights
Certificates evidencing the Rights surrendered for exercise. The Company shall
not be required to issue or deliver any certificates or depositary receipts for
Units of Preferred Stock (or, following the occurrence of a Triggering Event,
any other securities, cash or assets, as the case may be) to, or in a name
other than that of, the registered holder of the Rights Certificate upon the
exercise of any Rights evidenced thereby until any such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at
the time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
SECTION 10. Preferred Stock Record Date. Each Person in
whose name any certificate for Units of Preferred Stock (or, following the
occurrence of a Triggering Event, other securities) is issued upon the exercise
of Rights shall for all purposes be deemed to have become the holder of record
of the Units of Preferred Stock (or, following the occurrence of a Triggering
Event, other securities) evidenced thereby on, and such certificate
<PAGE> 18
15
shall be dated, the date upon which the Rights Certificate evidencing such
Rights was duly surrendered and payment of the Purchase Price (and any
applicable transfer taxes) was made; provided, however, that if the date of
such surrender and payment is a date upon which the Preferred Stock (or,
following the occurrence of a Triggering Event, other securities) transfer
books of the Company are closed, such Person shall be deemed to have become the
record holder of such securities on, and such certificate shall be dated, the
next succeeding Business Day on which the Preferred Stock (or, following the
occurrence of a Triggering Event, other securities) transfer books of the
Company are open; and further provided, however, that if delivery of Units of
Preferred Stock is delayed as a result of a failure to register such Units of
Preferred Stock pursuant to Section 9(c), such Persons shall be deemed to have
become the record holders of such Units of Preferred Stock only when such Units
first become deliverable. Prior to the exercise of the Rights evidenced
thereby, the holder of a Rights Certificate shall not be entitled to any rights
of a stockholder of the Company with respect to securities for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
SECTION 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after
the date of this Agreement (A) declare a dividend on the Preferred
Stock payable in shares of Preferred Stock, (B) subdivide the
outstanding Preferred Stock, (C) combine the outstanding Preferred
Stock into a smaller number of shares or (D) issue any shares of its
capital stock in a reclassification of the Preferred Stock (including
any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price
in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification,
and the number and kind of shares of Preferred Stock or capital stock,
as the case may be, issuable on such date upon exercise of the Rights,
shall be proportionately adjusted so that the holder of any Right
exercised after such time shall be entitled to receive, upon payment
of the Purchase Price then in effect, the aggregate number and kind of
shares of Preferred Stock or capital stock, as the case may be, which,
if such Right had been exercised immediately prior to such date, such
holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs that would require an adjustment
under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment
<PAGE> 19
16
provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section
11(a)(ii).
(ii) In the event:
(A) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date
of this Agreement, directly or indirectly, shall (1) merge
into the Company or otherwise combine with the Company and the
Company shall be the continuing or surviving corporation of
such merger or combination and Company Common Stock shall
remain outstanding and unchanged, (2) in one transaction or a
series of transactions, transfer any assets to the Company or
to any of its Subsidiaries in exchange (in whole or in part)
for shares of Company Common Stock, for other equity
securities of the Company or any such Subsidiary, or for
securities exercisable for or convertible into shares of
equity securities of the Company or any of its Subsidiaries
(whether Company Common Stock or otherwise) or otherwise
obtain from the Company or any of its Subsidiaries, with or
without consideration, any additional shares of such equity
securities or securities exercisable for or convertible into
such equity securities (other than pursuant to a pro rata
distribution to all holders of Company Common Stock), (3)
sell, purchase, lease, exchange, mortgage, pledge, transfer or
otherwise acquire or dispose of, in one transaction or a
series of transactions, to, from or with the Company or any of
its Subsidiaries or any employee benefit plan maintained by
the Company or any of its Subsidiaries or any trustee or
fiduciary with respect to such plan acting in such capacity,
assets (including securities) on terms and conditions less
favorable to the Company or such Subsidiary or plan than those
that could have been obtained in arm's-length negotiations
with an unaffiliated third party, other than pursuant to a
transaction set forth in Section 13(a), (4) sell, purchase,
lease, exchange, mortgage, pledge, transfer or otherwise
acquire or dispose of, in one transaction or a series of
transactions, to, from or with the Company or any of the
Company's Subsidiaries or any employee benefit plan maintained
by the Company or any of its Subsidiaries or any trustee or
fiduciary with respect to such plan acting in such capacity
(other than transactions, if any, consistent with those
engaged in, as of the date hereof, by the Company and such
Acquiring Person or such Associate or Affiliate), assets
(including securities) having an aggregate fair market value
of more than $5,000,000, other than pursuant to a transaction
set forth in Section 13(a), (5) sell, purchase, lease,
exchange, mortgage, pledge, transfer or otherwise acquire or
dispose of, in one transaction or a series of transactions,
to, from or with the Company or any of its Subsidiaries or any
employee benefit plan maintained by the Company or any of its
Subsidiaries or any trustee or fiduciary with respect to such
plan acting in such capacity, any
<PAGE> 20
17
material trademark or material service mark, other than
pursuant to a transaction set forth in Section 13(a), (6)
receive, or any designee, agent or representative of such
Acquiring Person or any Affiliate or Associate of such
Acquiring Person shall receive, any compensation from the
Company or any of its Subsidiaries other than compensation for
full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (7) receive the benefit, directly or indirectly
(except proportionately as a holder of Company Common Stock or
as required by law or governmental regulation), of any loans,
advances, guarantees, pledges or other financial assistance or
any tax credits or other tax advantage provided by the Company
or any of its Subsidiaries or any employee benefit plan
maintained by the Company or any of its Subsidiaries or any
trustee or fiduciary with respect to such plan acting in such
capacity; or
(B) any Person shall become an Acquiring Person,
unless the event causing such Person to become an Acquiring
Person is a transaction set forth in Section 13(a); or
(C) during such time as there is an Acquiring
Person, there shall be any reclassification of securities
(including any reverse stock split), or recapitalization of
the Company, or any merger or consolidation of the Company
with any of its Subsidiaries or any other transaction or
series of transactions involving the Company or any of its
Subsidiaries, other than a transaction or transactions to
which the provisions of Section 13(a) apply (whether or not
with or into or otherwise involving an Acquiring Person),
which has the effect, directly or indirectly, of increasing by
more than 1% the proportionate share of the outstanding shares
of any class of equity securities of the Company or any of its
Subsidiaries that is directly or indirectly beneficially owned
by any Acquiring Person or any Associate or Affiliate of any
Acquiring Person;
then, immediately upon the date of the occurrence of an event
described in Section 11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii)
Event"), proper provision shall be made so that each holder of a Right
(except as provided below and in Section 7(e)) shall thereafter have
the right to receive, upon exercise thereof at the then current
Purchase Price in accordance with the terms of this Agreement, in lieu
of the number of Units of Preferred Stock for which a Right was
exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event, such number of Units of Preferred Stock as shall
equal the result obtained by (x) multiplying the then current Purchase
Price by the then number of Units of Preferred Stock for which a Right
was exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event (such product thereafter being, for all purposes of
this Agreement other than Section 13, the
<PAGE> 21
18
"Purchase Price"), and (y) dividing that product by 50% of the then
current market price (determined pursuant to Section 11(d)) per Unit
of Preferred Stock on the date of such first occurrence (such Units of
Preferred Stock being the "Adjustment Shares").
(iii) In the event that the number of shares of Preferred
Stock that are authorized by the Company's Certificate of
Incorporation but not outstanding or reserved for issuance for
purposes other than upon exercise of the Rights is not sufficient to
permit the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii) of this Section 11(a), the Company, by the
vote of either (aa) 75% of the Company's Board of Directors or (bb) a
majority of the Company's Board of Directors and a majority of the
Continuing Directors, shall: (A) determine the excess of (1) the
value of the Adjustment Shares issuable upon the exercise of a Right
(the "Current Value") over (2) the Purchase Price (such excess being
the "Spread"), and (B) with respect to each Right, make adequate
provision to substitute for such Adjustment Shares, upon payment of
the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Company Common Stock or other equity securities of
the Company (including, without limitation, shares, or units of
shares, of preferred stock (such other shares being "preferred stock
equivalents")), (4) debt securities of the Company, (5) other assets
or (6) any combination of the foregoing, having an aggregate value
equal to the Current Value, where such aggregate value has been
determined by either (aa) 75% of the Company's Board of Directors or
(bb) a majority of the Company's Board of Directors and a majority of
the Continuing Directors, after receiving advice from a nationally
recognized investment banking firm; provided, however, that if the
Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty days following the later of
(x) the first occurrence of a Section 11(a)(ii) Event and (y) the date
on which the Company's right of redemption pursuant to Section 23(a)
expires (the later of (x) and (y) being referred to herein as the
"Section 11(a)(iii) Trigger Date"), then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, Units of Preferred
Stock (to the extent available) and then, if necessary, cash, which
Units of Preferred Stock and/or cash shall have an aggregate value
equal to the Spread. To the extent that the Company determines that
some action need be taken pursuant to the first sentence of this
Section 11(a)(iii), the Company shall provide, subject to Section
7(e), that such action shall apply uniformly to all outstanding
Rights. For purposes of this Section 11(a)(iii), the value of a Unit
of Preferred Stock shall be the current market price (as determined
pursuant to Section 11(d)) per Unit of Preferred Stock on the Section
11(a)(iii) Trigger Date and the value of any preferred stock
equivalent shall be deemed to have the same value as the Preferred
Stock on such date.
<PAGE> 22
19
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred
Stock entitling them to subscribe for or purchase (for a period
expiring within forty- five calendar days after such record date)
shares of Preferred Stock (or shares having substantially the same
rights, privileges and preferences as shares of Preferred Stock
("Equivalent Preferred Stock")) or securities convertible into
Preferred Stock or Equivalent Preferred Stock at a price per share of
Preferred Stock or per share of Equivalent Preferred Stock (or having
a conversion price per share, if a security convertible into Preferred
Stock or Equivalent Preferred Stock) less than the current market
price (as determined pursuant to Section 11(d)) per share of Preferred
Stock on such record date, the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price
in effect immediately prior to such record date by a fraction, the
numerator of which shall be the sum of the number of shares of
Preferred Stock outstanding on such record date plus the number of
shares of Preferred Stock which the aggregate offering price of the
total number of shares of Preferred Stock and/or Equivalent Preferred
Stock so to be offered (and/or the aggregate initial conversion price
of the convertible securities so to be offered) would purchase at such
current market price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date plus the
number of additional shares of Preferred Stock and/or Equivalent
Preferred Stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially
convertible). In case such subscription price may be paid by delivery
of consideration part or all of which may be in a form other than
cash, the value of such consideration shall be as determined in good
faith by either (1) 75% of the Company's Board of Directors or (2) a
majority of the Company's Board of Directors and a majority of the
Continuing Directors, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. Shares of Preferred Stock
owned by or held for the account of the Company or any Subsidiary
shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such
a record date is fixed, and in the event that such rights or warrants
are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price that would then be in effect if such record date had
not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of shares of Preferred Stock (including
any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of
evidences of indebtedness, cash (other than a regular quarterly cash
dividend out of the earnings or retained earnings of the Company),
assets (other than a dividend payable in shares of Preferred Stock,
but including any dividend payable in stock other than Preferred
Stock) or subscription rights or warrants (excluding those referred to
in Section 11(b)), the Purchase Price to be in effect after such
record date
<PAGE> 23
20
shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the current market price (as determined pursuant to
Section 11(d)) per share of Preferred Stock on such record date less
the fair market value (as determined in good faith by a majority of
either (1) 75% of the Company's Board of Directors or (2) a majority
of the Company's Board of Directors and a majority of the Continuing
Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the
holder of the Rights) of the cash, assets or evidences of indebtedness
so to be distributed or of such subscription rights or warrants
distributable in respect of a share of Preferred Stock and the
denominator of which shall be such current market price (as determined
pursuant to Section 11(d)) per share of Preferred Stock. Such
adjustments shall be made successively whenever such a record date is
fixed, and in the event that such distribution is not so made, the
Purchase Price shall be adjusted to be the Purchase Price that would
have been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder,
the "current market price" per share of Company Common Stock or Common
Stock on any date shall be deemed to be the average of the daily
closing prices per share of such shares for the ten consecutive
Trading Days immediately prior to such date; provided, however, if
prior to the expiration of such requisite ten Trading Day period the
issuer announces either (A) a dividend or distribution on such shares
payable in such shares or securities convertible into such shares
(other than the Rights) or (B) any subdivision, combination or
reclassification of such shares, then, following the ex-dividend date
for such dividend or the record date for such subdivision, as the case
may be, the "current market price" shall be properly adjusted to take
into account such event. The closing price for each day shall be, if
the shares are listed and admitted to trading on a national securities
exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which such shares are listed or
admitted to trading or, if such shares are not listed or admitted to
trading on any national securities exchange, the last quoted price or,
if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by The Nasdaq Stock Market
Consolidated Quotations Service or such other system then in use, or,
if on any such date such shares are not quoted by any such
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such
shares selected by either (1) 75% of the Company's Board of Directors
or (2) a majority of the Company's Board of Directors and a majority
of the Continuing Directors. If on any such date no market maker is
making a market in such shares, the fair value of such shares on such
date as determined in good faith by either (1) 75% of the Company's
Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors shall be used.
If such shares
<PAGE> 24
21
are not publicly held or not so listed or traded, "current market
price" per share shall mean the fair value per share as determined in
good faith by either (1) 75% of the Company's Board of Directors or
(2) a majority of the Company's Board of Directors and a majority of
the Continuing Directors, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes. The term "Trading Day" shall mean, if such shares are
listed or admitted to trading on any national securities exchange, a
day on which the principal national securities exchange on which such
shares are listed or admitted to trading is open for the transaction
of business or, if such shares are not so listed or admitted, a
Business Day.
(ii) For the purpose of any computation hereunder, the
"current market price" per share of Preferred Stock shall be
determined in the same manner as set forth above for Company Common
Stock in clause (i) of this Section 11(d) (other than the fourth
sentence thereof). If the current market price per share of Preferred
Stock cannot be determined in the manner provided above or if the
Preferred Stock is not publicly held or listed or traded in a manner
described in clause (i) of this Section 11(d), the "current market
price" per share of Preferred Stock shall be conclusively deemed to be
an amount equal to 1,000 (as such amount may be appropriately adjusted
for such events as stock splits, stock dividends and recapitalizations
with respect to Company Common Stock occurring after the date of this
Agreement) multiplied by the current market price per share of Company
Common Stock. If neither Company Common Stock nor Preferred Stock is
publicly held or so listed or traded, "current market price" per share
of the Preferred Stock shall mean the fair value per share as
determined in good faith by either (1) 75% of the Company's Board of
Directors or (2) a majority of the Company's Board of Directors and a
majority of the Continuing Directors, whose determination shall be
described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent and the holders of the Rights. For all
purposes of this Agreement, the "current market price" of a Unit of
Preferred Stock shall be equal to the "current market price" of one
share of Preferred Stock divided by 1,000.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by
reason of this Section 11(e) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one-hundredth of a share of Company Common
Stock or Common Stock or other share or hundred-thousandth of a share
of Preferred Stock, as the case may be. Notwithstanding the first
sentence of this Section 11(e), any adjustment required by this
Section 11 shall
<PAGE> 25
22
be made no later than the earlier of (i) three years from the date of
the transaction that mandates such adjustment and (ii) the Expiration
Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or 13(a), the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock
other than Preferred Stock, thereafter the number of such other shares
so receivable upon exercise of any Right and the Purchase Price
thereof shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions
with respect to the Preferred Stock contained in Sections 11(a), (b),
(c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the
Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company
subsequent to any adjustment made to the Purchase Price hereunder
shall evidence the right to purchase, at the adjusted Purchase Price,
the number of Units of Preferred Stock (or other securities or amount
of cash or combination thereof) that may be acquired from time to time
hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election
as provided in Section 11(i), upon each adjustment of the Purchase
Price as a result of the calculations made in Sections 11(b) and (c),
each Right outstanding immediately prior to the making of such
adjustment shall thereafter evidence the right to purchase, at the
adjusted Purchase Price, that number of Units of Preferred Stock
(calculated to the nearest one hundred- thousandth of a Unit) obtained
by (i) multiplying (x) the number of Units of Preferred Stock covered
by a Right immediately prior to this adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in
lieu of any adjustment in the number of Units of Preferred Stock that
may be acquired upon the exercise of a Right. Each of the Rights
outstanding after the adjustment in the number of Rights shall be
exercisable for the number of Units of Preferred Stock for which a
Right was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of Rights
shall become that number of Rights (calculated to the nearest
hundred-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase
Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust
the number of Rights, indicating
<PAGE> 26
23
the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if
the Rights Certificates have been issued, shall be at least ten days
later than the date of such public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of
Rights pursuant to this Section 11(i), the Company shall, as promptly
as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing,
subject to Section 14, the additional Rights to which such holders
shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record
in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender
thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled
after such adjustment. Rights Certificates to be so distributed shall
be issued, executed and countersigned in the manner provided for
herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the holders of
record of Rights Certificates on the record date specified in the
public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of Units of Preferred Stock issuable upon
the exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the Purchase Price per Unit
and the number of Units of Preferred Stock that were expressed in the
Initial Rights Certificates issued hereunder without prejudice to any
such adjustment or change.
(k) Before taking any action that would cause an
adjustment reducing the Purchase Price below the then par value of the
number of Units of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action that may, in the
opinion of its counsel, be necessary in order that the Company may
validly and legally issue such fully paid and non-assessable number of
Units of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require
that an adjustment in the Purchase Price be made effective as of a
record date for a specified event, the Company may elect to defer
until the occurrence of such event the issuance to the holder of any
Right exercised after such record date of that number of Units of
Preferred Stock and shares of other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the number
of Units of Preferred Stock and shares of other capital stock or
securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due
bill or other
<PAGE> 27
24
appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions
in the Purchase Price, in addition to those adjustments expressly
required by this Section 11, as and to the extent that in the good
faith judgment of either (1) 75% of the Company's Board of Directors
or (2) a majority of the Company's Board of Directors and a majority
of the Continuing Directors shall determine to be advisable in order
that any (i) consolidation or subdivision of the Preferred Stock, (ii)
issuance wholly for cash of any shares of Preferred Stock at less than
the current market price, (iii) issuance wholly for cash of shares of
Preferred Stock or securities that by their terms are convertible into
or exchangeable for shares of Preferred Stock, (iv) stock dividends or
(v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred
Stock, shall not be taxable to such holders or shall reduce the taxes
payable by such holders.
(n) The Company shall not, at any time after the
Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction that complies with Section
11(o)), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction that complies with Section
11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of transactions, assets or
earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with
Section 11(o)), if (x) at the time of or immediately after such
consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect that
would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously
with or immediately after such consolidation, merger or sale, the
Person that constitutes, or would constitute, the "Principal Party"
for purposes of Section 13(a) shall have distributed or otherwise
transferred to its stockholders or other persons holding an equity
interest in such Person Rights previously owned by such Person or any
of its Affiliates and Associates; provided, however, this Section
11(n) shall not affect the ability of any Subsidiary of the Company to
consolidate with, merge with or into, or sell or transfer assets or
earning power to, any other Subsidiary of the Company.
(o) After the Distribution Date, the Company shall not,
except as permitted by Section 23 or Section 26, take (or permit any
Subsidiary to take) any action if at
<PAGE> 28
25
the time such action is taken it is reasonably foreseeable that such
action will diminish substantially or otherwise eliminate the benefits
intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after
the Rights Dividend Declaration Date and prior to the Distribution
Date (i) declare a dividend on the outstanding shares of Company
Common Stock payable in shares of Company Common Stock, (ii) subdivide
the outstanding shares of Company Common Stock, (iii) combine the
outstanding shares of Company Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock in a
reclassification of Company Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), the number of
Rights associated with each share of Company Common Stock then
outstanding, or issued or delivered thereafter but prior to the
Distribution Date, shall be proportionately adjusted so that the
number of Rights thereafter associated with each share of Company
Common Stock following any such event shall equal the result obtained
by multiplying the number of Rights associated with each share of
Company Common Stock immediately prior to such event by a fraction the
numerator of which shall be the total number of shares of Company
Common Stock outstanding immediately prior to the occurrence of the
event and the denominator of which shall be the total number of shares
of Company Common Stock outstanding immediately following the
occurrence of such event.
SECTION 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 or Section
13, the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Company Common Stock, a copy of such certificate, and
(c) mail a brief summary thereof to each holder of a Rights Certificate (or, if
prior to the Distribution Date, to each holder of a certificate evidencing
shares of Company Common Stock) in accordance with Section 25. The Rights
Agent shall be fully protected in relying on any such certificate and on any
adjustment therein contained and shall not be deemed to have knowledge of any
such adjustment unless and until it shall have received such certificate.
SECTION 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. (a) In the event that, following the Stock
Acquisition Date, directly or indirectly, either (x) the Company shall
consolidate with, or merge with and into, any other Person (other than a
Subsidiary of the Company in a transaction that complies with Section 11(o)),
and the Company shall not be the continuing or surviving corporation of such
consolidation or merger, (y) any Person (other than a Subsidiary of the Company
in a transaction that complies with Section 11(o)) shall consolidate with, or
merge with or into,
<PAGE> 29
26
the Company, and the Company shall be the continuing or surviving corporation
of such consolidation or merger and, in connection with such consolidation or
merger, all or part of the outstanding shares of Company Common Stock shall be
converted into or exchanged for stock or other securities of any other Person
or cash or any other property, or (z) the Company shall sell or otherwise
transfer (or one or more of its Subsidiaries shall sell or otherwise transfer)
to any Person or Persons (other than the Company or any of its Subsidiaries in
one or more transactions each of which complies with Section 11(o)), in one or
more transactions, assets or earning power aggregating more than 50% of the
assets or earning power of the Company and its Subsidiaries, taken as a whole
(any such event described in clause (x), (y) or (z) being a "Section 13
Event"), then, and in each such case, proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e), shall
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price, such number of validly authorized and issued, fully
paid and non-assessable shares of Common Stock of the Principal Party, which
shares shall not be subject to any liens, encumbrances, rights of first
refusal, transfer restrictions or other adverse claims, as shall be equal to
the result obtained by (1) multiplying the then current Purchase Price by the
number of Units of Preferred Stock for which a Right is exercisable immediately
prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii)
Event has occurred prior to the first occurrence of a Section 13 Event,
multiplying the number of such Units for which a Right would be exercisable
hereunder but for the occurrence of such Section 11(a)(ii) Event by the
Purchase Price that would be in effect hereunder but for such first occurrence)
and (2) dividing that product (which, following the first occurrence of a
Section 13 Event, shall be the "Purchase Price" for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d)) per share of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall, for all purposes of this Agreement, thereafter be
deemed to refer to such Principal Party, it being specifically intended that
the provisions of Section 11 shall apply only to such Principal Party following
the first occurrence of a Section 13 Event; (iv) such Principal Party shall
take such steps (including, but not limited to, the reservation of a sufficient
number of shares of its Common Stock) in connection with the consummation of
any such transaction as may be necessary to ensure that the provisions of this
Agreement shall thereafter be applicable to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) shall be of no further effect following the first
occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause
(x) or (y) of the first sentence of Section 13(a), (A) the Person that
is the issuer of any securities into which shares of Company Common
Stock are converted in such merger or
<PAGE> 30
27
consolidation, or, if there is more than one such issuer, the issuer
of Common Stock that has the highest aggregate current market price
(determined pursuant to Section 11(d)) and (B) if no securities are so
issued, the Person that is the other party to such merger or
consolidation, or, if there is more than one such Person, the Person
the Common Stock of which has the highest aggregate current market
price (determined pursuant to Section 11(d)); and
(ii) in the case of any transaction described in clause
(z) of the first sentence of Section 13(a), the Person that is the
party receiving the largest portion of the assets or earning power
transferred pursuant to such transaction or transactions, or, if each
Person that is a party to such transaction or transactions receives
the same portion of the assets or earning power transferred pursuant
to such transaction or transactions or if the Person receiving the
largest portion of the assets or earning power cannot be determined,
whichever Person the Common Stock of which has the highest aggregate
current market price (determined pursuant to Section 11(d)); provided,
however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding
twelve-month period registered under Section 12 of the Exchange Act
("Registered Common Stock"), or such Person is not a corporation, and
such Person is a direct or indirect Subsidiary of another Person that
has Registered Common Stock outstanding, "Principal Party" shall refer
to such other Person; (2) if the Common Stock of such Person is not
Registered Common Stock or such Person is not a corporation, and such
Person is a direct or indirect Subsidiary of another Person but is not
a direct or indirect Subsidiary of another Person that has Registered
Common Stock outstanding, "Principal Party" shall refer to the
ultimate parent entity of such first-mentioned Person; (3) if the
Common Stock of such Person is not Registered Common Stock or such
Person is not a corporation, and such Person is directly or indirectly
controlled by more than one Person, and one or more of such other
Persons has Registered Common Stock outstanding, "Principal Party"
shall refer to whichever of such other Persons is the issuer of the
Registered Common Stock having the highest aggregate current market
price (determined pursuant to Section 11(d)); and (4) if the Common
Stock of such Person is not Registered Common Stock or such Person is
not a corporation, and such Person is directly or indirectly
controlled by more than one Person, and none of such other Persons
have Registered Common Stock outstanding, "Principal Party" shall
refer to whichever ultimate parent entity is the corporation having
the greatest stockholders' equity or, if no such ultimate parent
entity is a corporation, shall refer to whichever ultimate parent
entity is the entity having the greatest net assets.
(c) The Company shall not consummate any such
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Stock that have not been
issued or reserved for issuance to permit the
<PAGE> 31
28
exercise in full of the Rights in accordance with this Section 13, and unless
prior thereto the Company and such Principal Party shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in paragraphs (a) and (b) of this Section 13 and further providing
that the Principal Party will:
(i) (A) file on an appropriate form, as soon as
practicable following the execution of such agreement, a registration
statement under the Securities Act with respect to the Common Stock
that may be acquired upon exercise of the Rights, (B) cause such
registration statement to remain effective (and to include a
prospectus complying with the requirements of the Securities Act)
until the Expiration Date, and (C) as soon as practicable following
the execution of such agreement take such action as may be required to
ensure that any acquisition of such Common Stock upon the exercise of
the Rights complies with any applicable state securities or "blue sky"
laws; and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates that
comply in all respects with the requirements for registration on Form
10 under the Exchange Act.
(d) In case the Principal Party that is to be a party to
a transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or By-laws or
other instrument governing its corporate affairs, which provision would have
the effect of (i) causing such Principal Party to issue, in connection with, or
as a consequence of, the consummation of a transaction referred to in this
Section 13, shares of Common Stock of such Principal Party at less than the
then current market price per share (determined pursuant to Section 11(d)) or
securities exercisable for, or convertible into, Common Stock of such Principal
Party at less than such then current market price (other than to holders of
Rights pursuant to this Section 13) or (ii) providing for any special payment,
tax or similar provisions in connection with the issuance of the Common Stock
of such Principal Party pursuant to the provisions of this Section 13, then, in
such event, the Company shall not consummate any such transaction unless prior
thereto the Company and such Principal Party shall have executed and delivered
to the Rights Agent a supplemental agreement providing that the provision in
question of such Principal Party shall have been cancelled, waived or amended,
or that the authorized securities shall be redeemed, so that the applicable
provision will have no effect in connection with, or as a consequence of, the
consummation of the proposed transaction.
(e) The provisions of this Section 13 shall similarly
apply to successive mergers or consolidations or sales or other transfers. In
the event that a Section 13 Event shall occur at any time after the occurrence
of a Section 11(a)(ii) Event, the Rights that have not theretofore been
exercised shall thereafter become exercisable in the manner described in
Section 13(a).
<PAGE> 32
29
SECTION 14. Fractional Rights and Fractional Shares. (a)
The Company shall not be required to issue fractions of Rights or to distribute
Rights Certificates that evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the Persons to which such fractional
Rights would otherwise be issuable, an amount in cash equal to such fraction of
the market value of a whole Right. For purposes of this Section 14(a), the
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price of the Rights for any day
shall be, if the Rights are listed or admitted to trading on a national
securities exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or,
if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by The
Nasdaq Stock Market Consolidated Quotations Service or such other system then
in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by either (1)
75% of the Company's Board of Directors or (2) a majority of the Company's
Board of Directors and a majority of the Continuing Directors. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by either (1) 75% of the
Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors shall be used and such
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(b) The Company shall not be required to issue fractions
of shares of Preferred Stock (other than fractions that are integral multiples
of one one-thousandth of a share of Preferred Stock) upon exercise of the
Rights or to distribute certificates that evidence such fractional shares of
Preferred Stock (other than fractions that are integral multiples of one
one-thousandth of a share of Preferred Stock). In lieu of such fractional
shares of Preferred Stock that are not integral multiples of one one-thousandth
of a share, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the then current market price of a share
of Preferred Stock on the day of exercise, determined in accordance with
Section 11(d).
(c) The holder of a Right by the acceptance of such Right
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
SECTION 15. Rights of Action. All rights of action in
respect of this Agreement, other than rights of action vested in the Rights
Agent pursuant to Section 18, are
<PAGE> 33
30
vested in the respective registered holders of the Rights Certificates (and,
prior to the Distribution Date, the registered holders of certificates
evidencing shares of Company Common Stock); and any registered holder of a
Rights Certificate (or, prior to the Distribution Date, of a certificate
evidencing shares of Company Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of a certificate evidencing shares of Company Common Stock),
may, in such registered holder's own behalf and for such registered holder's
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company or any other Person to enforce, or otherwise act
in respect of, such registered holder's right to exercise the Rights evidenced
by such Rights Certificate in the manner provided in such Rights Certificate
and in this Agreement. Without limiting the foregoing or any remedies
available to the holders of Rights, it is specifically acknowledged that the
holders of Rights would not have an adequate remedy at law for any breach of
this Agreement and shall be entitled to specific performance of the obligations
hereunder and injunctive relief against actual or threatened violations of the
obligations hereunder of any Person subject to this Agreement.
SECTION 16. Agreement of Rights Holders. Every holder of a
Right by accepting the same consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Company Common
Stock;
(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent if
surrendered at the office of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of
transfer and with the appropriate forms and certificates duly
executed;
(c) subject to Section 6(a) and Section 7(f), the Company
and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated
Company Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Rights Certificates or the
associated Company Common Stock certificate made by anyone other than
the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence
of Section 7(e), shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or any other Person as a result of
its inability to perform any of its obligations under this
<PAGE> 34
31
Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority, prohibiting or
otherwise restraining performance of such obligation; provided,
however, the Company must use its best efforts to have any such order,
decree or ruling lifted or otherwise overturned as promptly as
practicable.
SECTION 17. Rights Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Rights Certificate shall be entitled
to vote, receive dividends or be deemed for any purpose the holder of the
number of shares of Preferred Stock or any other securities of the Company that
may at any time be issuable on the exercise of the Rights evidenced thereby,
nor shall anything contained herein or in any Rights Certificate be construed
to confer upon the holder of any Rights Certificate, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action, or, except as provided
in Section 24, to receive notice of meetings or other actions affecting
stockholders, or to receive dividends or subscription rights, or otherwise.
SECTION 18. Concerning the Rights Agent. (a) The Company
agrees to pay to the Rights Agent reasonable compensation for all services
rendered by it hereunder and, from time to time, on demand of the Rights Agent,
its reasonable expenses, including reasonable fees and disbursements of its
counsel, incurred in connection with the execution and administration of this
Agreement and the exercise and performance of its duties hereunder. The
Company shall indemnify the Rights Agent for, and hold it harmless against, any
loss, liability, or expense, incurred without negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or omitted by the
Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability hereunder.
(b) The Rights Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it
in connection with its administration of this Agreement in reliance upon any
Rights Certificate or certificate for Preferred Stock or for other securities
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement or other paper or document believed by it to be genuine and to have
been signed, executed and, where necessary, verified or acknowledged by the
proper Person or Persons.
SECTION 19. Merger or Consolidation or Change of Name of
Rights Agent. (a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger
<PAGE> 35
32
or consolidation to which the Rights Agent or any successor Rights Agent shall
be a party, or any corporation succeeding to the corporate trust or shareholder
services business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution or
filing of any document or any further act on the part of any of the parties
hereto; provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21. In case at the time
such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of a
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent
shall be changed and at such time any of the Rights Certificates shall have
been countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
SECTION 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that
any fact or matter (including, without limitation, the identity of any
Acquiring Person and the determination of "current market price") be
proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in
respect thereof be specified herein) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of the
Board, the President, any Vice President, the Treasurer, any Assistant
Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; provided, however, that
<PAGE> 36
33
so long as any Person is an Acquiring Person hereunder, such
certificate shall be signed and delivered by either (1) 75% of the
Company's Board of Directors or (2) a majority of the Company's Board
of Directors and a majority of the Continuing Directors; and such
certificate shall be full authorization to the Rights Agent for any
action taken or suffered in good faith by it under the provisions of
this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for
its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this
Agreement or in the Rights Certificates or be required to verify the
same (except as to its countersignature on such Rights Certificates),
but all such statements and recitals are and shall be deemed to have
been made by the Company only.
(e) The Rights Agent shall not have any responsibility
for the validity of this Agreement or the execution and delivery
hereof (except the due execution and delivery hereof by the Rights
Agent) or for the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for
any breach by the Company of any covenant or failure by the Company to
satisfy conditions contained in this Agreement or in any Rights
Certificate; nor shall it be responsible for any adjustment required
under the provisions of Section 11 or Section 13 or for the manner,
method or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates
after receipt by the Rights Agent of the certificate describing any
such adjustment contemplated by Section 12); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Preferred Stock or any
other securities to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any shares of Preferred Stock or any
other securities will, when so issued, be validly authorized and
issued, fully paid and non-assessable.
(f) The Company shall perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered
all such further acts, instruments and assurances as may reasonably be
required by the Rights Agent for the performance by the Rights Agent
of its duties under this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from the Chairman of the Board, the President, any Vice
President, the Secretary, any Assistant Secretary, the Treasurer or
any Assistant Treasurer of the Company, and to apply to
<PAGE> 37
34
such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to
be taken by it in good faith in accordance with instructions of any
such officer; provided, however, that so long as any Person is an
Acquiring Person hereunder, the Rights Agent shall accept such
instructions and advice only from a majority of the Continuing
Directors and shall not be liable for any action taken or suffered to
be taken by it in good faith in accordance with such instructions of
either (1) 75% of the Company's Board of Directors or (2) a majority
of the Company's Board of Directors and a majority of the Continuing
Directors. Any application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the
Rights Agent under this Rights Agreement and the date on and/or after
which such action shall be taken or such omission shall be effective.
The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included
in any such application on or after the date specified in such
application (which date shall not be less than five Business Days
after the date any such officer of the Company actually receives such
application, unless any such officer shall have consented in writing
to an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall
have received written instructions in response to such application
specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director,
officer or employee of the Rights Agent may buy, sell or deal in any
of the Rights or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested,
or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents.
(j) No provision of this Agreement shall require the
Rights Agent to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties or in the
exercise of its rights hereunder if the Rights Agent shall have
reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate
surrendered to the Rights Agent for exercise or transfer, the
certificate attached to the form of assignment or form of election to
purchase, as the case may be, has either not been completed, not
<PAGE> 38
35
signed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with
respect to such requested exercise or transfer without first
consulting with the Company. If such certificate has been completed
and signed and shows a negative response to clauses 1 and 2 of such
certificate, unless previously instructed otherwise in writing by the
Company (which instructions may impose on the Rights Agent additional
ministerial responsibilities, but no discretionary responsibilities),
the Rights Agent may assume without further inquiry that the Rights
Certificate is not owned by a person described in Section 4(b) or
Section 7(e) and shall not be charged with any knowledge to the
contrary.
SECTION 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty days' prior notice in writing mailed to the Company, and
to each transfer agent of the Preferred Stock and the Company Common Stock, by
registered or certified mail, and to the holders of the Rights Certificates (or
certificates for the Company Common Stock prior to the Distribution Date) by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon thirty days' prior notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of the Preferred Stock and the Company Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates (or certificates for the
Company Common Stock prior to the Distribution Date) by first-class mail. If
the Rights Agent shall resign or be removed or shall otherwise become incapable
of acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent
or by the holder of a Rights Certificate or, prior to the Distribution Date,
the holder of a certificate for the Company Common Stock (who shall, with such
notice, submit such holder's Rights Certificate or certificate for Company
Common Stock, as the case may be, for inspection by the Company), then any
registered holder of any Rights Certificate or, prior to the Distribution Date,
the holder of a certificate for the Company Common Stock may apply to any court
of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized and doing business under the laws of the
United States or any state of the United States in good standing, shall be
authorized to do business as a banking institution in the State of New York,
shall be authorized under such laws to exercise corporate trust or stock
transfer powers, shall be subject to supervision or examination by federal or
state authorities and shall have at the time of its appointment as Rights Agent
a combined capital and surplus of at least $100,000,000 or (b) an Affiliate of
a corporation described in clause (a). After appointment, the successor Rights
Agent shall be vested with the same powers, rights, duties and responsibilities
as if it had been originally named as Rights Agent without further act or deed;
but the predecessor Rights Agent shall deliver and transfer to the successor
Rights Agent any property at the time held by it hereunder, and execute and
<PAGE> 39
36
deliver any further assurance, conveyance, act or deed necessary for the
purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Preferred Stock and the Company Common Stock,
and mail a notice thereof in writing to the registered holders of the Rights
Certificates (or certificates for the Company Common Stock prior to the
Distribution Date). Failure to give any notice provided for in this Section
21, however, or any defect therein, shall not affect the legality or validity
of the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent.
SECTION 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or the Rights to the
contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by either (x) 75% of the
Company's Board of Directors or (y) a majority of the Company's Board of
Directors and a majority of the Continuing Directors to reflect any adjustment
or change made in accordance with the provisions of this Agreement in the
Purchase Price or the number or kind or class of shares or other securities or
property that may be acquired upon exercise of the Rights. In addition, in
connection with the issuance or sale of shares of Company Common Stock
following the Distribution Date and prior to the Expiration Date, the Company
(a) shall, with respect to shares of Company Common Stock so issued or sold
pursuant to the exercise of stock options or under any employee plan or
arrangement, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by either (1) 75% of the Company's Board of Directors
or (2) a majority of the Company's Board of Directors and a majority of the
Continuing Directors, issue Rights Certificates evidencing the appropriate
number of Rights in connection with such issuance or sale; provided, however,
that (i) no such Rights Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
person to whom such Rights Certificate would be issued and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
SECTION 23. Redemption and Termination. (a) Subject to
Section 28, the Company may, at its option, by approval of either (1) 75% of
the Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors then in office provided
that at the time of such action there are then in office not less than two
Continuing Directors, at any time prior to the earlier of (i) the Close of
Business on the tenth Day following the Stock Acquisition Date or (ii) the
Final Expiration Date, redeem all but not less than all of the then outstanding
Rights at a redemption price of $.01 per Right, as such amount may be
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being the
"Redemption Price"), and the Company may, at its option, by action of a
majority of the Company's Board of Directors, pay the Redemption Price either
in shares of Company
<PAGE> 40
37
Common Stock (based on the current market price, determined in accordance with
Section 11(d), of the shares of Company Common Stock at the time of redemption)
or cash. Subject to the foregoing, the redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish.
(b) Immediately upon the action ordering the redemption
of the Rights by either (1) 75% of the Company's Board of Directors or (2) a
majority of the Company's Board of Directors and a majority of the Continuing
Directors, evidence of which shall be filed with the Rights Agent, and without
any further action and without any notice, the right to exercise the Rights
will terminate and the only right thereafter of the holders of Rights shall be
to receive the Redemption Price for each Right so held. Promptly after the
action ordering the redemption of the Rights by either (1) 75% of the Company's
Board of Directors or (2) a majority of the Company's Board of Directors and a
majority of the Continuing Directors, the Company shall give notice of such
redemption to the Rights Agent and the holders of the then outstanding Rights
by mailing such notice to all such holders at each holder's last address as it
appears upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for Company
Common Stock. Any notice that is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of redemption will state the method by which the payment of the Redemption
Price will be made.
SECTION 24. Notice of Certain Events. (a) In case the
Company shall propose, at any time after the Distribution Date, (i) to pay any
dividend payable in stock of any class to the holders of Preferred Stock or to
make any other distribution to the holders of Preferred Stock (other than a
regular quarterly cash dividend out of earnings or retained earnings of the
Company), (ii) to offer to the holders of Preferred Stock rights or warrants to
subscribe for or to purchase any additional shares of Preferred Stock or shares
of stock of any class or any other securities, rights or options, (iii) to
effect any reclassification of the Preferred Stock (other than a
reclassification involving only the subdivision of outstanding shares of
Preferred Stock), (iv) to effect any consolidation or merger into or with any
other Person (other than a Subsidiary of the Company in a transaction that
complies with Section 11(o)), or to effect any sale or other transfer (or to
permit one or more of its Subsidiaries to effect any sale or other transfer),
in one or more transactions, of more than 50% of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o)) or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case,
the Company shall give to each holder of a Rights Certificate (or, prior to the
Distribution Date, to each holder of certificates for Company Common Stock), to
the extent feasible and in accordance with Section 25, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such
<PAGE> 41
38
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of the shares of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered
by clause (i) or (ii) above at least 20 days prior to the record date for
determining holders of the shares of Preferred Stock for purposes of such
action, and in the case of any such other action, at least 20 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of the shares of Preferred Stock, whichever shall be the
earlier; provided, however, no such notice shall be required pursuant to this
Section 24 if any Subsidiary of the Company effects a consolidation or merger
with or into, or effects a sale or other transfer of assets or earning power
to, any other Subsidiary of the Company.
(b) In case any of the events set forth in Section
11(a)(ii) shall occur, then, in any such case, the Company shall as soon as
practicable thereafter give to each holder of a Rights Certificate, to the
extent feasible and in accordance with Section 25, a notice of the occurrence
of such event, which shall specify the event and the consequences of the event
to holders of Rights under Section 11(a)(ii).
SECTION 25. Notices. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in writing and
mailed or sent or delivered (including by facsimile transmission), if to the
Company, at its address at:
Global TeleSystems Group, Inc.
1751 Pinnacle Drive
North Tower, 12th Floor
McLean, VA 22102
Attention: Grier Raclin
Telecopy No.: (703) 918-0338
and if to the Rights Agent, at its address at:
Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Stock Transfer Administration
Telecopy No.: (212) 815-3200
Notices or demands authorized or required by this Agreement to be given or made
by the Company or the Rights Agent to the holder of any Rights Certificate (or,
if prior to the Distribution Date, to the holder of certificates evidencing
shares of Company Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid,
<PAGE> 42
39
addressed to such holder at the address of such holder as shown on the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Company Common Stock.
SECTION 26. Supplements and Amendments. Prior to the
Distribution Date and subject to the penultimate sentence of this Section 26,
the Company and the Rights Agent shall, if the Company so directs, supplement
or amend any provision of this Agreement without the approval of any holders of
certificates evidencing shares of Company Common Stock. From and after the
Distribution Date and subject to the penultimate sentence of this Section 26,
the Company and the Rights Agent shall, if the Company so directs, supplement
or amend this Agreement without the approval of any holders of Rights
Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement
any provision contained herein that may be defective or inconsistent with any
other provisions herein, (iii) to shorten or lengthen any time period hereunder
or (iv) to change or supplement the provisions hereunder in any manner which
the Company may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Rights Certificates (other than an
Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, however, that this Agreement may not be supplemented or amended to
lengthen, pursuant to clause (iii) of this sentence, (A) subject to Section 30,
a time period relating to when the Rights may be redeemed at such time as the
Rights are not then redeemable or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery of
a certificate from an appropriate officer of the Company or, so long as any
Person is an Acquiring Person hereunder, from the majority either (1) 75% of
the Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors if at the time of such
action there are then in office not less than two Continuing Directors, that
states that the proposed supplement or amendment is in compliance with the
terms of this Section 26, the Rights Agent shall execute such supplement or
amendment. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Company
Common Stock.
SECTION 27. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 28. Determinations and Actions by the Board of
Directors, etc. (a) For all purposes of this Agreement, any calculation of
the number of shares of Company Common Stock outstanding at any particular
time, including for purposes of determining the particular percentage of such
outstanding shares of Company Common Stock of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the Exchange Act Regulations as in effect on the date hereof.
Except as otherwise specifically provided herein, and subject to paragraph (b)
of this Section 28, the
<PAGE> 43
40
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors of the Company or to the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power (i) to interpret the provisions of this
Agreement and (ii) to make all determinations deemed necessary or advisable for
the administration of this Agreement. All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y)
below, all omissions with respect to the foregoing) that are done or made by
the Board in good faith shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties, and
(y) not subject the Board of Directors of the Company or any member thereof to
any liability to the holders of the Rights.
(b) Notwithstanding anything to the contrary contained in
this Agreement, the concurrence of either (1) 75% of the Company's Board of
Directors or (2) a majority of the Company's Board of Directors and a majority
of the Continuing Directors then in office, shall be required to give effect to
any action, calculation, interpretation or determination made by the Board of
Directors of the Company in the administration of this Agreement and the
exercise of the rights or powers granted to the Board of Directors of the
Company, to the Continuing Directors or to the Company pursuant to this
Agreement and no effect shall be given to any such action, calculation,
interpretation, determination or exercise of rights or powers unless at least
two Continuing Directors are then in office.
SECTION 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, registered holders of shares of Company Common Stock)
any legal or equitable right, remedy or claim under this Agreement. This
Agreement shall be for the sole and exclusive benefit of the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, registered holders of shares of Company Common
Stock).
SECTION 30. Severability. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction
or other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and either (a) 75% of
the Company's Board of Directors or (b) a majority of the Company's Board of
Directors and a majority of the Continuing Directors determines in its good
faith judgment that severing the invalid language from this Agreement would
adversely affect the purpose or effect of this Agreement and the Rights shall
not then be redeemable, the right of redemption set forth in Section 23 shall
be reinstated and shall not expire until the Close of Business on the tenth
Business Day
<PAGE> 44
41
following the date of such determination by either (1) 75% of the Company's
Board of Directors or (2) a majority of the Company's Board of Directors and a
majority of the Continuing Directors.
SECTION 31. Governing Law. This Agreement, each Right and
each Rights Certificate issued hereunder shall be governed by, and construed in
accordance with, the laws of the State of Delaware provided, however, that the
rights and obligations of the Rights Agent shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
conflicts of laws principles thereof.
SECTION 32. Counterparts. This Agreement may be executed
(including by facsimile) in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall be
deemed to be an original, but all of which taken together shall constitute one
and the same instrument.
SECTION 33. Descriptive Headings. The headings contained in
this Agreement are for descriptive purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
SECTION 34. Exchange. (a) (i) The Company may, at its
option, at any time after any person becomes an Acquiring Person, upon
resolution adopted by a majority of the Company's Board of Directors, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant Section 7(e)) for Units of
Preferred Stock at an exchange ratio of one Unit of Preferred Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Section 34(a)(i) Exchange Ratio").
Notwithstanding the foregoing, the Company may not effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan maintained by the Company or any of its Subsidiaries,
or any trustee or fiduciary with respect to such plan acting in such capacity),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the shares of Company Common Stock then
outstanding.
(ii) The Company may, at its option, at any time after any
person becomes an Acquiring Person, upon resolution adopted by a majority of
the Company's Board of Directors, exchange all or part of the then outstanding
and exercisable Rights (which shall not include Rights that have become void
pursuant to Section 7(e)) for Units of Preferred Stock at an exchange ratio
specified in the following sentence, as appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof. Subject to such adjustment, each Right may be exchanged for that
number of Units of Preferred Stock obtained by dividing the Adjustment Spread
(as defined below) by the then current market price (determined pursuant to
Section 11(d)) per Unit of Preferred Stock on the earlier of (i) the date on
which any Person becomes an Acquiring Person and (ii) the date on which a
tender or exchange offer by any Person (other than the Company, any Subsidiary
<PAGE> 45
42
of the Company, any employee benefit plan maintained by the Company or any of
its Subsidiaries or any trustee or fiduciary with respect to such plan acting
in such capacity) is first published or sent or given within the meaning of
Rule 14d-4(a) of the Exchange Act Regulations or any successor rule, if upon
consummation thereof such Person would be the Beneficial Owner of 15% or more
of the shares of Company Common Stock then outstanding (such exchange ratio
being the "Section 34(a)(ii) Exchange Ratio"). The "Adjustment Spread" shall
equal (x) the aggregate market price on the date of such event of the number of
Adjustment Shares determined pursuant to Section 11(a)(ii), minus (y) the
Purchase Price. Notwithstanding the foregoing, the Company may not effect such
exchange at any time after any Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan maintained by the Company or any of
its Subsidiaries, or any trustee or fiduciary with respect to such plan acting
in such capacity), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the shares of the Company Common
Stock then outstanding.
Notwithstanding anything contained in this Section 34(a) to
the contrary, the Company may not exchange any Rights pursuant to this Section
34(a) unless (x) at the time of the action of the Board of Directors of the
Company approving such exchange, there are then in office not less than two
Continuing Directors and (y) such exchange is approved by a majority of the
Continuing Directors then in office.
(b) Immediately upon the action of either (1) 75% of the
Company's Board of Directors or (2) a majority of the Company's Board of
Directors and a majority of the Continuing Directors ordering the exchange of
any Rights pursuant to Section 34(a) and without any further action and without
any notice, the right to exercise such Rights shall terminate and the only
right thereafter of a holder of such Rights shall be to receive that number of
Units of Preferred Stock equal to the number of such Rights held by such holder
multiplied by the Section 34(a)(i) Exchange Ratio or Section 34(a)(ii) Exchange
Ratio, as the case may be. The Company shall promptly give public notice of
any such exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The Company
promptly shall mail a notice of any such exchange to all of the holders of such
Rights at their last addresses as they appear upon the registry books of the
Rights Agent. Any notice that is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of exchange shall state the method by which the exchange of Units of Preferred
Stock for Rights will be effected and, in the event of any partial exchange,
the number of Rights that will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights that have
become void pursuant to Section 7(e)) held by each holder of Rights.
(c) In the event that the number of shares of Preferred
Stock that are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for
<PAGE> 46
43
issuance for purposes other than upon exercise of the Rights are not sufficient
to permit any exchange of Rights as contemplated in accordance with this
Section 34, the Company shall take all such action as may be necessary to
authorize additional shares of Preferred Stock for issuance upon exchange of
the Rights or make adequate provision to substitute (1) cash, (2) Company
Common Stock or other equity securities of the Company, (3) debt securities of
the Company, (4) other assets or (5) any combination of the foregoing, having
an aggregate value equal to the Adjustment Spread, where such aggregate value
has been determined by either (x) 75% of the Company's Board of Directors or
(y) a majority of the Company's Board of Directors and a majority of the
Continuing Directors.
(d) The Company shall not be required to issue fractions
of Units of Preferred Stock or to distribute certificates that evidence
fractional Units. In lieu of fractional Units, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exchanged
as herein provided an amount in cash equal to the same fraction of the current
market price (determined pursuant to Section 11(d)) of one Unit of Preferred
Stock.
<PAGE> 47
44
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on their behalf as of the date first above
written.
GLOBAL TELESYSTEMS GROUP, INC.
By
--------------------------------------
Name:
Title:
THE BANK OF NEW YORK, as
Rights Agent
By
--------------------------------------
Name:
Title:
<PAGE> 48
EXHIBIT A
Form of Rights Certificate
Certificate No. ______ ______Rights
NOT EXERCISABLE AFTER THE EXPIRATION DATE (AS DEFINED IN THE RIGHTS AGREEMENT
REFERRED TO BELOW). THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES (SPECIFIED IN THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY
ACQUIRING PERSONS (AS DEFINED IN THE RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER
OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME
AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT REFERRED TO BELOW).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(E) OF THE
RIGHTS AGREEMENT.]*
RIGHTS CERTIFICATE
GLOBAL TELESYSTEMS GROUP, INC.
This certifies that _____________________, or registered
assigns, is the registered holder of the number of Rights set forth above, each
of which entitles the registered holder thereof, subject to the terms and
conditions of the Rights Agreement dated as of February __, 1998 (the "Rights
Agreement"; terms defined therein are used herein with the same meaning unless
otherwise defined herein) between Global TeleSystems Group, Inc., a Delaware
corporation (the "Company"), and The Bank of New York, as Rights Agent (which
term shall include any successor Rights Agent under the Rights Agreement), to
purchase from the Company at any time after the Distribution Date and prior to
the Expiration Date at the office of the Rights Agent, one one-thousandth of a
fully paid and non-assessable share of Series A Preferred Stock, par value
$1.00 per share (the "Preferred Stock"), of the Company at the Purchase Price
initially of $75 per one one-thousandth share (each such one one-thousandth of
a share being a "Unit") of Preferred Stock, upon presentation and surrender of
this Rights Certificate with the Election to Purchase and related certificate
duly executed. The number of Rights evidenced by this Rights Certificate (and
the number of Units which may be purchased upon exercise thereof) set
__________________________________
* THE PORTION OF THE LEGEND IN BRACKETS SHALL BE INSERTED ONLY IF
APPLICABLE AND SHALL REPLACE THE PRECEDING SENTENCE.
<PAGE> 49
2
forth above, and the Purchase Price per Unit set forth above shall be subject
to adjustment in certain events as provided in the Rights Agreement.
Upon the occurrence of a Section 11(a)(ii) Event or Section 13
Event, if the Rights evidenced by this Rights Certificate are beneficially
owned by an Acquiring Person or an Affiliate or Associate of any such Acquiring
Person or, under certain circumstances described in the Rights Agreement, a
transferee of any such Acquiring Person, Associate or Affiliate, such Rights
shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
In certain circumstances described in the Rights Agreement, the
Rights evidenced hereby may entitle the registered holder thereof to purchase
capital stock of an entity other than the Company or receive common stock, cash
or other assets, all as provided in the Rights Agreement.
This Rights Certificate is subject to all of the terms and
conditions of the Rights Agreement, which terms and conditions are hereby
incorporated herein by reference and made a part hereof and to which Rights
Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies
of the Rights Agreement are on file at the principal office of the Company and
are available from the Company upon written request.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing an aggregate number of Rights
equal to the aggregate number of Rights evidenced by the Rights Certificate or
Rights Certificates surrendered. If this Rights Certificate shall be exercised
in part, the registered holder shall be entitled to receive, upon surrender
hereof, another Rights Certificate or Rights Certificates for the number of
whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company under certain
circumstances at its option at a redemption price of $0.01 per Right, payable
at the Company's option in cash or in common stock of the Company, subject to
adjustment in certain events as provided in the Rights Agreement.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-thousandth of a share of Preferred Stock),
but in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
<PAGE> 50
3
No holder of this Rights Certificate, as such, shall be entitled
to vote or receive dividends or be deemed for any purpose the holder of
Preferred Stock or of any other securities which may at any time be issuable on
the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the
rights of a shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting shareholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Rights evidenced by this Rights Certificate shall have
been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of _________, [199__] [200__].
ATTEST: GLOBAL TELESYSTEMS GROUP, INC.
By By
----------------------- -------------------------
Name: Name:
Title: Title:
Countersigned:
The Bank of New York, as
Rights Agent
By
-----------------------
Name:
Title:
<PAGE> 51
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if
such holder desires to transfer the
Rights Certificate.)
FOR VALUE RECEIVED __________________________________________________ hereby
sells, assigns and transfers unto ______________________
________________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: , [199_] [200_]
----------
---------------------------
Signature
Signature Guaranteed:
<PAGE> 52
CERTIFICATE
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Dated: ------------ -- , [199__] [200__]
Signature
Signature Guaranteed:
--------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above is not completed,
the Company will deem the beneficial owner of the Rights evidenced by this
Rights Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and, in the case of an Assignment,
will affix a legend to that effect on any Rights Certificates issued in
exchange for this Rights Certificate.
<PAGE> 53
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder
desires to exercise Rights represented
by the Rights Certificate.)
To: Global TeleSystems Group, Inc.
The undersigned hereby irrevocably elects to exercise
____________ Rights represented by this Rights Certificate to purchase the
Units of Preferred Stock issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person or other property which
may be issuable upon the exercise of the Rights) and requests that certificates
for such Units be issued in the name of and delivered to:
____________________________________________________________
(Please print name and address)
____________________________________________________________
Please insert social security
or other identifying number: ______________________________
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
______________________________________________________________
(Please print name and address)
______________________________________________________________
Please insert social security
or other identifying number: ____________________________
Dated: , [199__] [200__]
------- --
------------------------------
Signature
Signature Guaranteed:
<PAGE> 54
CERTIFICATE
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are
[ ] are not beneficially owned by an Acquiring Person or an Affiliate or an
Associate thereof (as defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced
by this Rights Certificate from any person who is, was or subsequently became
an Acquiring Person or an Affiliate or Associate thereof.
Dated: , [199__] [200__] ---------------------------
-------- --
Signature
Signature Guaranteed:
--------------------------------------------------------------
NOTICE
The signature in the foregoing Election to Purchase and
Certificate must conform to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
In the event the certification set forth above is not completed,
the Company will deem the beneficial owner of the Rights evidenced by this
Rights Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and, in the case of an Assignment,
will affix a legend to that effect on any Rights Certificates issued in
exchange for this Rights Certificate.
<PAGE> 55
EXHIBIT B
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
On December 5, 1997, the Board of Directors of Global TeleSystems
Group, Inc. (the "Company") authorized and declared, effective as of the date of
entering into the Rights Agreement, a distribution of one Right for each
outstanding share of Common Stock, par value $1.00 per share (the "Company
Common Stock"), to stockholders of record at the close of business on February
2, 1998 (the "Record Date") and for each share of Company Common Stock issued
(including shares distributed from Treasury) by the Company thereafter and prior
to the Distribution Date. Each Right entitles the registered holder, subject to
the terms of the Rights Agreement (as defined below), to purchase from the
Company one one-thousandth of a share (a "Unit") of Series A Preferred Stock,
par value $1.00 per share (the "Preferred Stock"), at a Purchase Price of $75
per Unit, subject to adjustment. The Purchase Price is payable in cash or by
certified or bank check payable to the order of the Company or by wire transfer
to the account of the Company (provided a notice of such wire transfer is given
by the holder of the related Right to the Rights Agent). The description and
terms of the Rights are set forth in a Rights Agreement between the Company and
The Bank of New York, as Rights Agent (the "Rights Agreement").
Copies of the form of Rights Agreement and the Certificate of
Designation for the Preferred Stock have been filed with the Securities and
Exchange Commission as exhibits to a Registration Statement on Form 8-A dated
February 2, 1998 (the "Form 8-A"). Copies of the Rights Agreement and the
Certificate of Designation are available free of charge from the Company. This
summary description of the Rights and the Preferred Stock does not purport to be
complete and is qualified in its entirety by reference to all the provisions of
the Rights Agreement and the Certificate of Designation, including the
definitions therein of certain terms, which Rights Agreement and Certificate of
Designation are incorporated herein by reference.
The Rights Agreement
Initially, the Rights will attach to all certificates
representing shares of outstanding Company Common Stock, and no separate Rights
Certificates will be distributed. The Rights will separate from the Company
Common Stock and the "Distribution Date" will occur upon the earlier of (i) 10
days following a public announcement (the date of such announcement being the
"Stock Acquisition Date") that a person or group of affiliated or associated
persons (other than the Company, any subsidiary of the Company or any employee
benefit plan of the Company or such subsidiary) (an "Acquiring Person") has
acquired, obtained the right to acquire, or otherwise obtained beneficial
ownership of 15% or more of the then outstanding shares of Company Common
Stock; provided, however, that George Soros and his affiliates and Alan B.
Slifka and his
<PAGE> 56
B-2
affiliates shall not be deemed Acquiring Persons unless they have acquired,
obtained the right to acquire, or otherwise obtained beneficial ownership of
20% or more of the then outstanding shares of Company Common Stock, and (ii) 10
business days (or such later date as may be determined by action of the Board
of Directors prior to such time as any person becomes an Acquiring Person)
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of the then
outstanding shares of Company Common Stock. Until the Distribution Date, (i)
the Rights will be evidenced by Company Common Stock certificates and will be
transferred with and only with such Company Common Stock certificates, (ii) new
Company Common Stock certificates issued after the Record Date (also including
shares distributed from Treasury) will contain a notation incorporating the
Rights Agreement by reference and (iii) the surrender for transfer of any
certificates representing outstanding Company Common Stock will also constitute
the transfer of the Rights associated with the Company Common Stock represented
by such certificates.
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on the tenth anniversary of the Rights
Agreement unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Company Common Stock as of
the close of business on the Distribution Date and, thereafter, the separate
Rights Certificates alone will represent the Rights.
In the event that (i) the Company is the surviving corporation
in a merger with an Acquiring Person and shares of Company Common Stock shall
remain outstanding, (ii) a Person becomes an Acquiring Person, (iii) an
Acquiring Person engages in one or more "self-dealing" transactions as set
forth in the Rights Agreement, or (iv) during such time as there is an
Acquiring Person, an event occurs which results in such Acquiring Person's
ownership interest being increased by more than 1% (e.g., by means of a
recapitalization) (each such event being a "Section 11(a)(ii) Event"), then, in
each such case, each holder of a Right will thereafter have the right to
receive, upon exercise, Units of Preferred Stock (or, in certain circumstances,
Company Common Stock, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. The exercise price
is the Purchase Price multiplied by the number of Units of Preferred Stock
issuable upon exercise of a Right prior to the events described in this
paragraph. Notwithstanding any of the foregoing, following the occurrence of
any of the events set forth in this paragraph, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person will be null and void.
In the event that, at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or other business combination
transaction and the Company is not the surviving corporation (other than a
merger described in the preceding paragraph), (ii) any Person consolidates or
merges with the Company and all or part of the
<PAGE> 57
B-3
Company Common Stock is converted or exchanged for securities, cash or property
of any other Person or (iii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as described above) shall thereafter have the right
to receive, upon exercise, common stock of the ultimate parent of the Acquiring
Person having a value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of Units of Preferred
Stock issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock, or (iii) upon the distribution to
the holders of the Preferred Stock of evidences of indebtedness, cash or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments amount to at least 1% of the
Purchase Price. The Company is not required to issue fractional Units. In
lieu thereof, an adjustment in cash may be made based on the market price of
the Preferred Stock prior to the date of exercise.
At any time until ten business days following the Stock
Acquisition Date, either (a) 75% of the Company's Board of Directors or (b) a
majority of the Company's Board of Directors and a majority of the Continuing
Directors, may redeem the Rights in whole, but not in part, at a price of $0.01
per Right (subject to adjustment in certain events) (the "Redemption Price"),
payable, at the election of either (a) 75% of the Company's Board of Directors
or (b) a majority of the Company's Board of Directors and a majority of the
Continuing Directors, in cash or shares of Company Common Stock. Immediately
upon the action of either (a) 75% of the Company's Board of Directors or (b) a
majority of the Company's Board of Directors and a majority of the Continuing
Directors, ordering the redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption
Price.
The Board of Directors, at its option, may exchange each Right
for (i) one Unit of Preferred Stock or (ii) such number of Units of Preferred
Stock as will equal (x) the difference between the aggregate market price of
the number of Units of Preferred Stock to be received upon a Section 11(a)(ii)
Event and the purchase price set forth in the Rights Agreement, divided by (y)
the market price per Unit of Preferred Stock upon a Section 11(a)(ii) Event.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends. While the distribution of the
Rights will not be taxable to stockholders or to the
<PAGE> 58
B-4
Company, stockholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for Units of Preferred
Stock (or other consideration).
Any of the provisions of the Rights Agreement may be amended
without the approval of the holders of Company Common Stock at any time prior
to the Distribution Date. After the Distribution Date, the provisions of the
Rights Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable. Supplements or
amendments to the Rights Agreement may be made only if approved by (a) 75% of
the Company's Board of Directors or (b) a majority of the Company's Board of
Directors and a majority of the Continuing Directors.
Description of Preferred Stock
The Units of Preferred Stock that may be acquired upon exercise
of the Rights will be nonredeemable and subordinate to any other shares of
preferred stock that may be issued by the Company.
Each Unit of Preferred Stock will have a minimum preferential
quarterly dividend of $.01 per Unit or any higher per share dividend declared
on the Company Common Stock.
In the event of liquidation, the holder of a Unit of Preferred
Stock will receive a preferred liquidation payment equal to the greater of $.01
per Unit and the per share amount paid in respect of a share of Company Common
Stock.
Each Unit of Preferred Stock will have one vote, voting together
with the Company Common Stock. The holders of Units of Preferred Stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Preferred Stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction
in which shares of Company Common Stock are exchanged, each Unit of Preferred
Stock will be entitled to receive the per share amount paid in respect of each
share of Company Common Stock.
The rights of holders of the Preferred Stock to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary antidilution provisions.
<PAGE> 59
B-5
Because of the nature of the Preferred Stock's dividend,
liquidation and voting rights, the economic value of one Unit of Preferred
Stock that may be acquired upon the exercise of each Right is expected to
approximate the economic value of one share of Company Common Stock.
<PAGE> 60
EXHIBIT C
CERTIFICATE OF DESIGNATION
OF THE VOTING POWERS, DESIGNATION,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF THE
SERIES A PREFERRED STOCK
-----------------------------------
Pursuant to Section 151 of the
General Corporation Law of
the State of Delaware
-----------------------------------
I, ______________________________________________________ of
Global TeleSystems Group, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), DO HEREBY
CERTIFY:
that, pursuant to authority conferred upon the Board of
Directors of the Corporation by its Certificate of Incorporation (the
"Certificate") and delegated to a committee of the Board of Directors of the
Corporation at a duly called meeting held on December 5, 1997, at which a quorum
was present and acted throughout, and, pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, said committee, at a
duly called meeting held on January 30, 1998, at which a quorum was present and
acted throughout, adopted the following resolutions, which resolutions remain in
full force and effect on the date hereof creating a series of 200,000 shares of
Preferred Stock having a par value of $1.00 per share, designated as Series A
Preferred Stock (the "Series A Preferred Stock") out of the authorized preferred
stock, par value of $1.00 per share (the "Preferred Stock"):
RESOLVED, that pursuant to the authority vested in this
committee of the Board of Directors in accordance with the provisions of the
Certificate, and resolutions of the Board of Directors duly adopted on December
5, 1997, this committee of the Board of Directors does hereby create, authorize
and provide for the issuance of the Series A Preferred Stock having the voting
powers, designation, relative, participating, optional and other special rights,
preferences, and qualifications, limitations and restrictions thereof that are
set forth as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Preferred Stock" and the number of shares
constituting such series shall be 200,000.
<PAGE> 61
C-2
Section 2. Dividends and Distributions. (A) Subject to the
prior and superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of preferred stock of the Corporation
ranking prior and superior to the shares of Series A Preferred Stock with
respect to dividends, each holder of one one- thousandth (1/1,000) of a share
(a "Unit") of Series A Preferred Stock shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds legally available for
that purpose, (i) quarterly dividends payable in cash on the last day of March,
June, September and December in each year (each such date being a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment
Date after the first issuance of such Unit of Series A Preferred Stock, in an
amount per Unit (rounded to the nearest cent) equal to the greater of (a) $.01
or (b) subject to the provision for adjustment hereinafter set forth, the
aggregate per share amount of all cash dividends declared on shares of the
Common Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A Preferred Stock, and (ii) subject to the
provision for adjustment hereinafter set forth, quarterly distributions
(payable in kind) on each Quarterly Dividend Payment Date in an amount per Unit
equal to the aggregate per share amount of all non-cash dividends or other
distributions (other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock, by reclassification or
otherwise) declared on shares of Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or with respect to the first Quarterly
Dividend Payment Date, since the first issuance of a Unit of Series A Preferred
Stock. In the event that the Corporation shall at any time after February 2,
1998 (the "Rights Declaration Date") (i) declare any dividend on outstanding
shares of Common Stock payable in shares of Common Stock, (ii) subdivide
outstanding shares of Common Stock or (iii) combine outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
to which the holder of a Unit of Series A Preferred Stock was entitled
immediately prior to such event pursuant to the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or
distribution on Units of Series A Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the shares of
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall have
been declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date,
a dividend of $0.01 per Unit on the Series A Preferred Stock shall nevertheless
be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be
cumulative on each outstanding Unit of Series A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issuance of such
Unit of Series A Preferred Stock, unless the date
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of issuance of such Unit is prior to the record date for the first Quarterly
Dividend Payment Date, in which case, dividends on such Unit shall begin to
accrue from the date of issuance of such Unit, or unless the date of issuance
is a Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series A
Preferred Stock in an amount less than the aggregate amount of all such
dividends at the time accrued and payable on such Units shall be allocated pro
rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. The holders of Units of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to one
vote on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares, then in each such case the number of votes per Unit to which holders of
Units of Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which shall be the number of shares of Common Stock outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
Units of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) (i) If at any time dividends on any Units of Series A
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, then during the period (a "default period") from the
occurrence of such event until such time as all accrued and unpaid dividends
for all previous quarterly dividend periods and for the current quarterly
dividend period on all Units of Series A Preferred Stock then outstanding shall
have been declared and paid or set apart for payment, all holders of Units of
Series A Preferred Stock, voting separately as a class, shall have the right to
elect two Directors.
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(ii) During any default period, such voting rights of the holders of
Units of Series A Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting rights nor any right of the
holders of Units of Series A Preferred Stock to increase, in certain cases, the
authorized number of Directors may be exercised at any meeting unless one-third
of the outstanding Units of Preferred Stock shall be present at such meeting in
person or by proxy. The absence of a quorum of the holders of Common Stock
shall not affect the exercise by the holders of Units of Series A Preferred
Stock of such rights. At any meeting at which the holders of Units of Series A
Preferred Stock shall exercise such voting rights initially during an existing
default period, they shall have the right, voting separately as a class, to
elect Directors to fill up to two vacancies in the Board of Directors, if any
such vacancies may then exist, or, if such right is exercised at an annual
meeting, to elect two Directors. If the number which may be so elected at any
special meeting does not amount to the required number, the holders of the
Series A Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them of the
required number. After the holders of Units of Series A Preferred Stock shall
have exercised their right to elect Directors during any default period, the
number of Directors shall not be increased or decreased except as approved by a
vote of the holders of Units of Series A Preferred Stock as herein provided or
pursuant to the rights of any equity securities ranking senior to the Series A
Preferred Stock.
(iii) Unless the holders of Series A Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than 25% of the total number of the Units of
Series A Preferred Stock outstanding may request, the calling of a special
meeting of the holders of Units of Series A Preferred Stock, which meeting
shall thereupon be called by the Secretary of the Corporation. Notice of such
meeting and of any annual meeting at which holders of Units of Series A
Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall
be given to each holder of record of Units of Series A Preferred Stock by
mailing a copy of such notice to him at his last address as the same appears on
the books of the Corporation. Such meeting shall be called for a time not
earlier than 20 days and not later then 60 days after such order or request or
in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than 25% of the total number of
outstanding Units of Series A Preferred Stock. Notwithstanding the provisions
of this paragraph (C)(iii), no such special meeting shall be called during the
60 days immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) During any default period, the holders of shares of Common Stock
and Units of Series A Preferred Stock, and other classes or series of stock of
the Corporation, if applicable, shall continue to be entitled to elect all the
Directors until holders of the Units of Series A Preferred Stock shall have
exercised their right to elect two Directors voting as
<PAGE> 64
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a separate class, after the exercise of which right (x) the Directors so
elected by the holders of Units of Series A Preferred Stock shall continue in
office until their successors shall have been elected by such holders or until
the expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in paragraph (C)(ii) of this Section 3) be
filled by vote of a majority of the remaining Directors theretofore elected by
the holders of the class of capital stock which elected the Director whose
office shall have become vacant. References in this paragraph (C) to Directors
elected by the holders of a particular class of capital stock shall include
Directors elected by such Directors to fill vacancies as provided in clause (y)
of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Units of Series A Preferred Stock as a separate class
to elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series A Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Certificate or by-laws irrespective of any increase made
pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number
being subject, however, to change thereafter in any manner provided by law or
in the Certificate or by-laws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining Directors.
(vi) The provisions of this paragraph (C) shall govern the election
of Directors by holders of Units of Preferred Stock during any default period
notwithstanding any provisions of the Certificate to the contrary.
(D) Except as set forth herein, holders of Units of
Series A Preferred Stock shall have no special voting rights and their consents
shall not be required (except to the extent they are entitled to vote with
holders of shares of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions. (A) Whenever quarterly
dividends or other dividends or distributions payable on Units of Series A
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
outstanding Units of Series A Preferred Stock shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of junior stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of parity stock, except dividends paid
ratably on Units of Series A Preferred Stock and shares of all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of such Units and
all such shares are then entitled;
<PAGE> 65
C-6
(iii) redeem or purchase or otherwise acquire for
consideration shares of any parity stock, provided, however, that the
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any junior
stock;
(iv) purchase or otherwise acquire for consideration any Units
of Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph (A)
of this Section 4, purchase or otherwise acquire such shares at such time and
in such manner.
Section 5. Reacquired Shares. Any Units of Series A
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such Units shall, upon their cancellation, become authorized but
unissued Units of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
junior stock unless the holders of Units of Series A Preferred Stock shall have
received, subject to adjustment as hereinafter provided in paragraph (B), the
greater of either (a) $0.01 per Unit plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not earned or declared, to the
date of such payment, or (b) the amount equal to the aggregate per share amount
to be distributed to holders of shares of Common Stock, or (ii) to the holders
of shares of parity stock, unless simultaneously therewith distributions are
made ratably on Units of Series A Preferred Stock and all other shares of such
parity stock in proportion to the total amounts to which the holders of Units
of Series A Preferred Stock are entitled under clause (i)(a) of this sentence
and to which the holders of shares of such parity stock are entitled, in each
case upon such liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding shares of Common Stock
into a smaller number of shares, then in each such case the aggregate amount to
which holders of Units of Series A Preferred Stock were entitled immediately
prior to such event pursuant to clause (i)(b) of paragraph (A) of this Section
6 shall be adjusted by multiplying such amount by a fraction the numerator of
which shall be the number of shares of Common Stock that are outstanding
immediately after such
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event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of common stock are exchanged for or converted
into other stock or securities, cash and/or any other property, then in any
such case Units of Series A Preferred Stock shall at the same time be similarly
exchanged for or converted into an amount per Unit (subject to the provision
for adjustment hereinafter set forth) equal to the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is converted or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding Common Stock into a smaller number of
shares, then in each such case the amount set forth in the immediately
preceding sentence with respect to the exchange or conversion of Units of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which shall be the number of shares of Common Stock
that are outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. Redemption. The Units of Series A Preferred Stock
shall not be redeemable.
Section 9. Ranking. The Units of Series A Preferred Stock
shall rank junior to all other series of the Preferred Stock and to any other
class of preferred stock that hereafter may be issued by the Corporation as to
the payment of dividends and the distribution of assets, unless the terms of
any such series or class shall provide otherwise.
Section 10. Amendment. The Certificate, including, without
limitation, this resolution, shall not hereafter be amended, either directly or
indirectly, or through merger or consolidation with another corporations in any
manner that would alter or change the powers, preferences or special rights of
the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding Units
of Series A Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. The Series A Preferred Stock
may be issued in Units or other fractions of a share, which Units or fractions
shall entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series A Preferred Stock.
Section 12. Certain Definitions. As used herein with respect
to the Series A Preferred Stock, the following terms shall have the following
meanings:
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(A) The term "Common Stock" shall mean the class of stock
designated as the common stock, par value $1.00 per share, of the Corporation
at the date hereof or any other class of stock resulting from successive
changes or reclassification of such common stock.
(B) The term "junior stock" (i) as used in Section 4,
shall mean the Common Stock and any other class or series of capital stock of
the Corporation hereafter authorized or issued over which the Series A
Preferred Stock has preference or priority as to the payment of dividends and
(ii) as used in Section 6, shall mean the Common Stock and any other class or
series of capital stock of the Corporation over which the Series A Preferred
Stock has preference or priority in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(C) The term "parity stock" (i) as used in Section 4,
shall mean any class or series of stock of the Corporation hereafter authorized
or issued ranking pari passu with the Series A Preferred Stock as to the
payment of dividends and (ii) as used in Section 6, shall mean any class or
series of capital stock ranking pari passu with the Series A Preferred Stock in
the distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
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IN WITNESS WHEREOF, Global TeleSystems Group, Inc. has caused
this Certificate to be signed by its and
attested by its Secretary this 2nd day of February, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By
-------------------------------------
Attest:
- -------------------------------------
<PAGE> 1
2
Our opinions expressed below are limited to the law of the State of
New York, the General Corporation Law of the State of Delaware and the Federal
law of the United States, and we do not express any opinion herein concerning
any other law.
Based on the foregoing, and having regard for such legal
considerations as we deem relevant, we are of the opinion that when the
issuance of the Securities has been duly authorized by the Company, when the
Purchase Agreements have been duly authorized, executed and delivered by the
parties thereto and when the Securities have been issued and sold to the
Underwriters by the Company pursuant to the Purchase Agreements, the Securities
will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Shearman & Sterling
<PAGE> 1
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated December 16, 1997 (Global TeleSystems Group, Inc.),
February 21, 1997 (EDN Sovintel), and December 23, 1997 (Hermes Europe Railtel
B.V.), in Amendment No. 5 to the Registration Statement (Form S-1 No.
333-36555) and related Prospectus of Global TeleSystems Group, Inc. dated on or
about February 2, 1998.
/s/ Ernst & Young LLP
Vienna, Virginia
February 2, 1998
