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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITY
EXCHANGE ACT OF 1934
Commission file number:
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3068423
(State of incorporation) (I.R.S. Employer Identification Nos.)
1751 Pinnacle Drive, North Tower, 12th Floor
McLean, Virginia 22102
(Address of principal executive offices)
(703) 918-4500
(Registrant's telephone number)
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Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $0.10 per share and Rights associated with Common
Stock, par value $0.10 per share
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes No X
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this Form 10-K, and will not be
contained, to the best of the registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock of Global TeleSystems
Group, Inc. held by non-affiliates on February 27, 1998 was approximately
$1,182,668,000. On February 27, 1998, there were outstanding approximately
50,904,000 shares of Common Stock of Global TeleSystems Group, Inc.
Item of Form 10-K Document Incorporated By Reference
------------------ ----------------------------------
Part III, Item 10, 11, 12 and 13 Proxy Statement* (excluding therefrom
the subsections entitled "Report of
the Compensation and Benefits
Committee of the Board of Directors"
and "Performance Graph")
Part IV, Item 14 (c) Exhibits
- --------------------------
* Refers to the definitive Proxy Statement of Global TeleSystems Group, Inc., to
be filed pursuant to Regulation 14A, relating to the Annual Meeting of
Stockholders of Global TeleSystems Group, Inc. to be held on May 20, 1998.
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GLOBAL TELESYSTEMS GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I PAGE
ITEM 1. Business
Introduction
Business Strategy
Russia and the CIS
Sovintel
TCM
TeleRoss
Sovam
GTS Cellular
Certain Considerations Applicable to the Company's
Operations in Russia and the CIS
Western Europe
HER
GTS Monaco Access
Central Europe
Asia
Certain Considerations Generally Applicable to the Company's
Operations
Glossary of Telecommunications Industry Terms
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for the Company's Common Equity and Related
Stockholder Matters.
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 8. Consolidated Financial Statements and Supplementary
Information for the Company
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ITEM 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Company
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
SIGNATURES
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PART I
ITEM 1. BUSINESS
To aid the reader, a "Glossary of Telecommunications Industry Terms," which
defines certain terms used in this "Business" section and elsewhere in this
Report, follows commencing on page 58.
INTRODUCTION
The predecessor to Global TeleSystems Group, Inc. (the "Company" or "GTS")
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.
The Company 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 below), 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 operates cellular
networks in thirteen 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 1997. 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 442 million minutes of traffic
for the year ended December 31, 1997 and had approximately 33,300 customers,
including approximately 23,400 cellular subscribers, as of December 31, 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 S.A.M. ("GTS-Monaco Access"). HER's objective is to become the leading
pan-European carriers' carrier by providing centrally managed cross-border
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telecommunications transmission capacity to telecommunications companies
including traditional public 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 pan-European high capacity fiber optic network
designed to interconnect a majority of the largest Western and Central European
cities. As of April 1, 1998, HER's network will link Brussels, Antwerp,
Rotterdam, Amsterdam, London, Paris, and Frankfurt. HER expects the initial five
country network and Switzerland 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 3,800 kilometers of fiber optic cable linking, in
addition to the cities discussed above, the cities of Zurich, Geneva,
Dusseldorf, Stuttgart, and Munich. 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 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."
The following table sets forth certain information, as of December 31,
1997, for the principal ventures through which the Company conducts its
business:
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<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
Data and Internet
Sovam ...................................... Russia 67%(3) Institute for
Automated Systems
GTS Cellular................................. CIS 25-70%(4) Primarily various Basic Cellular
local PTOs
WESTERN EUROPE
HER ...................................... Western Europe 79%(5) Various Carriers' Carrier
Carriers' Carrier;
GTS-Monaco Access............................ Monaco 50% Principality of International Gateway
Monaco
CENTRAL EUROPE
GTS-Hungary.................................. Hungary 99% -- VSAT Network
EuroHivo..................................... Hungary 70% Microsystems Paging Services
Telecom Rt.;
Gerard Aircraft
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 "-- Russia and the CIS -- TeleRoss."
(3) GTS purchased its minority partner's 33.3% interest 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 12 operational 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 "-- Russia and
the CIS -- GTS Cellular."
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(5) As a result of the sale of shares by one of the other shareholders of
HER in March 1998, GTS currently owns approximately 89% of HER. See
"---Western Europe---HER---HER Recapitalization." 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 HER stock
option plan established in the fourth quarter of 1997. See "Executive
Compensation and Other Information -- Key Employee Stock Option Plan
of Hermes Europe Railtel B.V." in the Company's Proxy Statement for
its 1998 Annual Meeting.
(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.
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:
o 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.
o 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.
o 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.
o 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.
o 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
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cultural awareness and fluency with international and local business
practices necessary to implement the Company's objectives.
o 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.
From 1993 through 1997, the Company raised privately 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. On February 10, 1998, the Company
completed an initial public offering of its common stock. The Company
sold 12,765,000 shares in the offering, including 1,665,000 shares sold
as a result of the exercise of over-allotment options granted to the
underwriters of the offering and realized net proceeds of $238.7
million from the offering after the payment of underwriting fees but,
before payment of other expenses associated with the offering. On the
same date, the Company also sold $105 million aggregate principal
amount of 9-7/8% Senior Notes due 2005 ("the Senior Notes"), and
realized net proceeds of $82.3 million, after the payment of
underwriting fees and the deposit of $19.6 million in escrow to cover
the first four scheduled payments of interest on the Senior Notes, but
before expenses associated with the sale of the Senior Notes.
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.
o 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.
o 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.
o 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
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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.
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 Ministry of Communications (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 (then the monopoly
international and domestic long distance service provider) and national radio,
television and satellite
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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 second 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.
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 benefited 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
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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 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:
o 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.
o 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.
12
<PAGE> 13
o 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.
o 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.
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. Several of
the TeleRoss Ventures and the cellular joint ventures were not operational, or
had just commenced operating, in 1995. As a result, TeleRoss and GTS Cellular
did not generate significant revenues in 1995.
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,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cities In Service............................... 33 40
Total Voice Minutes (millions)(1)
Inter-city.................................... 15.8 57.1
Local......................................... 133.0 269.1
International Outgoing........................ 20.5 46.0
Incoming...................................... 33.2 69.9
Total Data Customers (thousands)................ 6.2 9.9
Total Cellular Subscribers (thousands).......... 9.8 23.4
</TABLE>
- ----------
(1) Amounts include minutes between Company affiliates.
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
13
<PAGE> 14
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 43,900 telephone numbers, or
"ports," for business customers and cellular providers and had over 275
employees as of December 31, 1997.
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.
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.
The following table sets forth certain operating data related to Sovintel's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31.
--------------------------------------
1995 1996 1997
---------- --------- --------
<S> <C> <C> <C>
MINUTES OF USE(1)
International Minutes
Number of Minutes ............ 10,516 20,839 43,664
Average Rate Per Minute ...... $ 2.06 $ 1.55 $ 1.12
Domestic Long Distance Minutes
Number of Minutes ............ 2,047 10,098 26,606
Average Rate Per Minute ...... $ 0.86 $ 0.65 $ 0.52
Moscow (Local) Fixed Line Minutes
Number of Minutes ............ -- -- --3,501
Average Rate Per Minute ...... -- -- $--0.05
Moscow (Local) Cellular Minutes
Number of Minutes ............ 21,478 83,673 118,447
Average Rate Per Minute ...... $ 0.06 $ 0.08 $ 0.08
Incoming Minutes
Number of Minutes ............ 3,839 24,306 43,626
Average Rate Per Minutes ..... $ 0.58 $ 0.28 $ 0.30
PORTS
Number of Ports (cumulative) .... 6,079 29,646 43,976
NUMBER OF PRIVATE LINE CHANNELS
International ................... 26 89 201
Inter- and Intra-City ........... 26 103 243
APPROXIMATE EQUIPMENT SALES
(THOUSANDS) ..................... $ 1,400 $ 2,200 $ 3,400
</TABLE>
14
<PAGE> 15
- ----------
(1) Minutes in thousands. Amounts include minutes among affiliates.
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:
o 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.
o 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
benefiting from Sovintel's high quality infrastructure. Private line
domestic long distance 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.
o 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.
o 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
15
<PAGE> 16
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 $1.12
per minute for the year ended December 31, 1997. Sovintel expects increased
pricing pressure from competitors over time. Sovintel prices domestic long
distance services in line with those of its principal competitors, however, due
to its obligations under certain agreements with affiliated entities,
Sovintel's margins for these services are declining. 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 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 December 31, 1997, GTS and Rostelecom
have each made equity contributions of $1.0 million to Sovintel. The Sovintel
joint venture agreement does not have an expiration date. See "--Certain
Considerations Generally Applicable to the Company's Operations-- Dependence on
Certain Local Parties; Absence of Control" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations --- Accounting
Methodology --- Profit and Loss Accounting."
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 50,000 have been leased. TCM
has contracted with MGTS to construct up to an additional 100,000
16
<PAGE> 17
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. 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 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 December 31, 1997, GTS had no outstanding loans
relating to TCM. None of the operative charters and agreements relating to the
holding company or TCM have expiration dates. See "Certain Considerations
Generally Applicable to the Company's Operations -- Dependence on Certain Local
Parties; Absence of Control" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations --- Accounting Methodology ---
Profit and Loss Accounting."
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, 24 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 December 31, 1997, TeleRoss employed approximately 188 persons
of which approximately
17
<PAGE> 18
90 people were based in Moscow and approximately 98 people were deployed in the
regions in which TeleRoss operates.
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
12 million. TeleRoss's licenses cover the entire oblast surrounding these
cities, with populations totaling approximately 38 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: Arkhangelsk, Ekaterinburg, Irkutsk,
Khabarovsk, Krasnodar, Nizhni Novgorod, Novosibirsk, Syktyvkar, Tyumen, Ufa,
Vladivostok, Volgograd and Voronezh. The Company has formed an additional
TeleRoss Venture in the city of Samara. As of March 1998, this venture was not
operational.
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 24 customers
in 24 additional cities through VSAT technology which links the customers via
satellite to the Moscow hub.
The following table sets forth certain operating data related to TeleRoss's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997
---- ----
<S> <C> <C>
MINUTES OF USE(1)
Domestic Minutes (thousands) ........ 4,035 23,233
Average Rate Per Domestic Minute .... $ 0.99 $ 0.63
International Minutes (thousands) ... 272 744
Average Rate Per International Minute $ 2.76 $ 2.47
NUMBER OF CITIES SERVED(2) ............ 13 14
WORLD CONNECT DIAL/RUSSIA
Number of Connect Dial Ports ........ 472 1,112
Average Revenue Per Port Per Month .. $ 767 $ 370
MOSCOW CONNECT
Number of Ports ..................... 49 78
Average Revenue Per Port Per Month .. $ 1,165 $ 1,358
DEDICATED CIRCUITS
Number of Dedicated Channels ........ 33 60
Average Price Per Channel ........... $ 4,553 $ 4,140
WORLD ACCESS SERVICE
Number of World Access Card Users ... 3,929 4,595
Average Revenue Per Card Per Month .. $ 52 $ 48
VSAT SERVICES
Number of VSATs ..................... 12 24
</TABLE>
- ----------
(1) Includes minutes among affiliates.
(2) Includes connection to Moscow.
Services. Through its network and VSAT offerings, TeleRoss offers the
following services:
o 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
18
<PAGE> 19
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.
o 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.
o 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 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.
o 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.
o 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.
o 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 December 31, 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.
19
<PAGE> 20
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. During the year ended December 31, 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 December 31, 1997, TeleRoss
employed 31 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 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
"--Certain Considerations Generally Applicable to the Company's Operations --
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 December 31, 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 $3.4 million to GTS as of December 31, 1997. In addition,
as of December 31, 1997, GTS had made equity contributions of $5.8 million to
the TeleRoss Operating Company and the TeleRoss Operating Company had
outstanding loans of $37.4 million to GTS. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting."
SOVAM
Sovam is a venture that is wholly owned by GTS. Sovam was founded in 1990
as a venture equally owned by GTS and the Institute for Automated Systems
("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 66.7%. GTS purchased IAS's interest in Sovam 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.
(Russia On Line(TM) is a trademark of the Company.) As of December 31, 1997,
Sovam had approximately 1,571 data service customers and approximately
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<PAGE> 21
3,960 Russia On Line customers. Sovam employed over 110 persons in Moscow and
other regions of the CIS as of December 31, 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 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.
The following table sets forth certain operating data related to Sovam's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
BASIC DATA SERVICE
Percentage of Total Sovam Revenue 91% 79% 81%
Number of Customers ............. 1,587 1,726 1,571
Average Revenue Per Month Per
Customer ..................... $ 201 $ 446 $ 728
Number of Cities in Service ..... 11 25 30
EQUIPMENT AND HARDWARE SALES
Percentage of Total Sovam Revenue 8% 14% 8%
RUSSIA ON LINE SERVICE
Percentage of Total Sovam Revenue 1% 7% 11%
Number of Subscribers(1) ........ 407 1,854 3,159
Average Revenue Per Month Per
Subscriber ................... $ 49 $ 52 $ 64
</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 December 31, 1997, there were approximately 800 such potential
subscribers.
Services. Sovam's service offerings are comprised of data services,
equipment and hardware sales and its Russia On Line services.
o Data Services. Sovam provided high speed connectivity, electronic mail,
database access and fax services to approximately 1,571 customers as of
December 31, 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.
o 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.
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<PAGE> 22
o 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 3,960 Russia On Line subscribers (which includes
approximately 800 trial subscribers) as of December 31, 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 also entered into agreements with equipment
manufacturers, including Dell, Motorola and Acer, 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 $728 per
subscriber in 1996 and 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. At December 31, 1997, GTS owned 66.7% of Sovam and
IAS owned the remaining 33.3%. GTS purchased IAS's interest in Sovam in
February 1998, thereby making Sovam a wholly owned subsidiary of GTS. As of
December 31, 1997, neither GTS nor IAS were obligated to fund Sovam's
operations or capital expenditures. Losses and profits of Sovam were allocated
to the partners in accordance with their ownership percentages, in
consideration of funds at risk. As of December 31, 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 $5.7 million to GTS as of
December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- 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 is organized in
The Netherlands), which currently operates twelve 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
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<PAGE> 23
Cellular entities possess licenses covering major Russian and Ukrainian markets
(excluding Moscow and St. Petersburg) with an aggregate 1997 population of
approximately 25 million people.
GTS currently offers cellular services in the following regions as of
December 31, 1997:
<TABLE>
<CAPTION>
GTS'S
OPERATING ECONOMIC NUMBER OF
COMPANY INTEREST(1)(2) CITY SUBSCRIBERS
- --------------------------- -------------- -------------- ------------
<S> <C> <C> <C>
RUSSIA
Vostok Mobile(2)
Arkhangelsk Mobile 50.0% Arkhangelsk 602
Networks............
Astrakhan Mobile...... 50.0% Astrakhan 1,264
Barnaul Mobile(3).... 50.0% Barnaul -----
Chuvashi Mobile...... 70.0% Cheboksary 1,201
Lipetsk Mobile....... 70.0% Lipetsk 461
Murmanskaya Mobilnaya
Set................ 50.0% Murmansk 1,457
Penza Mobile......... 60.0% Penza 519
Saratov Mobile....... 50.0% Saratov 1,456
Parma Mobile......... 50.0% Syktyvkar 750
Volgograd Mobile..... 50.0% Volgograd 2,065
Votec Mobile......... 50.0% Voronezh 1,725
Mar Mobile........... 50.0% Yoshkar-ola 2,061
PrimTelefone............ 50.0% Vladivostok(4) 6,152
UKRAINE
Bancomsvyaz............. 24.9% Kiev 3,664
-------
Total........... 23,377
-------
</TABLE>
- ----------
(1) Represents the indirect economic interest of GTS in each entity.
(2) 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 12 operational cellular
joint ventures in various regions in Russia. In the second half of
1997, the Company formed three additional ventures in the cities of
Bryansk, Kostroma and Ufa. As of March 1998, these additional ventures
were not operational. Moreover, GTS intends to enter into the cellular
markets of additional Russian regions through its Vostok Mobile
venture.
(3) Joint venture acquired in October 1997; operations commenced in
February 1998.
(4) Includes Vladivostok and four other cities in the Primorsky region.
23
<PAGE> 24
The following table sets forth certain operating data related to GTS
Cellular's operations:
<TABLE>
<CAPTION>
AT AND FOR THE
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- ---------
Vostok Mobile
<S> <C> <C>
Total Subscribers................................................. 6,884 13,561
Average Revenue Per Subscriber Per Month.......................... $ 128 $ 146
Minutes of Use(1)(thousands)...................................... 10,561 27,771
Population Covered by Licenses (thousands)........................ 18,400 18,400
Population Covered by Networks (thousands)........................ 6,500 6,500
Subscriber Penetration of Population Covered by
Networks........................................................ 0.11% 0.21%
PrimTelefone
Total Subscribers................................................. 2,822 6,152
Average Revenue Per Subscriber Per Month(2)....................... $ 236 $ 188
Minutes of Use(1)(thousands)...................................... 6,919 14,270
Population Covered by Licenses (thousands)........................ 2,200 2,270
Population Covered by Networks (thousands)........................ 1,175 1,175
Subscriber Penetration of Population Covered by
Networks(2)..................................................... 0.24% 0.52%
Bancomsvyaz
Cellular Network
Total Subscribers................................................. 121 3,664
Average Revenue Per Subscriber Per Month.......................... $ 62 $ 160
Minutes of Use(1)(thousands)...................................... 9 5,085
Population Covered by Licenses (thousands)........................ 4,500 4,536
Population Covered by Networks (thousands)........................ 1,669 2,507
Subscriber Penetration of Population Covered by
Networks........................................................ 0.01% 0.15%
Overlay Network
Minutes of Use(1)(thousands)...................................... -- 4,909
Number of Ports................................................... -- 751
Average Revenue Per Minute........................................ -- $ 0.34
</TABLE>
- ----------
(1) Includes minutes among affiliates.
(2) 1997 operating data calculated using 5,212 active subscribers.
Vostok Mobile. Through Vostok Mobile, GTS currently operates twelve
cellular joint ventures in Russia. Vostok Mobile owns between 50% and 70%
interests in each of the twelve 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 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.
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<PAGE> 25
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 330
persons as of December 31, 1997, with over 290 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 total subscriber base has grown to 6,152 (including
5,212 active subscribers) as of December 31, 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 December 31, 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 owns a 50% economic interest in an 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 approximately 100 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 December 31, 1997,
its cellular network covered an area with approximately 2.5 million people.
Bancomsvyaz plans to expand its network's coverage to approximately 3.2 million
people over the next five years.
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.
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<PAGE> 26
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 "--Certain
Considerations Generally Applicable to the Company's Operations -- 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 December 31, 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 $25.0 million to GTS as of December 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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.
26
<PAGE> 27
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 directly 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, and has notified Bancomsvyaz that it has
levied a $2.9 million frequency license fee on Bancomsvyaz's cellular license.
At this time, the Company is formulating its response to the government's action
and expects that the authorities will grant a ninety-day extension for payment
of such fee. The Company does not believe the outcome will have a material
adverse effect on the Company. There can be no assurance that additional 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)
27
<PAGE> 28
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. 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 number
of circuits leased is approximately 444 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. The Company's purchase of IAS's 33.3%
interest in Sovam requires that Sovam re-register its license. The Company
expects that the license will be re-registered.
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 "Combellga" joint venture, an RPOA
operator in which Alcatel and the Belgian PTO participate as foreign investors,
"Comstar", a joint venture between GPT Plessey
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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 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.
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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 Combellga. However, since TCM has obtained an allocation of 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.
CERTAIN CONSIDERATIONS APPLICABLE TO THE COMPANY'S OPERATIONS IN 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. In March 1998,
President Yeltsin dismissed his entire cabinet, including Prime Minister Victor
Chernomyrdin, citing, among other things, a need for more dynamism and
initiative in the Russian government. It was unclear, however, how the change
will affect governmental policy and constitutional issues, including the
identity of President Yeltsin's successor if he were not to survive his term of
office. In addition, it was uncertain whether the resolution of these and other
issues could 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.
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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 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 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. As of
March 1998, there had not been any readings of the draft legislation beyond the
first reading. 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 "-- 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
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(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 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.
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
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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.
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. In
addition, since November 1997, Russian monetary authorities have pegged the
ruble/U.S. dollar exchange rate to fluctuate within a certain narrow range. It
is uncertain whether the Russian authorities will be able to maintain this
exchange rate and there can be no assurance that there will not be a
significant and sudden decline in the value of the ruble. Such a devaluation of
the ruble could have a material adverse effect on the Company and its results
of operations and on the Russian economy generally.
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, particularly in
Russia and the CIS. 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, there can be no
assurance as to what effect such personnel changes will have on the Company's
operations in Russia and the CIS.
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. As of April 1, 1998, HER's network will link Brussels, Antwerp,
Rotterdam, Amsterdam, London,Paris, and Frankfurt. HER expects the initial five
country network and Switzerland to be placed in operation in the second quarter
of 1998. This
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segment of the network is expected to deliver managed transport services over
approximately 3,800 kilometers of fiber optic cable linking the cities of
London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf, Frankfurt,
Stuttgart, Munich, Geneva and Zurich. 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 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
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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.
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. 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 and Switzerland in the second quarter of 1998, as
discussed below, 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.
HER expects to continue to roll-out full telecommunications transport
service on the initial network in the first five countries and Switzerland
linking the additional cities of Dusseldorf, Stuttgart, Munich, Zurich and
Geneva by June 30, 1998. This initial network is expected to consist of
approximately 3,800 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. 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 coverage
is planned to be expanded to include the cities Berlin, 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 33 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. Additional
contracts have been concluded in Switzerland, Denmark, Sweden, Spain and Italy.
HER continues to negotiate rights-of-way and other infrastructure arrangements
in order to extend its network in Western Europe. 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.
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 may need to be obtained to
construct the HER network and there can be no assurance that such
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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
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. 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.
HER was formed on July 6, 1993 by HIT Rail B.V. ("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, Inc., a Delaware
corporation ("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. In March 1998,
GTS-Hermes increased its ownership of HER to 89% by purchasing a portion of Hit
Rail's ownership interest in HER. GTS-Hermes is a wholly owned subsidiary of
GTS.
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 offers 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
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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.
o 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.
o 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.
o Innovative Pricing. Currently the price of high-bandwidth E1 equivalent
circuits on transborder European routes is artificially high and not
necessarily related to the cost of such circuits. HER offers
competitive pricing. HER also offers 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.
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.
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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 provide 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 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
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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 certain of its railway shareholders and/or railway or other
infrastructure providers 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 upfront 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.
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 January 1998, twenty customers were under
contract for service on the HER network, including PTOs, a global consortium of
PTOs, Internet service providers, an international carrier, value added networks
("VANs") and resellers. HER provided capacity of approximately 446 E1 equivalent
circuits as of January 1998. 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:
o 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.
o 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
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infrastructure. Furthermore, HER believes that it is well positioned to
provide cross-border connectivity between different domestic
infrastructures of these alliances.
o 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.
o 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.
o 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.
o 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.
o 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.
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
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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 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.
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 regenerators 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 Company believes that the relationships between HER and local
access network suppliers can benefit both parties.
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Network Routes. HER's current planning dates for operation in certain
cities and kilometers covered by the initial network in the first five
countries and Switzerland are set forth below .
Expected to be operational by:
April 30, 1998 - Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris,
Strasbourg, Frankfurt, Zurich and Geneva - covering approximately
3,000 kilometers.
June 30, 1998 - Above cities and Dusseldorf, Stuttgart and Munich - covering
approximately 3,800 kilometers.
HER expects to have an aggregate of approximately 10,000 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 routes planned to be operational in the second quarter of 1998 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 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.
HER is deploying the network along the rights-of-way of a variety of
alternative sources, including railways, 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
railways, highway commissions, pipeline owners, utilities or others. 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, Inc. ("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.
Viatel, Inc. ("Viatel") also recently announced its intention to build a
pan-European fiber optic network connecting select cities in Belgium, France,
the Netherlands and the United Kingdom. Excess capacity would be available for
other carriers. Viatel has stated that, assuming that it obtains necessary
financing, construction would begin in spring 1998 and the network would become
operational in 1999.
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In addition, Exprit Telecom Group plc ("Esprit") also recently announced
plans to construct an SDH fiber optic ring network that will connect the United
Kingdom, France, the Netherlands and Belgium.
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
"--Certain Considerations Generally Applicable to the Company's Operations -
Competition."
HER RECAPITALIZATION
During 1997, HER 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) ("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. In March 1998, Hit Rail sold all of its shares in HER to
GTS-Hermes, SNCB/NMBS and AB Swed Carrier. As a result of such sale,
GTS-Hermes, SNCB/NMBS and AB Swed Carrier currently own 170,307, 13,610, and
6,551 shares of HER, repectively, or 89.4%, 7.2%, and 3.4%, respectively of
HER.
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. As a result of the March 1998 sale
by Hit
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Rail of all its shares in HER, Hit Rail no longer has any rights or
obligations, except as set forth below, under the Shareholders Agreement and
GTS-Hermes, acting alone, can approve all the matters described above which
require an 85% HER shareholder vote.
Articles of Association and Shareholders Agreement
Under the Articles of Association and the Shareholders Agreement, HER's
shareholders 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 it. 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, which is an Exhibit to this Report.
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.
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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.
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 -- "Certain Considerations Generally Applicable to the
Company's Operations -- 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
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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 by mid - 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 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. The liberalization legislation is expected to require all previously
licensed operators to apply for new licenses or authorizations. HER expects
that, in such event, its existing licenses and authorizations would be renewed
in due course, although there can be no assurance that this will be the case.
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. In October 1997, HER obtained authorization to
operate its network in specific regions of France. Such authorization requires
prior notification to and approval of the ART of any substantial changes in the
capital of HER or its controlling
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shareholder. HER has notified the ART of the initial public offering of the
Company's common stock and intends to notify the ART of the March 1998 increase
to approximately 89% of GTS-Hermes, ownership interest in HER.
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. This concession expired
on December 31, 1997. HER has filed an application for a concession for the
operation of a telecommunications infrastructure and was granted a provisional
concession on March 16, 1998. The provisional concession takes retroactive
effect as of January 1, 1998 and HER expects that the Swiss regulatory
authority will grant HER a final concession by the end of the third quarter
1998. However, no assurance can be given that such final concession will be
granted or granted on terms acceptable to HER.
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 has been 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
authorization 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.
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In addition, to the discussion above, 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 HER's 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 and the Company.
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 December 31, 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 $2.8 million to GTS as of
December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Accounting Methodology -- Profit and
Loss Accounting." The agreement between GTS-Monaco Access and MT, by its terms,
continues in operation until 2020.
BUSINESS AND MARKETING STRATEGY
GTS's strategy for developing GTS-Monaco Access into an international
gateway hub includes the following:
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o 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.
o 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.
o 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 competitive cost
operations.
o 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.
o 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:
o 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.
o 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.
o 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.
o Second Carriers/Resellers. GTS believes that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity.
o 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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o 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
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capacity and established customer bases. PTOs currently providing large amounts
of international 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. GTS intends to evaluate additional
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 December 31, 1997, GTS-Hungary's VSAT network consisted of
approximately 968 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.
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The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 50% of GTS-Hungary's total revenue for the year ended December
31, 1997. GTS-Hungary has also 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 December 31, 1997, GTS had made equity
contributions of $12.5 million to GTS-Hungary, GTS' partner has not made any
equity contributions as of December 31, 1997. In addition, GTS-Hungary had
outstanding loans of $2.8 million to GTS as of December 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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 of Financial Condition and Results of
Operations --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 December 31, 1997, the Czech Companies had concluded agreements
with building owners to convert PABXs in 25 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 a shareholder of the Company owns a 25% interest. See "Certain
Related Party Transactions" in the Company's Proxy Statement for its 1998
Annual Meeting. 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 by the end of the third quarter of 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 of Financial Condition and Results of
Operations -- 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 of Financial Condition and Results of
Operations -- 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 December 31, 1997, GTS and its consolidated subsidiaries employed a
total of 387 persons. On December 31, 1997, the joint ventures in which GTS
participates employed approximately 1,195 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.
CERTAIN CONSIDERATIONS GENERALLY APPLICABLE TO THE COMPANY'S OPERATIONS
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
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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 markets
in which GTS participates are currently undergoing changes initiated by the
Commission of the European Union.
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
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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.
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 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
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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 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.
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 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
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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 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.
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. See also "---Western Europe - HER - Competition" for a discussion
of the plans of WorldCom, Viatel and Esprit to build fiber optic networks in
Western Europe.
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."
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
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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.
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.
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.
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.
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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.
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Electrosviaz -- regional telephone company.
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
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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.
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.
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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 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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ITEM 2. PROPERTIES
The Company leases, under long-term leases, office space to serve as sales
office and/or administrative facilities, including its 15,000 square-foot
headquarters in McLean, Virginia with a five year lease expiring December,
2000. The Company maintains regional headquarters offices in Moscow and
Budapest, as well as facilities in London. HER is headquartered just outside of
Brussels, Belgium.
HER leases, under long-term leases, portions of railroad, utility and other
rights-of-way for its fiber-optic routes. HER is creating a fiber optic network
consisting of optical fiber pairs, which are leased under long-term leases, and
technical sites leased under long-term leases. See "Business -Western Europe -
HER."
ITEM 3. LEGAL PROCEEDINGS
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.
On March 27, 1998, V-Tech brought a claim for approximately $1.1 million
against Gilat Satellite Networks, Ltd. ("Gilat"), the vendor of a Ku-band VSAT
hub and system which V-Tech purchased in 1996, in an arbitration proceeding
under the Rules of Arbitration of the ICC International Court of Arbitration.
V-Tech has demanded in the request for arbitration that Gilat accept return of
the equipment, which V-Tech has not accepted or commissioned because it has
failed to meet contract specifications, and refund purchase amounts already paid
under the contract, plus other sums. Gilat has previously asserted that the
equipment meets specifications and demanded that V-Tech pay the balance due
under the contract, approximately $400,000. It is not possible at this time to
make an assessment of the outcome of the arbitration proceeding.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997 and first quarter of 1998, the
Company, in lieu of calling stockholders meetings, solicited written consents
from its common stockholders with respect to the following three proposed
actions:
1) The Company solicited written consents from its common stockholders of record
on November 14, 1997, regarding a proposal to amend the Company's Certificate
of Incorporation, as amended (the "Charter"), to:
a) change the par value per share of the Company's common stock from
$0.0001 to $0.10;
b) effect a 3-for-2 split of the Company's common stock; and
c) increase the authorized common stock from 60 million to 135 million
shares.
As of December 1, 1997, holders representing 17,847,036 shares of the
Company's common stock, or 71% of the outstanding shares of common stock,
submitted written consents approving such proposed amendment of the Charter.
The Company did not receive any responses "against," or abstentions with
respect to, the proposed amendment.
2) The Company solicited written consents from its common stockholders of
record on December 10, 1997 regarding a proposal to amend its Charter to:
a) classify its Board of Directors into three classes and stagger the
election of each such class for three-year terms commencing at the
annual stockholders meetings to be held in 1998, 1999 and 2000;
b) eliminate the ability of the stockholders to act by written consent;
and
c) provide that the provisions of the charter set forth in (a) and (b)
above can be amended only by an affirmative vote of 75% of the shares
present and eligible to vote (the "Locking Provision").
As of January 29, 1998, holders representing 20,627,807 shares of the
Company's common stock, or 55% of the outstanding shares of common stock,
submitted written consents approving such proposed amendments of the Charter.
The Company received 2,014,287 votes, or 5% of the outstanding common stock,
against the proposed amendment. The Company did not receive any abstentions
with respect to the proposed amendment.
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2) The Company solicited written consents from its common stockholders of
record on January 12, 1998 regarding a proposal to amend the Charter to
require an affirmative vote of 75% of the shares present and eligible to
vote to amend the Locking Provision. As of January 29, 1998 holders
representing 23,595,352 shares of the Company's common stock, or 63% of the
outstanding shares of common stock, submitted written consents approving
such proposed amendment of the Charter. The Company did not receive any
responses "against," or abstentions with respect to, the proposed amendment.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The listing of the Company's common stock on the NASDAQ National Market
commenced on February 5, 1997. The high and low sale prices of the Company's
common stock as reported by the NASDAQ National Market from February 5, 1998
through February 27, 1998 were:
High $38.75; Low $25
As of February 27, 1997, the Company's common stock was held by 179 holders of
record.
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 Company's 9-7/8% Senior Notes due 2005 contains restrictions on
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
such indenture) exists, its leverage ratio does not exceed 6.0 to 1.0 and such
restricted payments do not exceed the Basket (as defined in such indenture).
Moreover, GTS is a holding company which has no significant business operations
or assets other than its interests in joint ventures and its subsidiaries.
Accordingly, GTS must rely entirely upon distributions from the joint ventures
and its subsidiaries and investments to generate the funds necessary to pay any
dividends. The joint ventures and the Company's subsidiaries are separate and
distinct legal entities which have no obligation, contingent or otherwise, to
pay any amount to the Company, whether by dividends, loans or other payments,
except for payments under certain intercompany indebtedness. See "Business." In
addition, should the Company receive dividends or other distributions from its
joint ventures, subsidiaries or investments, the ability of the Company to
repatriate such profits and capital is dependent upon the provisions of the
applicable foreign investment and exchange laws and availability of foreign
exchange in sufficient quantities in those countries. The amount of such
dividends and other distributions from these entities will be affected by the
current tax systems in these jurisdictions, primarily the provisions relating
to corporate profits and withholding taxes. Furthermore, because consent is
required of the venture partners in some of the Company's joint ventures for
distributions from such joint ventures, the Company's ability to receive
dividends and other distributions is to some degree dependent on cooperation
from its joint venture partners. Thus, there can be no assurance that the
Company will be able to realize benefits from its joint ventures, subsidiaries
and investments through the receipt of dividends or other distributions at such
times and amounts it desires. In addition, the Company and certain operating
subsidiaries of the Company may enter into future financings, the terms of
which may include dividend restrictions.
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 1, 1997.
During the year ended December 31, 1997 the Company issued securities which
were not registered under the Securities Act of 1933, as amended (the
"Securities Act") as follows:
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
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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 February 10, 1998, the Company completed a "Complying Public Equity
Offering," as defined in the indenture for such Bonds, and, as a result, such
Bonds became convertible into the common stock at a conversion price of $20 per
share.
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. See the discussion above concering the terms
of conversion of these Bonds.
On September 26, 1997, the Company filed a registration statement
(Commission file no. 333-36555) (the "Stock Registration Statement") with the
Securities and Exchange Commission (the "Commission") to offer and sell to the
public, in an underwritten offering, 11,100,000 shares of its common stock, par
value $0.10 per share (the "Stock Offering"). Merrill Lynch & Co., Donaldson,
Lufkin & Jenrette Securities Corporation, UBS Securities LLC, Lehman Brothers
Inc. and Furman Selz LLC acted as the managers of the U.S. portion (7,400,000
shares) of the Stock Offering. Merrill Lynch International, UBS Limited,
Donaldson, Lufkin and Jenrette International, Lehman Brothers International
(Europe) and Baring Brothers Limited (as agent for ING Bank N.V.) acted as the
managers of the international portion (3,700,000 shares) of the Stock Offering.
The Stock Registration Statement was declared effective by the Commission on
February 5, 1998. In connection with the Stock Offering, the managing
underwriters exercised an overallotment option of 1, 665,000 shares. The Stock
Offering has terminated. The Company realized from the sale of a total of
12,765,000 common shares at $20 per share net proceeds from the Stock Offering,
including shares issued pursuant to exercise of the overallotment option, of
$238,705,500, after payment of $16,594,500 in underwriting discounts. On
December 23, 1997, the Company also filed a registration statement (Commission
file no. 333-43155) (the "Debt Registration Statement") to offer and sell to the
public, in an underwritten offering, senior notes due 2005 of the Company (the
"Debt Offering"). Donaldson, Lufkin & Jenrette Securities Corporation, Merrill
Lynch & Co. and UBS Securities acted as managers of this offering. The Debt
Registration Statement was declared effective by the Commission on February 5,
1998. The Debt Offering has terminated and the Company issued $105 million
aggregate principal amount of 9-7/8% Senior Notes due 2005 (the "Senior Notes").
The Company realized from the sale of the Senior Notes net proceeds of $82.3
million, after payment of underwriting discounts and commissions of $3,150,000,
and the deposit of $19.6 million in escrow to cover the first four scheduled
payments of interest on the Senior Notes. In February 1998, the Company
applied a portion of the net proceeds of the Offerings, approximately $85.2
million, to repay the outstanding principal of, and accrued interest on, certain
loans from related parties. See Note 5 --- Debt Obligations --- the Company's
audited consolidated financial statements for a description of such related
party loans. The Company will disclose additional information regarding expenses
incurred in connection with, and application of net proceeds of, the Offerings
in its quarterly report on Form 10-Q for the quarter ended March 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
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The following selected historical consolidated financial data as of and for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from
the Company's audited 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, many 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 3 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>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995 1996 1997(1) 1997
---- ---- ---- ---- ------- ----
PROFORMA
(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA) ---
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net ..................... $ 328 $ 2,468 $ 8,412 $ 24,117 $ 47,098 47,098
Gross margin ...................... 328 23 16 5,176 4,379 4,379
Operating expenses ................ 3,340 12,863 41,014 52,955 78,410 78,410
Equity in earnings (losses) of
ventures .......................... 472 (135) (7,871) (10,150) (14,599) (14,599)
Other income (expense) ............ 100 990 11,034 (8,729) (29,551) (29,551)
Loss before extraordinary loss .... (2,440) (11,985) (40,400) (67,991) (116,986) (116,986)
Extraordinary loss ................ -- -- -- -- -- (13,213)
Net loss .......................... (2,440) (11,985) (40,400) (67,991) (116,986) (130,199)
Loss per share before extraordinary
loss .............................. (0.26) (0.69) (1.61) (2.22) (3.26) (3.26)
Extraordinary loss per share ...... -- -- -- -- -- (0.27)
Net loss per share ................ (0.26) (0.69) (1.61) (2.22) (3.26) (2.68)
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents ......... $ 3,641 $ 29,635 $ 9,044 $ 57,874 $ 318,766 551,641
Property and equipment,
net ............................... 829 8,393 29,523 35,463 236,897 236,897
Investments in and advances to
ventures .......................... 794 13,841 56,153 104,459 76,730 76,730
Total assets ...................... 5,968 61,957 115,621 237,378 780,461 1,036,400
Total debt ........................ 725 2,152 27,454 85,547 639,359 672,219
Minority interest and stock subject
to repurchase ..................... -- 8 5,273 6,248 31,255 18,766
Shareholders' equity .............. 4,685 54,684 55,322 113,668 26,967 266,706
</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.
(2) The above unaudited pro forma information gives effect to the
underwritten public offerings by the Company of common stock and debt
securities consummated in February 1998, as though the transactions had
occurred on December 31, 1997. The adjustments include the raising of
$255.3 million from the sale of 12.8 million
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shares of common stock at an issue price of $20.00 per share. In addition,
the Company issued $105.0 million in senior notes. Approximately $85.2
million of the net proceeds were used to repay the related party debt
obligations. See Note 15, Audited Financial Statements of the Company.
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, 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)
YEAR ENDED DECEMBER 31, 1997
Sovintel ......................................... 50% $ 113,962 $ 72,629 $ 17,020 $ 18,464
TCM .............................................. 50% 29,308 7,169 3,286 12,512
TeleRoss ......................................... 50% 6,794 2,138 3,612 71
Sovam ............................................ 66.7% 17,808 10,684 5,653 780
GTS Cellular Companies ........................... 50%(3) 44,275 21,355 17,678 (906)
Other ............................................ 50%(3) 14,013 13,757 27,596 (26,591)
--------- -------- -------- --------
Total ...................................... 226,160 127,732 74,845 4,330
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1)... (24,927) (23,250) (8,357)
</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.
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(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.
ITEM 7. 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 December 31, 1997, 1996 and 1995 and for the
years ended December 31, 1997, 1996, 1995. The following discussion should be
read in conjunction with the Company's Consolidated Financial Statements and
the notes related thereto.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs,
(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.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in
which the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Report.
The factors described in this Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements of
the Company made by or on behalf of the Company, and investors, therefore,
should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
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, Central Europe and Asia. In Western Europe, through HER,
GTS is developing and operating the initial segment 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
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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. See "Business."
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.
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. See "Business--Certain Considerations Applicable to the Company's
Operations in Russia and the CIS" and "--Certain Considerations Generally
Applicable to the Company's Operations."
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 minority shareholder rights, 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 December
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31, 1997, $5.3 million and $10.0 million represent 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 issuance of $265
million aggregate principal amount of senior notes (of which $56.6 million was
placed in escrow for the first two years' interest payments) in August 1997, the
Company 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.
The following table summarizes the accounting methodology for the principal
business ventures through which the Company conducts its business.
<TABLE>
<CAPTION>
COUNTRY/REGION EFFECTIVE GTS ACCOUNTING
COMPANY NAME OF OPERATIONS OWNERSHIP METHODOLOGY
- ------------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
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" and "Business--Russia and the CIS--TeleRoss." 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
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Ventures. In 1996 and 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 operating 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."
(3) GTS purchased the remaining 33% interest in Sovam in February 1998.
(4) GTS conducts its cellular operations through (i) Vostok Mobile, a wholly
owned GTS venture that owns between 50% and 70% of a series of 12 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.
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, the Czech Companies and HER
(for 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 1997), GTS-Monaco Access,
EuroHivo and the Asia business ventures.
Revenue. The Company's consolidated revenue was $47.1 million, $24.1
million and $8.4 million for the years ended December 31, 1997, 1996, and 1995,
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, and HER's
initial Amsterdam to Brussels route and further expansion to London and Paris
during 1997.
The CIS region's consolidated revenue was $27.1 million, $12.7 million, and
$3.8 million for the years ended December 31, 1997, 1996 and 1995 respectively.
TeleRoss Operating Company generated revenue of $24.7 million, $9.2 million and
$3.8 million, representing 91.1%, 72.4% and 100% of the region's consolidated
revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
Service revenue represented 81.8%, 64.1% and 21.1% of TeleRoss Operating
Company's revenue for the years ended December 31, 1997, 1996 and 1995,
respectively, with the balance of its revenue in such periods principally
represented by installation and equipment sales. The growth in revenue was a
result of increased traffic volume generated by the TeleRoss Ventures as they
expanded to 13 cities for the year ended December 31, 1997, added customers in
existing cities and installed several VSATs at customer locations outside of
cities in which they have a presence.
Within the Central Europe region, GTS-Hungary and the Czech Companies
accounted for 100% of the revenue earned, of which GTS-Hungary and the Czech
Companies provided $8.5 million and $5.1 million of the Company's consolidated
revenue in 1997, respectively, compared to $6.9 million and $2.3 million in
1996, respectively, and $4.2 million and $0.3 million in 1995, respectively.
The growth in revenue of GTS-Hungary from 1995 to 1997 was due to the expansion
of its customer base and the introduction of microwave technology services. The
Hungary state lottery accounted for 50.6%, 55.3% and 65.0% of GTS-Hungary's
revenue in 1997, 1996 and 1995, respectively. The growth in revenue of the
Czech Companies was generated through increases in voice traffic carried from
twenty-five buildings at December 31, 1997, as compared to sixteen buildings at
December 31, 1996.
All of Western Europe's consolidated revenue of $5.4 million for the year
ended December 31, 1997 was derived from HER.
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Gross Margin. GTS's consolidated gross margin was $4.4 million, or 9.3% of
revenue, for the year ended December 31, 1997, $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 year ended December 31, 1995.
The CIS region had a gross margin of $4.0 million, $0.8 million and $(0.9)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
TeleRoss Operating Company had a gross margin of $3.5 million, or 14.2% of
revenues, for the year ended December 31, 1997 and a negative gross margin of
$(1.0) million for each of 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 and the Czech Companies comprised 100% of the Central Europe
region's gross margin. GTS-Hungary had a gross margin of $3.5 million, $3.0
million, and $1.7 million, representing 41.2%, 43.4%, and 40.5% of
GTS-Hungary's revenue for the years ended December 31, 1997, 1996 and 1995,
respectively. The favorable gross margin trend reflected the increased
utilization of GTS-Hungary's 1,000 VSAT capacity hub located in Budapest. The
Czech Companies had a gross margin of $1.5 million, $0.3 million and $(0.1)
million for the years ended December 31, 1997, 1996 and 1995, respectively. HER
incurred a negative gross margin of $(4.6) million for the year ended December
31, 1997, which was primarily due to the initial cost structure of the new
routes and minimal revenue generated.
Operating Expenses. Consolidated operating costs were $76.7 million, $52.9
million, and $41.0 million for the years ended December 31, 1997, 1996 and
1995, 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, the inclusion of HER's operating
expenses in 1997 and increasing corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $14.6 million, $10.2 million and
$7.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Included in these losses were $3.6 million, $5.7 million and $5.2
million for the years ended December 31, 1997, 1996 and 1995, respectively,
that related to GTS's ownership share of the losses. Also included in the
losses for the year ended December 31, 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 (primarily Beijing Tianmu and V-Tech) and Central
Europe (EuroHivo) that 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," 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,"
"Business--Central Europe" and "Business--Asia." Additionally, included within
GTS's ownership share of the losses incurred and the Excess Losses for the year
ended December 31, 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 $5.2 million for the year ended December 31, 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 due to the
recognition of Excess Losses of $5.6 million, $4.5 million and $2.7 million for
the years ended December 31, 1997, 1996 and 1995, respectively. See
"--Overview." 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 $15.5 million, $11.8 million and
$3.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively, which partially offset losses generated by other ventures.
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Other Non-Operating Income. Favorably affecting the 1995 results was the
non-recurring $10.3 million gain that 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 $39.1 million, $11.1
million and $0.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Interest expense is comprised of interest incurred from debt
maturing within one year, long-term debt obligations, capital lease
obligations, amortization of debt discount on the long-term debt obligations
and various other debt obligations. The significant increase in interest
expense was due to the $409.8 million increase in debt raised in 1997. See
"--Liquidity and Capital Resources."
GTS earned interest income of $11.4 million, $3.6 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, 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
$2.5 million, $1.4 million and $2.6 million for the years ended December 31,
1997, 1996 and 1995, respectively. 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 non-U.S. loss
carryforwards will be allowed, in part or in full, by local tax authorities
against future income.
RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES (EQUITY INVESTEES)
RUSSIA -- CIS
Sovintel. Sovintel's revenue for the years ended December 31, 1997, 1996
and 1995 was $114.0 million, $75.0 million and $44.3 million, respectively. The
increase in revenue was primarily the result of telecommunications service
revenue, which increased to $85.4 million for the year ended December 31, 1997
from $50.8 million and $26.8 million for the years ended December 31, 1996 and
1995, respectively, 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. Revenue from incoming international
minutes also increased to $13.1 million for the year ended December 31, 1997,
from $6.8 million and $2.2 million for the years ended December 31, 1996 and
1995, respectively. Included in Sovintel's traffic revenue for 1997 and 1996
was $12.4 million and $5.0 million, respectively, 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
international/long distance billings from TCM-supplied phone numbers.
Sovintel's non-traffic-related revenue of $28.6 million, $24.2 million and
$17.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively, was primarily attributable to port sales and monthly port fees
revenues.
Sovintel's gross margin was $41.3 million, $31.1 million and $18.0 million,
or 36.2%, 41.5% and 40.6% of revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in gross margin percentage was
attributable to a general price decrease in international and domestic revenues
due to competitive pressures and a higher percentage of domestic minutes, which
yield a lower margin.
Operating expenses were $17.0 million, $10.3 million and $7.1 million, or
14.9%, 13.7% and 16.0% of total revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The increase in operating expenses was related to
increases 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 $5.7 million, $5.2 million and $2.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
income tax expense was attributable to Sovintel's profitable operations.
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TCM. TCM's revenue was $29.3 million and $16.5 million for the years ended
December 31, 1997 and 1996, respectively. TCM had minimal activities in 1995.
TCM had a gross margin of $22.1 million and $13.2 million, or 75.4% and 80.0%
of total revenue. The decrease in gross margin as a percentage of revenue was
attributable to higher infrastructure and settlement costs. TCM had operating
expenses of $3.3 million and $1.9 million, or 11.3% and 11.5% of total revenue,
for the years ended December 31, 1997 and 1996, respectively.
Sovam. Sovam's revenue was $17.8 million, $11.7 million and $4.4 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The
increase in revenues is primarily attributable to the expansion of Sovam's
network throughout Russia and the CIS and the wider variety of service
offerings, including the introduction of Russia On Line services.
Gross margin was $7.1 million, $3.4 million and $1.5 million, or 39.9%,
29.1% and 34.1% of total revenue for the years ended December 31 in 1997, 1996
and 1995, respectively. Operating expenses were $5.7 million, $5.7 million and
$3.3 million, or 32.0%, 48.7% and 75.0% of total revenue, for the years ended
December 31, 1997, 1996 and 1995, respectively.
TeleRoss Ventures. Revenue for the TeleRoss Ventures for the years ended
December 31, 1997, 1996 and 1995 was $6.8 million, $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, an additional seven new cities in the network in 1996 and an
additional city in 1997.
Gross margin for the years ended December 31, 1997, 1996 and 1995 was $4.7
million, $1.6 million and $0.1 million, respectively. Operating expenses of
$3.6 million, $2.3 million and $0.2 million were incurred for the years ended
December 31, 1997, 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 $25.8 million, $16.5 million and $2.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Vostok
Mobile's gross margin was $13.6 million, $9.3 million and $1.1 million, or
52.7%, 56.4% and 55.0% of total revenue, and operating expenses were $10.1
million, $9.2 million and $4.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Revenue for PrimTelefone was $12.1 million, $8.4 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
PrimTelefone's gross margin was $6.6 million, $4.7 million and $0.6 million, or
54.5%, 56.0% and 27.3% of total revenue, and operating expenses were $3.6
million, $3.7 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Bancomsvyaz did not have significant operations until 1997. Revenue for
Bancomsvyaz was $7.2 million and gross margin was $2.8 million, or 38.9% of
total revenue, for the year ended December 31, 1997. Operating expenses were
$4.9 million for the year ended December 31, 1997.
WESTERN EUROPE
HER. HER earned a small revenue stream in 1996 and no revenue in 1995.
Operating expenses were $16.0 million and $6.7 million for the years ended
December 31, 1996 and 1995, respectively. The increase in selling, general and
administrative expenses reflected HER's continued transition from the start-up
phase to the operational phase. In 1997, HER was included in the consolidated
results of the Company.
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 $13.0 million and
$3.9 million and gross margin was $0.2 million and $(0.4) million for the years
ended December 31, 1997 and 1996, respectively.
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CENTRAL EUROPE
EuroHivo. EuroHivo's operating results were minimal for the years ended
December 31, 1997, 1996 and 1995. In September 1997, the Company recorded a
$2.4 million charge to recognize the liabilities associated with the planned
liquidation and discontinuance of EuroHivo's operations. See Footnote 3 in the
Company's audited 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 revenue of $7.0 million for the year ended December 31,
1996, and had minimal revenues in 1997 and 1995. 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.
During the year ended December 31, 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 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 companies, 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 recoverability 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 of 1997. See Footnote 3 in the Company's
audited financial statements for additional disclosures related to the
Company's Asia operations and "Business--Asia."
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 $36.4 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 $248.3
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 $285.3 million and $46.9 million as of
December 31, 1997 and 1996, respectively. Approximately $190.5 million of
working capital at December 31, 1997 is intended to be used for the buildout of
the HER Network. The Company had an accumulated deficit of $242.9 million as of
December 31, 1997, including net losses of approximately $117.0 million, $68.0
million and $40.4 million for the years ended
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<PAGE> 77
December 31, 1997, 1996 and 1995, 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 and
investments in ventures during the next three 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 due in August 2007 by HER that may be redeemed upon the successful
completion of a complying equity offering by HER 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 effected a three-for-two split of its common stock effective
December 31, 1997, and the information presented in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
reflects that action.
Subsequent to December 31, 1997, the Company raised approximately $255.3
million in gross proceeds from an initial public stock offering of 12.8 million
common shares at $20.00 per share. Such initial public offering constituted a
"complying public equity offering" under the Company's Convertible Bonds. As a
result, the conversion price of the Bonds is $20 per share. In addition, the
Company issued $105.0 million in gross proceeds of 9.875% senior notes due
February 15, 2005, of which $19.6 million was placed in escrow to fund the
first two years' interest payments. The Company believes that the net proceeds
from these 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.
The actual amount and timing of the Company's future capital requirements
may differ materially from management's estimates. In particular, the accuracy
of management's estimates is 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 "Business."
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
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<PAGE> 78
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, with
approximately $35 million required for the initial five country network. See
"Business--Western Europe--HER." As of December 31, 1997, approximately $34.3
million has been spent on network capital expenditure. 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 discussions 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 HER Recapitalization, in 1997, 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 HER. 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 HER 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 valued at ECU 1.8 million
(approximately $2.0 million). The ownership of HER subsequent to the HER
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." In March 1998, Hit Rail sold a portion of its
ownership interest to GTS-Hermes for ECU 13.5 million (approximately $14.6
million) and, as a result, GTS-Hermes increased its ownership of HER to 89.42%.
See "Business---Western Europe---HER---HER Recapitalization."
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of $318.8 million and $57.9
million as of December 31, 1997 and 1996, respectively. Approximately $190.5
million of the $319.0 million of cash and cash equivalents at December 31,
1997, is intended to be used for the build-out of the HER network. The Company
had restricted cash of $66.9 million and $16.2 million as of December 31, 1997
and 1996, respectively. Restricted cash included $29.0 million 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 years ended December 31, 1997 and 1996, the Company used $48.6
million and $39.0 million, respectively, of cash for operating activities. Cash
used for investing activities was $103.4 million and $80.9 million for the
years ended December 31, 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. 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
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<PAGE> 79
profitability or positive cash flow from operations, it may not be able to meet
its debt service obligations or working capital requirements.
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 Florint, Belgium Franc and the European Currency Equivalent. 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 is
attempting 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. See
"Business--Russia and the CIS--Certain Considerations Applicable to the
Company's Operations in Russia and the CIS--Exchange Controls and Risks
Relating to Russian Securities" and "Business--Certain Considerations Generally
Applicable to the Company's Operations--Currency and Exchange Risks."
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk. The Company is currently
evaluating the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate this exposure. The
Company's ability to hedge its exposure is limited since certain of its
operations are located in countries whose currencies are not easily
convertible. Financial hedge instruments for these countries are nonexistent or
limited and also pricing of these instruments is often volatile and not always
efficient. The Company is designing reporting processes to monitor the
potential exposure on an ongoing basis and expects to implement this process
before the end of 1998. The Company will use the output of this process to
execute financial hedges to cover foreign exchange exposure when practical and
economically justified.
The Company is considering alternatives to hedge the foreign exchange
exposure resulting from the issuance of $265 million senior notes by HER. It
expects to have a transaction which eliminates this risk consummated by the end
of April 1998.
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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<PAGE> 80
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS GROUP, INC.
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors..............................
Consolidated Balance Sheets as of December 31, 1996 and 1997
...............................................................................
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997
...............................................................................
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996, and 1997
...............................................................................
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1996, and 1997 and for the
...............................................................................
Notes to Consolidated Financial Statements.....................................
EDN SOVINTEL
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors.....................................................................
Balance Sheets as of December 31, 1997 and 1996................................
Statements of Income and Retained Earnings for the years
ended December 31, 1997, 1996, and 1995......................................
Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.........................................................
Notes to Financial Statements..................................................
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<PAGE> 81
GLOBAL TELESYSTEMS GROUP, INC.
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, 1996 and 1997, and
the related consolidated statements of operations, cash flows, and
shareholders' equity for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedules 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, 1996 and
1997, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
Ernst & Young LLP
Vienna, Virginia
February 26,1998
81
<PAGE> 82
GLOBAL TELESYSTEMS GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
- ---------------------------------------------------------------------- --------- ---------
(in thousands, except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 57,874 $ 318,766
Accounts receivable, net 8,920 17,079
Restricted cash 13,627 30,486
Prepaid expenses 2,537 14,101
Other assets 2,396 6,707
--------- ---------
TOTAL CURRENT ASSETS 85,354 387,139
Property and equipment, net 35,463 236,897
Investments in and advances to ventures 104,459 76,730
Goodwill and intangible assets, net of accumulated amortization of
$3,916 and $10,184 at December 31, 1996 and 1997, respectively 9,548 43,284
Restricted cash 2,554 36,411
--------- ---------
TOTAL ASSETS $ 237,378 $ 780,461
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 15,211 $ 61,984
Debt maturing within one year 16,261 6,390
Current portion of capital lease obligations -- 21,490
Related party debt maturing within one year 4,947 5,708
Other current liabilities 2,040 6,301
--------- ---------
TOTAL CURRENT LIABILITIES 38,459 101,873
Long-term debt, less current portion 5,260 408,330
Long-term portion of capital lease obligations -- 117,645
Related party long-term debt, less current portion 59,079 79,796
Taxes and other non-current liabilities 14,664 14,595
--------- ---------
TOTAL LIABILITIES 117,462 722,239
COMMITMENTS AND CONTINGENCIES
Minority interest 1,915 18,766
Common stock, subject to repurchase (325,000 shares and 797,100
shares outstanding at December 31, 1996 and 1997, respectively) 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;
34,589,106, and 37,606,814 shares issued and outstanding, net of
116,639 and 195,528 shares of treasury stock at December 31,
1996 and 1997, respectively) 3,459 3,761
Additional paid-in capital 238,268 274,359
Cumulative translation adjustment
(2,161) (8,269)
Accumulated deficit (125,898) (242,884)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 113,668 26,967
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 237,378 $ 780,461
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
82
<PAGE> 83
GLOBAL TELESYSTEMS GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
- --------------------------------------------------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services $ 5,979 $ 19,210 $ 41,300
Equipment sales 2,433 4,907 5,798
--------- --------- ---------
8,412 24,117 47,098
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services 8,150 14,741 37,206
Equipment sales 246 4,200 5,513
Selling, general and administrative 37,291 47,940 68,425
Depreciation and amortization 3,491 4,165 6,227
Non-income taxes 234 850 2,085
--------- --------- ---------
49,412 71,896 119,456
Write-off of venture-related assets -- -- 1,673
Equity in losses of ventures 7,871 10,150 14,599
--------- --------- ---------
Loss from operations (48,871) (57,929) (88,630)
OTHER INCOME/(EXPENSE):
Other non-operating income 10,270 -- --
Interest income 2,177 3,569 11,361
Interest expense (728) (11,122) (39,086)
Foreign currency losses (685) (1,176) (1,826)
--------- --------- ---------
11,034 (8,729) (29,551)
--------- --------- ---------
Net loss before income taxes and minority interest (37,837) (66,658) (118,181)
Income taxes 2,565 1,360 2,482
--------- --------- ---------
Net loss before minority interest (40,402) (68,018) (120,663)
Minority interest 2 27 3,677
--------- --------- ---------
Net loss $ (40,400) $ (67,991) $(116,986)
========= ========= =========
Net loss per share $ (1.70) $ (2.33) $ (3.26)
========= ========= =========
Weighted average common shares outstanding 23,707 29,157 35,833
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
83
<PAGE> 84
GLOBAL TELESYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
- --------------------------------------------------------------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (40,400) $ (67,991) $(116,986)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation and amortization 3,721 7,444 14,843
Amortization of discount on note payable -- 3,598 5,023
Equity in losses of ventures, net of dividends received 7,871 11,123 17,474
Deferred interest -- 6,583 12,970
Write-off of venture related assets -- -- 1,673
Non-cash compensation -- -- 4,571
Minority interest (2) (27) (3,677)
Other
2,577 1,342 2,985
Changes in assets and liabilities, excluding effects of
acquisitions and ventures:
Accounts receivable (1,557) (6,996) (10,900)
Prepaid expenses (438) (605) (7,522)
Accounts payable and accrued expenses 12,820 (1,694) 34,925
Other changes in assets and liabilities 9,474 8,207 (3,984)
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (5,934) (39,016) (48,605)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of repayments (45,102) (54,932) 5,943
Purchases of property and equipment (24,324) (12,195) (45,148)
Restricted cash (2,543) (13,138) (62,924)
Acquisitions, net of cash acquired (1,871) -- 1,050
Goodwill and other intangibles (6,181) (487) (2,196)
Other investing activities 2,069 (125) (149)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (77,952) (80,877) (103,424)
FINANCING ACTIVITIES
Proceeds from debt 23,325 63,599 409,817
Payment of debt issue costs (779) (2,777) (24,927)
Net proceeds from issuance of common stock 42,175 107,775 36,432
Other financing activities (750) -- (536)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 63,971 168,597 420,786
Effect of exchange rate changes on cash and cash
equivalents (676) 126 (7,865)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (20,591) 48,830 260,892
Cash and cash equivalents at beginning of year
29,635 9,044 57,874
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,044 $ 57,874 $ 318,766
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
84
<PAGE> 85
GLOBAL TELESYSTEMS GROUP, INC.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1996, and 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, 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 $2,777 2,503 250 36,182 -- -- 36,432
Translation adjustment -- -- -- (6,108) -- (6,108)
Net loss -- -- -- -- (116,986) (116,986)
Other 515 52 (91) -- -- (39)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 37,607 $ 3,761 $ 274,359 $ (8,269) $(242,884) $ 26,967
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
85
<PAGE> 86
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.
On December 1, 1997, the Company filed an amendment to its Certificate of
Incorporation to effect 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 $0.10 on a post-split
basis. Accordingly, the Company has presented share and per share data for
issued and outstanding shares as well as options and warrants 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.
Subsequent to year end, the Company completed an initial public offering of 12.8
million shares of common stock at $20 per common share (the "Stock Offering").
The Company also issued aggregate principal amount $105.0 million of 9.875%
senior notes due 2005 (the "Notes Offering" and together with the Stock
Offering, the "Offerings"). See Note 15, "Subsequent Events."
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 minority shareholder rights, 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.
86
<PAGE> 87
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
$16.2 million and $66.9 million of restricted cash at December 31, 1996 and
1997, respectively. The restricted cash is primarily related to cash held in
escrow for interest payments associated with the Company's debt obligations.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
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.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Costs," the Company intends to capitalize material
interest costs associated with the construction of capital assets for business
operations and amortize the costs over the assets' useful lives. The Company has
not capitalized any interest costs through December 31, 1997.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the fair market value
of the net assets of acquired businesses and is being amortized on a
straight-line basis over 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 Accounting Principles Board
("APB") Opinion No. 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
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," 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
87
<PAGE> 88
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 year ended December 31, 1996, the Company's analyses
indicated that there was not an impairment of its long-lived assets. During the
year ended December 31, 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 its investments 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
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share for
all years presented. The Company's net loss per share calculation (basic and
fully diluted) is based upon the weighted average common shares issued. There
are no reconciling items in the numerator or denominator of the Company's net
loss per share calculation. Employee stock options,
88
<PAGE> 89
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
warrants, and convertible debt instruments have been excluded from the net loss
per share calculation because their effect would be anti-dilutive (see Note 5,
"Debt Obligations," Note 6, Shareholders' Equity and Note 7, "Stock Option
Plans").
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of its financial instruments
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 currently hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results of operations could be adversely affected by
fluctuations in foreign currency exchange rates.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." The Company has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and presents pro forma disclosures of net loss as if the fair value
method had been adopted.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of these consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect amounts in the financial statements and accompanying
notes and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two new standards which
become effective for reporting periods beginning after December 15, 1997. SFAS
No. 130, "Reporting Comprehensive Income," requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires financial and descriptive
information with respect to "operating segments" of an entity based on the way
management disaggregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
89
<PAGE> 90
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
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,
------------------------
(in thousands) 1996 1997
- -------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Equity in net assets acquired $ 41,105 $ 31,183
Excess of investment cost over equity in net assets acquired net of
amortization of $4,347 and $4,851 at December 31,
1996 and 1997, respectively 11,288 7,582
Accumulated (losses) earnings recognized
(13,840) 14,659
Dividends
(973) (3,848)
Cash advances and other 66,879 27,154
--------- ---------
Total investments in and advances to ventures $ 104,459 $ 76,730
========= =========
</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 its 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 December 31, 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 deteriorated during 1997 as a result of
problems
90
<PAGE> 91
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES (CONTINUED)
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) earnings recognized (23,253)
Dividends --
Cash advances and other 10,921
--------
Net write-off as of December 31, 1997 $ 5,354
========
</TABLE>
Prior to the write-off detailed above, the Company included approximately $14.4
million in its accumulated 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 year ended December 31, 1997. Such write-offs, for the same
reasons mentioned in the previous paragraph, were recorded by the Company's
equity method investments pursuant to SFAS No. 121 and are included in the
$(23.3) million accumulated (losses) detailed above. Additionally, during the
year ended December 31, 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 year ended December 31, 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 million of goodwill
in connection with the recapitalization. As a result of the Company's loss
recognition policy, the consolidation of HER would 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 December 31, 1997, the consolidation of HER resulted in reductions of
$72.9 million, $10.0 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 December 31, 1997 the
consolidation of HER had a $21.4 million favorable impact on the accumulated
(losses) earnings recognized.
91
<PAGE> 92
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES (CONTINUED)
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,
------------------------
(in thousands) 1996 1997
- ------------------------------------------------------------- --------- ---------
<S> <C> <C>
Balance, at beginning of period $ 56,153 $ 104,459
Equity in net assets acquired 22,441 80,054
Excess of investment cost over equity in net assets acquired 5,288 10,187
Dividends (973) (2,875)
Cash advances (repayments) and other 31,700 (24,171)
Effect of consolidating equity method company -- (76,325)
--------- ---------
58,456 (13,130)
Equity ownership in losses (3,122) (5,552)
Excess losses recognized over amount attributable
to ownership interest (4,451) (10,610)
Amortization of excess of investment cost over equity
in net assets acquired (2,577) (3,313)
Loss in value that is other than temporary -- (5,354)
Effect of consolidating equity method company -- 10,230
--------- ---------
(10,150) (14,599)
--------- ---------
Balance, at end of period $ 104,459 $ 76,730
========= =========
</TABLE>
As of December 31, 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 (holds a 95% interest in TeleCommunications of Moscow) 52.64%
TeleRoss Ventures - 13 joint ventures in various regions in the CIS 50%
Vostok Ventures - 12 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, in shares of the Company's common
stock, based on the actual earnings of the venture. 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 the first quarter of 1998, the Company will issue
additional shares based on the venture's 1997 earnings (see Note 15, "Subsequent
Events").
92
<PAGE> 93
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES (CONTINUED)
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 by
exchange for 713,311 shares of the Company's common stock. Subsequent to the
Stock Offering, repayment of this financing is due on demand and must be in
exchange for the Company's common stock. This amount has been included in "Other
financing agreements" (see Note 5, "Debt Obligations").
Subsequent to year end, the Company purchased the remaining interest in Sovam
Teleport, one of its equity method investments in the CIS.
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, 1996 and 1997.
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Majority Owned 50% or Less Owned Total Equity Method
Equity Method Entities Ventures Ventures Ventures
- ----------------------------------------------- -------------- ----------------- -------------------
<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>
(in thousands)
- -----------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Majority Owned 50% or Less Owned Total Equity Method
Equity Method Entities Ventures Ventures Ventures
- ----------------------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
Revenue $ 47,986 $ 178,174 $ 226,160
Gross margin 29,292 69,136 98,428
Net (loss) income (10,370) 14,700 4,330
Equity in net (losses) earnings (11,538) 5,131 (6,407)
Current assets 20,841 59,959 80,800
Total assets 35,090 176,117 211,207
Current liabilities 18,719 68,503 87,222
Total liabilities 27,653 102,758 130,411
Net assets 7,438 73,359 80,797
Ownership interest in equity in net assets 9,541 45,638 55,179
</TABLE>
93
<PAGE> 94
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 4: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1996 1997
- ------------------------------------------------ -------- --------
<S> <C> <C>
ACCOUNTS RECEIVABLE CONSISTS OF:
Trade accounts receivable $ 6,769 $ 15,725
Value added taxes receivable 1,971 3,350
Other receivables 962 2,089
-------- --------
9,702 21,164
Less: allowance for doubtful accounts 782 4,085
-------- --------
Total accounts receivable, net $ 8,920 $ 17,079
======== ========
PROPERTY AND EQUIPMENT CONSISTS OF:
Telecommunications equipment $ 28,302 $231,996
Furniture, fixtures and equipment 5,877 9,760
Other property 837 3,470
Construction in process 7,009 7,799
-------- --------
42,025 253,025
Less: accumulated depreciation 6,562 16,128
-------- --------
Total property and equipment, net $ 35,463 $236,897
======== ========
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSISTS OF:
Accounts payable $ 6,761 $ 25,005
Interest payable 213 17,483
Accrued compensation 3,151 6,165
Other accrued expenses 5,086 13,331
-------- --------
Total accounts payable and accrued expenses $ 15,211 $ 61,984
======== ========
</TABLE>
NOTE 5: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1996 1997
- ----------------------------------------------------------------------------- -------- --------
<S> <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 warrants to purchase 7,778 common
shares 59,079 72,233
Other financing agreements 26,468 18,204
-------- --------
85,547 500,224
Less: debt maturing within one year 21,208 12,098
-------- --------
Total long-term debt $ 64,339 $488,126
======== ========
</TABLE>
94
<PAGE> 95
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 5: DEBT OBLIGATIONS (CONTINUED)
In the third quarter of 1997, HER issued $265.0 million aggregate principal
amount 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, 2002 at specific
redemption prices. HER may also redeem a portion of 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.
In July 1997, the Company issued $144.8 million aggregate principal amount 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 as defined in the Bond Agreement. 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 feature, interest expense is
being accrued and accreted at a 15% annual rate. (Subsequent to year end, the
Company completed the Stock Offering at $20.00 per common share which will
result in the Bonds being convertible into approximately 7.2 million shares of
the Company's common stock. In addition, due to the completion of the Stock
Offering, the interest rate will remain at 8.75% until maturity (see Note 15,
"Subsequent Events").)
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 warrants to purchase 7,777,776 common shares,
valued at $20.7 million. 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. 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. As of December 31, 1997, the
Debt Obligations have been classified within "Related party long-term debt, less
current portion" on the balance sheet. Subsequent to year end the Company repaid
the Debt Obligations by using a portion of the proceeds from the Offerings (see
Note 15, "Subsequent Events").
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 December 31, 1997, are as follows:
1998 - $12.1 million, 1999 - $1.1 million, 2000 - $149.4 million, 2001 - $0.2
million and $349.5 million thereafter.
95
<PAGE> 96
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 5: DEBT OBLIGATIONS (CONTINUED)
The Company paid interest of $0.7 million, $0.2 million and $2.0 million in
1995, 1996 and 1997, respectively. The Company incurred interest expense of
$39.1 million in 1997 and would have recorded $33.1 million in additional
interest expense in 1997 had the Senior Notes and Bonds been outstanding on
January 1, 1997.
NOTE 6: SHAREHOLDERS' EQUITY
COMMON STOCK
The following table summarizes the Company's equity private placements for the
periods ending:
<TABLE>
<CAPTION>
(in thousands, except share data) Shares Issued Share Price Net Proceeds
- ----------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
DECEMBER 31, 1995 5,090,876 $ 9.00 $ 42,138
DECEMBER 31, 1996 8,348,532 13.33 107,744
DECEMBER 31, 1997 2,502,686 15.67 36,432
</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 over the next three years. During 1997, the
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. The Company has accreted the value of the
outstanding common stock subject to repurchase (325,000 shares at December 31,
1996 and 797,100 shares at December 31, 1997), to the fair value of the
Company's common stock as of December 31, 1996 and 1997 ($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 warrants to purchase 7,777,776 common shares 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
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 15,572,260 shares of common stock for issuance upon
conversion of the exercise of outstanding and future stock options, warrants and
similar rights.
PREFERRED STOCK
As of December 31, 1996 and 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, 1996 and 1997, no shares of
preferred stock had been issued.
96
<PAGE> 97
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
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, 1996 and 1997 would have been
approximately $40.9 million, $69.4 million and $123.4 million, respectively. The
fair value of options granted during 1995 and 1996 are estimated as $2.19 and
$2.93 per common 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 1997 are estimated
as $7.35 per common 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 the
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 December 31, 1997, the maximum number of shares of common stock available for
grant under the Option Plans was 8,836,534. All options granted under the Option
Plans are at exercise prices that were at least equal to the fair market value
of common stock at the date of grant. Generally, all options granted under the
Option Plans vest over a three-year period from the date of grant and expire ten
years from the date of grant.
Additional information with respect to stock option activity is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,431,800 $ 3.65 3,422,399 $ 5.56 4,869,360 $ 7.31
Options granted 1,210,800 9.04 1,612,962 11.10 2,215,296 14.53
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 (433,173) 7.38
--------- --------- ---------
Outstanding at end of year 3,422,399 5.56 4,869,360 7.31 6,562,171 9.75
========= ========= =========
Options exercisable at
year end 995,617 $ 3.59 1,992,236 $ 4.65 2,962,110 $ 6.06
</TABLE>
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Price Number Contractual Life Exercise Number Exercise
at December 31, 1997: Outstanding (In Years) Price Exercisable Price
- ----------------------------- ----------------- -------------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$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 7.88 986,679 7.66
$10.00 to $15.67 3,845,521 8 13.03 604,431 11.13
--------- ---------
6,562,171 7 $ 9.75 2,962,110 $ 6.06
========= =========
</TABLE>
97
<PAGE> 98
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 7: STOCK OPTION PLANS (CONTINUED)
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, 1996 and 1997.
During 1996, the Company implemented the GTS 1996 Top Talent Retention Program
(the "Program"), which granted options to certain employees under the 1992 Stock
Option Plan. The Program was offered to 28 employees, who had an aggregate of
339,524 options, and provided for an altered vesting period based on certain
revenue levels achieved and certain stock price levels maintained. If these
performance-based achievements are not attained, the options vest in April 2001.
As of December 31, 1997 no performance levels were met.
In the fourth quarter of 1997, HER implemented a stock option plan for its key
officers and employees (the "HER Plan"). The ownership dilution caused by the
HER Plan is not expected to be significant. As a result of issuing options under
the HER Plan, HER will incur a non-cash charge of approximately $3.7 million, of
which $2.6 million was recorded during the fourth quarter and the remaining $1.1
million will be recognized in 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%
matching contribution on the first 5% 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 approximately $0.1
million, $0.2 million and $0.2 million for the years ended December 31, 1995,
1996 and 1997, respectively. The Company made no discretionary (non-matching)
contributions for the years ended December 31, 1995, 1996 or 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 does not bear significant financial
risk for its pension plan. HER's expense under the pension plan was $0.05
million, $0.4 million and $0.7 million for the years ended December 31, 1995,
1996 and 1997, respectively.
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.
98
<PAGE> 99
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(in thousands) 1995 1996 1997
- --------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Pretax loss:
Domestic $ (22,398) $ (41,554) $ (64,920)
Foreign (15,437) (25,077) (53,261)
--------- --------- ---------
$ (37,835) $ (66,631) $(118,181)
========= ========= =========
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, the Company recorded $2.6
million, $1.4 million and $2.5 million, respectively, in income tax expense that
related exclusively to its current provision for foreign taxes.
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>
Year Ended December 31,
----------------------------------------------------------------------------------------
(in thousands) 1995 1996 1997
- -------------------------------- ---------------------------- ---------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at U.S. statutory rates $(12,865) 34.0% $(22,655) 34.0 % $(40,181) 34.0%
Foreign operating losses
generating no tax benefit 6,550 (17.3) 8,526 (12.8) 18,108 (15.3)
Domestic operating losses
generating no tax benefit 6,315 (16.7) 14,129 (21.2) 22,073 (18.7)
Other - net 2,565 (6.8) 1,360 (2.1) 2,482 (2.1)
-------- -------- -------- -------- -------- --------
$ 2,565 (6.8)% $ 1,360 (2.1)% $ 2,482 (2.1)%
======== ======== ======== ======== ======== ========
</TABLE>
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,
--------------------------------------
(in thousands) 1996 1997
- ------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 20,720 $ 38,029
Other deferred tax assets 1,326 3,912
---------------- ----------------
Total deferred tax asset 22,046 41,941
DEFERRED TAX LIABILITY 1,161 2,292
---------------- ----------------
Net deferred tax asset 20,885 39,649
Less: valuation allowance (20,885) (39,649)
---------------- ----------------
Total $ - $ -
================ ================
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards for
U.S. federal income tax purposes of approximately $110 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 carry-forwards will be subject to an annual limitation.
99
<PAGE> 100
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 10: INCOME TAXES (CONTINUED)
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 of the Company's foreign ventures have foreign tax loss carryforwards in
excess of $60 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
LEASES
The Company has various lease agreements for office space, equipment and fiber.
The obligations extend through 2018. Most of the leases contain renewal options
of one to twelve years. Assets under capital leases are included in the
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
(in thousands) 1996 1997
----------------------------------------------- ----------------- -----------------
<S> <C> <C>
Telecommunications equipment $ - $ 150,787
Less: accumulated amortization - 482
------------ -------------
$ - $ 150,305
============ =============
</TABLE>
Rental expense aggregated $2.0 million, $2.2 million, and $3.1 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum payments, by year and in the aggregate, under the capital leases
and other non-cancellable operating leases with initial or remaining terms in
excess of one year as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
(in thousands)
----------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
December 31, 1998 $ 26,679 $ 3,311
1999 14,217 2,982
2000 15,300 1,604
2001 16,465 1,143
2002 16,630 933
Thereafter 152,016 1,155
--------------- -------------------
Total minimum lease payments 241,307 $ 11,128
===================
Less amount representing interest 102,172
---------------
Present value of net minimum lease payments 139,135
Less current portion of capital lease obligations 21,490
---------------
Long-term portion of capital lease obligations $ 117,645
===============
</TABLE>
100
<PAGE> 101
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 11: COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER COMMITMENTS AND CONTINGENCIES
In September 1997, the Company purchased the remaining interest in one of its
subsidiaries, which owns interests in cellular ventures 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 when
certain revenue levels are met, certain other 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's consolidated and non-consolidated ventures have future purchase
commitments amounting to $2.7 million and $1.1 million, respectively, as of
December 31, 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 December 31, 1997 was approximately
$29.0 million.
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. There were
no major customers in 1997.
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, 1996 and 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,
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.
101
<PAGE> 102
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 12: RELATED PARTY TRANSACTIONS
As discussed within Note 5, "Debt Obligations," the Company entered into the
Debt Obligations during 1996 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. The Company repaid
the Debt Obligations subsequent to year end (see Note 15, "Subsequent Events").
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. Subsequent to the Stock Offering,
repayment of this financing must be in exchange for the Company's common stock.
This amount has been included in "Other financing agreements" (see Note 5, "Debt
Obligations").
During 1997, the 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. As a result of the issuance of the common shares, the
seller became a shareholder of the Company (see Note 3, "Investments in and
Advances to Ventures," and Note 6, "Shareholders' Equity").
The Company has entered into certain consulting agreements with directors of the
Company and paid $0.2 million, $0.2 million and $0.4 million in 1995, 1996, and
1997, respectively, pursuant to those agreements.
The Company had notes receivable due from employees aggregating $0.1 million and
less than $0.1 million as of December 31, 1996 and 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 $4.4 million in
1996 and 1997, respectively. There was no significant revenue earned from
affiliate sales in 1995.
NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities for
the Company:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(in thousands) 1996 1997
- ----------------------------------------------------------------------------- -------------------- --------------------
<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
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
Capitalization of leases -- 139,136
</TABLE>
No significant non-cash investing activities were incurred for the year ended
December 31, 1995.
102
<PAGE> 103
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
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 1995, 1996 and 1997. Transfers between geographic areas were not considered
material for disclosure purposes.
<TABLE>
<CAPTION>
Corporate
Western Central Office &
(in thousands) Europe CIS Europe Asia Eliminations Total
- -------------------------------------- ------------- -------------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Corporate
Western Central Office &
(in thousands) Europe CIS Europe Asia Eliminations Total
- -------------------------------------- ------------- -------------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Corporate
Western Central Office &
(in thousands) Europe CIS Europe Asia Eliminations Total
- -------------------------------------- ------------- -------------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Total revenue $ 5,373 $ 27,045 $ 13,513 $ 1,016 $ 151 $ 47,098
Gross margin (4,599) 3,940 4,985 (99) 152 4,379
Operating loss (25,926) (7,088) (5,076) (28,066) (22,474) (88,630)
Net loss (29,064) (9,505) (6,882) (28,043) (43,492) (116,986)
Identifiable assets 505,593 99,926 23,840 (6,544) 157,646 780,461
Liabilities 451,171 62,862 40,465 19,161 148,580 722,239
Net (liabilities)/assets 54,422 37,064 (16,625) (25,705) 9,066 58,222
</TABLE>
103
<PAGE> 104
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 15: SUBSEQUENT EVENTS
THE OFFERINGS
In February 1998, the Company completed the Stock Offering in which the Company
raised $255.3 million in gross proceeds, including $33.3 million attributable to
the sale of shares resulting from the exercise by the underwriters of an
over-allotment option, from the sale of 12.8 million shares of common stock at
an issue price of $20.00 per share. The Stock Offering resulted in the Company's
common stock being listed in the United States on the National Association of
Securities Dealers Automated Quotation Market and internationally on the
European Association of Securities Dealers Automated Quotation Market. Also in
February 1998, the Company completed the Notes Offering and issued $105.0
million aggregate principal amount of senior notes, due February 15, 2005.
Interest at 9.875% on the Notes will be payable in cash semiannually on February
15 and August 15 of each year, commencing August 15, 1998. Net proceeds from the
Offerings were approximately $336.7 million. Approximately $19.6 million of the
net proceeds of the Notes Offering is being held in escrow for the first four
semiannual interest payments commencing in 1998. Approximately $85.2 million of
the net proceeds of the Offerings has been used to repay the related party Debt
Obligations (see Note 5, "Debt Obligations") of $70.0 million plus accrued
interest that were due March 31, 2001. In addition, approximately $13.2 million
in unamortized discount and debt issuance costs on the Debt Obligations was
written off at the time of repayment. The remaining net proceeds from the
Offerings will primarily be used to provide working capital for existing
ventures, particularly in Russia and the CIS, to expand the Company's operations
and for general corporate purposes, including strategic acquisitions.
As a result of the completion of the Stock Offering, the interest rate for the
Bonds will remain at 8.75% until maturity (see Note 5, "Debt Obligations") and
the 6.25% additional interest that was previously accrued, $4.2 million, has
been reflected as an increase to additional paid-in capital. The Bonds are
convertible into approximately 7.2 million common shares at a conversion price
of $20.00 per share.
The following unaudited pro forma condensed balance sheet and results of
operations of the Company give effect to the Offerings as though the
transactions had occurred on December 31, 1997. The pro forma shares and per
share data have been calculated assuming the Stock Offering occurred on January
1, 1997. The pro forma results are presented for informational purposes only and
do not purport to be indicative of the results of operations which actually
would have been obtained if the transactions had occurred in such periods, or
which may exist or be obtained in the future.
<TABLE>
<CAPTION>
As Adjusted
CONDENSED BALANCE SHEET (UNAUDITED) Reported Adjustments for the Offerings
- -------------------------------------------- ----------- ----------- -----------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 318,766 $ 232,875 $ 551,641
Other assets 461,695 23,064 484,759
----------- ----------- -----------
TOTAL ASSETS $ 780,461 $ 255,939 $ 1,036,400
=========== =========== ===========
Long-term debt, less current portion $ 408,330 $ 105,000 $ 513,330
Related party debt 85,504 (72,140) 13,364
Other liabilities 228,405 (4,171) 224,234
----------- ----------- -----------
TOTAL LIABILITIES 722,239 28,689 750,928
Minority interest 18,766 -- 18,766
Common stock subject to repurchase 12,489 (12,489) --
Common stock and additional paid-in capital 278,120 252,952 531,072
Cumulative translation adjustment (8,269) -- (8,269)
Accumulated deficit (242,884) (13,213) (256,097)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 26,967 239,739 266,706
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 780,461 $ 255,939 $ 1,036,400
=========== =========== ===========
</TABLE>
104
<PAGE> 105
GLOBAL TELESYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 15: SUBSEQUENT EVENTS (CONTINUED)
<TABLE>
<CAPTION>
As Adjusted
for the Loss
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Reported Adjustments Offerings per Share
- ---------------------------------------------- --------- ----------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Loss before extraordinary item $(116,986) $ -- $ (116,986) $ (2.41)
Extraordinary item -- (13,213) (13,213) (0.27)
--------- --------- ----------- -----------
Net loss $(116,986) $ (13,213) $ (130,199) $ (2.68)
========= ========= =========== ===========
Weighted average common shares outstanding 35,833 12,765 48,598
</TABLE>
OTHER SUBSEQUENT EVENT TRANSACTIONS
Pursuant to a purchase agreement that the Company has with a venture's partner
in the CIS region (see Note 3, "Investments in and Advances to Ventures," Note
6, "Shareholders' Equity," and Note 12, "Related Party Transactions") the
Company is obligated to pay additional consideration, via shares of common
stock, based on the subsidiary's earnings performance. Based on the 1997
results, the Company is obligated to issue 336,630 shares of common stock during
the first quarter of 1998.
Subsequent to December 31, 1997, HER 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 $12.9
million. The commitments have expected lease terms of ten to twenty-one years
with options for renewal rights of one and one-half to five additional years.
The Company entered into a rights agreement (the "Rights Agreement") on February
2, 1998, and accordingly, the Company authorized the distribution of one right
(a "Right") for each common share outstanding from February 2, 1998 through the
distribution date (the "Distribution Date"). Each Right entitles 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
an exercise price of $75 per Unit, subject to adjustment. The Distribution Date,
as defined in further detail within the Rights Agreement, is triggered when a
person acquires 15% of the outstanding common stock of the Company, or a tender
or exchange offer is commenced for 15% of such outstanding stock, except in
the case of two related party shareholders in which case the acquisition
threshold that applies is 20% of such outstanding stock. Under certain
circumstances thereafter, certain Rightholders may have the right to purchase
common stock of the Company, or of an Acquiring Person, as defined in the
Rights Agreement, having a value equal to two times the exercise price of the
Rights. In addition, the Rights are redeemable or exchangeable under certain
circumstances.
NOTE 16: EVENTS OCCURRING SUBSEQUENT TO DATE OF AUDIT REPORT
In March 1998, the Company purchased an additional 10% interest in HER from an
existing shareholder of HER for ECU 13.5 million (approximately $14.6 million).
As a result of the purchase, the Company owns approximately 89% of HER.
105
<PAGE> 106
Audited Financial Statements
EDN Sovintel
Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
106
<PAGE> 107
Report of Independent Auditors
The Board of Directors and Shareholders
EDN Sovintel
We have audited the accompanying balance sheets of EDN Sovintel as of December
31, 1997 and 1996, and the related statements of income and retained earnings,
and cash flows for each of the three years in the period ended December 31,
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 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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,
1997 and 1996 and for each of the three years ended December 31, 1997, 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 1997 audited
financial statements and have reported separately for the 1996 and 1995
financial statements. The significant differences between the accounting
principles applied in preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2.
Ernst & Young (CIS) Ltd.
Moscow, Russia
February 16, 1998
107
<PAGE> 108
EDN Sovintel
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------------
(In Thousands of US Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,620 $ 3,606
Cash deposit with related party 485 476
Accounts receivable, net of allowances 16,223 15,329
Due from affiliates 1,586 1,879
Inventories 1,697 1,749
Prepaid expenses and other assets 1,630 1,171
VAT receivable, net 3,688 1,157
Deferred income taxes 186
-------------------------
Total current assets 31,115 25,367
Property and equipment, net 38,709 27,709
Deferred expenses 945 1,080
-------------------------
Total assets $ 70,769 $ 54,156
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note due shareholder $ 39 $ 5,700
Trade payables 5,725 8,382
Accrued liabilities and other payables 3,194 1,661
Taxes accrued or payable 1,088 555
Amounts due to shareholder and affiliates 10,104 5,703
Amount due to partner in commercial venture 1,350 1,350
-------------------------
Total current liabilities 21,500 23,351
Commitments and contingencies
Shareholders' equity:
Capital contributions 2,000 2,000
Retained earnings 47,269 28,805
-------------------------
Total shareholders' equity 49,269 30,805
-------------------------
Total liabilities and shareholders' equity $ 70,769 $ 54,156
=========================
</TABLE>
See accompanying notes.
108
<PAGE> 109
EDN Sovintel
Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------------
(In Thousands of US Dollars)
<S> <C> <C> <C>
Revenues, net:
Service revenues $ 105,288 $ 63,488 $ 29,920
Installation revenues 5,241 9,312 12,981
Product sales 3,433 2,240 1,391
------------------------------------------------------
113,962 75,040 44,292
Cost of revenues:
Service costs 67,174 37,884 18,545
Cost of installation 2,621 4,656 6,491
Cost of products 2,834 1,370 1,211
------------------------------------------------------
72,629 43,910 26,247
------------------------------------------------------
Gross profit 41,333 31,130 18,045
Selling, general and administrative expenses
17,020 10,291 7,145
Interest expense 503 638 703
Interest income (392) (87) (59)
Other (income) loss (57) 120 (98)
Foreign exchange loss on net monetary items
131 252 112
------------------------------------------------------
Income before taxes 24,128 19,916 10,242
Income taxes 5,664 5,154 2,594
------------------------------------------------------
Net income 18,464 14,762 7,648
Retained earnings, beginning of year 28,805 14,043 6,395
------------------------------------------------------
Retained earnings, end of year $ 47,269 $ 28,805 $ 14,043
======================================================
</TABLE>
See accompanying notes.
109
<PAGE> 110
EDN Sovintel
Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
(In Thousands of US Dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,464 $ 14,762 $ 7,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,312 3,638 2,448
Provision for deferred income taxes (186)
Provision for doubtful accounts 345 678 132
Write-off of accounts receivable (602) (147) (492)
Write-down of network equipment and inventories 100 196
Foreign exchange loss 131 252 112
Changes in operating assets and liabilities:
Accounts receivable (637) (8,460) (2,759)
Due from affiliates 293 (683) (1,011)
Inventories 52 (911) (309)
Prepaid expenses and other assets (538) (1,108) 599
VAT receivable, net (2,609) 54 (906)
Trade payables (2,491) (193) 2,983
Accrued liabilities and other payables 1,533 310 1,233
Taxes accrued or payable 570 326 229
Amounts due to shareholder and affiliates 4,401 3,039 2,165
------------------------------------
Net cash provided by operating activities 24,038 11,657 12,268
INVESTING ACTIVITIES - purchases of and advances for
property and equipment (16,177) (9,863) (9,259)
FINANCING ACTIVITIES
Borrowings from shareholder 10,760 11,300 11,888
Repayments to shareholder (16,421) (11,100) (9,271)
Repayments of long-term debt (694) (3,979)
Cash deposited with related party (41) (476)
------------------------------------
Net cash used in financing activities (5,702) (970) (1,362)
Effect of exchange rate changes on cash and cash
equivalents (145) (312)
------------------------------------
Net increase in cash and cash equivalents 2,014 512 1,647
Cash and cash equivalents at beginning of year 3,606 3,094 1,447
------------------------------------
Cash and cash equivalents at end of year $ 5,620 $ 3,606 $ 3,094
====================================
</TABLE>
See accompanying notes.
110
<PAGE> 111
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 May 1,
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 Soviet-American joint venture. The venture
re-registered as a Russian limited liability partnership in November 1992. The
Company is 50% owned by Open Joint Stock Company "Rostelecom", an intercity and
long-distance carrier which is 38% owned by Svyazinvest, and 50% 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 certain accrued
revenue and expenses, foreign currency translation, deferred taxation, 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.
111
<PAGE> 112
EDN Sovintel
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Official exchange rates are 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 rates at December 31, 1997, 1996 and 1995 for one US dollar were
RUR 5,960, RUR 5,560 and RUR 4,640 respectively. At February 16, 1998, the CBR
rate had changed to RUR 6,050. The effect of this devaluation of the rouble on
monetary assets and liabilities has not been determined.
On January 1, 1998, the CBR introduced a new rouble to replace existing roubles.
The new rouble has been redonominated so that one new rouble is equivalent to
one thousand old roubles. The old rouble will continue in circulation until
December 31, 1998 and will be accepted as legal tender until December 31, 2002.
All rouble amounts reflected in these financial statements are stated in old
roubles.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in the bank.
112
<PAGE> 113
EDN Sovintel
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable are shown at their net realizable value which approximates
fair value. Accounts receivable are shown in the balance sheet net of an
allowance for uncollectible accounts of $643,000 and $900,000 at December 31,
1997 and 1996, 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 is
provided on the straight-line method over the following estimated useful lives:
Network equipment 10 years
Other property and equipment 3-5 years
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
Revenues from telecommunication traffic are recognized in the period in which
the traffic occurs. Revenues from product sales, connection fees, and other
services are recognized in the period in which the products are shipped,
connections made, and services rendered. Taxes on certain revenues were charged
at rates ranging from 1.5% to 4.0% over the three years ended December 31, 1997,
1996 and 1995 and amounted to $4,458,000, $2,792,000 and $1,166,000,
respectively, and are charged to selling general and administrative expenses.
ADVERTISING
The Company expenses the cost of advertising as incurred. Advertising expenses
for the years ended December 31, 1997, 1996 and 1995 were $671,000, $512,000 and
$395,000, respectively, and are included in selling, general and administrative
expenses.
113
<PAGE> 114
EDN Sovintel
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 fund and transport fund on behalf of
all its Russian employees. Contributions were 40.5%, 40.5% and 41.0% from base
payroll for 1997, 1996 and 1995, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, 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". SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. The adoption of SFAS
No. 121 had no impact on the Company's financial position or results of
operations.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued. SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
and is effective for fiscal years beginning after December 15, 1997. The Company
will adopt SFAS No. 130 in fiscal 1998. SFAS No. 130 expands or modifies
disclosures and, accordingly, will have no impact on the Company's reported
financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain 1996 and 1995 comparative figures have been reclassified to conform to
the presentation adopted in the current year.
114
<PAGE> 115
EDN Sovintel
Notes to Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Network equipment $ 43,876 $ 31,251
Other property and equipment 4,527 3,108
----------------------
48,403 34,359
Accumulated depreciation (14,557) (9,380)
Construction-in-progress 4,409 1,796
Network equipment and advances for network equipment not yet
in service 454 934
----------------------
Net book value $ 38,709 $ 27,709
======================
</TABLE>
Total depreciation expense on property and equipment for 1997, 1996 and 1995 was
$5,177,000, $3,503,000 and $2,253,000, respectively.
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 income and retained earnings for the years ended December 31, 1997, 1996 and
1995 represents the provision for current and deferred taxes.
Significant components of the provision for income taxes for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Current tax expense $ 5,850 $5,154 $2,594
Deferred tax benefit (186)
------------------------------
Provision for income taxes $ 5,664 $5,154 $2,594
==============================
</TABLE>
115
<PAGE> 116
EDN Sovintel
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
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>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Taxable income reported for Russian
tax purposes $ 16,184 $ 14,726 $ 7,411
Investment incentive deductions 12,337 9,030 7,220
Tax loss carry-forwards utilized 97 113
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 (2,455) (1,174) (2,595)
------------------------------------
Russian income before taxes 26,163 22,695 12,036
Adjustments to present financial
statements in accordance with
US GAAP:
Reversal of excess depreciation due
to statutory revaluations (2,101) (1,497) (293)
Depreciation rate differences (279) (424) (236)
Allowances for uncollectible
accounts 35 369 (132)
Inventory write-downs (100) (249)
Accrual of deductible expenses (3,234) (2,437) (1,339)
Accrual of revenue 2,704 1,093 19
Foreign exchange differences 236 280 1,425
Other 604 (63) (989)
------------------------------------
Income before taxes under US GAAP $ 24,128 $ 19,916 $ 10,242
====================================
</TABLE>
116
<PAGE> 117
EDN Sovintel
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
A reconciliation between the statutory rate and the effective income tax rate is
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Income tax expense computed on
financial income before taxes at
statutory tax rate of 35% $ 8,445 $ 6,970 $ 3,585
Tax effect of permanent differences:
Investment incentive deductions (4,318) (3,161) (2,594)
Tax loss carryforwards utilized (34) (40)
Other permanent differences 859 411 805
Adjustments made to compute
income before taxes for US
GAAP financial reporting 1,142 813 555
Increase (decrease) in the valuation
allowance for deferred tax assets (430) 161 243
---------------------------------
Income tax expense reported in the
financial statements $ 5,664 $ 5,154 $ 2,594
=================================
</TABLE>
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>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciation $ 398 $ 300 $ 151
Inventory write-downs and
allowances 235 235 147
Accrual of expenses 1,132 898 469
Accrual of revenue (946) (383) (7)
Allowance for uncollectible accounts (13) 129
-------------------------------
Deferred tax assets 806 1,050 889
Valuation allowance for deferred tax
assets (620) (1,050) (889)
-------------------------------
Net deferred tax assets $ 186 $ -- $ --
===============================
</TABLE>
117
<PAGE> 118
EDN Sovintel
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
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.
The Company paid Russian profits tax of $4,302,000, $5,849,000 and $2,660,000 in
1997, 1996 and 1995, respectively.
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 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
which was then extended to December 19, 1997. The loan was repaid prior to
December 31, 1997 except for withholding taxes on interest. The loan carried
interest at a rate equal to the then current six month LIBOR rate (5.6%) plus
5.0 percent per annum. As of December 31, 1997, 1996 and 1995, the outstanding
borrowings under this agreement were $39,000, $5,700,000 and $5,500,000,
respectively.
The Company believes that the carrying value of the above loans approximates
fair values.
The Company paid interest of $697,000, $542,000 and $576,000 in 1997, 1996 and
1995, respectively.
7. SHAREHOLDERS' EQUITY
The Company's capital structure as specified in the charter capital document is
as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<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>
118
<PAGE> 119
EDN Sovintel
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
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, 1997 amounted to
256 billion roubles or approximately $42,953,000 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 follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Sales $ 2,310 $1,525 $ 62
Telecommunication lease and traffic
costs 11,183 4,586 1,506
Amounts due to shareholder and
affiliates 4,184 656 460
Cash deposit with related party 485 476
</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, which
was rolled over for an additional year during 1997. 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 follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Sales $4,974 $3,115 $1,041
Management service fees and
reimbursements of expenses of
expatriate staff
1,318 927 2,062
Balances due under credit facility 39 5,700 5,500
Interest expense 503 626 461
Amounts due from affiliates 1,586 1,879 1,196
Amounts due to shareholder and
affiliates 5,919 5,047 2,204
</TABLE>
119
<PAGE> 120
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 follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Telecommunication settlement and
rent expense $19,003 $15,889 $10,491
Balances in trade payables 1,237 2,184
Balances in accounts receivable 487
Amount due to partner in
commercial venture 1,350 1,350 1,350
Balances in prepaid expenses and
other assets 800
</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, net of related
amortization, as deferred expenses. In 1997 the Company prepaid $800 of 1998
rent to MTU-Inform for additional office space to be occupied during 1998.
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, 1997, two customers accounted for 16% and 11% of revenues and 11%
and 7% of accounts receivable, respectively. As of December 31, 1996, these same
two customers accounted for 17% and 16% of revenues and 25% and 10% of accounts
receivable, respectively. As of December 31, 1995, these two customers accounted
for 1% and 14% of revenues and 10% and 11% of accounts receivable, respectively.
The Company has no other significant concentrations of credit risk.
120
<PAGE> 121
EDN Sovintel
Notes to Financial Statements (continued)
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 1997, 1996 and 1995 was $2,794,000, $2,137,000 and
$1,234,000, respectively.
11. CONTINGENCIES
Legislation and regulations regarding taxation, foreign currency transactions
and licensing of foreign currency loans in the Russian Federation continues to
evolve as the central government manages the transformation from a command to a
market-oriented economy. The various legislation and regulations are not always
clearly written and their interpretation is subject to the opinions of the tax
inspectors, Central Bank officials and the Ministry of Finance. Instances of
inconsistent opinions between local, regional and national tax authorities and
between the Central Bank and Ministry of Finance are not unusual.
The Company believes that it has paid or accrued all taxes that are applicable.
Where practice concerning the provision of taxes is unclear, the Company has
accrued tax liabilities based on management's best estimate. 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.
Because of the uncertainties associated with the Russian tax and legal systems,
the ultimate amount of taxes, penalties and interest, if any, assessed may be in
excess of the amount expensed to date and accrued at December 31, 1997. It is
the opinion of the Company's management that any material amounts are either not
probable, not reasonably determinable, or both.
The Company's operations and financial position will continue to be affected by
Russian political developments, including the application of existing and future
legislation and tax regulations. The Company does not believe that these
contingencies, as related to its operations, are any more significant than those
of similar enterprises in Russia.
121
<PAGE> 122
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information regarding Directors appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by
reference.
The executive officers of the Company and their ages and business experience
since at least January 1, 1993 are as follows.
Gerald W. Thames, 51, President and Chief Executive Officers. 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, 56, 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
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, 41, 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, 54, 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, 51, 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
122
<PAGE> 123
Digital Information Group for MCI Communications Corporation. Mr. Marks has 28
years of experience in the telecommunications and computer industries.
Kevin Power, 44, 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.
Grier C. Raclin, 45, 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.
Stewart P. Reich, 53, 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.
Eileen K. Sweeney, 46, 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 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.
Louis T. Toth, 55, 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.
There are no family relationships among any of the officers listed above.
Officers are elected annually to serve for the following year or until the
election and qualification of their successors.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by
reference.
123
<PAGE> 124
ITEM. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this report:
1 Financial Statements
The following consolidated financial statements of the Company are
included in Part II, Item 8 of this report:
o Independent Auditors' Report
o Consolidated Statements of Operations for each of the Three Years
Ended December 31, 1995, 1996 and 1997
o Consolidated Balance Sheets as of December 31, 1996 and 1997
o Consolidated Statements of Cash Flows for each of the Three Years
Ended December 31, 1995, 1996 and 1997
o Consolidated Statements of Changes in Stockholders' Equity for each of
the Three Years Ended December 31, 1995, 1996 and 1997
o Notes to Consolidated Financial Statements
The following financial statements of EDN Sovintel are included in Part
II, Item 8 of this report:
o Independent Auditors' Report
o Statements of Income and Retained Earnings for each of the Three Years
Ended December 31, 1997, 1996 and 1995
o Balance Sheets as of December 31, 1997 and 1996
o Statements of Cash Flows for each of the Three Years Ended December
31, 1997, 1996 and 1995
o Notes to Financial Statements
2 Consolidated Financial Statement Schedules
The Company has furnished Schedule II - Valuation and Qualifying Accounts
on Page _____
All other schedules are omitted because they are not applicable or not
required, or because the required information is either incorporated
herein by reference or included in the financial statements or notes
thereto included in this report.
b) Reports on Form 8-K
Date of Report Subject of Report
None
c) Exhibits
Designation Description
124
<PAGE> 125
<TABLE>
<S> <C>
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)
3.10* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998.
3.11* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12* -- Certificate of Designation, of the Series A Preferred Stock of the Company.
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.
4.7* -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto).
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
</TABLE>
125
<PAGE> 126
<TABLE>
<S> <C>
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.,
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
</TABLE>
126
<PAGE> 127
<TABLE>
<S> <C>
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* -- Restated and Amended 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* -- Third Amended and Restated 1992 Stock Option Plan of Global
TeleSystems Group Inc. dated September 25, 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
</TABLE>
127
<PAGE> 128
<TABLE>
<S> <C>
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
10.43* -- Key Employee Stock Option Plan of Hermes Europe Railtel B.V.
21.1* -- List of Subsidiaries of the Registrant
23.2* -- Consent of Ernst & Young LLP
24.1* -- Powers of Attorney (included on signature page to this
report)
27.1* -- Financial Data Schedule extracted from December 31, 1997 audited
financial statements
</TABLE>
- ----------
*Filed herewith.
** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 6 to the Company's registration statement on Form S-1 dated
February 5, 1998 (Commission File No. 333-36555)
128
<PAGE> 129
(d) Schedules
Schedule II -- Valuation and Qualifying Accounts. 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.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15 (d) of the Securities
Exchange Act 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
McLean, Commonwealth of Virginia, on this 30 day of March, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By:
/s/ Gerald W. Thames
Name: Gerald W. Thames
Title: President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Gerald
W. Thames, William H. Seippel, Grier Raclin and Richard B. Nash, Jr. and each
of them singly, as his true and lawful attorney-in-fact and agents with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities to sign any and all amendments and supplements
to this annual report on Form 10-K and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite
and necessary to be done, as full to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 30 day of March, 1998.
129
<PAGE> 130
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------------------------------------ ---------------
<S> <C> <C>
/s/ GERALD W. THAMES President, Chief Executive Officer March 30, 1998
- ------------------------------- and Director (principal
Gerald W. Thames executive officer)
/s/ WILLIAM H. SEIPPEL Executive Vice President --- March 30, 1998
- ------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)
/s/ ALAN B. SLIFKA Chairman of the Board of Directors March 30, 1998
- -------------------------------
Alan B. Slifka
/s/ GARY GLADSTEIN Director March 30, 1998
- -------------------------------
Gary Gladstein
/s/ MICHAEL GREELEY Director March 30, 1998
- -------------------------------
Michael Greeley
/s/ BERNARD MCFADDEN Director March 30, 1998
- -------------------------------
Bernard McFadden
/s/ STEWART J. PAPERIN Director March 30, 1998
- -------------------------------
Stewart J. Paperin
/s/ W. JAMES PEET Director March 30, 1998
- -------------------------------
W. James Peet
/s/ JEAN SALMONA Director March 30, 1998
- -------------------------------
Jean Salmona
Director March 30, 1998
- -------------------------------
Morris A. Sandler
/s/ JOEL SCHATZ* Director March 30, 1998
- -------------------------------
Joel Schatz
Director March 30, 1998
- -------------------------------
Adam Solomon
</TABLE>
130
<PAGE> 131
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 12/31/95....... 0 30 30
Allowance for doubtful
accounts at 12/31/96....... 30 752 782
Allowance for doubtful
accounts at 12/31/97....... 782 3,303 4,085
</TABLE>
131
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------
<S> <C>
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)
3.10* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998.
3.11* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12* -- Certificate of Designation, of the Series A Preferred Stock
of the Company.
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.
4.7* -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto).
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>
132
<PAGE> 133
<TABLE>
<S> <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.,
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
</TABLE>
133
<PAGE> 134
<TABLE>
<S> <C>
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* -- Restated and Amended 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* -- Third Amended and Restated 1992 Stock Option Plan of Global
TeleSystems Group Inc. dated September 25, 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
</TABLE>
134
<PAGE> 135
<TABLE>
<S> <C>
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
10.43* -- Key Employee Stock Option Plan of Hermes Europe Railtel B.V.
21.1* -- List of Subsidiaries of the Registrant
23.2* -- Consent of Ernst & Young LLP
24.1* -- Powers of Attorney (included on signature page to this
report)
27.1* -- Financial Data Schedule extracted from December 31, 1997 audited
financial statements
</TABLE>
- ----------
135
<PAGE> 136
*Filed herewith.
** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 6 to the Company's registration statement on Form S-1 dated
February 5, 1998 (Commission File No. 333-36555)
136
<PAGE> 1
EXHIBIT 3.10
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
GLOBAL TELESYSTEMS GROUP, INC.
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation, HEREBY
CERTIFIES AS FOLLOWS:
1. The name of the corporation is Global TeleSystems Group, Inc. The
date of filing of its Certificate of Incorporation with the Secretary of State
of the State of Delaware was September 30, 1993.
2. This Certificate of Amendment sets forth amendments to the
Certificate of Incorporation, as amended, of the Corporation that were duly
adopted by the written consent of the holders of a majority of the outstanding
stock of the Corporation entitled to vote thereon in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware. Written notice of the taking of corporate action has been or shall be
given promptly in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
3. Article SIXTH of the Certificate of Incorporation, as amended, of
the Corporation is hereby amended to read in full as follows:
"SIXTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and, except as
provided in the next following sentence, all rights and powers
conferred herein upon stockholders and directors are granted subject to
this reservation. This Article Sixth and Article Eleventh of this
Certificate of Incorporation of the Corporation, each as amended, and
notwithstanding the fact that a lesser percentage may be specified by
law, may not be amended, altered, changed or repealed without the
affirmative vote of the holders of at least seventy-five percent (75%)
of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote."
4. The Certificate of Incorporation of the Corporation, as amended, is
hereby amended by inserting a new Article ELEVENTH as follows:
<PAGE> 2
"ELEVENTH: This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.
11.1. The number of directors of the Corporation shall not be
less than three. The exact number of directors within the limitations
specified in the preceding sentence shall be fixed from time to time
by, or in the manner provided in, the Corporation's By-Laws.
11.2. The Board of Directors shall be and is divided into
three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number
of directors by three, then, if such fraction is one-third, the extra
director shall be a member of Class I, and if such fraction is
two-thirds, one of the extra directors shall be a member of Class I and
one of the extra directors shall be a member of Class II, unless
otherwise provided from time to time by resolution adopted by the Board
of Directors.
11.3. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting in
1998; each initial director in Class II shall serve for a term ending
on the date of the annual meeting in 1999; and each initial director in
Class III shall serve for a term ending on the date of the annual
meeting in 2000; and provided further, that the term of each director
shall be subject to the election and qualification of his successor and
to his earlier death, resignation or removal.
11.4. In the event of any increase or decrease in the
authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a
member and (ii) the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of
Directors among the three classes of directors so as to ensure that no
one class has more than one director more than any other class. To the
extent possible, consistent with the foregoing rule, any newly created
directorships shall be added to those classes whose terms of office are
to expire at the latest dates following such allocation, and any newly
eliminated directorships shall be subtracted from those classes whose
terms of offices are to expire at the earliest dates following such
allocation, unless otherwise provided from time to time by resolution
adopted by the Board of Directors.
2
<PAGE> 3
11.5. A majority of the directors at any time in office shall
constitute a quorum for the transaction of business. In the event one
or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the
number of directors fixed pursuant to Article 11.1 above constitute a
quorum. If at any meeting of the Board of Directors there shall be less
than such a quorum, a majority of those present may adjourn the meeting
from time to time. Every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board of Directors unless a
greater number is required by law, by the By-Laws of the Corporation or
by this Certificate of Incorporation.
11.6. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board of
Directors, shall be filled only by a vote of a majority of the
directors then in office, although less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be
elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and
qualification of his successor and to his earlier death, resignation or
removal."
IN WITNESS WHEREOF, GLOBAL TELESYSTEMS GROUP, INC. has caused this
certificate to be signed by Grier C. Raclin, its Senior Vice President, General
Counsel and Secretary, and attested by Arnold Y. Dean, its Assistant Secretary,
this 29th day of January, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ Grier C. Raclin
-----------------------------------------
Name: Grier C. Raclin
Title: Senior Vice President,
General Counsel and Secretary
ATTEST:
By: /s/ Arnold Y. Dean
-------------------------
Name: Arnold Y. Dean
Title: Assistant Secretary
3
<PAGE> 1
EXHIBIT 3.11
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
GLOBAL TELESYSTEMS GROUP, INC.
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation, HEREBY
CERTIFIES AS FOLLOWS:
1. The name of the corporation is Global TeleSystems Group, Inc. The
date of filing of its Certificate of Incorporation with the Secretary of State
of the State of Delaware was September 30, 1993.
2. This Certificate of Amendment sets forth amendments to the
Certificate of Incorporation, as amended, of the Corporation that were duly
adopted by the written consent of the holders of a majority of the outstanding
stock of the Corporation entitled to vote thereon in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware. Written notice of the taking of corporate action shall be given
promptly in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
3. Article SIXTH of the Certificate of Incorporation, as amended, of
the Corporation is hereby amended to read in full as follows:
"SIXTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and, except as
provided in the next following sentence, all rights and powers
conferred herein upon stockholders and directors are granted subject to
this reservation. This Article Sixth and Articles Eleventh and Twelfth
of this Certificate of Incorporation of the Corporation, each as
amended, and notwithstanding the fact that a lesser percentage may be
specified by law, may not be amended, altered, changed or repealed
without the affirmative vote of the holders of at least seventy-five
percent (75%) of the shares of capital stock of the Corporation issued
and outstanding and entitled to vote."
1
<PAGE> 2
4. The Certificate of Incorporation of the Corporation, as amended, is
hereby amended by inserting a new Article TWELFTH as follows:
"TWELFTH: Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting."
IN WITNESS WHEREOF, GLOBAL TELESYSTEMS GROUP, INC. has caused this
certificate to be signed by Grier C. Raclin, its Senior Vice President, General
Counsel and Secretary, and attested by Arnold Y. Dean, its Assistant Secretary,
this 9th day of February, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ Grier C. Raclin
------------------------------------------
Name: Grier C. Raclin
Title: Senior Vice President,
General Counsel and Secretary
ATTEST:
By: /s/ Arnold Y. Dean
----------------------------------
Name: Arnold Y. Dean
Title: Assistant Secretary
2
<PAGE> 1
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, Grier Raclin, Senior Vice President, General Counsel and
Secretary 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 acting by unanimous written consent on January 30, 1998, 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 $.0001 per share, designated as Series A Preferred Stock (the
"Series A Preferred Stock") out of the authorized preferred stock, par value of
$.0001 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 or 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.
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
<PAGE> 2
2
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 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
<PAGE> 3
3
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.
(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
<PAGE> 4
4
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 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
<PAGE> 5
5
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;
(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
<PAGE> 6
6
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 event and the denominator of which shall be the number
of shares of Common Stock that were outstanding immediately prior to such
event.
<PAGE> 7
7
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:
(A) The term "Common Stock" shall mean the class of stock
designated as the common stock, par value $0.10 per share, of the Corporation
at the date hereof or any
<PAGE> 8
8
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.
<PAGE> 9
9
IN WITNESS WHEREOF, Global TeleSystems Group, Inc. has caused
this Certificate to be signed by its Senior Vice President, General Counsel and
Secretary and attested by its Secretary this 2nd day of February, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ GRIER C. RACLIN
----------------------------
Name: Grier C. Raclin
Title: Senior Vice President,
General Counsel and
Secretary
Attest:
By: /s/ ARNOLD Y. DEAN
--------------------------
Name: Arnold Y. Dean
Title: Assistant Secretary
<PAGE> 1
EXHIBIT 4.7
================================================================================
INDENTURE
DATED AS OF FEBRUARY 10, 1998
BETWEEN
GLOBAL TELESYSTEMS GROUP, INC., AS ISSUER,
AND
THE BANK OF NEW YORK, AS TRUSTEE
------------
$105,000,000
9 7/8% SENIOR NOTES DUE 2005
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TRUST INDENTURE INDENTURE
ACT SECTION SECTION
- --------------- ----------
<S> <C>
Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08, 7.10.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10; 10.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.03
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 10.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07; 4.09; 10.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.02
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.04
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.04
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 10.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
Section 316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . 2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04
Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.01
</TABLE>
- -----------------------------------
N.A. means Not Applicable.
NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act. . . . . . . . . . . . . . . . . . . . 19
SECTION 1.03. Rules of Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.02. Execution and Authentication. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.03. Registrar and Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.04. Paying Agent to Hold Assets in Trust. . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.05. Securityholder Lists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.06. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.07. Replacement Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.08. Outstanding Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.09. Treasury Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.10. Temporary Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.13. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.14. Deposit of Moneys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.15. Book-Entry Provisions for Global Securities. . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.16. Registration of Transfers and Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.02. Selection of Securities to Be Redeemed. . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.03. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.04. Effect of Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 3.05. Deposit of Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 3.06. Securities Redeemed in Part. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
-i-
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<TABLE>
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ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.02. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.03. Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.04. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.05. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.06. Maintenance of Properties and Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.07. Compliance Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.08. Waiver of Stay, Extension or Usury Laws. . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.09. Provision of Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.10. Change of Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.11. Limitation on Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 4.12. Limitation on Incurrence of Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.13. Limitations on Restrictions Affecting Restricted Group Members. . . . . . . . . . . . . 37
SECTION 4.14. Designation of Unrestricted Group Members. . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.15. Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 4.16. Limitation on Asset Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 4.17. Limitation on Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.18. Limitation on Issuances of Guarantees by Restricted Group Members. . . . . . . . . . . . 42
SECTION 4.19. Limitation on the Issuance and Sale of Equity Interests of Restricted Group Members. . . 42
SECTION 4.20. Limitations on Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.21. Additional Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.22. Deposit of Funds with Escrow Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE FIVE
MERGERS; SUCCESSOR CORPORATION
SECTION 5.01. Mergers, Sale of Assets, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 5.02. Successor Corporation Substituted. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.02. Acceleration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 6.03. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 6.04. Waiver of Past Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 6.05. Control by Majority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 6.06. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 6.07. Rights of Holders to Receive Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 6.08. Collection Suit by Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 6.09. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
-ii-
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<TABLE>
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<S> <C> <C>
SECTION 6.10. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 6.11. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 7.02. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 7.03. Individual Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 7.04. Trustee's Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 7.05. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 7.06. Reports by Trustee to Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 7.07. Compensation and Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 7.08. Replacement of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.09. Successor Trustee by Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.10. Eligibility; Disqualification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.11. Preferential Collection of Claims Against Company. . . . . . . . . . . . . . . . . . . . 55
SECTION 7.12. Trustee's Application for Instructions from the Company. . . . . . . . . . . . . . . . . 55
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 8.02. Application of Trust Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 8.03. Repayment to Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 8.04. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 9.02. With Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 9.03. Compliance with Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 9.04. Revocation and Effect of Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 9.05. Notation on or Exchange of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 9.06. Trustee to Sign Amendments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.03. Communications by Holders with Other Holders. . . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.04. Certificate and Opinion as to Conditions Precedent. . . . . . . . . . . . . . . . . . . 61
</TABLE>
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<TABLE>
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Page
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<S> <C> <C>
SECTION 10.05. Statements Required in Certificate or Opinion. . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.06. Rules by Trustee, Paying Agent, Registrar. . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.07. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.08. No Recourse Against Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.09. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.10. Counterpart Originals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.11. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 10.12. No Adverse Interpretation of Other Agreements. . . . . . . . . . . . . . . . . . . . . 63
SECTION 10.13. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE ELEVEN
COLLATERAL AND SECURITY
SECTION 11.01. Escrow Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 11.02. Recording and Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.03. Release of Escrow Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.04. Authorization of Actions to Be Taken by the Trustee Under the Escrow Agreement. . . . . 65
SECTION 11.05. Authorization of Receipt of Funds by the Trustee Under the Escrow Agreement. . . . . . 65
SECTION 11.06. Termination of Security Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
EXHIBIT A Form of Series A Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B Form of Legend for Global Securities . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-iv-
<PAGE> 7
INDENTURE dated as of February 10, 1998, between GLOBAL
TELESYSTEMS GROUP, INC. (the "Company"), and THE BANK OF NEW YORK, a New York
banking corporation, as Trustee.
Each party hereto agrees as follows for the benefit of each
other party and for the equal and ratable benefit of the Holders of the
Securities:
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person (a)
assumed in connection with an Acquisition from such Person or (b) existing at
the time such Person succeeds to the obligations of the Company pursuant to
Section 5.01 or existing at the time such Person becomes a Restricted Group
Member or is merged or consolidated with or into the Company or any Restricted
Group Member; provided, however, that the amount of any Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of the transactions by which such Person
becomes a Restricted Group Member or is merged or consolidated with or into the
Company or any Restricted Group Member, or such Acquisition shall not be
Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person,
any other Person which merges with or into or becomes a Subsidiary of such
specified Person.
"Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Group Member to any other Person, or any acquisition or purchase of
Equity Interests of any other Person by the Company or any Restricted Group
Member, in either case pursuant to which such Person shall become a Restricted
Group Member or shall be consolidated, merged with or into the Company or any
Restricted Group Member or (ii) any acquisition by the Company or any
Restricted Group Member of the assets of any Person which constitute
substantially all of an operating unit or line of business of such Person or
which is otherwise outside of the ordinary course of business.
"Additional Amount" has the meaning set forth in Section 4.21.
"Adjusted Income Tax Expense" means, with respect to any
period, (without duplication) the provision for federal, state, local and
foreign income taxes payable by the Company and the Restricted Group Members
for such period as determined in accordance with GAAP, excluding, however, with
respect to any Restricted Group Member, that proportion thereof that
corresponds to the percentage ownership interest in the outstanding Equity
Interests of such Restricted Group Member not owned on the last day of such
period, directly or indirectly, by the Company.
"Adjusted Interest Expense" means, with respect to any period,
without duplication, the sum of (i) the interest expense of the Company and the
Restricted Group Members for such period as determined in accordance with GAAP,
including, without limitation, (a) any amortization of debt discount, (b) the
net cost under Interest Rate Protection Obligations (including any amortization
of discounts), (c) the interest portion of
<PAGE> 8
-2-
any deferred payment obligation, (d) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all capitalized interest and all accrued interest, (ii) the
interest component of Capital Lease Obligations paid, accrued and/or scheduled
to be paid or accrued by the Company and the Restricted Group Members during
such period as determined in accordance with GAAP and (iii) dividends and
distributions in respect of Disqualified Equity Interests actually paid in cash
by the Company or any Restricted Group Member (other than to the Company or
another Restricted Group Member) during such period as determined in accordance
with GAAP, excluding, however, with respect to any Restricted Group Member,
that proportion thereof that corresponds to the percentage ownership interest
in the outstanding Equity Interests of such Restricted Group Member not owned
on the last day of such period, directly or indirectly, by the Company.
"Adjusted Net Income" means, with respect to any period, the
net income of the Company and the Restricted Group Members for such period
determined in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (a) all
extraordinary gains or losses for such period, (b) all gains or losses from the
sales or other dispositions of assets out of the ordinary course of business
(net of taxes, fees and expenses relating to the transaction giving rise
thereto) for such period; (c) that portion of such net income derived from or
in respect of investments in Persons other than Restricted Group Members,
except to the extent actually received in cash by the Company or any Restricted
Group Member (subject, in the case of any Restricted Group Member, to the
provisions of clause (f) of this definition); (d) the portion of such net
income (or loss) allocable to minority interests in any Person (other than a
Restricted Group Member) for such period, except to the extent the Company's
allocable portion of such Person's net income for such period is actually
received in cash by the Company or any Restricted Group Member (subject, in the
case of any Restricted Group Member, to the provisions of clause (f) of this
definition); (e) for purposes of calculating the Basket, the net income (or
loss) of any other Person combined with the Company or any Restricted Group
Member on a "pooling of interests" basis attributable to any period prior to
the date of combination; (f) the net income of any Restricted Group Member to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Group Member of that income is not at the time
(regardless of any waiver) permitted, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to that Restricted Group
Member or its Equity Interest holders; provided, however, that with respect to
any restriction on the declaration or payment of dividends or similar
distribution in place on the Issue Date pursuant to any agreement in effect on
the Issue Date (or any amendment or modification thereto no more restrictive
than that in effect on the Issue Date), so long as such restriction on the
declaration or payment of dividends or similar distributions is no less
favorable to the Holders than the restrictions contained in the Hermes Europe
Senior Notes Indenture as in effect on the Issue Date, this clause (f) shall
apply solely for purposes of determining Cumulative Operating Cash Flow in
connection with a Restricted Payment described in clauses (i), (ii) and (iii)
of the first paragraph of Section 4.11; and (g) to the extent not otherwise
excluded in accordance with GAAP, the net income (or loss) of any Restricted
Group Member in an amount that corresponds to the percentage ownership interest
in the income of such Restricted Group Member not owned on the last day of such
period, directly or indirectly, by the Company.
"Adjusted Operating Cash Flow" means, with respect to any
period, Adjusted Net Income for such period increased (without duplication), to
the extent deducted in calculating such Adjusted Net Income, by (a) Adjusted
Income Tax Expense for such period; (b) Adjusted Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for
such period (other than any non-cash item which requires the accrual of, or a
reserve for, cash charges for any future period) of the Company and the
Restricted Group Members, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing
determined in accordance with GAAP minus non-cash items to the extent they
increase Adjusted Net Income (including the partial or entire reversal of
reserves taken in prior periods) for such period. In calculating
<PAGE> 9
-3-
Adjusted Operating Cash Flow, for each Restricted Group Member, the addition to
Adjusted Net Income for such Restricted Group Member of the items set forth in
clause (c) of the previous sentence shall exclude that proportion thereof that
corresponds to the percentage ownership interest in the Outstanding Equity
Interests of such Restricted Group Member not owned on the last day of such
period, directly or indirectly, by the Company.
"Adjusted Total Assets" means the total amount of assets of
the Company and its Restricted Group Members, except to the extent resulting
from write-ups of assets (other than write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Group Members; and (ii)
all goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, all as calculated in conformity with GAAP;
provided that Adjusted Total Assets shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to the amount of
restricted cash of the Company and its Restricted Group Members, including cash
or Cash Equivalents held in the Escrow Account or the escrow account for the
Indebtedness of Hermes Europe issued under the Hermes Europe Senior Notes
Indenture. For purposes of this Adjusted Total Assets definition, (a) assets
shall be calculated less applicable accumulated depreciation, accumulated
amortization and other valuation reserves, and (b) all calculations shall
exclude all intercompany items.
"Adjusted Total Controlled Assets" means the total amount of
assets of the Company and the Restricted Group Members of which the Company,
directly or indirectly, owns greater than 51% of the outstanding Equity
Interests, except to the extent resulting from write-ups of assets (other than
write-ups in connection with accounting for acquisitions in conformity with
GAAP), after deducting therefrom (i) all current liabilities of the Company and
such Restricted Group Members; and (ii) all goodwill, trade names, trademarks,
patents, unamortized debt discount and expense and other like intangibles of
the Company and such Restricted Group Members, all as calculated in conformity
with GAAP; provided that Adjusted Total Controlled Assets shall be reduced (to
the extent not otherwise reduced in accordance with GAAP) by an amount (1)
equal to the amount of restricted cash of the Company and such Restricted Group
Members, including cash or Cash Equivalents held in the Escrow Account or the
escrow account for the Indebtedness of Hermes Europe issued under the Hermes
Europe Senior Notes Indenture and (2) equal to the aggregate amount of all
Investments of the Company or any such Restricted Group Members in any Person
(other than any loans or advances that are evidenced by a validly executed and
enforceable promissory note). For purposes of this Adjusted Total Controlled
Assets definition, (a) assets shall be calculated less applicable accumulated
depreciation, accumulated amortization and other valuation reserves, and (b)
all calculations (other than with respect to the parenthetical clause in clause
(2) above) shall exclude all intercompany items.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control"(including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person
whether through the ownership of voting securities, by agreement or otherwise.
"Affiliate Transaction" has the meaning set forth in Section
4.17.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Asset Sale" means any direct or indirect sale, conveyance,
transfer, lease (that has the effect of a disposition), or other disposition
(including, without limitation, any merger, consolidation or sale-leaseback
transaction) to any Person other than the Company or a Restricted Group Member,
in one transaction or a series
<PAGE> 10
-4-
of related transactions, of (i) any Equity Interest of any Restricted Group
Member; (ii) any material license, franchise or other authorization of the
Company or any Restricted Group Member; (iii) any assets of the Company or any
Restricted Group Member which constitute substantially all of an operating unit
or line of business of the Company or any Restricted Group Member; or (iv) any
other property or asset of the Company or any Restricted Group Member outside
of the ordinary course of business (including the receipt of proceeds paid on
account of the loss of or damage to any property or asset and awards of
compensation for any asset taken by condemnation, eminent domain or similar
proceedings). For the purposes of this definition, the term "Asset Sale" shall
not include (a) any transaction consummated in compliance with Section 5.01 and
the creation of any Lien not prohibited by Section 4.15; (b) sales of property
or equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Group Member, as the case may be; (c) the making of any Permitted
Investment; and (d) any transaction consummated in compliance with Section 4.11
or Section 4.14. In addition, solely for purposes of Section 4.16, any sale,
conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions, with a Fair
Market Value not in excess of $1.0 million shall be deemed not to be an Asset
Sale.
"Bankruptcy Law" has the meaning set forth in Section 6.01.
"Basket" has the meaning set forth in Section 4.11.
"Board of Directors" means, with respect to any Person, the
Board of Directors of such Person (or comparable governing body), or any
authorized committee of that Board (it being understood that the Board of
Directors of the Company shall be its Board of Supervisory Directors).
"Board Resolution" means, with respect to any Person, a duly
adopted resolution of the Board of Directors of such Person.
"Business Day" means a day (other than a Saturday or Sunday)
on which the Depository and banks in New York are open for business.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be so required to be capitalized on the
balance sheet in accordance with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities
issued or directly and fully guaranteed or insured by the U.S. government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition; provided, however, that securities
deposited in the Escrow Account may have longer maturities; (c) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any commercial bank
having capital and surplus in excess of $500 million; provided, however, that
securities deposited in the Escrow Account may have longer maturities; (d)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (b) and (c) entered into with any
financial institution meeting the qualifications specified in clause (c) above;
and (e) commercial paper rated P-1, A-1 or the equivalent thereof by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group, respectively, and
in each case maturing within six months after the date of acquisition.
"Change of Control" means the occurrence of any of the
following events (whether or not approved by the Board of Directors of the
Company): (a) any Person or group, other than the Permitted Holders, is
<PAGE> 11
-5-
or becomes the beneficial owner, directly or indirectly, of Voting Equity
Interests representing 50% or more of the total voting power of the Voting
Equity Interests of the Company or has the power, directly or indirectly, to
elect a majority of the members of the Board of Directors of the Company; (b)
the Company consolidates with, or merges with or into, another Person or the
Company or one or more Restricted Group Members sell, assign, convey, transfer,
lease or otherwise dispose of all or substantially all of the assets of the
Company and the Restricted Group Members, taken as a whole, to any Person
(other than a Restricted Group Member), or any Person consolidates with, or
merges with or into, the Company, in any such event other than pursuant to a
transaction in which the Person or Persons that "beneficially owned," directly
or indirectly, a majority of the total voting power of the Voting Equity
Interests of the Company immediately prior to such transaction, "beneficially
own," directly or indirectly, Voting Equity Interests representing a majority
of the total voting power of the Voting Equity Interests of the surviving or
transferee Person; (c) during any consecutive two year period, individuals who
at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by the Board of
Directors of the Company or whose nomination for election by the stockholders
of the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason (other than by action of the Permitted Holders) to constitute a majority
of the Board of Directors of the Company, then in office; or (d) there shall
occur the liquidation or dissolution of the Company. For purposes of this
definition, (i) "group" has the meaning under Section 13(d) and 14(d) of the
Exchange Act or any successor provision to either of the foregoing, including
any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, and
(ii) "beneficial ownership" has the meaning set forth in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time, upon the happening of an event or otherwise.
"Change of Control Date" has the meaning set forth in Section
4.10.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor shall have become such pursuant
to the applicable provisions of this Indenture, and thereafter "Company" shall
mean such successor.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by two Officers or by an Officer and
an Assistant Treasurer or an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 10.02 or such other address as the
Trustee may give notice to the Company.
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Adjusted Operating Cash Flow realized
during the period commencing on the Issue Date and ending on the last day of
the most recent fiscal quarter immediately preceding the date of determination
for which consolidated financial information of the Company is available or, if
such cumulative Adjusted Operating Cash Flow for such period is negative, the
negative amount by which cumulative Adjusted Operating Cash Flow is less than
zero.
"Currency Agreement" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement, which may
include the use of derivatives, designed to protect the Company or any
Restricted Group Member against fluctuations in currency values.
<PAGE> 12
-6-
"Custodian" has the meaning set forth in Section 6.01.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio
of (a) the Total Indebtedness as of the date of calculation (the "Determination
Date") to (b) two times the Adjusted Operating Cash Flow for the latest two
fiscal quarters for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For purposes of
calculating Adjusted Operating Cash Flow for the Measurement Period immediately
prior to the relevant Determination Date, (I) any Person that is a Restricted
Group Member on the Determination Date (or would become a Restricted Group
Member on such Determination Date in connection with the transaction that
requires the determination of such Adjusted Operating Cash Flow) will be deemed
to have been a Restricted Group Member at all times during such Measurement
Period, (II) any Person that is not a Restricted Group Member on such
Determination Date (or would cease to be a Restricted Group Member on such
Determination Date in connection with the transaction that requires the
determination of such Adjusted Operating Cash Flow) will be deemed not to have
been a Restricted Group Member at any time during such Measurement Period, and
(III) if the Company or any Restricted Group Member shall have in any manner
(x) acquired (through an Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by way of an Asset
Sale or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to such Determination Date, such
calculation will be made on a pro forma basis in accordance with GAAP as if, in
the case of an Acquisition or the commencement of activities constituting such
operating business, all such transactions had been consummated on the first day
of such Measurement Period and, in the case of an Asset Sale or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period (it being understood that in calculating Adjusted Operating Cash Flow
the exclusions set forth in clauses (a) through (f) of the definition of
Adjusted Net Income shall apply to an Acquired Person as if it were a
Restricted Group Member).
"Default" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.
"Depository" means, with respect to the Securities issued in
the form of one or more Global Securities, The Depository Trust Company or
another Person designated as Depository by the Company, which must be a
clearing agency registered under the Exchange Act.
"Designation" has the meaning set forth in Section 4.14.
"Designation Amount" has the meaning set forth in Section
4.14.
"Designation Basket" has the meaning set forth in Section
4.14.
"Disinterested Director" means a member of the Board of
Directors of the Company who does not have any material direct or indirect
financial interest in or with respect to the transaction being considered.
"Disposition" means, with respect to any Person, any merger,
consolidation or other business combination involving such Person (whether or
not such Person is the Surviving Person) or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets.
"Disqualified Equity Interest" means any Equity Interest
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder
thereof), or
<PAGE> 13
-7-
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable, at the option of the
holder thereof, in whole or in part, on or prior to the Maturity Date;
provided, however, that any Equity Interests that would not constitute
Disqualified Equity Interests but for provisions thereof giving holders thereof
the right to require the Company to repurchase or redeem such Equity Interests
upon the occurrence of a change in control occurring prior to the Maturity Date
shall not constitute Disqualified Equity Interests if the change in control
provisions applicable to such Equity Interests are no more favorable to the
holders of such Equity Interests than the provisions described under Section
4.10 and such Equity Interests specifically provide that the Company will not
repurchase or redeem any such Equity Interests pursuant to such provisions
prior to the Company's repurchase of Securities as are required to be
repurchased pursuant to the provisions described under Section 4.10.
"Equity Interest" in any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate stock or other
equity participations, including partnership interests, whether general or
limited, in such Person, including any Preferred Equity Interests.
"Escrow Account" has the meaning set forth in Section 2 of the
Escrow Agreement.
"Escrow Agent" means The Bank of New York, as escrow agent
under the Escrow Agreement, until a successor replaces it in accordance with
the provisions of the Escrow Agreement and thereafter means such successor.
"Escrow Agreement" means the Escrow Agreement dated as of
February 10, 1998 among the Company, the Escrow Agent, and the Trustee.
"Escrow Collateral" has the meaning set forth in Section 6 of
the Escrow Agreement.
"Escrow Funds" has the meaning set forth in Section 11.03.
"Event of Default" has the meaning set forth in Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the SEC thereunder.
"Existing Joint Venture" means each of PrymTelefon,
Bancomsvyaz, TeleCommunications of Moscow, GTS Monaco Access S.A.M., Sovam
Teleport Kiev Division L.L.C., EDN Sovintel, all the entities in which
SFMT-Rusnet, Inc. currently has an interest, all the entities in which Vostok
Mobile B.V. currently has an interest and their respective successors.
"Expiration Date" has the meaning set forth in the definition
of "Offer to Purchase" below.
"Fair Market Value" means, with respect to any asset, the
price (after taking into account any liabilities relating to such assets) which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of which is
under any compulsion to complete the transaction; provided, however, that the
Fair Market Value of any such asset or assets shall be determined conclusively
by the Board of Directors of the Company acting in good faith, which
determination shall be evidenced by a resolution of such Board delivered to the
Trustee.
<PAGE> 14
-8-
"GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States which are applicable at
the date of determination and which are consistently applied for all applicable
periods.
"Global Security" means a security evidencing all or a portion
of the Securities issued to the Depository or its nominee in accordance with
Section 2.01.
"guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner, of any
part or all of such obligation and (ii) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any way
the payment or performance (or payment of damages in the event of
non-performance) of all or any part of such obligation, including, without
limiting the foregoing, the payment of amounts drawn down by letters of credit.
A guarantee shall include, without limitation, any agreement to maintain or
preserve any other person's financial condition or to cause any other Person to
achieve certain levels of operating results.
"Guarantee" has the meaning set forth in Section 4.18.
"Guaranteed Indebtedness" has the meaning set forth in Section
4.18.
"Hermes Europe" means Hermes Europe Railtel B.V., a company
organized in the Netherlands.
"Hermes Europe Senior Notes Indenture" means the indenture
governing the 11 1/2% Senior Securities due 2007 of Hermes Europe.
"Holder," "holder of Securities," "Securityholders" or other
similar terms mean the registered holder of any Security.
"Incur" means, with respect to any Indebtedness or other
obligation of any Person, to create, issue, incur (including by conversion,
exchange or otherwise), assume, guarantee or otherwise become liable in respect
of such Indebtedness or other obligation or the recording, as required pursuant
to GAAP or otherwise, of any such Indebtedness or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring"
shall have meanings correlative to the foregoing). Indebtedness of a Person
existing at the time such Person becomes a Restricted Group Member or is merged
or consolidated with or into the Company or any Restricted Group Member shall
be deemed to be Incurred at such time.
"Indebtedness" means (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such
Person and whether or not contingent, (a) every obligation of such Person for
money borrowed; (b) every obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (c) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person; (d) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable
incurred in the ordinary course of business and payable in accordance with
industry practices, or other accrued liabilities arising in the ordinary course
of business which are not overdue or which are being contested in good faith);
(e) every Capital Lease Obligation of such Person; (f) every net obligation
under interest rate swap or similar agreements or foreign currency hedge,
exchange or similar agreements of such Person; and (g) every obligation of the
type
<PAGE> 15
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referred to in clauses (a) through (f) of another Person and all dividends of
another Person the payment of which, in either case, such Person has guaranteed
or is responsible or liable for, directly or indirectly, as obligor, guarantor
or otherwise. Indebtedness (i) shall never be calculated taking into account
any cash and Cash Equivalents held by such Person; (ii) shall not include
obligations of any Person (x) arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business, provided
that such obligations are extinguished within 20 Business Days of their
incurrence unless covered by an overdraft line, (y) resulting from the
endorsement of negotiable instruments for collection in the ordinary course of
business and consistent with past business practices and (z) under stand-by
letters of credit to the extent collateralized by cash or Cash Equivalents;
(iii) which provides that an amount less than the principal amount thereof
shall be due upon any declaration of acceleration thereof shall be deemed to be
Incurred or outstanding in an amount equal to the accreted value thereof at the
date of determination determined in accordance with GAAP; and (iv) shall
include the liquidation preference and any mandatory redemption payment
obligations in respect of any Disqualified Equity Interests of the Company or
any Preferred Equity Interests of any Restricted Group Member not held by the
Company or any Restricted Group Member.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Independent Financial Advisor" means a recognized accounting,
appraisal, investment banking firm or consultant with experience in a
Telecommunications Business (i) which does not, and whose directors, officers
and employees or Affiliates do not, have a material direct or indirect
financial interest in the Company and (ii) which, in the judgment of the Board
of Directors of the Company, is otherwise independent and qualified to perform
the task for which it is to be engaged.
"interest" means, with respect to the Securities, the sum of
any cash interest on the Securities.
"Interest Payment Date" means each semiannual interest payment
date on February 15 and August 15 of each year, commencing August 15, 1998.
"Interest Rate Protection Obligations" means, with respect to
any Person, the Obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
and (ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Interest Record Date" for the interest payable on any
Interest Payment Date (except a date for payment of defaulted interest) means
the February 1 or August 1 (whether or not a Business Day), as the case may be,
immediately preceding such Interest Payment Date.
"Investment" means, with respect to any Person, any direct or
indirect loan, advance, guarantee or other extension of credit or capital
contribution to (by means of transfers of cash or other property or assets to
others or payments for property or services for the account or use of others,
or otherwise), or purchase or acquisition (whether from the issuer thereof or
any existing holder thereof) of Equity Interests, bonds, securities, debentures
or other securities or evidences of Indebtedness issued by, any other Person.
The amount of any Investment shall be the original cost of such Investment,
plus the cost of all additions thereto, and minus the amount of any portion of
such Investment repaid to such Person in cash as a repayment of principal or a
return of capital, as the case may be, but without any other adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. In determining the amount of any investment
involving a transfer of any property or asset other than cash, such property
shall be valued at its Fair Market
<PAGE> 16
-10-
Value at the time of such transfer. "Investments" shall exclude (A) extensions
of trade credit in the ordinary course of business in accordance with normal
trade practices and (B) the Designation of any Restricted Group Member as an
Unrestricted Group Member in accordance with Section 4.14.
"Involuntary Event" has the meaning specified in the
definition of "Permitted Investments" below.
"Issue Date" means the original issue date of the Securities.
"Judgment Currency" has the meaning set forth in Section
10.15.
"Latest Balance Sheet" means, of any Person, the latest
consolidated balance sheet of such Person reported on by a recognized firm of
independent accountants without qualification as to scope.
"Lien" means any lien, mortgage, charge, security interest,
hypothecation, assignment for security or encumbrance of any kind (including
any conditional sale or capital lease or other title retention agreement, any
lease in the nature thereof, and any agreement to give any security interest).
"Maturity Date" means the date, which is set forth on the face
of the Securities, on which the Securities will mature.
"Measurement Period" has the meaning set forth in the
definition of "Debt to Annualized Operating Cash Flow Ratio" above.
"Monetization Sale" has the meaning set forth in Section 4.16.
"Net Cash Proceeds" means the aggregate proceeds in the form
of cash or Cash Equivalents received by the Company or any Restricted Group
Member in respect of any Asset Sale, including all cash or Cash Equivalents
received upon any sale, liquidation or other exchange of proceeds of Asset
Sales received in a form other than cash or Cash Equivalents, net of (a) the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof; (b) taxes paid or payable as
a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements); (c) amounts required to be
applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that were the subject of such Asset Sale; (d) amounts deemed, in good
faith, appropriate by the Board of Directors of the Company to be provided as a
reserve, in accordance with GAAP, against any liabilities associated with such
assets which are the subject of such Asset Sale (provided that the amount of
any such reserves shall be deemed to constitute Net Cash Proceeds at the time
such reserves shall have been released or are not otherwise required to be
retained as a reserve); and (e) with respect to Asset Sales by any Restricted
Group Member, the portion of such cash payments attributable to Persons holding
a minority interest in such Restricted Group Member.
"Net Proceeds" means the aggregate net proceeds (including the
Fair Market Value of non-cash proceeds constituting equipment or other assets
of a type generally used in a Telecommunications Business in an amount
reasonably determined by the Board of Directors of the Company) received by the
Company from the sale of Qualified Equity Interests (other than to a Restricted
Group Member) after payment of out-of-pocket expenses, commissions and
discounts incurred in connection therewith.
<PAGE> 17
-11-
"Non-Subsidiary Affiliate" of any specified Person, means any
other Person in which an Investment in the Equity Interests of such Person has
been made by such specified Person other than a direct or indirect Subsidiary
of such specified Person.
"Obligations" means any principal, interest (including,
without limitation, post-petition interest), penalties, fees, indemnifications,
reimbursement obligations, damages and other liabilities payable under the
documentation governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer
to Purchase" below.
"Offer to Purchase" means a written offer (the "Offer") sent
by or on behalf of the Company by first- class mail, postage prepaid, to each
Holder at his address appearing in the register for the Securities on the date
of the Offer offering to purchase up to the principal amount of Securities
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to this Indenture). Unless otherwise required by applicable
law, the Offer shall specify an expiration date (the "Expiration Date") of the
Offer to Purchase, which shall be not less than 20 Business Days nor more than
90 days after the date of such Offer, and a settlement date (the "Purchase
Date") for purchase of Securities to occur no later than five Business Days
after the Expiration Date. The Company shall notify the Trustee at least 15
Business Days (or such shorter period as is acceptable to the Trustee) prior to
the mailing of the Offer of the Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company. The
Offer shall contain all the information required by applicable law to be
included therein. The Offer shall contain all instructions and materials
necessary to enable such Holders to tender Securities pursuant to the Offer to
Purchase. The Offer shall also state:
(1) the Section of this Indenture pursuant to which the Offer
to Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding
Securities offered to be purchased by the Company pursuant to the
Offer to Purchase (including, if less than 100%, the manner by which
such amount has been determined pursuant to the Section of this
Indenture requiring the Offer to Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each
$1,000 aggregate principal amount of Securities accepted for payment
(as specified pursuant to this Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the
Securities registered in the name of such Holder and that any portion
of a Security tendered must be tendered in an integral multiple of
$1,000 principal amount;
(6) the place or places where Securities are to be
surrendered for tender pursuant to the Offer to Purchase;
(7) that interest on any Security not tendered or tendered
but not purchased by the Company pursuant to the Offer to Purchase
will continue to accrue;
<PAGE> 18
-12-
(8) that on the Purchase Date the Purchase Price will become
due and payable upon each Security being accepted for payment pursuant
to the Offer to Purchase and that interest thereon shall cease to
accrue on and after the Purchase Date;
(9) that each Holder electing to tender all or any portion of
a Security pursuant to the Offer to Purchase will be required to
surrender such Security at the place or places specified in the Offer
to Purchase prior to the close of business on the Expiration Date
(such Security being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Trustee duly executed by, the
Holder thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any
portion of Securities tendered if the Company (or Paying Agent)
receives, not later than the close of business on the fifth Business
Day next preceding the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Security the Holder tendered, the certificate
number of the Security the Holder tendered and a statement that such
Holder is withdrawing all or a portion of his or her tender;
(11) that (a) if Securities in an aggregate principal amount
less than or equal to the Purchase Amount are duly tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall
purchase all such Securities and (b) if Securities in an aggregate
principal amount in excess of the Purchase Amount are tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall
purchase Securities having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Securities in denominations of $1,000
principal amount or integral multiples thereof shall be purchased);
and
(12) that in the case of any Holder whose Security is
purchased only in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder, in an aggregate principal
amount equal to and in exchange for the unpurchased portion of the
Security so tendered.
An Offer to Purchase shall be governed by and effected in
accordance with the provisions above pertaining to any Offer.
"Officer" means the Chairman, any Vice Chairman, the
President, any Vice President, the Chief Financial Officer, the Treasurer, or
the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers or by an Officer and an Assistant Treasurer or Assistant Secretary of
the Company complying with Sections 10.04 and 10.05.
"Opinion of Counsel" means a written opinion from legal
counsel. The counsel may be an employee of or counsel to the Company.
"Other Debt" has the meaning set forth in Section 4.16.
"Participant" has the meaning set forth in Section 2.15.
<PAGE> 19
-13-
"Permitted Holders" means (a) Alan B. Slifka and any entity
controlled by him, (b) one or more of George Soros, Soros Fund Management LLC,
Purnendu Chatterjee or Chatterjee Management Company or Affiliates of any of
the foregoing, and any person or entity for which any such person or entity
acts as investment advisor or investment manager, (c) charitable organizations
controlled by or affiliated with any of the Persons named in the foregoing
clauses (a) and (b), and (d) any Person that acquires the capital stock of the
Company in a Strategic Equity Investment.
"Permitted Investments" means (a) Cash Equivalents; (b)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (c) loans and advances to employees made in the ordinary course of
business not to exceed $7.5 million in the aggregate at any one time
outstanding; (d) Interest Rate Protection Obligations and Currency Agreements
permitted under Section 4.12; (e) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under Section 4.16; (f)
transactions with officers, directors and employees of the Company or any
Restricted Group Member entered into in the ordinary course of business
(including compensation or employee benefit arrangements with any such director
or employee) and consistent with past business practices; (g) Investments made
in the ordinary course of business and on ordinary business terms as partial
payment for constructing a network relating principally to a Telecommunications
Business; (h) intercompany Indebtedness to the extent permitted under paragraph
(b)(vii) of Section 4.12; (i) Investments in evidences of Indebtedness,
securities or other property received from another Person by the Company or any
Restricted Group Member in connection with any bankruptcy proceeding or by
reason of a composition or readjustment of debt or a reorganization of such
Person or as a result of foreclosure, perfection or enforcement of any Lien in
exchange for evidences of Indebtedness, securities or other property of such
Person held by the Company or any Restricted Group Member, or for other
liabilities or obligations of such other Person to the Company or any
Restricted Group Member that were created in accordance with the terms of this
Indenture; and (j) any Investment (other than the acquisition or purchase of
any Equity Interests held by any Affiliate of the Company other than a
Restricted Group Member) in any Restricted Group Member or a Person which will,
upon the making of such Investment, become a Restricted Group Member or be
merged or consolidated with or into or transfer or convey all or substantially
all its assets to, a Restricted Group Member; provided, however, that (I) with
respect to any such Investment in a Person that will become a Restricted Group
Member as a result thereof (or be merged or consolidated with or into or
transfer or convey all or substantially all of its assets to a Restricted Group
Member), such Person's primary business is related, ancillary or complementary
to the businesses of the Company and its Restricted Group Members on the date
of such Investment, and (II) with respect to any Investment in a Restricted
Affiliate, any such Investment shall cease to be a Permitted Investment in the
event that such Restricted Affiliate shall cease to observe any of the
provisions of the covenants that are applicable to such Restricted Affiliate;
provided, however, that in the event that such Restricted Affiliate ceases to
observe any of the provisions of the covenants applicable to it solely as a
result of circumstances, developments or conditions beyond the control of the
Company (each such failure to observe a covenant as a result of any such
circumstance, development or condition, being an "Involuntary Event") any such
Investment previously made in such Restricted Affiliate will not cease to be a
Permitted Investment unless such Involuntary Event continues for 90 days.
"Permitted Liens" means (a) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the
Company or any Restricted Group Member and Liens securing Acquired
Indebtedness; provided, however, that such Liens were in existence prior to the
contemplation of such merger or consolidation or Incurrence of such Acquired
Indebtedness and were not incurred in connection therewith and do not secure
any property or assets of the Company or any Restricted Group Member other than
the property or assets subject to the Liens prior to such merger or
consolidation or Incurrence of such Acquired Indebtedness; (b) Liens existing
on the Issue Date; (c) Liens securing Indebtedness consisting of Capitalized
Lease Obligations,
<PAGE> 20
-14-
mortgage financings, industrial revenue bonds or other monetary
obligations, in each case incurred solely for the purpose of financing all or
any part of the purchase price or cost of construction or installation of
assets used in the business of the Company or any Restricted Group Member, or
repairs, additions or improvements to such assets; provided, however, that (I)
such Liens secure Indebtedness in an amount not in excess of the original
purchase price or the original cost of any such assets or repair, addition or
improvement thereto (plus an amount equal to the reasonable fees and expenses
in connection with the Incurrence of such Indebtedness), (II) such Liens do not
extend to any other assets of the Company or any Restricted Group Member (and,
in the case of repair, addition or improvements to any such assets, such Lien
extends only to the assets (and improvements thereto or thereon) repaired,
added to or improved), (III) the Incurrence of such Indebtedness is permitted
by Section 4.12 and (IV) such Liens attach within 90 days of such purchase,
construction, installation, repair, addition or improvement; (d) Liens to
secure the Senior Credit Facility; (e) Liens securing letters of credit entered
into in the ordinary course of business and consistent with past business
practice; (f) Liens on and pledges of the Equity Interests of any Unrestricted
Group Member securing any Indebtedness of such Unrestricted Group Member; (g)
Liens on any property or assets of a Restricted Group Member granted in favor
of and held by the Company or any Restricted Group Member; (h) Liens on any
property or assets of the Company or any Restricted Group Member securing on a
pari passu basis all of the Securities; (i) statutory Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
like Liens arising in the ordinary course of business of the Company or any
Restricted Group Member and with respect to amounts not yet delinquent or being
contested in good faith by appropriate proceedings; (j) Liens for taxes,
assessments, government charges or claims that are being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted;
provided, however, that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (k) Liens
incurred or deposits made to secure the performance of tenders, bids, leases,
statutory obligations, surety and appeal bonds, government contracts,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business (other than contracts for the payment of money);
(l) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of the
Company or any Restricted Group Member and incurred in the ordinary course of
business; (m) Liens arising by reason of judgment, decree or order of any court
so long as such Lien is adequately bonded and any appropriate legal proceedings
that may have been duly initiated for the review of such judgment, decree or
order shall not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired; (n) Liens on the Equity
Interests or properties or assets of any Restricted Group Member securing
Indebtedness of such Restricted Group Member (other than any guarantee of
Indebtedness other than Indebtedness under the Senior Credit Facility) of the
Company or any other Restricted Group Member to the extent permitted to be
Incurred under Section 4.12, (o) Liens securing Indebtedness under Interest
Rate Protection Obligations or Indebtedness under Currency Agreements to the
extent permitted to be Incurred under Section 4.12; (p) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (q)
Liens to secure any Refinancings, in whole or in part, of any Indebtedness
secured by Liens referred to in the clauses above so long as such Lien does not
extend to any other property (other than improvements thereto); and (r) Liens
arising under the Escrow Agreement.
"Permitted Refinancing" means, with respect to any
Indebtedness, Indebtedness to the extent representing a Refinancing of such
Indebtedness; provided, however, that (1) the Refinancing Indebtedness shall
not exceed the sum of the amount of the Indebtedness being Refinanced, plus the
amount of accrued interest or dividends thereon, the amount of any reasonably
determined prepayment premium necessary to accomplish such Refinancing and
reasonable fees and expenses incurred in connection therewith; (2) the
Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced and shall not have a final stated maturity prior to the final
stated maturity of the Indebtedness being Refinanced; and (3) Indebtedness that
ranks pari passu with the Securities
<PAGE> 21
-15-
may be Refinanced only with Indebtedness that is made pari passu with or
subordinate in right of payment to the Securities, and Indebtedness that is
subordinate in right of payment to the Securities may be Refinanced only with
Indebtedness that is subordinate in right of payment to the Securities on terms
no less favorable to the Holders than those contained in the Indebtedness being
Refinanced.
"Permitted Repurchase" means any purchase, redemption or other
acquisition of any Equity Interests of the Company issued as consideration for
the purchase of the Equity Interests in GTS-Vox Limited held by the Company in
the event that such Equity Interests are required to be repurchased by the
Company pursuant to the terms of the purchase of such Equity Interests.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, limited
liability partnership, limited partnership, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"Physical Securities" means certificated securities in
registered form evidencing all or a portion of the Securities issued to the
Holders in accordance with Section 2.15.
"Preferred Equity Interest," in any Person, means an Equity
Interest of any class or classes (however designated) which is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over Equity Interests of any other class in such Person.
"principal" of a debt security means the principal of the
security, plus, when appropriate, the premium, if any, on the security.
"Public Equity Offering" means an underwritten public offering
of common Equity Interests of the Company pursuant to an effective registration
statement filed under the Securities Act (excluding registration statements
filed on Form S-8).
"Purchase Amount" has the meaning set forth in the definition
of "Offer to Purchase" above.
"Purchase Date" has the meaning set forth in the definition of
"Offer to Purchase" above.
"Purchase Price" has the meaning set forth in the definition
of "Offer to Purchase" above.
"Qualified Equity Interest" means any Equity Interest of the
Company other than any Disqualified Equity Interest.
"Redemption Date," when used with respect to any Security to
be redeemed, means the date fixed for such redemption pursuant to this
Indenture.
"Redemption Price," when used with respect to any Security to
be redeemed, means the price fixed for such redemption pursuant to this
Indenture as set forth in the form of Security annexed hereto as Exhibit A
hereto.
"Refinance" means refinance, renew, extend, replace, defease
or refund; and "Refinancing" and "Refinanced" have correlative meanings.
<PAGE> 22
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"Registrar" has the meaning set forth in Section 2.03.
"Related Business" means any business in which the Company or
its Restricted Group Members are engaged, directly or indirectly, that consists
primarily of, or is related to, operating, acquiring, developing and
constructing any telecommunications services and related businesses.
"Replacement Assets" means (x) properties and assets (other
than cash or any Equity Interests or other security) that will be used in a
Telecommunications Business of the Company and the Restricted Group Members or
(y) Equity Interests of any Person engaged primarily in a Telecommunications
Business, which Person will become on the date of acquisition thereof a
Restricted Group Member as a result of the Company's acquiring such Equity
Interests.
"Required Filing Dates" has the meaning set forth in Section
4.09.
"Restricted Affiliate" means any direct or indirect
Non-Subsidiary Affiliate of the Company or a Restricted Subsidiary of the
Company that has been designated by the Board of Directors of the Company as a
Restricted Affiliate based on a determination by the Board of Directors that
the Company has, directly or indirectly, the requisite control over such
Non-Subsidiary Affiliate to prevent it from Incurring Indebtedness, or taking
any other action at any time, in contravention of any of the provisions of this
Indenture that are applicable to Restricted Affiliates; provided, however, that
immediately after giving effect to such designation (i) the Liens and
Indebtedness of such Non-Subsidiary Affiliate outstanding immediately after
such designation would, if Incurred at such time, have been permitted to be
Incurred for all purposes of this Indenture; and (ii) no Default or Event of
Default shall have occurred and be continuing. The Company shall deliver an
Officers' Certificate to the Trustee upon designating any Non-Subsidiary
Affiliate as a Restricted Affiliate. As of the Issue Date, every Existing Joint
Venture is a Restricted Affiliate.
"Restricted Group Members" means collectively, each Restricted
Subsidiary of the Company, each Restricted Affiliate and each Restricted
Subsidiary of a Restricted Affiliate.
"Restricted Subsidiary" means any Subsidiary of the Company
that has not been designated by the Board of Directors of the Company, by a
resolution of the Board of Directors of the Company delivered to the Trustee,
as an Unrestricted Subsidiary pursuant to Section 4.14. Any such designation
may be revoked by a resolution of the Board of Directors of the Company
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth in Section 4.14.
"SEC" means the Securities and Exchange Commission.
"Securities" means any securities authenticated and delivered
under this Indenture.
"Security Amount" has the meaning set forth in Section 4.16.
"Security Portion of Excess Proceeds" has the meaning set
forth in Section 4.16.
"Senior Credit Facility" means any senior credit facility
among the Company, Restricted Group Members (if any), and the lenders and
agents named therein, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto
<PAGE> 23
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and any agreement providing therefor, whether by or with the same or any other
lender, creditor, group of lenders or group of creditors, and including related
notes, guarantees and other instruments and agreements executed in connection
therewith.
"Share Capital" means, at any time of determination, the
stated capital of the Equity Interests (other than Disqualified Equity
Interests) and additional paid-in capital of the Company at such time, all as
determined in accordance with GAAP.
"Significant Restricted Group Member" means, at any date of
determination, (a) any Restricted Group Member that, together with its
Subsidiaries that constitute Restricted Group Members (i) for the most recent
fiscal year of the Company accounted for more than 10.0% of the revenues of the
Company and the Restricted Group Members or (ii) as of the end of such fiscal
year, owned more than 10.0% of the assets of the Company and the Restricted
Group Members, all as set forth on the financial statements of the Company and
the Restricted Group Members for such year prepared in conformity with GAAP,
and (b) any Restricted Group Member which, when aggregated with all other
Restricted Group Members that are not otherwise Significant Restricted Group
Members and as to which any event described in clauses (f), (g), (h) or (i) of
Section 6.01 has occurred and is continuing, would constitute a Significant
Restricted Group Member under clause (a) of this definition.
"Stated Maturity" when used with respect to any Security or
any installment of interest thereon, means the date specified in such Security
as the fixed date on which the principal of such Security or such installment
of interest is due and payable.
"Strategic Equity Investments" means the issuance and sale of
Qualified Equity Interests to a Person that has an equity market
capitalization, a net asset value or annual revenues of at least $1.5 billion
and owns and operates business primarily in a Telecommunications Business
provided that such Telecommunications Business may be located anywhere in the
world.
"Subordinated Indebtedness" means any Indebtedness of the
Company which is expressly subordinated in right of payment to the Securities.
"Subsidiary" means, with respect to any Person, (a) any
corporation of which the outstanding Voting Equity Interests having at least a
majority of the votes entitled to be cast in the election of directors shall at
the time be owned, directly or indirectly, by such Person, or (b) any other
Person of which at least a majority of Voting Equity Interests are at the time,
directly or indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved
in or that makes any Disposition, the Person formed by or surviving such
Disposition or the Person to which such Disposition is made.
"Tax" shall mean any tax, duty, levy, impost, assessment or
other governmental charge (including penalties, interest and any other
liabilities related thereto).
"Taxing Authority" shall mean any government or political
subdivision or territory or possession of any government or any authority or
agency therein or thereof having power to tax.
"Telecommunications Acquisition" means an Acquisition of
properties or assets to be used in a Telecommunications Business or the Equity
Interests of any Person that becomes a Restricted Group Member;
<PAGE> 24
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provided, however, that such Person's properties and assets shall consist
principally of properties or assets that will be used in a Telecommunications
Business.
"Telecommunications Business" means any business owning,
constructing, financing and operating a telephone and/or communications system
located principally in countries located in Europe and/or Asia (including
Russia and the CIS), or any business reasonably related thereto, including,
without limitation, any business conducted by the Company or any Restricted
Group Member on the Issue Date and the provision of ancillary services related
thereto and other services provided through the facilities of such telephone
and telecommunications system.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
Sections 77aaa-77bbbb), as amended, as in effect on the date of this Indenture
until such time as this Indenture is qualified under the TIA, and thereafter as
in effect on the date on which this Indenture is qualified under the TIA,
except in each case as provided in Section 9.03.
"Total Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
the Restricted Group Members, outstanding as of such date of determination,
after giving effect to any Incurrence of Indebtedness and the application of
the proceeds therefrom giving rise to such determination. Total Indebtedness
shall be calculated by excluding at such date that percentage of the
Indebtedness of any Restricted Group Member that corresponds to the percentage
ownership interest in the outstanding Equity Interests of such Restricted Group
Member not owned, directly or indirectly, by the Company on such date.
"Trustee" means the party named as such in this Indenture
until a successor replaces it in accordance with the provisions of this
Indenture and thereafter means such successor.
"Trust Officer" means any officer within the corporate trust
department (or any successor group of the Trustee) including any vice
president, assistant vice president, assistant secretary or any other officer
or assistant officer of the Trustee customarily performing functions similar to
those performed by the persons who at that time shall be such officers, and
also means, with respect to a particular corporate trust matter, any other
officer to whom such trust matter is referred because of his knowledge of and
familiarity with the particular subject.
"Unrestricted Affiliate" means any Non-Subsidiary Affiliate of
the Company designated as such pursuant to Section 4.14. Any such designation
may be revoked by a resolution of the Board of Directors of the Company
delivered to the Trustee, subject to the provisions of such covenant.
"Unrestricted Group Member" means, collectively, each
Unrestricted Subsidiary of the Company and each Unrestricted Affiliate.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to Section 4.14. Any such designation may be
revoked by a resolution of the Board of Directors of the Company delivered to
the Trustee, subject to the provisions of such covenant.
"U.S. Government Obligations" means direct non-callable
obligations of, or obligations guaranteed by, the United States of America for
the payment of which guarantee or obligations the full faith and credit of the
United States is pledged.
<PAGE> 25
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"Voting Equity Interests" means Equity Interests in a
corporation or other Person with voting power under ordinary circumstances
entitling the holders thereof to elect the Board of Directors or other
governing body of such corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary all of the outstanding Voting Equity Interests (other than
directors' qualifying shares) of which are owned, directly or indirectly, by
the Company.
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Company or any
other obligor on the Securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule and
not otherwise defined herein have the meanings assigned to them therein.
SECTION 1.03. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with generally accepted
accounting principles in effect from time to time, and any other
reference in this Indenture to "generally accepted accounting
principles" refers to GAAP;
<PAGE> 26
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(3) "or" is not exclusive;
(4) words in the singular include the plural, and words
in the plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating.
The Securities and the Trustee's certificate of authentication
thereof shall be substantially in the form of Exhibit A hereto, which is hereby
incorporated in and expressly made a part of this Indenture. The Securities
may have notations, legends or endorsements required by law, stock exchange
rule or usage. The Company and the Trustee shall approve the form of the
Securities and any notation, legend or endorsement on them. Each Security
shall be dated the date of its issuance and shall show the date of its
authentication.
Securities initially offered and sold by the Initial
Purchasers shall be issued in the form of one or more permanent Global
Securities in registered form, substantially in the form set forth in Exhibit A
hereto, deposited with the Trustee, as custodian for the Depository, and shall
bear the legend set forth in Exhibit B hereto.
The aggregate principal amount of any Global Security may from
time to time be increased or decreased by adjustments made on the records of
the Trustee, as custodian for the Depository, as hereinafter provided.
SECTION 2.02. Execution and Authentication.
Two Officers, or an Officer and an Assistant Secretary, shall
sign, or one Officer shall sign and one Officer or an Assistant Secretary (each
of whom shall, in each case, have been duly authorized by all requisite
corporate actions) shall attest to, the Securities for the Company by manual or
facsimile signature.
If an Officer whose signature is on a Security was an Officer
at the time of such execution but no longer holds that office at the time the
Trustee authenticates the Security, the Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue
in the aggregate principal amount not to exceed $105,000,000 upon a written
order of the Company in the form of an Officers' Certificate. The
<PAGE> 27
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Officers' Certificate shall specify the amount of Securities to be
authenticated, the series of Securities and the date on which the Securities
are to be authenticated. The aggregate principal amount of Securities
outstanding at any time may not exceed $105,000,000, except as provided in
Section 2.07. Upon receipt of a written order of the Company in the form of an
Officers' Certificate, the Trustee shall authenticate Securities in
substitution for Securities originally issued to reflect any name change of the
Company.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Securities. Unless otherwise
provided in the appointment, an authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
and Affiliates of the Company.
The Securities shall be issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. Registrar and Paying Agent.
The Company shall maintain an office or agency in the Borough
of Manhattan, The City of New York where (a) Securities may be presented or
surrendered for registration of transfer or for exchange ("Registrar"), (b)
Securities may be presented or surrendered for payment ("Paying Agent") and (c)
notices and demands in respect of the Securities and this Indenture may be
served. The Registrar shall keep a register or registers of the Securities and
of their transfer and exchange. The Company, upon notice to the Trustee, may
appoint one or more co-Registrars and one or more additional Paying Agents.
The term "Paying Agent" includes any additional Paying Agent. Except as
provided herein, the Company or any Subsidiary may act as Paying Agent,
Registrar or co-Registrar.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture, which shall incorporate the
provisions of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of
the name and address of any such Agent. If the Company fails to maintain a
Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee
shall act as such and shall be entitled to appropriate compensation in
accordance with Section 7.07.
The Company initially appoints the Trustee as Registrar and
Paying Agent until such time as the Trustee has resigned or a successor has
been appointed.
SECTION 2.04. Paying Agent to Hold Assets in Trust.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that each Paying Agent shall hold in trust for the
benefit of Holders or the Trustee all assets held by the Paying Agent for the
payment of principal of, or interest on, the Securities, and shall notify the
Trustee of any Default by the Company in making any such payment. The Company
at any time may require a Paying Agent to distribute all assets held by it to
the Trustee and account for any assets disbursed and the Trustee may at any
time during the continuance of any payment Default, upon written request to a
Paying Agent, require such Paying Agent to distribute all assets held by it to
the Trustee and to account for any assets distributed. Upon distribution to
the Trustee of all assets that shall have been delivered by the Company to the
Paying Agent (if other than the Company), the Paying Agent shall have no
further liability for such assets. If the Company or any Subsidiary acts as
Paying Agent, it shall, on or before each due date of the principal of or
interest on the Securities, segregate and
<PAGE> 28
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hold in trust for the benefit of the Persons entitled thereto a sum sufficient
to pay the principal or interest so becoming due until such sums shall be paid
to such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
SECTION 2.05. Securityholder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of Holders. If the Trustee is not the Registrar, the Company shall
furnish to the Trustee as soon as possible after each Interest Record Date and
at such other times as the Trustee may request in writing a list as of such
date and in such form as the Trustee may reasonably require of the names and
addresses of Holders, which list may be conclusively relied upon by the
Trustee.
SECTION 2.06. Transfer and Exchange.
Subject to the provisions of Sections 2.15 and 2.16, when
Securities are presented to the Registrar or a co-Registrar with a request to
register the transfer of such Securities or to exchange such Securities for an
equal principal amount of Securities of other authorized denominations of the
same series, the Registrar or co-Registrar shall register the transfer or make
the exchange as requested if its requirements for such transaction are met;
provided, however, that the Securities surrendered for transfer or exchange
shall be duly endorsed or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Registrar or co-Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing. To
permit registrations of transfers and exchanges, the Company shall execute and
the Trustee shall authenticate Securities at the Registrar's or co-Registrar's
written request. No service charge shall be made for any registration of
transfer or exchange, but the Company may require payment of a sum sufficient
to cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or other governmental charge
payable upon exchanges or transfers pursuant to Section 2.02, 2.10, 3.06, 4.10,
4.16 or 9.05). The Registrar or co-Registrar shall not be required to register
the transfer or exchange of any Security (i) during a period beginning at the
opening of business 15 days before the mailing of a notice of redemption of
Securities and ending at the close of business on the day of such mailing and
(ii) selected for redemption in whole or in part pursuant to Article Three
hereof, except the unredeemed portion of any Security being redeemed in part.
Prior to the registration of any transfer by a Holder as
provided herein, the Company, the Trustee, and any Agent of the Company shall
treat the person in whose name the Security is registered as the owner thereof
for all purposes whether or not the Security shall be overdue, and neither the
Company, the Trustee, nor any such Agent shall be affected by notice to the
contrary. Any Holder of a Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interests in such Global Security
may be effected only through a book-entry system maintained by the Depository
(or its agent), and that ownership of a beneficial interest in a Global
Security shall be required to be reflected in a book entry.
SECTION 2.07. Replacement Securities.
If a mutilated Security is surrendered to the Trustee or if
the Holder of a Security claims that the Security has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate a
replacement Security if the Trustee's requirements for replacement of
Securities are met. Such Holder must provide an indemnity bond or other
indemnity, sufficient in the judgment of both the Company and the Trustee, to
protect the Company, the Trustee and any Agent from any loss which any of them
may suffer if a Security is replaced and evidence to their satisfaction of the
apparent loss, destruction or theft of such Security. The Company may charge
such Holder for its reasonable out-of-pocket expenses in replacing a Security,
in-
<PAGE> 29
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cluding reasonable fees and expenses of counsel. In case any such mutilated,
lost, destroyed or wrongfully taken Security has become or is about to become
due and payable, the Company in its discretion may pay such Security instead of
issuing a new Security in replacement thereof.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities.
Securities outstanding at any time are all the Securities that
have been authenticated by the Trustee except those cancelled by it, those
delivered to it for cancellation and those described in this Section 2.08 as
not outstanding. Subject to Section 2.09, a Security does not cease to be
outstanding because the Company or any of its Affiliates holds the Security.
If a Security is replaced pursuant to Section 2.07 (other than
a mutilated Security surrendered for replacement), it ceases to be outstanding
unless a Trust Officer of the Trustee receives proof satisfactory to him that
the replaced Security is held by a bona fide purchaser. A mutilated Security
ceases to be outstanding upon surrender of such Security and replacement
thereof pursuant to Section 2.07.
If on a Redemption Date, Purchase Date or the Maturity Date
the Paying Agent holds money sufficient to pay all of the principal and
interest due on the Securities payable on that date, then on and after that
date such Securities cease to be outstanding and interest on them ceases to
accrue.
SECTION 2.09. Treasury Securities.
In determining whether the Holders of the required principal
amount of Securities have concurred in any direction, waiver or consent,
Securities owned by the Company or any of its Affiliates shall be disregarded,
except that, for the purposes of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
that a Trust Officer of the Trustee actually knows are so owned shall be
disregarded. Securities so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or of such other obligor.
SECTION 2.10. Temporary Securities.
Until definitive Securities are ready for delivery, the
Company may prepare and the Trustee shall authenticate temporary Securities.
Temporary Securities shall be substantially in the form of definitive
Securities but may have variations that the Company considers appropriate for
temporary Securities. Without unreasonable delay, the Company shall prepare
and the Trustee shall authenticate upon receipt of a written order of the
Company pursuant to Section 2.02 definitive Securities in exchange for
temporary Securities.
SECTION 2.11. Cancellation.
The Company at any time may deliver Securities to the Trustee
for cancellation. The Registrar and the Paying Agent shall forward to the
Trustee any Securities surrendered to them for transfer, exchange or payment.
The Trustee, or at the direction of the Trustee, the Registrar or the Paying
Agent, and no one else, shall cancel all Securities surrendered for transfer,
exchange, payment or cancellation and deliver to the Company such cancelled
Securities for disposal. Subject to Section 2.07, the Company may not issue
new Securities
<PAGE> 30
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to replace Securities that it has paid or delivered to the Trustee for
cancellation. If the Company shall acquire any of the Securities, such
acquisition shall not operate as a redemption or satisfaction of the
Indebtedness represented by such Securities unless and until the same are
surrendered to the Trustee for cancellation pursuant to this Section 2.11. The
Trustee shall cancel all Securities surrendered for transfer, exchange, payment
or cancellation and shall dispose of them in accordance with its normal
procedure.
SECTION 2.12. Defaulted Interest.
If the Company defaults in a payment of principal or interest
on the Securities, it shall pay interest on overdue principal and on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the rate per annum borne by the Securities, to the
extent lawful.
SECTION 2.13. CUSIP Number.
The Company in issuing the Securities will use one or more
"CUSIP" numbers and the Trustee shall use the appropriate CUSIP number in
notices of redemption or exchange as a convenience to Holders; provided,
however, that any such notice may state that no representation is made as to
the correctness or accuracy of the CUSIP number printed in the notice or on the
Securities, and that reliance may be placed only on the other identification
numbers printed on the Securities. The Company shall promptly notify the
Trustee of any changes in CUSIP numbers.
SECTION 2.14. Deposit of Moneys.
Prior to 10:00 a.m. New York City time on each Interest
Payment Date, Redemption Date, Purchase Date and the Maturity Date, the Company
shall deposit with the Paying Agent in immediately available funds money
sufficient to make cash payments, if any, due on such Interest Payment Date,
Redemption Date, Purchase Date or Maturity Date, as the case may be, in a
timely manner which permits the Paying Agent to remit payment to the Holders on
such Interest Payment Date, Redemption Date, Purchase Date or Maturity Date, as
the case may be.
SECTION 2.15. Book-Entry Provisions for Global Securities.
(a) The Global Securities initially shall (i) be registered
in the name of the Depository or the nominee of such Depository, (ii) be
delivered to the Trustee as custodian for such Depository and (iii) bear
legends as set forth in Exhibit B hereto.
Members of, or participants in, the Depository
("Participants") shall have no rights under this Indenture with respect to any
Global Security held on their behalf by the Depository, or the Trustee as its
custodian, or under such Global Security, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or impair, as between the Depository and Participants, the operation of
customary practices governing the exercise of the rights of a beneficial owner
of any Security.
(b) Transfers of Global Securities shall be limited to
transfers in whole, but not in part, to the Depository, its successors or their
respective nominees. Physical Securities shall be transferred to all
beneficial owners in exchange for their beneficial interests in Global
Securities if (i) the Depository notifies the Company
<PAGE> 31
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that it is unwilling or unable to continue as Depository for any Global
Security and a successor Depository is not appointed by the Company within 90
days of such notice or (ii) an Event of Default has occurred and is continuing
and the Registrar has received a request from the Depository to issue Physical
Securities.
(c) In connection with the transfer of Global Securities as
an entirety to beneficial owners pursuant to paragraph (b) of this Section
2.15, the Global Securities shall be deemed to be surrendered to the Trustee
for cancellation, and the Company shall execute, and the Trustee shall upon
written instructions from the Company authenticate and make available for
delivery, to each beneficial owner identified by the Depository in exchange for
its beneficial interest in the Global Securities, an equal aggregate principal
amount of Physical Securities of authorized denominations.
(d) The Holder of any Global Security may grant proxies and
otherwise authorize any Person, including Participants and Persons that may
hold interests through Participants, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
SECTION 2.16. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Physical Securities. When
Physical Securities are presented to the Registrar or co-Registrar with a
request:
(i) to register the transfer of the Physical Securities; or
(ii) to exchange such Physical Securities for an equal
principal amount of Physical Securities of other authorized
denominations,
the Registrar or co-Registrar shall register the transfer or make the exchange
as requested if the requirements under this Indenture as set forth in this
Section 2.16 for such transactions are met; provided, however, that the
Physical Securities presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instrument of
transfer in form satisfactory to the Registrar or co-Registrar, duly executed
by the Holder thereof or his attorney duly authorized in writing.
(b) Transfer and Exchange of Global Securities. The transfer
and exchange of Global Securities or beneficial interests therein shall be
effected through the Depository in accordance with this Indenture and the
procedures of the Depository therefor.
(c) Restrictions on Transfer and Exchange of Global
Securities. Notwithstanding any other provisions of this Indenture, a Global
Security may not be transferred as a whole except by the Depository to a
nominee of the Depository or by a nominee of the Depository to the Depository
or another nominee of the Depository or by the Depository or any such nominee
to a successor Depository or a nominee of such successor Depository.
(d) General. The Trustee shall have no obligation or duty to
monitor, determine or inquire as to compliance with any restrictions on
transfer imposed under this Indenture or under applicable law with respect to
any transfer of any interest in any Security (including any transfers between
or among Participants or beneficial owners of interest in any Global Security)
other than to require delivery of such certificates and other documentation or
evidence as are expressly required by, and to do so if and when expressly
required by the terms of, this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
<PAGE> 32
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The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 2.15 or this Section
2.16. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon
the giving of reasonable written notice to the Registrar.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee.
If the Company elects to redeem Securities pursuant to
paragraph 5 of the Securities at the applicable redemption price set forth
thereon, it shall notify the Trustee in writing of the Redemption Date and the
principal amount of Securities to be redeemed. The Company shall give such
notice to the Trustee at least 45 days before the Redemption Date (unless a
shorter notice shall be agreed to by the Trustee in writing), together with an
Officers' Certificate stating that such redemption will comply with the
conditions contained herein.
SECTION 3.02. Selection of Securities to Be Redeemed.
If less than all of the Securities are to be redeemed pursuant
to paragraph 5(a) or (b) of the Securities, the Trustee shall select the
Securities to be redeemed in compliance with the requirements of the principal
national securities exchange, if any, on which the Securities are listed or, if
the Securities are not then listed on a national securities exchange, on a pro
rata basis, by lot or by such other manner as the Trustee shall deem fair and
appropriate; provided, however, that (1) no Securities of a principal amount of
$1,000 or less shall be redeemed in part and (2) if a partial redemption is
made pursuant to the provisions of paragraph 5 of the Securities, selection of
the Securities or portions thereof for redemption shall be made by the Trustee
only on a pro rata basis or on as nearly a pro rata basis as is practicable
(subject to the procedures of the Depository), unless such method is otherwise
prohibited. The Trustee shall make the selection from the Securities then
outstanding, subject to redemption and not previously called for redemption.
The Trustee may select for redemption pursuant to paragraph
5(a) or (b) of the Securities portions of the principal amount of Securities
that have denominations equal to or larger than $1,000 principal amount.
Securities and portions of them the Trustee so selects shall be in amounts of
$1,000 principal amount or integral multiples thereof. Provisions of this
Indenture that apply to Securities called for redemption also apply to portions
of Securities called for redemption.
SECTION 3.03. Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption
Date, the Company shall mail a notice of redemption by first-class mail to each
Holder whose Securities are to be redeemed at such Holder's registered address;
provided, however, that notice of a redemption pursuant to paragraph 5(b) of
the Securities shall be mailed to each Holder whose Securities are to be
redeemed no later than 60 days following the consummation of the last Public
Equity Offering or Strategic Equity Investment resulting in gross cash proceeds
to the Company, when aggregated with all prior Public Equity Offerings and
Strategic Equity Investments, of at least $75.0 million.
<PAGE> 33
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Each notice of redemption shall identify the Securities to be
redeemed (including the CUSIP number thereon) and shall state:
(1) the Redemption Date;
(2) the redemption price;
(3) the name and address of the Paying Agent to which the
Securities are to be surrendered for redemption;
(4) that Securities called for redemption must be
surrendered to the Paying Agent to collect the redemption price;
(5) that, unless the Company defaults in making the
redemption payment, interest on Securities called for redemption
ceases to accrue on and after the Redemption Date and the only
remaining right of the Holders is to receive payment of the redemption
price upon surrender to the Paying Agent; and
(6) if any Security is being redeemed in part, the
portion of the principal amount of such Security to be redeemed and
that, after the Redemption Date, upon surrender of such Security, a
new Security or Securities in principal amount equal to the unredeemed
portion thereof will be issued.
At the Company's request, the Trustee shall give the notice of
redemption on behalf of the Company, in the Company's name and at the Company's
expense.
SECTION 3.04. Effect of Notice of Redemption.
Once a notice of redemption is mailed, Securities called for
redemption become due and payable on the Redemption Date and at the redemption
price. Upon surrender to the Paying Agent, such Securities shall be paid at the
redemption price, plus accrued interest thereon, if any, to the Redemption
Date, but interest installments whose maturity is on or prior to such
Redemption Date shall be payable to the Holders of record at the close of
business on the relevant Interest Record Date.
SECTION 3.05. Deposit of Redemption Price.
Prior to 10:00 a.m. New York City time on the Redemption Date,
the Company shall deposit with the Paying Agent (or if the Company is its own
Paying Agent, shall, on or before the Redemption Date, segregate and hold in
trust) money sufficient to pay the redemption price of and accrued interest, if
any, on all Securities to be redeemed on that date other than Securities or
portions thereof called for redemption on that date which have been delivered
by the Company to the Trustee for cancellation.
If any Security surrendered for redemption in the manner
provided in the Securities shall not be so paid on the Redemption Date due to
the failure of the Company to deposit with the Paying Agent money sufficient to
pay the redemption price thereof, the principal and accrued and unpaid
interest, if any, thereon shall, until paid or duly provided for, bear interest
as provided in Sections 2.12 and 4.01 with respect to any payment default.
<PAGE> 34
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SECTION 3.06. Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the
Trustee shall authenticate for the Holder a new Security equal in principal
amount to the unredeemed portion of the Security surrendered.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Securities.
The Company shall pay the principal of and interest on the
Securities in the manner provided in the Securities. An installment of
principal or interest shall be considered paid on the date due if the Trustee
or Paying Agent (other than the Company, a Subsidiary or an Affiliate of the
Company) holds on that date money designated for and sufficient to pay the
installment in full and is not prohibited from paying such money to the Holders
of the Securities pursuant to the terms of this Indenture.
The Company shall pay cash interest on overdue principal at
the same rate per annum borne by the Securities. The Company shall pay cash
interest on overdue installments of interest at the same rate per annum borne
by the Securities, to the extent lawful, as provided in Section 2.12.
SECTION 4.02. Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, The
City of New York, the office or agency required under Section 2.03. The
Company shall give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the address of the
Trustee set forth in Section 10.02 hereof. The Company hereby initially
designates the Trustee at its address set forth in Section 10.02 hereof as its
office or agency in The Borough of Manhattan, The City of New York, for such
purposes.
SECTION 4.03. Corporate Existence.
Subject to Article Five, the Company shall do or shall cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the corporate, partnership or other existence of
each Restricted Subsidiary in accordance with the respective organizational
documents of each such Restricted Subsidiary and the rights (charter and
statutory) and material franchises of the Company and the Restricted
Subsidiaries; provided, however, that the Company shall not be required to
preserve any such right or franchise, or the corporate existence of any
Restricted Subsidiary, if the Board of Directors of the Company shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and the Restricted Subsidiaries, taken as a whole, and
that the loss thereof is not, and will not be, adverse in any material respect
to the Holders; provided, further, however, that a determination of the Board
of Directors of the Company shall not be required in the event of a merger of
one or more Wholly Owned Restricted Subsidiaries of the Company with or into
another Wholly Owned Restricted Subsidiary of the Company or another Person, if
the surviving Person is a Wholly Owned Restricted Subsidiary of the Company
organized under the laws of the United States or a State thereof or of the
District of Columbia.
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SECTION 4.04. Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (1) all material taxes,
assessments and governmental charges levied or imposed upon the Company or any
Restricted Subsidiary or upon the income, profits or property of the Company or
any Restricted Subsidiary and (2) all lawful claims for labor, materials and
supplies which, in each case, if unpaid, might by law become a material
liability, or Lien upon the property, of the Company or any Restricted
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which appropriate provision has been made.
SECTION 4.05. Notice of Defaults.
(a) In the event that any Indebtedness of the Company or any
of its Subsidiaries is declared due and payable before its maturity because of
the occurrence of any default (or any event which, with notice or lapse of
time, or both, would constitute such a default) under such Indebtedness, the
Company shall promptly give written notice to a Trust Officer of the Trustee of
such declaration, the status of such default or event and what action the
Company is taking or proposes to take with respect thereto.
(b) Upon becoming aware of any Default, the Company shall
promptly deliver an Officers' Certificate to a Trust Officer of the Trustee
specifying the Default.
SECTION 4.06. Maintenance of Properties and Insurance.
(a) The Company shall cause all material properties owned by
or leased to it or any Restricted Subsidiary and used or useful in the conduct
of its business or the business of any Restricted Subsidiary to be maintained
and kept in normal condition, repair and working order and supplied with all
necessary equipment and shall cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary, so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section 4.06 shall prevent the Company or any
Restricted Subsidiary from discontinuing the use, operation or maintenance of
any of such properties, or disposing of any of them, if such discontinuance or
disposal is, in the judgment of the Board of Directors or of the board of
directors of the Restricted Subsidiary concerned, or of an officer (or other
agent employed by the Company or of any Restricted Subsidiary) of the Company
or such Restricted Subsidiary having managerial responsibility for any such
property, desirable in the conduct of the business of the Company or any
Restricted Subsidiary, and if such discontinuance or disposal is not adverse in
any material respect to the Holders.
(b) The Company shall maintain, and shall cause the
Restricted Subsidiaries to maintain, insurance with responsible carriers
against such risks and in such amounts, and with such deductibles, retentions,
self-insured amounts and co-insurance provisions, as are customarily carried by
similar businesses of similar size, including property and casualty loss, and
workers' compensation insurance.
SECTION 4.07. Compliance Certificate.
The Company shall deliver to the Trustee within 120 days after
the close of each fiscal year a certificate signed by the principal executive
officer, principal financial officer or principal accounting officer stating
that a review of the activities of the Company has been made under the
supervision of the signing officers
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with a view to determining whether a Default has occurred and whether or not
the signers know of any Default by the Company that occurred during such fiscal
year. If they do know of such a Default, the certificate shall describe all
such Defaults, their status and the action the Company is taking or proposes to
take with respect thereto. The first certificate to be delivered by the Company
pursuant to this Section 4.07 shall be for the fiscal year ending December 31,
1998.
SECTION 4.08. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury law or other law, which would prohibit or forgive the Company from
paying all or any portion of the principal of and/or interest, if any, on the
Securities as contemplated herein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of
this Indenture; and (to the extent that it may lawfully do so) the Company
hereby expressly waives all benefit or advantage of any such law, and covenants
that it shall not hinder, delay or impede the execution of any power herein
granted to the Trustee, but shall suffer and permit the execution of every such
power as though no such law had been enacted.
SECTION 4.09. Provision of Financial Information.
Whether or not the Company is subject to Section 13(a) or
15(d) of the Exchange Act, or any successor provision thereto, the Company
shall file with the SEC (if permitted by SEC practice and applicable law and
regulations) the annual reports, quarterly reports and other documents which
the Company would have been required to file with the SEC pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if the Company were
so required, such documents to be filed with the SEC on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required so to file such documents if the Company were so required. The
Company shall also in any event (a) within 15 days of each Required Filing Date
(whether or not permitted or required to be filed with the SEC) (i) transmit
(or cause to be transmitted) by mail to all Holders, as their names and
addresses appear in the Securities register, without cost to such Holders, and
(ii) file with the Trustee, copies of the annual reports, quarterly reports and
other documents which the Company is required to file with the SEC pursuant to
the preceding sentence, or, if such filing is not so permitted, information and
data of a similar nature, and (b) if, notwithstanding the preceding sentence,
filing such documents by the Company with the SEC is not permitted by SEC
practice or applicable law or regulations, promptly upon written request supply
copies of such documents to any Holder. Delivery of such reports, information
and documents to the Trustee is for informational purposes only and the
Trustee's receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates).
SECTION 4.10. Change of Control.
(a) Following the occurrence of a Change of Control (the date
of such occurrence being the "Change of Control Date"), the Company shall
notify the Holders of such occurrence in the manner prescribed by this
Indenture and shall, within 30 days after the Change of Control Date, make an
Offer to Purchase all Securities then outstanding at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. The Company's obligations may be
satisfied if a third party makes the Offer to Purchase in the manner, at the
times and otherwise in compliance with the requirements of this Indenture
applicable to an Offer to Purchase made by the Company and purchases all
Securities validly tendered and not withdrawn under such Offer to Purchase.
Each Holder shall be entitled to tender all or any
<PAGE> 37
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portion of the Securities owned by such Holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Security tendered
must be tendered in an integral multiple of $1,000 principal amount.
(b) On or prior to the Purchase Date specified in the Offer
to Purchase, the Company shall (i) accept for payment all Securities or
portions thereof validly tendered pursuant to the Offer, (ii) deposit with the
Paying Agent or, if the Company is acting as its own Paying Agent, segregate
and hold in trust as provided in Section 2.04, money sufficient to pay the
Purchase Price of all Securities or portions thereof so accepted and (iii)
deliver or cause to be delivered to the Trustee for cancellation all Securities
so accepted together with an Officers' Certificate stating the Securities or
portions thereof accepted for payment by the Company. The Paying Agent (or the
Company, if so acting) shall promptly mail or make available for delivery to
Holders of Securities so accepted, payment in an amount equal to the Purchase
Price for such Securities, and the Trustee shall promptly authenticate and mail
or make available for delivery to each Holder of Securities a new Security or
Securities equal in principal amount to any unpurchased portion of the Security
surrendered as requested by the Holder. Any Security not accepted for payment
shall be promptly mailed or delivered by the Company to the Holder thereof. The
Company shall publicly announce the results of the Offer on or as soon as
practicable after the Purchase Date.
(c) If the Company makes an Offer to Purchase, the Company
will comply with all applicable tender offer laws and regulations, including,
to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act,
and any other applicable Federal or state securities laws and regulations and
any applicable requirements of any securities exchange on which the Securities
are listed, and any violation of the provisions of this Indenture relating to
such Offer to Purchase occurring as a result of such compliance shall not be
deemed a Default.
SECTION 4.11. Limitation on Restricted Payments.
The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly:
(i) declare or pay any dividend or any other distribution on
any Equity Interests of the Company or any Restricted Group Member or
make any payment or distribution to the direct or indirect holders of
Equity Interests of the Company or any Restricted Group Member in
their capacities as such, other than (a) dividends, distributions and
payments made to the Company or any Restricted Group Member, (b)
dividends or distributions payable to any Person solely in Qualified
Equity Interests or in options, warrants or other rights to purchase
Qualified Equity Interests and (c) pro rata dividends or distributions
on Equity Interests of any Restricted Group Member held by Persons
other than the Company or any other Restricted Group Member; provided,
however, that the Company and any other Restricted Group Member
holding Equity Interests of such dividend or distribution-paying
Restricted Group Member shall receive such pro rata or greater
dividends or distributions as may be due to such other Restricted
Group Members at or prior to the payment of such pro rata dividends or
distributions to such Persons other than the Company or any other
Restricted Group Member;
(ii) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any Equity Interests of
any Restricted Group Member owned by any Affiliate of the Company,
other than (a) any such Equity Interests owned by the Company or any
Restricted Group Member; and (b) any Permitted Repurchase;
<PAGE> 38
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(iii) purchase, redeem, defease or retire for value, or make
any principal payment on, prior to any scheduled maturity, scheduled
repayment or scheduled sinking fund payment, any Subordinated
Indebtedness, other than any (a) Subordinated Indebtedness held by any
Restricted Group Member, (b) purchase, repurchase or acquisition of
Indebtedness in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in any case due within one
year of the date of acquisition and (c) prepayment of interest on the
Company's outstanding Senior Subordinated Convertible Bonds due 2000;
or
(iv) make any Investment (other than any Permitted Investment)
(any of the foregoing (other than any exception to any of the foregoing), a
"Restricted Payment"), unless
(a) no Default or Event of Default shall have occurred and be
continuing at the time of, or after giving effect to, such Restricted
Payment;
(b) immediately after giving effect to such Restricted
Payment, the Company would be able to Incur $1.00 of additional
Indebtedness under paragraph (a) of Section 4.12; and
(c) immediately after giving effect to such Restricted
Payment, the aggregate amount of all Restricted Payments (including
the Fair Market Value of any non-cash Restricted Payment) declared or
made on or after the Issue Date (excluding any Restricted Payment
described in clause (ii), (iii), (iv) or (vii) of the next paragraph)
does not exceed an amount equal to the sum of the following (the
"Basket"):
(1) (x) the Cumulative Operating Cash Flow
determined at the time of such Restricted Payment less (y)
150% of cumulative Adjusted Interest Expense determined for
the period (treated as one accounting period) commencing on
the first day of the first fiscal quarter following the Issue
Date and ending on the last day of the most recent fiscal
quarter immediately preceding the date of such Restricted
Payment for which consolidated financial information of the
Company is required to be available, plus
(2) the aggregate Net Proceeds received by the
Company either (x) as capital contributions to the Company
after the Issue Date or (y) from the issue and sale (other
than to any Restricted Group Member) of Qualified Equity
Interests after the Issue Date, other than any issuance and
sale of Qualified Equity Interests (A) financed, directly or
indirectly, using funds (I) borrowed from the Company or any
Restricted Group Member until and to the extent such borrowing
is repaid or (II) contributed, extended, guaranteed or
advanced by the Company or any Restricted Group Member
(including, without limitation, in respect of any employee
stock ownership or benefit plan), (B) to the extent the Net
Proceeds were used to Incur Indebtedness pursuant to clause
(xii) of paragraph (b) of Section 4.12 or (C) the proceeds of
which are used to effect any transaction permitted by clauses
(ii), (iii), (iv) or (vii) of the next paragraph, plus
(3) the aggregate amount by which Indebtedness
(other than the Company's outstanding Senior Subordinated
Convertible Bonds due 2000 (or any Permitted Refinancing
thereof)) of the Company or any Restricted Subsidiary is
reduced on the Company's balance sheet upon the conversion or
exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date into Qualified Equity Interests
(less the amount of any cash, or the fair value of property,
distributed by the Company or any Restricted Subsidiary upon
such conversion or exchange), plus
<PAGE> 39
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(4) in the case of the disposition or repayment of
any Investment that was treated as a Restricted Payment made
after the Issue Date, an amount (to the extent not included in
the computation of Cumulative Operating Cash Flow) equal to
the lesser of: (x) the return of capital with respect to such
Investment and (y) the amount of such Investment that was
treated as a Restricted Payment, in either case, less the cost
of the disposition of such Investment and net of taxes, plus
(5) with respect to any Unrestricted Group Member
that has been redesignated as a Restricted Group Member after
the Issue Date in accordance with Section 4.14, the Company's
proportionate interest in an amount equal to the excess of (x)
the total assets of such Restricted Group Member, valued on an
aggregate basis at the lesser of book value and Fair Market
Value, over (y) the total liabilities (other than liabilities
to the Company or any Restricted Group Member) of such
Restricted Group Member, determined in accordance with GAAP
(and provided that such amount shall not in any case exceed in
the case of any Restricted Group Member designated pursuant to
clause (A)(ii) of paragraph (a) of Section 4.14, the
Designation Amount with respect to such Restricted Group
Member when it was originally designated as an Unrestricted
Group Member), minus
(6) with respect to each Restricted Group Member
which has been designated as an Unrestricted Group Member
after the Issue Date in accordance with clause (A)(ii) of
paragraph (a) of Section 4.14, the greater of (x) $0 and (y)
the Designation Amount thereof (measured as of the date of
Designation), minus
(7) at any date, the outstanding amount of the
Designation Basket.
The foregoing provisions will not prevent (i) the payment of
any dividend or distribution on, or redemption of, Equity Interests within 60
days after the date of declaration of such dividend or distribution or the
giving of formal notice of such redemption, if at the date of such declaration
or giving of formal notice such payment or redemption would comply with the
provisions of this Indenture; (ii) the purchase, redemption, retirement or
other acquisition of any Equity Interests of the Company or any Restricted
Group Member in exchange for, or out of the net cash proceeds of the
substantially concurrent (A) common equity capital contribution to the Company
from any Person (other than a Restricted Group Member) or (B) issue and sale by
the Company (other than to a Restricted Group Member) of Qualified Equity
Interests of the Company; (iii) any Investment to the extent that the
consideration therefor consists of the net proceeds of the substantially
concurrent issue and sale (other than to a Restricted Group Member) of
Qualified Equity Interests; (iv) the purchase, redemption, retirement,
defeasance or other acquisition of Subordinated Indebtedness made in exchange
for, or out of the net cash proceeds of, a substantially concurrent issue and
sale (other than to a Restricted Group Member) of (x) Qualified Equity
Interests or (y) other Subordinated Indebtedness issued in a Permitted
Refinancing; (v) any Investment in a Person principally engaged in a
Telecommunications Business so long as after giving effect to each such
Investment thereto (A) Adjusted Total Controlled Assets is greater than 51% of
the Adjusted Total Assets and (B) any such Investment is not directly or
indirectly made with the proceeds of any Indebtedness Incurred under paragraph
(b)(v) or (b)(xii) of Section 4.12; (vi) other Restricted Payments in an amount
not to exceed $50.0 million so long as not more than $25.0 million of which is
Restricted Payments of the type described in clauses (i) or (ii) of the first
paragraph of this covenant; or (vii) Investments in a Person which has ceased
to be a Restricted Affiliate or ceases to observe any of the provisions of the
covenants applicable to it as a result of an Involuntary Event if (a) such
Investment is made with the proceeds of a substantially concurrent capital
contribution to the Company from any Person (other than a Restricted Group
Member), or sale (other than to any Restricted Group Member) of Qualified
Equity Interests of the Company, and (b) after such Invest-
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ment such Involuntary Event shall no longer continue and such Person shall be a
Restricted Affiliate; provided, however, that in the case of each of clauses
(ii), (iii), (iv), (v) (vi), and (vii), no Default or Event of Default shall
have occurred and be continuing or would arise therefrom (except, with respect
to clause (vii), a Default or Event of Default that will cease to exist
substantially contemporaneously with such Investment).
For purposes of clause (iv) of the first paragraph of this
covenant, the Company shall be deemed to have made an Investment not
constituting a Permitted Investment:
(i) at the date that any Restricted Group Member ceases to
be a Restricted Group Member for any reason (other than by virtue of a
Designation), including without limitation, by virtue of any
transaction permitted by clause (iii) of Section 4.19, in an amount
equal to the greater of (I) $0 and (II) the lesser of (A) the Fair
Market Value of the Equity Interests (or any other Investment) held by
the Company or any Restricted Group Member in any such Restricted
Group Member and (B) the excess of the Fair Market Value of the
aggregate amount of Investments made prior to such date in such
Restricted Group Member by the Company or any Restricted Group Member
(valued in each case at the time such Investment was made) over the
net reduction of such Investments; and
(ii) at the time that any Investment has ceased to be a
Permitted Investment pursuant to clause (j)(II) of the definition of
Permitted Investments, in an amount equal to the Fair Market Value of
such Investment at the time it was made.
SECTION 4.12. Limitation on Incurrence of Indebtedness.
(a) The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, Incur any Indebtedness
(including Acquired Indebtedness); provided, however, that the Company and any
Restricted Group Member may Incur Indebtedness if, at the time of and after
giving effect to such Incurrence, the Company's Debt to Annualized Operating
Cash Flow Ratio would be less than or equal to 6.0 to 1.0.
(b) The foregoing limitations of paragraph (a) of this
covenant will not apply to any of the following, each of which shall be given
independent effect:
(i) the Securities and Permitted Refinancings thereof;
(ii) indebtedness of the Company or any Restricted Group
Member to the extent outstanding on the date of this Indenture, and
Permitted Refinancings thereof;
(iii) indebtedness of the Company pursuant to the Senior
Credit Facility in an aggregate amount at any time outstanding not to
exceed $100.0 million;
(iv) Indebtedness of the Company or any Restricted Group
Member, in each case, to the extent that the proceeds of or credit
support provided by such Indebtedness is used to finance the cost
(including the cost of design, development, construction, installation
or integration) of network assets, equipment or inventory acquired by
the Company or any Restricted Group Member after the Issue Date or to
finance or support working capital or capital expenditures for a
Telecommunications Business, and Permitted Refinancings thereof;
<PAGE> 41
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(v) Indebtedness (including Acquired Indebtedness) of the
Company or any Restricted Group Member to the extent that the proceeds
of or credit support provided by such Indebtedness is used in
connection with the development, expansion or operation of a
Telecommunications Business or is used to finance (or is Incurred as
Acquired Indebtedness in connection with the consummation of) a
Telecommunications Acquisition (or is used to provide working capital
for, or to finance the construction of, the business or network
acquired), and, in each case, Permitted Refinancings thereof, but in
each case only to the extent that the aggregate amount of outstanding
Indebtedness of the Company and the Restricted Group Members
immediately after giving effect to the Incurrence of such Indebtedness
and the application of the proceeds therefrom does not exceed the
product of 2.0 and the Share Capital of the Company at the date of
Incurrence of such Indebtedness;
(vi) Acquired Indebtedness of the Company or any Restricted
Group Member Incurred in connection with the consummation of a
Telecommunications Acquisition, and, in each case, Permitted
Refinancings thereof, but in each case only to the extent that the
aggregate amount of such Acquired Indebtedness does not exceed the net
sum of the plant, property and equipment acquired by the Company or a
Restricted Group Member in such Telecommunications Acquisition as set
forth on the Latest Balance Sheet of the Person which is the other
party to such Telecommunications Acquisition;
(vii) (1) Indebtedness of any Restricted Group Member owed to
and held by the Company or any Restricted Group Member and (2)
Indebtedness of the Company owed to and held by any Restricted Group
Member, in each case which is unsecured and subordinated in right of
payment to the payment and performance of the Company's obligations
under the Securities; provided, however, that an Incurrence of
Indebtedness that is not permitted by this clause (vii) shall be
deemed to have occurred upon (x) any sale or other disposition of any
Indebtedness of the Company or any Restricted Group Member referred to
in this clause (vii) to any Person other than the Company or any
Restricted Group Member or (y) any Restricted Group Member that holds
Indebtedness of the Company or another Restricted Group Member ceasing
to be a Restricted Group Member;
(viii) Interest Rate Protection Obligations of the Company or
any Restricted Group Member relating to Indebtedness of the Company or
such Restricted Group Member, as the case may be (which Indebtedness
is otherwise permitted to be Incurred under this covenant); provided,
however, that the notional principal amount of such Interest Rate
Protection Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Rate Protection Obligations
relate;
(ix) Indebtedness of the Company or any Restricted Group
Member under Currency Agreements to the extent relating to (x)
Indebtedness of the Company or such Restricted Group Member, as the
case may be, and/or (y) obligations to purchase assets, properties or
services incurred in the ordinary course of business of the Company or
such Restricted Group Member, as the case may be; provided, however,
that such Currency Agreements do not increase the Indebtedness or
other obligations of the Company and the Restricted Group Members
outstanding other than as a result of fluctuations in foreign currency
exchange rates or by reason of fees, indemnities or compensation
payable thereunder;
(x) Indebtedness of the Company and/or any Restricted Group
Member in respect of performance bonds of the Company or any
Restricted Group Member or surety bonds provided by the Company or any
Restricted Group Member incurred in the ordinary course of business
and on ordinary business terms in connection with the construction or
operation of a Telecommunications Business;
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(xi) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations,
or from guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of the Company or any Restricted Group
Member pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Group
Member (other than guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Group Member for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by
the Company or any Restricted Group Member in connection with such
disposition;
(xii) Indebtedness of the Company or any Restricted Group
Member so long as the sum of (1) the aggregate amount of Indebtedness
Incurred and outstanding by the Company pursuant to this clause (xii)
and (2) the product of 2.0 and the aggregate amount of Indebtedness
Incurred and outstanding by the Restricted Group Members
(collectively) pursuant to this clause (xii) does not exceed the
product of 2.0 and (A) 100% of the Net Proceeds received by the
Company after the Issue Date from contributions of capital or the
issuance and sale of its Qualified Equity Interests to any Person
(other than any Restricted Group Member) and (B) 80% of the Net
Proceeds of property other than cash received by the Company after the
Issue Date from contributions of capital or the issuance and sale of
its Qualified Equity Interests to any Person (other than any
Restricted Group Member), in each case (A) and (B) only to the extent
that such Net Proceeds have not been used pursuant to clause (c)(2) of
the first paragraph of Section 4.11 to make a Restricted Payment;
provided, however, that no such Indebtedness may be Incurred pursuant
to this clause (xii) to the extent that such contributions to capital
or issuance and sale of Qualified Equity Interests were previously
included in the determination of Share Capital for purposes of
Incurring Indebtedness under clause (v) above of this paragraph (b) of
this covenant;
(xiii) in addition to the items referred to in clauses (i)
through (xii) above, Indebtedness of the Company or any Restricted
Group Member in an aggregate amount not to exceed $20.0 million at any
time outstanding; and
(xiv) guarantees by the Company of any Indebtedness of any
Restricted Group Member permitted to be Incurred by such Restricted
Group Member under this paragraph (b).
(c) For purposes of determining any particular amount of
Indebtedness under this covenant, guarantees, Liens or obligations with respect
to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included; provided,
however, that the foregoing shall not in any way be deemed to limit the
provisions of Section 4.18.
(d) For purposes of determining compliance with this
covenant, in the event that an item of Indebtedness may be Incurred through the
first paragraph of this covenant or by meeting the criteria of one or more of
the types of Indebtedness described in the second paragraph of this covenant
(or the definitions of the terms used therein), the Company, in its sole
discretion, may, at the time of such Incurrence, (i) classify such item of
Indebtedness under and comply with either of such paragraphs (or any of such
definitions), as applicable, (ii) classify and divide such item of Indebtedness
into more than one of such paragraphs (or definitions), as applicable, and
(iii) elect to comply with such paragraphs (or definitions), as applicable, in
any order.
(e) Notwithstanding any other provision of this covenant, the
maximum amount of Indebtedness that the Company or a Restricted Group Member
may Incur pursuant to this covenant shall not be deemed
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to be exceeded, with respect to any outstanding Indebtedness, due solely to the
result of fluctuations in the exchange rates of currencies.
SECTION 4.13. Limitations on Restrictions Affecting Restricted Group Members.
The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Group Member to (x) pay dividends or make any other
distributions to the Company or any other Restricted Group Member on its Equity
Interests or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Group Member, (y) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted Group
Member, or (z) transfer any of its properties or assets to the Company or any
other Restricted Group Member.
The foregoing shall not prohibit (a) any encumbrance or
restriction existing under or by reason of any agreement in effect on the Issue
Date, as any such agreement is in effect on such date or as thereafter amended
or supplemented but only if such encumbrance or restriction is no more
restrictive than that in the agreement being amended; (b) customary provisions
contained in an agreement that has been entered into for the sale or
disposition of all or substantially all of the Equity Interests or assets of a
Restricted Group Member; provided, however, that (x) such encumbrance or
restriction is applicable only to such Restricted Group Member (or the
applicable assets to be sold) and (y) such sale or disposition is made in
accordance with Section 4.16; (c) any encumbrance or restriction existing under
or by reason of applicable law; (d) customary provisions restricting subletting
or assignment of any lease governing any leasehold interest of any Restricted
Group Member; (e) covenants in purchase money obligations for property acquired
in the ordinary course of business restricting transfer of such property; (f)
covenants in security agreements securing Indebtedness of the Company or any
Restricted Group Member (to the extent that such Liens were otherwise incurred
in accordance with Section 4.15) that restrict the transfer of property subject
to such agreements; (g) any agreement or other instrument of a Person acquired
by the Company or any Restricted Group Member in existence at the time of such
acquisition, which encumbrance or restriction (x) is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the properties or assets of the Person so acquired, and (y) is not incurred in
connection with or in contemplation of such acquisition; (h) any encumbrance or
restriction contained in any agreement entered into after the Issue Date, so
long as such encumbrance or restriction is not materially more disadvantageous
to the Holders than the encumbrances and restrictions of the Company or any
Restricted Group Member in existence at the Issue Date; (i) any encumbrance or
restriction contained in any stockholders, joint venture or similar agreement,
so long as such encumbrance or restriction is not materially more
disadvantageous to the Holders than the encumbrances and restrictions contained
in comparable agreements entered into prior to the Issue Date by the Company or
a Restricted Group Member; (j) any encumbrance or restriction contained in any
Senior Credit Facility; or (k) any encumbrance or restriction contained in any
agreement entered into after the Issue Date for Indebtedness so long as (A)
such encumbrance or restriction is not more restrictive than that which is
customary in comparable financing agreements and (B) management of the Company
determines that such encumbrance or restriction will not materially impair the
Company's ability to make payments when due on the Securities.
Nothing contained in this covenant shall prevent the Company
or any Restricted Group Member from (i) creating, Incurring, assuming or
suffering to exist any Liens not prohibited by Section 4.15; or (ii)
restricting the sale or other disposition of property or assets of the Company
or any Restricted Group Member that secure Indebtedness of the Company or any
Restricted Group Member.
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SECTION 4.14. Designation of Unrestricted Group Members.
(a) The Company may designate any Restricted Group Member as
an "Unrestricted Group Member" under this Indenture (a "Designation") only if:
Either (A):
(i) no Default or Event of Default shall have occurred and
be continuing after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment
(other than a Permitted Investment) at the time of such Designation
(assuming the effectiveness of such Designation) pursuant to Section
4.11 in an amount (the "Designation Amount") equal to the Fair Market
Value of the Equity Interests of such Restricted Group Member owned
directly or indirectly by the Company on such date; and
(iii) if such Restricted Group Member is a Subsidiary of
Hermes Europe, simultaneously with such Designation, Hermes Europe
shall make a similar designation of such Subsidiary in accordance with
the terms of the Hermes Europe Senior Notes Indenture; or
(B):
(i) such Restricted Group Member is not in compliance with
one or more covenants under this Indenture that it is required to
comply with;
(ii) the Company has used its diligent best efforts to
procure compliance by such Restricted Group Member with the covenants
of this Indenture that such Restricted Group Member is required to
comply with;
(iii) the Company has used its diligent best efforts to cure
such noncompliance; and
(iv) the aggregate sum of (x) the Fair Market Value of all
Equity Interests owned directly or indirectly by the Company of all
Restricted Group Members which have been the subject of a Designation
pursuant to this clause (B) since the Issue Date and which Designation
has not been the subject of a Revocation (each such Fair Market Value
of the Equity Interests of any such Restricted Group Member to be the
Fair Market Value thereof at the date of each such Designation) plus
(y) the greater of (1) $0 and (2) the excess of the Fair Market Value
at the date of Designation pursuant to this clause (B) of the Equity
Interests of such Restricted Group Member owned directly or indirectly
by the Company over the Fair Market Value at the date of Revocation of
the status of such Restricted Group Member as an Unrestricted Group
Member does not exceed $25.0 million (such sum, at any date, the
"Designation Basket").
All Subsidiaries of Unrestricted Subsidiaries shall be
Unrestricted Group Members. On the Issue Date, the Company shall effect
Designations of each Subsidiary of Hermes Europe that Hermes Europe has
previously designated as an Unrestricted Subsidiary in accordance with terms of
the Hermes Europe Senior Notes Indenture.
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The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, at any time be liable for
any Indebtedness (other than any Senior Credit Facility) which provides that
the holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Group Member.
(b) The Company may revoke any Designation of a Subsidiary or
Affiliate as an Unrestricted Group Member (a "Revocation") only if:
(i) no Default or Event of Default shall have occurred and
be continuing at the time of and after giving effect to such
Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Group
Member outstanding immediately following such Revocation would, if
Incurred at such time, have been permitted to be Incurred for all
purposes of this Indenture; and
(iii) if such Subsidiary is a Subsidiary of Hermes Europe,
simultaneously with such Revocation, Hermes Europe shall make a
similar revocation with respect to such Subsidiary in accordance with
the terms of the Hermes Europe Senior Notes Indenture.
All Designations and Revocations must be evidenced by
resolutions of the Board of Directors of the Company, delivered to the Trustee
certifying compliance with the foregoing provisions.
SECTION 4.15. Limitation on Liens.
The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, Incur or suffer to exist
any Lien (other than any Permitted Lien) of any kind against or upon any of
their respective properties or assets now owned or hereafter acquired, or any
proceeds, income or profits therefrom, unless contemporaneously therewith or
prior thereto, (i) in the case of any Lien securing an obligation that ranks
pari passu with the Securities, effective provision is made to secure the
Securities equally and ratably with or prior to such obligation with a Lien on
the same collateral and (ii) in the case of any Lien securing an obligation
that is subordinated in right of payment to the Securities, effective provision
is made to secure the Securities with a Lien on the same collateral that is
prior to the Lien securing such subordinated obligation, in each case, for so
long as such obligation is secured by such Lien.
SECTION 4.16. Limitation on Asset Sales.
The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, make any Asset Sale, unless
(x) the Company or such Restricted Group Member, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets sold or otherwise disposed of and (y) at least 75% of such
consideration consists of (i) cash or Cash Equivalents, (ii) Replacement
Assets, (iii) publicly traded Equity Interests of a Person; provided, however,
that the Company or such Restricted Group Member shall sell (a "Monetization
Sale"), for cash or Cash Equivalents, such Equity Interests to a third Person
(other than to the Company or a Restricted Group Member) at a price not less
than the Fair Market Value thereof within 425 days of the consummation of such
Asset Sale, or (iv) any combination of the foregoing clauses (i) through (iii).
The amount of any (x) Indebtedness (other than any Subordinated Indebtedness)
of the Company or any Restricted Group Member that is actually assumed by the
transferee in such Asset Sale and from which the Company and the Restricted
Group Members are fully released shall be deemed to
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be cash for purposes of determining the percentage of cash consideration
received by the Company or such Restricted Group Member and (y) notes or other
similar obligations received by the Company or any Restricted Group Member from
such transferee that are converted, sold or exchanged within 365 days of the
related Asset Sale by the Company or any Restricted Group Member into cash
shall be deemed to be cash, in an amount equal to the net cash proceeds
realized upon such conversion, sale or exchange for purposes of determining the
percentage of cash consideration received by the Company or such Restricted
Group Member. Any Net Cash Proceeds from any Asset Sale or any Monetization
Sale that are not, within 425 days of the consummation of such Asset Sale or
Monetization Sale, (A) invested in Replacement Assets or (B) used to repay and
permanently reduce the commitments under Indebtedness of the Company or any
Restricted Group Member other than Subordinated Indebtedness or Indebtedness of
the Company (other than under the Senior Credit Facility) with a Weighted
Average Life to Maturity or stated final maturity longer than that of the
Securities shall constitute "Excess Proceeds" subject to disposition as
provided below.
Within 40 days after the aggregate amount of Excess Proceeds
equals or exceeds $10.0 million, the Company shall make an Offer to Purchase,
from all Holders, that aggregate principal amount of Securities as can be
purchased with the Security Portion of Excess Proceeds (as defined below) at a
price in cash equal to 100% of the outstanding principal amount thereof, plus
accrued and unpaid interest, if any, to any purchase date. To the extent that
the aggregate of the principal and accrued interest of Securities validly
tendered and not withdrawn pursuant to an Offer to Purchase is less than the
Excess Proceeds, the Company may use such surplus for general corporate
purposes. If the aggregate of the principal and accrued interest of Securities
validly tendered and not withdrawn by Holders thereof exceeds the amount of
Securities that can be purchased with the Security Portion of Excess Proceeds,
Securities to be purchased will be selected pro rata based on the aggregate
principal amount of Securities tendered by each Holder. Upon completion of an
Offer to Purchase, the amount of Excess Proceeds shall be reset to zero.
In the event that any other Indebtedness of the Company that
ranks pari passu with the Securities (the "Other Debt") requires an offer to
purchase to be made to repurchase such Other Debt upon the consummation of an
Asset Sale, the Company may apply the Excess Proceeds otherwise required to be
applied to an Offer to Purchase to offer to purchase such Other Debt and to an
Offer to Purchase so long as the amount of such Excess Proceeds applied to
purchase the Securities is not less than the Security Portion of Excess
Proceeds. With respect to any Excess Proceeds, the Company shall make the Offer
to Purchase in respect thereof at the same time as the analogous offer to
purchase is made pursuant to any Other Debt and the Purchase Date in respect
thereof shall be the same as the purchase date in respect thereof pursuant to
any Other Debt.
For purposes of this covenant, "Security Portion of Excess
Proceeds" means (1) if no Other Debt is being offered to be purchased, the
amount of the Excess Proceeds and (2) if Other Debt is being offered to be
purchased, the amount of the Excess Proceeds equal to the product of (x) the
Excess Proceeds and (y) a fraction the numerator of which is the aggregate
amount of all Securities tendered pursuant to the Offer to Purchase related to
such Excess Proceeds (the "Security Amount") and the denominator of which is
the sum of the Security Amount and the aggregate amount as of the relevant
purchase date of all Other Debt tendered and purchased pursuant to a concurrent
offer to purchase such Other Debt made at the time of such Offer to Purchase.
If and to the extent that the Excess Proceeds from any Asset
Sale of any Restricted Group Member cannot at such time be paid as a dividend
to the Company by virtue of the Hermes Europe Senior Note Indenture as in
effect on the issue date, such Excess Proceeds shall not be deemed to
constitute Excess Proceeds until such time as and to the extent that such
Excess Proceeds are permitted to be paid as a dividend thereunder.
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Notwithstanding the foregoing, to the extent that any or all
of the Net Cash Proceeds of any Asset Sale of assets based outside the United
States are prohibited or delayed by applicable local law from being repatriated
to the United States and such Net Cash Proceeds are not actually applied in
accordance with the foregoing paragraphs, the Company shall not be required to
apply the portion of such Net Cash Proceeds so affected but may permit the
applicable Restricted Group Members to retain such portion of the Net Cash
Proceeds so long as the applicable local law will not permit repatriation to
the United States (the Company hereby agreeing to cause the applicable
Restricted Group Member to promptly take all actions required by the applicable
local law to permit such repatriation) and once such repatriation of any such
affected Net Cash Proceeds is permitted under the applicable local law, such
repatriation will be immediately effected and such repatriated Net Cash
Proceeds will be applied in the manner set forth in this covenant as if the
Asset Sale had occurred on such date; provided, however, that to the extent
that the Company has determined in good faith that repatriation of any or all
of the Net Cash Proceeds of such Asset Sale would have a material adverse tax
cost consequence, the Net Cash Proceeds so affected may be retained by the
applicable Restricted Group Member for so long as such material adverse tax
cost event would continue.
In the event that the Company makes an Offer to Purchase the
Securities, the Company shall comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and
Rule 14e- 1 under, the Exchange Act, and any violation of the provisions of
this Indenture relating to such Offer to Purchase occurring as a result of such
compliance shall not be deemed a Default or an Event of Default.
SECTION 4.17. Limitation on Transactions with Affiliates.
The Company shall not, and shall not cause or permit any
Restricted Group Member to, directly or indirectly, conduct any business or
enter into any transaction or series of related transactions with or for the
benefit of any Affiliate, any holder of 5% or more of any class of Equity
Interests of the Company or any Restricted Group Member or any officer,
director or employee of the Company or any Restricted Group Member (each, an
"Affiliate Transaction"), unless such Affiliate Transaction is on terms that
are no less favorable to the Company or such Restricted Group Member, as the
case may be, than could reasonably be obtained at such time in a comparable
transaction with an unaffiliated third party. For any such transaction that
involves value in excess of $5.0 million, the Company shall deliver to the
Trustee an officers' certificate stating that a majority of the Disinterested
Directors has determined that the transaction satisfies the above criteria and
shall evidence such a determination by a Board Resolution delivered to the
Trustee. For any such transaction that involves value in excess of $20.0
million, the Company shall also obtain a written opinion from an Independent
Financial Advisor to the effect that such transaction is fair, from a financial
point of view, to the Company or such Restricted Group Member, as the case may
be.
Notwithstanding the foregoing, the restrictions set forth in
this covenant shall not apply to (i) transactions between or among the Company
and one or more Restricted Group Members or between or among Restricted Group
Members; (ii) customary directors' fees, indemnification and similar
arrangements, employee salaries, bonuses or employment agreements, compensation
or employee benefit arrangements and incentive arrangements with any officer,
director or employee of the Company or any Restricted Group Member entered into
in the ordinary course of business (including customary benefits thereunder);
(iii) transactions pursuant to agreements in effect on the Issue Date, as such
agreements are in effect on the Issue Date or as thereafter amended or
supplemented in a manner not adverse to the Holders; (iv) loans and advances to
officers, directors and employees of the Company or any Restricted Group Member
for travel, entertainment, housing, moving and other relocation expenses, in
each case made in the ordinary course of business and consistent with past
business practices; (v) any transaction between the Company or any Restricted
Group Member, on the one hand, and any
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Affiliate of the Company or any Restricted Group Member engaged primarily in a
Telecommunications Business, on the other hand, (x) in the ordinary course of
business and consistent with commercially reasonable practices or (y) approved
by a majority of the Disinterested Directors; and (vi) payment of dividends in
respect of Equity Interests of the Company or any Restricted Group Member
permitted under Section 4.11 above; and (vii) any transaction or series of
related transactions involving consideration or payments of less than $25,000.
SECTION 4.18. Limitation on Issuances of Guarantees by Restricted Group
Members.
The Company shall not cause or permit any Restricted Group
Member, directly or indirectly, to guarantee any Indebtedness of the Company
("Guaranteed Indebtedness") (other than any guarantee of the Senior Credit
Facility), unless (i) such Restricted Group Member simultaneously executes and
delivers a supplemental indenture to this Indenture pursuant to which such
Restricted Group Member guarantees (a "Guarantee") all of the Company's
obligations under the Securities and this Indenture and (ii) such Restricted
Group Member waives, and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Restricted Group Member as
a result of any payment by such Restricted Group Member under its Guarantee. If
the Guaranteed Indebtedness is (A) pari passu with the Securities, then the
guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Guarantee or (B) subordinated to the Securities, then the
guarantee of such Guaranteed Indebtedness shall be subordinated to the
Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Securities.
Any Guarantee by a Restricted Group Member shall provide by
its terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Equity Interests of the Company or any
Restricted Group Member in, or all or substantially all the assets of, such
Restricted Group Member (which sale, exchange or transfer is made in accordance
with this Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Guarantee, except a discharge or release by or
as a result of payment under such guarantee.
SECTION 4.19. Limitation on the Issuance and Sale of Equity Interests of
Restricted Group Members.
The Company shall not sell, and shall not cause or permit any
Restricted Group Member, directly or indirectly, to issue or sell, any Equity
Interests of any Restricted Group Member, except (i) to the Company or a
Restricted Group Member; (ii) issuances of director's qualifying shares or
sales to foreign nationals of shares of Equity Interests of a foreign
Restricted Group Member, to the extent required by applicable law; (iii) if,
immediately after giving effect to such issuance or sale, such Restricted Group
Member would no longer constitute a Restricted Group Member; provided, however,
any investment in such Person remaining after giving effect to such issuance or
sale would have been permitted to be made under Section 4.11 above, if made on
the date of such issuance or sale; (iv) issuances or other sales of common
stock (including options, warrants or other rights to purchase common stock) of
a Restricted Group Member; provided, however, the Net Cash Proceeds, if any, of
such sale are applied in accordance with Section 4.16 above; (v) issuances of
common stock for cash (including options, warrants or other rights to purchase
common stock) of a Restricted Group Member; provided, however, that the per
share price to the investor of each share of common stock sold in such issuance
shall not be less than the book value per share of such Restricted Group
Member's common stock prior to such issuance (after adjusting for the effect of
such issuance);(vi) issuances of Equity Interests pursuant to employee stock
option plans created in the ordinary course of business on ordinary business
terms; and (vii) issuances of Equity Interests by any Restricted Group Member
in a transaction in which the Company acquires at the same time sufficient
Equity Interests of such Restricted Group Member to at least maintain the same
percentage ownership interest it had prior to such transaction.
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SECTION 4.20. Limitations on Lines of Business.
The Company shall not, and shall not cause or permit any
Restricted Group Members to, directly or indirectly engage to any substantial
extent in any line or lines of business other than a Related Business.
SECTION 4.21. Additional Amounts.
All payments made by the Company under or with respect to the
Securities will be made free and clear of and without withholding or deduction
for or on account of any present of future Taxes imposed or levied by or on
behalf of any Taxing Authority within any jurisdiction in which the Company is
organized or engaged in business for tax purposes, unless the Company is
required to withhold or deduct Taxes by law or by the interpretation or
administration thereof. If the Company is required to withhold or deduct any
amount for or on account of Taxes imposed by a Taxing Authority within any
jurisdiction in which the Company is organized or engaged in business for tax
purposes, from any payment made under or with respect to the Securities, the
Company will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each holder of Securities
(including Additional Amounts) after such withholding or deduction will equal
the amount the holder would have received if such Taxes had not been withheld
or deducted; provided, however, that no Additional Amounts will be payable with
respect to any Tax that would not have been imposed, payable or due (i) but for
the existence of any present or former connection between the holder (or the
beneficial owner of, or person ultimately entitled to obtain an interest in,
such Securities) and the jurisdiction in which the Company is organized or
engaged in business for tax purposes other than the mere holding of the
Securities; (ii) but for the failure to satisfy any certification,
identification or other reporting requirements whether imposed by statute,
treaty, regulation or administrative practice, provided that the Company has
delivered a request to the holder to comply with such requirements at least 30
days prior to the date by which such compliance is required; (iii) if the
presentation of Securities (where presentation is required) for payment has
occurred within 30 days after the date such payment was due and payable or was
duly provided for, whichever is later; or (iv) if the beneficial owner of, or
person ultimately entitled to obtain an interest in, such Securities had been
the holder of the Securities and would not be entitled to the payment of
Additional Amounts (excluding the impact of the book-entry procedures described
in Section 2.15). In addition, Additional Amounts will not be payable with
respect to any Tax which is payable otherwise than by withholding from payments
of, or in respect of principal of, or any interest on, the Securities.
SECTION 4.22. Deposit of Funds with Escrow Agent.
(a) On the Issue Date, the Company shall deposit with the
Escrow Agent funds that together with the proceeds from the investment thereof
will be sufficient to pay the first four scheduled interest payments on the
Securities (excluding any Additional Amounts or Additional Interest). All
Escrow Collateral shall be held in the Escrow Account until permitted to be
disbursed pursuant to the Escrow Agreement and then shall be disbursed strictly
in accordance with the terms thereof.
(b) Pending release of the Escrow Funds as provided in the
Escrow Agreement, the Escrow Funds will be invested in Cash Equivalents as
specifically directed in writing by the Company. Any interest or other profit
resulting from such investment will be deposited in the Escrow Account.
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ARTICLE FIVE
MERGERS; SUCCESSOR CORPORATION
SECTION 5.01. Mergers, Sale of Assets, etc.
The Company shall not consolidate with or merge with or into
(whether or not the Company is the Surviving Person) any other Person and the
Company shall not, and shall not cause or permit any Restricted Group Member
to, sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the property and assets of the Company and the Restricted
Group Members, taken as a whole, to any Person or Persons (other than any
Wholly Owned Restricted Subsidiary), in each case, in a single transaction or
series of related transactions, unless: (i) either (x) the Company shall be the
Surviving Person or (y) the Surviving Person (if other than the Company) shall
be a corporation organized and validly existing under the laws of Bermuda, the
British Virgin Islands, Netherlands Antilles, Canada, any country which is a
member of the European Union or the United States of America or any State
thereof or the District of Columbia, and shall, in any such case, expressly
assume by a supplemental indenture, the due and punctual payment of the
principal of and interest on the Securities and the performance and observance
of every covenant of this Indenture and the Escrow Agreement to be performed or
observed on the part of the Company; (ii) immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing; and (iii) other than in the case of sale, conveyance, assignment,
transfer, lease or other disposition of all or substantially all of the
property and assets of the Company and the Restricted Group Members to any
Restricted Subsidiary, immediately after giving effect to such transaction, the
Debt to Annualized Operating Cash Flow Ratio of the Surviving Person (as the
Company) would be less than the Debt to Annualized Operating Cash Flow Ratio of
the Company immediately prior to such transaction.
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all the properties and assets of one or
more Restricted Group Members the Equity Interests of which constitutes all or
substantially all the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all the properties and assets of the
Company.
SECTION 5.02. Successor Corporation Substituted.
In the event of any transaction (other than a lease) described
in and complying with the conditions listed in Section 5.01 in which the
Company is not the Surviving Person and the Surviving Person is to assume all
the Obligations of the Company under the Securities, this Indenture and the
Escrow Agreement pursuant to a supplemental indenture, such Surviving Person
shall succeed to, and be substituted for, and may exercise every right and
power of, the Company, and the Company shall be discharged from its Obligations
under the Securities, this Indenture and the Escrow Agreement.
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ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.
The occurrence of any of the following will be an "Event of
Default" under this Indenture:
(a) failure to pay principal of any Security when due;
(b) failure to pay any interest on any Security when due,
continued for 30 days or more;
(c) failure to pay on the Purchase Date the Purchase Price
for any Security validly tendered pursuant to any Offer to Purchase;
(d) failure to perform or comply with any of the provisions
described under Section 5.01;
(e) failure to perform any other covenant, warranty or
agreement of the Company under this Indenture or the Escrow Agreement
or in the Securities continued for 30 days or more after written
notice to the Company by the Trustee or Holders of at least 25% in
aggregate principal amount of the outstanding Securities; provided,
however, that a default or breach of a covenant or agreement arising
from a Restricted Affiliate ceasing to observe any covenant applicable
to it resulting from an Involuntary Event shall not constitute an
Event of Default unless such Involuntary Event continues for 90 days;
(f) there shall be, with respect to any issue or issues of
Indebtedness of the Company or any Significant Restricted Group Member
having an outstanding principal amount of $10.0 million or more in the
aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (x) an event of
default that has caused the holders thereof (or their representative)
(I) to declare such Indebtedness to be due and payable prior to its
scheduled maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within 45
days following such acceleration and/or (II) to commence judicial
proceedings to foreclose upon, or to exercise remedies under
applicable law or applicable security documents to take ownership of,
the property or assets securing such Indebtedness and/or (y) the
failure to make a principal payment at the final fixed maturity and
such defaulted payment shall not have been made, waived or extended
within 45 days of such payment default;
(g) the rendering of a final judgment or judgments (not
covered by insurance) against the Company or any Significant
Restricted Group Member in an amount of $10.0 million or more which
remains undischarged or unstayed for a period of 60 consecutive days;
(h) the Company or any Significant Restricted Group Member
pursuant to or within the meaning of any Bankruptcy Law:
(1) admits in writing its inability to pay its debts
generally as they become due,
(2) commences a voluntary case or proceeding,
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(3) consents to the entry of an order for relief against
it in an involuntary case or proceeding,
(4) consents or acquiesces in the institution of a
bankruptcy or insolvency proceeding against it,
(5) consents to the appointment of a Custodian of it or
for all or substantially all of its property, or
(6) makes a general assignment for the benefit of its
creditors, or any of them takes any action to authorize or effect any
of the foregoing;
(i) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(1) is for relief against the Company or any Significant
Restricted Group Member in an involuntary case or proceeding,
(2) appoints a Custodian of the Company or any
Significant Restricted Group Member or for all or substantially all of
its property, or
(3) orders the liquidation of the Company or any
Significant Restricted Group Member, and in each case the order or
decree remains unstayed and in effect for 60 days; provided, however,
that if the entry of such order or decree is appealed and dismissed on
appeal, then the Event of Default hereunder by reason of the entry of
such order or decree shall be deemed to have been cured; or
(j) the Company shall challenge the Lien on the Escrow
Collateral under the Escrow Agreement prior to such time as the Escrow
Collateral is to be released to the Company, or the Trustee (on behalf
of the Holders) shall fail to have a first priority perfected security
interest in Escrow Collateral.
The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar Federal, state or foreign law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law.
The Trustee shall, within 30 days after receiving actual
notice of any Default or Event of Default with respect to the Securities, give
the Holders notice of all uncured Defaults thereunder known to it; provided,
however, that, except in the case of an Event of Default in payment with
respect to the Securities or a Default or Event of Default in complying with
Section 5.01, the Trustee shall be protected in withholding such notice if and
so long as a committee of its Trust Officers in good faith determines that the
withholding of such notice is in the interest of the Holders.
SECTION 6.02. Acceleration.
If an Event of Default with respect to the Securities (other
than an Event of Default specified in clause (h) or (i) of Section 6.01 with
respect to the Company) occurs and is continuing, the Trustee or the Holders of
at least 25% in aggregate principal amount of the outstanding Securities by
notice in writing to the Company may declare the unpaid principal of (and
premium, if any) and accrued interest to the date of acceleration on all the
outstanding Securities to be due and payable immediately and, upon any such
declaration, such
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principal amount (and premium, if any) and accrued interest, notwithstanding
anything contained in this Indenture or the Securities to the contrary, will
become immediately due and payable.
If an Event of Default specified in clause (h) or (i) of
Section 6.01 with respect to the Company occurs, all unpaid principal of and
accrued interest on all outstanding Securities shall ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
After a declaration of acceleration, but before a judgment or
decree of the money due in respect of the Securities has been obtained, the
Holders of not less than a majority in aggregate principal amount of the
Securities then outstanding by written notice to the Trustee may rescind an
acceleration and its consequences if all existing Events of Default (other than
the nonpayment of principal of and interest on the Securities which has become
due solely by virtue of such acceleration) have been cured or waived and if the
rescission would not conflict with any judgment or decree. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
No Holder will have any right to institute any proceeding with
respect to this Indenture or for any remedy thereunder, unless the Trustee (i)
shall have failed to act for a period of 60 days after receiving written notice
of a continuing Event of Default by such Holder and a request to act by Holders
of at least 25% in aggregate principal amount at maturity of Securities
outstanding, (ii) shall have been offered indemnity reasonably satisfactory to
it and (iii) shall not have received from the Holders of a majority in
aggregate principal amount at maturity of the outstanding Securities a
direction inconsistent with such request. However, such limitations do not
apply to a suit instituted by a Holder of any Security for enforcement of
payment of the principal of or interest on such Security on or after the due
date therefor (after giving effect to the grace period specified in clause (b)
of the first paragraph of this Article Six).
SECTION 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy by proceeding at law or in equity to collect
the payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities, this Indenture or the Escrow
Agreement.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy maturing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative to the extent permitted by law.
Upon a declaration of acceleration of the Securities in
accordance with Section 6.02, the Trustee shall foreclose on all Escrow
Collateral and take all other actions permitted of a secured party under the
UCC or otherwise.
SECTION 6.04. Waiver of Past Default.
Subject to Sections 2.09, 6.07 and 9.02, prior to the
declaration of acceleration of the Securities, the Holders of not less than a
majority in aggregate principal amount of the outstanding Securities by written
notice to the Trustee may waive an existing Default and its consequences,
except a Default in the payment of principal of or interest on any Security as
specified in Section 6.01(a), (b) or (c) or a Default in respect of any term or
provision of this Indenture that may not be amended or modified without the
consent of each Holder
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affected as provided in Section 9.02. The Company shall deliver to the Trustee
an Officers' Certificate stating that the requisite percentage of Holders have
consented to such waiver and attaching copies of such consents. In case of any
such waiver, the Company, the Trustee and the Holders shall be restored to
their former positions and rights hereunder and under the Securities,
respectively. This paragraph of this Section 6.04 shall be in lieu of Section
316(a)(1)(B) of the TIA and such Section 316(a)(1)(B) of the TIA is hereby
expressly excluded from this Indenture and the Securities, as permitted by the
TIA.
Upon any such waiver, such Default shall cease to exist and be
deemed to have been cured and not to have occurred, and any Event of Default
arising therefrom shall be deemed to have been cured and not to have occurred
for every purpose of this Indenture and the Securities, but no such waiver
shall extend to any subsequent or other Default or impair any right consequent
thereon.
SECTION 6.05. Control by Majority.
Subject to Section 2.09, the Holders of a majority in
principal amount of the outstanding Securities may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with law, this Indenture or the Escrow
Agreement, that the Trustee determines may be unduly prejudicial to the rights
of another Securityholder, or that may involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee which is not inconsistent with such direction. In the
event the Trustee takes any action or follows any direction pursuant to this
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against any loss or expense caused by taking such action
or following such direction. This Section 6.05 shall be in lieu of Section
316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of the TIA is hereby
expressly excluded from this Indenture and the Securities, as permitted by the
TIA.
SECTION 6.06. Limitation on Suits.
A Securityholder may not pursue any remedy with respect to
this Indenture or the Securities unless:
(i) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal
amount of the outstanding Securities make a written request to the
Trustee to pursue a remedy;
(iii) such Holder or Holders offer and, if requested, provide
to the Trustee indemnity reasonably satisfactory to the Trustee
against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 60
days after receipt of the request; and
(v) during such 60-day period the Holders of a majority in
principal amount of the outstanding Securities (excluding Affiliates
of the Company) do not give the Trustee a direction which, in the
opinion of the Trustee, is inconsistent with the request.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
such other Securityholder.
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SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder to receive payment of principal of or interest on a
Security, on or after the respective due dates therefor, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default in payment of principal or interest
specified in Section 6.01(a), (b) or (c) occurs and is continuing, the Trustee
may recover judgment in its own name and as trustee of an express trust against
the Company or any other obligor on the Securities for the whole amount of
principal and accrued interest remaining unpaid, together with interest overdue
on principal and to the extent that payment of such interest is lawful,
interest on overdue installments of interest, in each case at the rate per
annum borne by the Securities and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholders allowed in any judicial proceedings relative to the Company (or
any other obligor upon the Securities), its creditors or its property and shall
be entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceedings is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent
and counsel, and any other amounts due the Trustee under Section 7.07. Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.
SECTION 6.10. Priorities.
If the Trustee collects any money or property pursuant to this
Article Six or the Escrow Agreement, it shall pay out the money or property in
the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to Holders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
Third: to the Company.
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The Trustee, upon prior written notice to the Company, may fix
a record date and payment date for any payment to Securityholders pursuant to
this Section 6.10.
SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees and expenses, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section 6.11 shall not apply to a suit by the
Trustee, a suit by a Holder or group of Holders of more than 10% in aggregate
principal amount of the outstanding Securities, or to any suit instituted by
any Holder for the enforcement or the payment of the principal or interest on
any Securities on or after the respective due dates therefor.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If a Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.
(b) Except during the continuance of a Default:
(1) The Trustee shall not be liable except for the
performance of such duties as are specifically set forth herein; and
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions conforming to the requirements of this Indenture or the
Escrow Agreement; however, in the case of any such certificates or
opinions which by any provision hereof are specifically required to be
furnished to the Trustee, the Trustee shall examine such certificates
and opinions to determine whether or not they conform to the
requirements of this Indenture or the Escrow Agreement.
(c) The Trustee shall not be relieved from liability for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph
(b) of this Section 7.01;
(2) The Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
(3) The Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
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(d) No provision of this Indenture or the Escrow Agreement
shall require the Trustee to expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its duties hereunder or to
take or omit to take any action under this Indenture or take any action at the
request or direction of Holders if it shall have reasonable grounds for
believing that repayment of such funds is not assured to it or it does not
receive from such Holders an indemnity or security satisfactory to it in its
sole discretion against such risk, liability, loss, fee or expense which might
be incurred by it in compliance with such request or direction.
(e) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section
7.01.
(f) The Trustee shall not be liable for interest on any money
received by it. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
Subject to Section 7.01:
(a) The Trustee shall conclusively rely on any document
believed by it to be genuine and to have been signed or presented by the proper
person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate and/or an Opinion of Counsel, which shall
conform to the provisions of Section 10.05. The Trustee shall not be liable for
any action it takes or omits to take in good faith in reliance on such
certificate or opinion.
(c) The Trustee may act through attorneys and agents of its
selection and shall not be responsible for the misconduct or negligence of any
agent or attorney (other than an agent who is an employee of the Trustee)
appointed with due care.
(d) The Trustee shall not be liable for any action it takes
or omits to take in good faith which it reasonably believes to be authorized or
within its rights or powers.
(e) The Trustee may consult with counsel of its selection and
the advice or opinion of such counsel as to matters of law shall be full and
complete authorization and protection from liability in respect of any action
taken, omitted or suffered by it hereunder in good faith and in accordance with
the advice or opinion of such counsel.
(f) Any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution.
(g) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture or the Escrow Agreement
at the request or direction of any of the Securityholders pursuant to this
Indenture, unless such Securityholders shall have offered to the Trustee
security or indemnity satisfactory to the Trustee against the costs, expenses
and liabilities which might be incurred by it in compliance with such request
or direction.
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(h) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled
to examine the books, records and premises of the Company, personally or by
agent or attorney at the sole cost of the Company and shall incur no liability
or additional liability of any kind by reason of such inquiry or investigation.
(i) The Trustee shall not be deemed to have notice of any
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless the Trustee shall have received written notice thereof at the
Corporate Trust Office of the Trustee, and such notice references the
Securities (including CUSIP Number) and this Indenture.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Securities and may otherwise deal with the Company or
its Affiliates with the same rights it would have if it were not Trustee,
subject to Section 7.10 hereof. Any Agent may do the same with like rights.
However, the Trustee is subject to Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Escrow
Agreement or the Securities, it shall not be accountable for the Company's use
of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in this Indenture or any document issued in connection
with the sale of Securities or any statement in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults.
If a Default occurs and is continuing and the Trustee actually
knows of such Default, the Trustee shall mail to each Securityholder notice of
the Default within 30 days after the occurrence thereof. Except in the case of
a Default in payment of principal of or interest on any Security or a Default
in complying with any of the provisions of the Escrow Agreement, the Trustee
may withhold the notice if and so long as a committee of its Trust Officers in
good faith determines that withholding the notice is in the interest of
Securityholders. This Section 7.05 shall be in lieu of the proviso to Section
315(b) of the TIA and such proviso to Section 315(b) of the TIA is hereby
expressly excluded from this Indenture and the Securities, as permitted by the
TIA.
SECTION 7.06. Reports by Trustee to Holders.
If required by TIA Section 313(a), within 60 days after each
September 1 beginning with September 1, 1998, the Trustee shall mail to each
Securityholder a report dated as of such September 1 that complies with TIA
Section 313(a). The Trustee also shall comply with TIA Section 313(b), (c) and
(d).
A copy of each such report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange, if any, on
which the Securities are listed.
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The Company shall promptly notify the Trustee in writing if
the Securities become listed on any stock exchange or of any delisting thereof.
SECTION 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time such
compensation as the Company and the Trustee shall from time to time agree in
writing for its services. The Trustee's compensation shall not be limited by
any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, expenses
and advances (including fees, disbursements and expenses of its agents and
counsel) incurred or made by it in addition to the compensation for its
services except any such disbursements, expenses and advances as may be
attributable to the Trustee's negligence or bad faith. Such expenses shall
include the reasonable compensation, disbursements and expenses of the
Trustee's agents, accountants, experts and counsel and any taxes or other
expenses incurred by a trust created pursuant to Section 8.01 hereof.
The Company shall indemnify the Trustee, its agents and
officers, for, and hold it harmless against any and all loss, damage, claims,
liability or expense, including taxes (other than franchise taxes imposed on
the Trustee and taxes based upon, measured by or determined by the income of
the Trustee), arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder, except to
the extent that such loss, damage, claim, liability or expense is due to its
own negligence or bad faith. The Trustee shall notify the Company promptly of
any claim asserted against the Trustee for which it may seek indemnity.
However, the failure by the Trustee to so notify the Company shall not relieve
the Company of its obligations hereunder. The Company shall defend the claim
and the Trustee shall cooperate in the defense (and may employ its own counsel)
at the Company's expense; provided, however, that the Company's reimbursement
obligation with respect to counsel employed by the Trustee will be limited to
the reasonable fees and expenses of such counsel.
The Company need not pay for any settlement made without its
written consent, which consent shall not be unreasonably withheld. The Company
need not reimburse any expense or indemnify against any loss or liability
incurred by the Trustee as a result of the material violation of this Indenture
by the Trustee.
To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a Lien prior to the Securities against all money
or property held or collected by the Trustee, in its capacity as Trustee,
except money or property held in trust to pay principal of or interest on
particular Securities or the Purchase Price or redemption price of any
Securities to be purchased or pursuant to an Offer to Purchase or redeemed.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(h) or (i) occurs, the expenses
(including the reasonable fees and expenses of its agents and counsel) and the
compensation for the services shall be preferred over the status of the Holders
in a proceeding under any Bankruptcy Law and are intended to constitute
expenses of administration under any Bankruptcy Law. The Company's obligations
under this Section 7.07 and any claim arising hereunder shall survive the
resignation or removal of any Trustee, the discharge of the Company's
obligations pursuant to Article Eight and any rejection or termination under
any Bankruptcy Law, and the termination of this Indenture.
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SECTION 7.08. Replacement of Trustee.
The Trustee may resign at any time by so notifying the Company
in writing. The Holders of a majority in principal amount of the outstanding
Securities may remove the Trustee by so notifying the Trustee and the Company
in writing and may appoint a successor Trustee with the Company's consent. The
Company may at any time, other than during the existence of a Default or an
Event of Default, remove the Trustee by Company Order given at least 30 days
prior to the date of the proposed removal.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the Securities may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. As promptly as
practicable after that, the retiring Trustee shall transfer, after payment of
all sums then owing to the Trustee pursuant to Section 7.07, all property held
by it as Trustee to the successor Trustee, subject to the Lien provided in
Section 7.07, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have the rights, powers and duties
of the Trustee under this Indenture. A successor Trustee shall mail notice of
its succession to each Securityholder.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of at least 10% in principal amount of the outstanding
Securities may petition, at the expense of the Company, any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this
Section 7.08, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation or banking corporation, the resulting, surviving or transferee
corporation or banking corporation without any further act shall be the
successor Trustee.
SECTION 7.10. Eligibility; Disqualification.
This Indenture shall always have a Trustee which shall be
eligible to act as Trustee under TIA Sections 310(a)(1) and 310(a)(2). The
Trustee shall have a combined capital and surplus of at least $50,000,000 as
set forth in
its most recent published annual report of condition. If the Trustee has or
shall acquire any "conflicting interest" within the meaning of TIA Section
310(b), the Trustee and the Company shall comply with the provisions of TIA
Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which
other securities or certificates of interest or participation in other
securities of the Company are outstanding if the requirements for such
exclusion set forth in TIA Section 310(b)(1) are met. If at
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any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 7.10, the Trustee shall resign immediately in the
manner and with the effect hereinbefore specified in this Article Seven.
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA Section 311(a), excluding
any creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.
SECTION 7.12. Trustee's Application for Instructions from the Company.
Any application by the Trustee for written instructions from
the Company may, at the option of the Trustee, set forth in writing any action
proposed to be taken or omitted by the Trustee under this Indenture and the
date on and/or after which such action shall be taken or such omission shall be
effective. The Trustee shall not be liable for any action taken by, or
omission of, the Trustee in accordance with a proposal included in such
application on or after the date specified in such application (which date
shall not be less than three Business Days after the date any officer of the
Company actually receives such application, unless any such officer shall have
consented in writing to any earlier date) unless prior to taking any such
action (or the effective date in the case of an omission), the Trustee shall
have received written instructions in response to such application specifying
the action to be taken or omitted.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations.
The Company may terminate its substantive obligations in
respect of the Securities by delivering all outstanding Securities to the
Trustee for cancellation and paying all sums payable by it on account of
principal of and interest on all Securities or otherwise. In addition to the
foregoing, the Company may terminate its obligation under Sections 4.04, 4.06,
4.08, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19 and 4.20 (and
no Default with respect to such Sections under Section 6.01(c) shall thereafter
apply), by (i) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or U. S. Government Obligations sufficient (without
reinvestment) to pay all remaining indebtedness on the Securities at maturity
or upon earlier redemption, (ii) delivering to the Trustee either an Opinion of
Counsel or a ruling directed to the Trustee from the Internal Revenue Service
to the effect that the Holders of the Securities will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
termination of obligations, (iii) delivering to the Trustee an Opinion of
Counsel to the effect that the Company's exercise of its option under this
paragraph will not result in any of the Company, the Trustee or the trust
created by the Company's deposit of funds pursuant to this provision becoming
or being deemed to be an "investment company" under the Investment Company Act
of 1940, as amended (the "Investment Company Act"), and (iv) delivering to the
Trustee an Officers' Certificate and an Opinion of Counsel each stating
compliance with all conditions precedent provided for herein. In addition, the
Company may, provided that no Default or Event of Default has occurred and is
continuing or would arise therefrom (or, with respect to a Default specified in
Section 6.01(h) or (i), occurs at any time on or prior to the 91st calendar day
after the date of such deposit (it being understood that this condition shall
not be deemed satisfied until after such 91st day)), terminate all of its
substantive obligations in respect of the Securities (including
<PAGE> 62
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its obligations to pay the principal of and interest on the Securities) by (i)
depositing with the Trustee, under the terms of an irrevocable trust agreement,
money or U.S. Government Obligations sufficient (without reinvestment) to pay
all remaining indebtedness on the Securities at maturity or upon earlier
redemption, (ii) delivering to the Trustee either a ruling directed to the
Trustee from the Internal Revenue Service to the effect that the Holders of the
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of obligations or an
Opinion of Counsel addressed to the Trustee based upon such a ruling or based
on a change in the applicable Federal tax law since the date of this Indenture
to such effect, (iii) delivering to the Trustee an Opinion of Counsel to the
effect that the Company's exercise of its option under this paragraph will not
result in any of the Company, the Trustee or the trust created by the Company's
deposit of funds pursuant to this provision becoming or being deemed to be an
"investment company" under the Investment Company Act and (iv) delivering to
the Trustee an Officers' Certificate and an Opinion of Counsel each stating
compliance with all conditions precedent provided for herein.
Notwithstanding the foregoing paragraph, the Company's
obligations under Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 2.12, 2.13
and 4.01 (but not with respect to termination of substantive obligations
pursuant to the third sentence of the foregoing paragraph), 4.02, 7.07, 7.08,
8.03 and 8.04 shall survive until the Securities are no longer outstanding.
Thereafter the Company's obligations in Sections 7.07, 8.03 and 8.04 shall
survive.
After such delivery or irrevocable deposit and delivery of an
Officers' Certificate and Opinion of Counsel, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture except for those surviving obligations specified
above.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the U. S. Government
Obligations deposited pursuant to this Section 8.01 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding
Securities.
SECTION 8.02. Application of Trust Money.
The Trustee shall hold in trust money or U. S. Government
Obligations deposited with it pursuant to Section 8.01, and shall apply the
deposited money and the money from United States Government Obligations in
accordance with this Indenture solely to the payment of principal of and
interest on the Securities.
SECTION 8.03. Repayment to Company.
Subject to Sections 7.07 and 8.01, the Trustee shall promptly
pay to the Company upon written request any excess money held by it at any
time. The Trustee shall pay to the Company upon written request any money held
by it for the payment of principal or interest that remains unclaimed for two
years; provided, however, that the Trustee before being required to make any
payment may at the expense of the Company cause to be published once in a
newspaper of general circulation in The City of New York or mail to each Holder
entitled to such money notice that such money remains unclaimed and that, after
a date specified therein which shall be at least 30 days from the date of such
publication or mailing, any unclaimed balance of such money then remaining
shall be repaid to the Company. After payment to the Company, Securityholders
entitled to money must look to the Company for payment as general creditors
unless an applicable abandoned property law designates another person and all
liability of the Trustee or Paying Agent with respect to such money shall
thereupon cease.
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SECTION 8.04. Reinstatement.
If the Trustee is unable to apply any money or U.S. Government
Obligations in accordance with Section 8.01 by reason of any legal proceeding
or by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Securities shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.01 until
such time as the Trustee is permitted to apply all such money or U.S.
Government Obligations in accordance with Section 8.01; provided, however, that
if the Company has made any payment of interest on or principal of any
Securities because of the reinstatement of its obligations, the Company shall
be subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders.
The Company, when authorized by a resolution of its Board of
Directors, and the Trustee may amend or supplement this Indenture or the
Securities without notice to or consent of any Securityholder:
(i) to cure any ambiguity, defect or inconsistency;
provided, however, that such amendment or supplement does not
materially adversely affect the rights of any Holder;
(ii) to effect the assumption by a successor Person of all
obligations of the Company under the Securities, this Indenture and
the Escrow Agreement in connection with any transaction complying with
Article Five of this Indenture;
(iii) to provide for uncertificated Securities in addition to
or in place of certificated Securities;
(iv) to comply with any requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the TIA;
(v) to make any change that would provide any additional
benefit or rights to the Holders;
(vi) to make any other change that does not materially
adversely affect the rights of any Holder under this Indenture;
(vii) to add to the covenants of the Company for the benefit
of the Holders, or to surrender any right or power herein conferred
upon the Company; or
(viii) to secure the Securities pursuant to the requirements of
Section 4.15 or otherwise;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such amendment or supplement complies with the provisions
of this Section 9.01.
<PAGE> 64
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SECTION 9.02. With Consent of Holders.
Subject to Section 6.07, the Company, when authorized by a
resolution of its Board of Directors, and the Trustee may amend or supplement
this Indenture or the Securities with the written consent of the Holders of a
majority in principal amount of the outstanding Securities. Subject to Section
6.07, the Holders of a majority in principal amount of the outstanding
Securities may waive compliance by the Company with any provision of this
Indenture or the Securities. However, without the consent of the Holder of each
Security affected, an amendment, supplement or waiver, including a waiver
pursuant to Section 6.04, may not:
(1) change the maturity of the principal of any such
Security;
(2) alter the optional redemption or repurchase provisions
of any such Security or this Indenture in a manner adverse to the
Holders of such Security;
(3) reduce the principal amount of any such Security;
(4) reduce the rate of or extend the time for payment of
interest on any such Security;
(5) change the place or currency of payment of the principal
of or interest on any such Security;
(6) modify any provisions of Section 6.04 (other than to add
sections of this Indenture or the Securities subject thereto) or 6.07
or this Section 9.02 (other than to add sections of this Indenture or
the Securities which may not be amended, supplemented or waived
without the consent of each Securityholder affected);
(7) reduce the percentage of the principal amount of
outstanding Securities necessary for amendment to or waiver of
compliance with any provision of this Indenture or the Securities or
for waiver of any Default in respect thereof;
(8) waive a default in the payment of the principal of or
interest on or redemption payment with respect to any such Security
(except a rescission of acceleration of the Securities by the Holders
as provided in Section 6.02 and a waiver of the payment default that
resulted from such acceleration);
(9) modify the ranking or priority of such Security;
(10) modify the provisions of any covenant (or the related
definitions in this Indenture) requiring the Company to make any Offer
to Purchase in a manner materially adverse to the Holders; or
(11) modify the provisions of the Escrow Agreement or this
Indenture relating to the Escrow Collateral or release the Escrow
Collateral from the Lien under the Escrow Agreement or permit any
other obligation to be secured by the Escrow Collateral.
It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
<PAGE> 65
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After an amendment, supplement or waiver under this Section
9.02 becomes effective, the Company shall mail to the Holders affected thereby
a notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture.
SECTION 9.03. Compliance with Trust Indenture Act.
Every amendment to or supplement of this Indenture or the
Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent
Holder of that Security or portion of that Security that evidences the same
debt as the consenting Holder's Security, even if notation of the consent is
not made on any Security. Subject to the following paragraph, any such Holder
or subsequent Holder may revoke the consent as to such Holder's Security or
portion of such Security by notice to the Trustee or the Company received
before the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Securities
have consented (and not theretofore revoked such consent) to the amendment,
supplement or waiver.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders of Securities entitled to
consent to any amendment, supplement or waiver. If a record date is fixed,
then, notwithstanding the last sentence of the immediately preceding paragraph,
those persons who were Holders of Securities at such record date (or their duly
designated proxies), and only those persons, shall be entitled to consent to
such amendment, supplement or waiver or to revoke any consent previously given,
whether or not such persons continue to be Holders of such Securities after
such record date. No such consent shall be valid or effective for more than 90
days after such record date.
After an amendment, supplement or waiver becomes effective, it
shall bind every Securityholder, unless it makes a change described in any of
clauses (1) through (11) of Section 9.02. In that case the amendment,
supplement or waiver shall bind each Holder of a Security who has consented to
it and every subsequent Holder of a Security or portion of a Security that
evidences the same debt as the consenting Holder's Security.
SECTION 9.05. Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a
Security, the Trustee may require the Holder of the Security to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Security
about the changed terms and return it to the Holder. Alternatively, if the
Company or the Trustee so determines, the Company in exchange for the Security
shall issue and the Trustee shall authenticate a new Security that reflects the
changed terms. Failure to make the appropriate notation or issue a new Security
shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.06. Trustee to Sign Amendments, etc.
The Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
any amendment, supplement or waiver authorized pursuant to this
<PAGE> 66
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Article Nine is authorized or permitted by this Indenture and that such
amendment, supplement or waiver constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms (subject to
customary exceptions). The Trustee may, but shall not be obligated to, execute
any such amendment, supplement or waiver which affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise. In signing any
amendment, supplement or waiver, the Trustee shall be entitled to receive an
indemnity reasonably satisfactory to it.
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act Controls.
This Indenture is subject to the provisions of the TIA that
are required to be a part of this Indenture, and shall, to the extent
applicable, be governed by such provisions. If any provision of this Indenture
modifies any TIA provision that may be so modified, such TIA provision shall be
deemed to apply to this Indenture as so modified. If any provision of this
Indenture excludes any TIA provision that may be so excluded, such TIA
provision shall be excluded from this Indenture.
The provisions of TIA Sections 310 through 317 that impose
duties on any Person (including the provisions automatically deemed included
unless expressly excluded by this Indenture) are a part of and govern this
Indenture, whether or not physically contained herein.
SECTION 10.02. Notices.
Any notice or communication shall be sufficiently given if in
writing and delivered in person, by facsimile and confirmed by overnight
courier, or mailed by first-class mail addressed as follows:
if to the Company:
Global TeleSystems Group, Inc.
1751 Pinnacle Drive
North Tower 12th Floor
McLean, Virginia 22102
Attention: Chief Executive Officer
Facsimile: (703) 847-0663
Telephone: (703) 918-4500
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022-6069
<PAGE> 67
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Attention: David J. Beveridge, Esq.
Facsimile: (212) 848-7179
Telephone: (212) 848-4000
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Facsimile: (212) 815-5915
Telephone: (212) 815-4701
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed, first-class, postage
prepaid, to a Holder including any notice delivered in connection with TIA
Section 310(b), TIA Section 313(c), TIA Section 314(a) and TIA Section 315(b),
shall be mailed to him at his address as set forth on the Security Register and
shall be sufficiently given to him if so mailed within the time prescribed. To
the extent required by the TIA, any notice or communication shall also be
mailed to any Person described in TIA Section 313(c).
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. Except for a notice to the Trustee, which is deemed given only
when received, if a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 10.03. Communications by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b)
with other Securityholders with respect to their rights under this Indenture or
the Securities. The Company, the Trustee, the Registrar and any other person
shall have the protection of TIA Section 312(c).
SECTION 10.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee
to take or refrain from taking any action under this Indenture, the Company
shall furnish to the Trustee at the request of the Trustee:
(1) an Officers' Certificate in form and substance
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
<PAGE> 68
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(2) an Opinion of Counsel in form and substance satisfactory
to the Trustee stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
SECTION 10.05. Statements Required in Certificate or Opinion.
Each certificate (other than the certificates provided
pursuant to Section 4.07) or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that the person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has
made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether such covenant or
condition has been complied with; and
(4) a statement as to whether, in the opinion of such
person, such condition or covenant has been complied with; provided,
however, that with respect to matters of fact an Opinion of Counsel
may rely on an Officers' Certificate or certificates of public
officials.
SECTION 10.06. Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules for action by or at a
meeting of Securityholders. The Paying Agent or Registrar may make reasonable
rules for its functions.
SECTION 10.07. Governing Law.
The laws of the State of New York shall govern this Indenture
and the Securities.
SECTION 10.08. No Recourse Against Others.
A director, officer, employee, incorporator or stockholder of
the Company or any of its Affiliates, as such, shall not have any liability for
any obligations of the Company or any of its Affiliates under the Securities or
this Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability.
SECTION 10.09. Successors.
All agreements of the Company in this Indenture and the
Securities shall bind its successor. All agreements of the Trustee in this
Indenture shall bind its successor.
SECTION 10.10. Counterpart Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
<PAGE> 69
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SECTION 10.11. Severability.
In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and a Holder shall have no claim therefor against any party
hereto.
SECTION 10.12. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture,
loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan
or debt agreement may not be used to interpret this Indenture.
SECTION 10.13. Legal Holidays.
If a payment date is a not a Business Day at a place of
payment, payment may be made at that place on the next succeeding Business Day,
and no interest shall accrue for the intervening period.
ARTICLE ELEVEN
COLLATERAL AND SECURITY
SECTION 11.01. Escrow Agreement.
The due and punctual payment of the first four scheduled
interest payments on the Securities when and as the same shall be due and
payable on an Interest Payment Date or by acceleration shall be secured as
provided in the Escrow Agreement which the Company and the Trustee have entered
into simultaneously with the execution of this Indenture. Upon the
acceleration of the maturity of the Securities, the Trustee shall foreclose
upon the Escrow Collateral. Each Holder of Securities, by its acceptance
thereof, consents and agrees to the terms of the Escrow Agreement (including,
without limitation, the provisions providing for foreclosure and disbursement
of Escrow Collateral) as the same may be in effect or may be amended from time
to time in accordance with its terms and the terms hereof and authorizes and
directs the Escrow Agent and the Trustee to enter into the Escrow Agreement and
to perform its obligations and exercise its rights thereunder in accordance
therewith. The Trustee is hereby empowered and directed to act as secured
party hereunder and under the Escrow Agreement for the benefit of the Holders.
The Company shall deliver to the Trustee copies of the Escrow Agreement, and
shall do or cause to be done all such acts and things as may be necessary or
proper, or as may be required by the provisions of the Escrow Agreement, to
assure and confirm to the Trustee the security interest in the Escrow
Collateral contemplated by the Escrow Agreement or any part thereof, as from
time to time constituted, so as to render the same available for the security
and benefit of this Indenture with respect to, and of, the Securities,
according to the intent and purposes expressed in the Escrow Agreement. The
Company shall take any and all actions reasonably required to cause the Escrow
Agreement to create and maintain (to the extent possible under applicable law),
as security for the obligations of the Company hereunder, a first priority and
exclusive security interest in and on all the Escrow Collateral, in favor of
the Trustee for the benefit of the Holders of Securities, superior to and prior
to the rights of all third Persons and subject to no other Liens. The Trustee
shall have no responsibility for perfecting or maintaining the perfection of
the Trustee's security interest in the Escrow Collateral or for filing any
instrument, document or notice in any public office at any time or times.
<PAGE> 70
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SECTION 11.02. Recording and Opinions.
(a) The Company shall furnish to the Trustee simultaneously
with the execution and delivery of this Indenture an Opinion of Counsel either
(i) stating that in the opinion of such counsel all action has been taken with
respect to the recording, registering and filing of this Indenture, financing
statements or other instruments necessary to make effective the security
interest intended to be created by the Escrow Agreement and reciting the
details of such action, or (ii) stating that in the opinion of such counsel no
such action is necessary to make such security interest effective.
(b) The Company shall furnish to the Trustee on each
anniversary of the Issue Date (upon receipt of written notice from Escrow
Agent) until the date upon which the balance of Escrow Funds shall have been
reduced to zero, an Opinion of Counsel, dated as of such date, either (i)
stating that (A) in the opinion of such counsel, action has been taken with
respect to the recording, registering, filing, re-recording, re-registering and
refiling of all supplemental indentures, financing statements, continuation
statements or other instruments of further assurance as is necessary to
maintain the Lien of the Escrow Agreement and reciting the details of such
action or referring to prior Opinions of Counsel in which such details are
given and (B) based on relevant laws as in effect on the date of such Opinion
of Counsel, all financing statements and continuation statements have been
executed and filed that are necessary as of such date and during the succeeding
12 months fully to preserve and protect, to the extent such protection and
preservation are possible by filing, the rights of the Holders of Securities
and the Trustee hereunder and under the Escrow Agreement with respect to the
security interests in the Escrow Collateral or (ii) stating that, in the
opinion of such counsel, no such action is necessary to maintain such Lien and
assignment.
SECTION 11.03. Release of Escrow Collateral.
(a) Subject to subsections (b), (c) and (d) of this Section
11.03, the Escrow Collateral may be released from the security interest created
by the Escrow Agreement only in accordance with the provisions of the Escrow
Agreement.
(b) Except to the extent that any security interest on
proceeds of Escrow Collateral is automatically released by operation of Section
9-306 of the Uniform Commercial Code or other similar law, no Escrow Collateral
shall be released from the security interest created by the Escrow Agreement
pursuant to the provisions of the Escrow Agreement, other than to the Holders
pursuant to the terms thereof.
(c) At any time when an Event of Default shall have occurred
and be continuing and the maturity of the Securities shall have been
accelerated (whether by declaration or otherwise), no Escrow Collateral shall
be released pursuant to the provisions of the Escrow Agreement, and no release
of Escrow Collateral in contravention of this Section 11.03(c) shall be
effective as against the Holders of Securities, except for the disbursement of
all Escrow Funds (as defined in the Escrow Agreement) and other Escrow
Collateral to the Trustee pursuant to Section 6(c) of the Escrow Agreement.
(d) The release of any Escrow Collateral from the security
interests created by this Indenture and the Escrow Agreement shall not be
deemed to impair the security under this Indenture in contravention of the
provisions hereof if and to the extent the Escrow Collateral is released
pursuant to the terms hereof or pursuant to the terms of the Escrow Agreement.
To the extent applicable, the Company shall cause TIA Section 314(d) relating
to the release of property or securities from the security interest of the
Escrow Agreement to be complied with. Any certificate or opinion required by
TIA Section 314(d) may be made by an Officer of the Company except in cases
where TIA Section 314(d) requires that such certificate or opinion be made by
an independent Person, which
<PAGE> 71
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Person shall be an independent engineer, appraiser or other expert selected or
approved by the Trustee in the exercise of reasonable care.
SECTION 11.04. Authorization of Actions to Be Taken by the Trustee Under the
Escrow Agreement.
Subject to the provisions of Section 7.01 and Section 7.02,
the Trustee may, without the consent of the Holders of Securities, on behalf of
the Holders of Securities, take all actions it deems necessary or appropriate
in order to (a) enforce any of the terms of the Escrow Agreement and (b)
collect and receive any and all amounts payable in respect of the obligations
of the Company hereunder. The Trustee shall have power to institute and
maintain such suits and proceedings as it may deem expedient to prevent any
impairment of the Escrow Collateral by any acts that may be unlawful or in
violation of the Escrow Agreement or this Indenture, and such suits and
proceedings as the Trustee may deem expedient to preserve or protect its
interests and the interests of the Holders of Securities in the Escrow
Collateral (including power to institute and maintain suits or proceedings to
restrain the enforcement of or compliance with any legislative or other
governmental enactment, rule or order that may be unconstitutional or otherwise
invalid if the enforcement of, or compliance with, such enactment, rule or
order would impair the security interest hereunder or be prejudicial to the
interests of the Holders of Securities or of the Trustee).
SECTION 11.05. Authorization of Receipt of Funds by the Trustee Under the
Escrow Agreement.
The Trustee is authorized to receive any funds for the benefit
of the Holders of Securities disbursed under the Escrow Agreement, and to make
further distributions of such funds to the Holders of Securities according to
the provisions of this Indenture.
SECTION 11.06. Termination of Security Interest.
Upon the earliest to occur of (i) the date upon which the
balance of Escrow Funds and other Escrow Collateral shall have been reduced to
zero, (ii) the payment of the first four scheduled interest payments on the
Securities, (iii) legal defeasance pursuant to Section 8.01 and (iv) covenant
defeasance pursuant to Section 8.01, the Trustee shall, at the written request
of the Company, release the security interest in the Escrow Collateral pursuant
to this Indenture and the Escrow Agreement upon the Company's compliance with
the provisions of the TIA pertaining to release of collateral.
[Signature Pages Follow]
<PAGE> 72
S-1
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the date first written above.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ WILLIAM H. SEIPPEL
---------------------------------
Name: William H. Seippel
Title: Executive Vice President
and Chief Financial Officer
THE BANK OF NEW YORK,
as Trustee
By: /s/ MARY BETH LEWICKI
---------------------------------
Name: Mary Beth Lewicki
Title: Assistant Vice President
<PAGE> 73
EXHIBIT A
[FORM OF SECURITY]
GLOBAL TELESYSTEMS GROUP, INC.
9 7/8% Senior Note due 2005
CUSIP No.:37936UAC8
No. 001 $105,000,000
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company", which term includes any successor corporation), for value received
promises to pay to Cede & Co. or registered assigns, the principal sum of ONE
HUNDRED AND FIVE MILLION DOLLARS, on February 15, 2005.
Interest Payment Dates: February 15 and August 15, commencing
August 15, 1998.
Interest Record Dates: February 1 and August 1.
Reference is made to the further provisions of this Security
contained herein, which will for all purposes have the same effect as if set
forth at this place.
A-1
<PAGE> 74
IN WITNESS WHEREOF, the Company has caused this Security to be
signed manually or by facsimile by its duly authorized officer.
GLOBAL TELESYSTEMS GROUP, INC.
By:
-----------------------------------
Name:
Title:
Attest:
-----------------------------------
Name:
Title:
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the 9 7/8% Senior Notes due 2005, described in
the within-mentioned Indenture.
Dated: , 1998
THE BANK OF NEW YORK,
as Trustee
By:
-----------------------------------
Authorized Signatory
A-2
<PAGE> 75
(REVERSE OF SECURITY)
GLOBAL TELESYSTEMS GROUP, INC.
9 7/8% Senior Note due 2005
1. Interest.
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Security
at the rate per annum shown above. Cash interest on the Securities will accrue
from the most recent date to which interest has been paid or, if no interest
has been paid, from February 10, 1998. The Company will pay interest
semi-annually in arrears on each Interest Payment Date, commencing August 15,
1998. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
The Company shall pay interest on overdue principal from time
to time on demand at the rate borne by the Securities and on overdue
installments of interest (without regard to any applicable grace periods) at
the rate borne by the Securities to the extent lawful.
2. Method of Payment.
The Company shall pay interest on the Securities (except
defaulted interest) to the persons who are the registered Holders at the close
of business on the Interest Record Date immediately preceding the Interest
Payment Date even if the Securities are cancelled on registration of transfer
or registration of exchange after such Interest Record Date. Holders must
surrender Securities to a Paying Agent to collect principal payments. The
Company shall pay principal and interest in money of the United States that at
the time of payment is legal tender for payment of public and private debts
("U.S. Legal Tender"). However, the Company may pay principal and interest by
wire transfer of Federal funds (provided that the Paying Agent shall have
received wire instructions on or prior to the relevant Interest Record Date),
or interest by check payable in such U.S. Legal Tender. The Company may
deliver any such interest payment to the Paying Agent or to a Holder at the
Holder's registered address.
3. Paying Agent and Registrar.
Initially, The Bank of New York, a New York banking
corporation (the "Trustee"), will act as Paying Agent and Registrar in the
Borough of Manhattan, The City of New York. The Company may change any Paying
Agent or Registrar without notice to the Holders. The Company or any of its
Subsidiaries may, subject to certain exceptions, act as Registrar.
4. Indenture.
The Company issued the Securities under an Indenture, dated as
of February 10, 1998 (the "Indenture"), among the Company, Global TeleSystems
Group, Inc. and the Trustee. Capitalized terms herein are used as defined in
this Indenture unless otherwise defined herein. The terms of the Securities
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb)
(the "TIA"), as in effect on the date of the Indenture until such time as the
Indenture is
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<PAGE> 76
qualified under the TIA, and thereafter as in effect on the date on which the
Indenture is qualified under the TIA. Notwithstanding anything to the contrary
herein, the Securities are subject to all such terms, and holders of Securities
are referred to the Indenture and the TIA for a statement of them. This is one
of the Securities referred to in the Indenture. The Securities referred to in
the Indenture are general obligations of the Company limited in aggregate
principal amount to $105,000,000.
5. Optional Redemption.
(a) The Securities will be redeemable at the option of the Company,
in whole or in part, at any time or from time to time, on or after February 15,
2002 at the redemption prices (expressed as a percentage of principal amount)
set forth below, plus accrued and unpaid interest thereon, if any, to the
redemption date if redeemed during the twelve- month period commencing on
February 15 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ------------
<S> <C>
2002 104.938%
2003 102.469%
2004 and thereafter 100.000%
</TABLE>
(b) Redemption Upon Public Equity Offering or Strategic Equity
Investment.
At any time, or from time to time, prior to February 15, 2001,
the Company may redeem up to one-third of the original aggregate principal
amount of the Securities at a redemption price equal to 109.875% of the
principal amount of the Securities so redeemed, plus accrued and unpaid
interest thereon, if any, to the redemption date, with the net cash proceeds of
one or more Public Equity Offerings or Strategic Equity Investments resulting
in aggregate gross proceeds to the Company of at least $75.0 million; provided,
however, that at least two-thirds of the principal amount of Securities
originally issued would remain outstanding immediately after giving effect to
any such redemption (excluding any Securities owned by the Company or any of
its Affiliates).
6. Notice of Redemption.
Notice of redemption will be mailed by first-class mail at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at its registered address; provided,
however, that notice of redemption pursuant to paragraph 5(b) of this Security
will be mailed to each Holder of Securities to be redeemed no later than 60
days following the consummation of the last Public Equity Offering resulting in
gross cash proceeds to the Company, when aggregated with all prior Public
Equity Offerings, of at least $75.0 million. The Trustee may select for
redemption portions of the principal amount of Securities that have
denominations equal to or larger than $1,000 principal amount. Securities and
portions of them the Trustee so selects shall be in amounts of $1,000 principal
amount or integral multiples thereof.
If any Security is to be redeemed in part only, the notice of
redemption that relates to such Security shall state the portion of the
principal amount thereof to be redeemed. A new Security in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Security. On and after the
Redemption Date, interest will cease to accrue on Securities or
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<PAGE> 77
portions thereof called for redemption so long as the Company has deposited
with the Paying Agent for the Securities funds in satisfaction of the
redemption price pursuant to this Indenture.
7. Change of Control Offer.
Upon the occurrence of a Change of Control, the Company will
be required to offer to purchase all outstanding Securities at a purchase price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the Purchase Date.
8. Limitation on Disposition of Assets.
Upon the occurrence of certain Asset Sales, the Company is,
subject to certain conditions, obligated to make an offer to purchase
Securities at a purchase price in cash equal to 100% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
Purchase Date.
9. Denominations; Transfer; Exchange.
The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection therewith as
permitted by the Indenture. The Registrar need not register the transfer of or
exchange any Securities or portions thereof selected for redemption, except the
unredeemed portion of any security being redeemed in part.
10. Persons Deemed Owners.
The registered Holder of a Security shall be treated as the
owner of it for all purposes.
11. Unclaimed Funds.
If funds for the payment of principal or interest remain
unclaimed for two years, the Trustee and the Paying Agent will repay the funds
to the Company at its written request. After that, all liability of the
Trustee and such Paying Agent with respect to such funds shall cease.
12. Legal Defeasance and Covenant Defeasance.
The Company may be discharged from its obligations under the
Indenture and the Securities except for certain provisions thereof, and may be
discharged from obligations to comply with certain covenants contained in the
Indenture and the Securities, in each case upon satisfaction of certain
conditions specified in the Indenture.
13. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture and the
Securities may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal amount of the Securities
then outstanding, and any existing Default or compliance with any provision may
be waived with the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without no-
A-5
<PAGE> 78
tice to or consent of any Holder, the parties thereto may amend or supplement
the Indenture and the Securities to, among other things, cure any ambiguity,
defect or inconsistency, provide for uncertificated Securities in addition to
or in place of certificated Securities, effect the assumption by a successor
person of all obligations of the Company under Securities, the Indenture and
the Escrow Agreement in connection with any transaction complying with Article
Five of the Indenture or comply with any requirements of the SEC in connection
with the qualification of the Indenture under the TIA, or make any other change
that does not materially adversely affect the rights of any Holder of a
Security.
14. Restrictive Covenants.
The Indenture contains certain covenants that, among other
things, limit the ability of the Company and the Restricted Group Members to
make restricted payments, to incur indebtedness, to create liens, to sell
assets, to permit restrictions on dividends and other payments to become
applicable to Restricted Group Members, to consolidate, merge or sell all or
substantially all of its assets, to engage in transactions with affiliates or
certain other related persons. The limitations are subject to a number of
important qualifications and exceptions. The Company must annually report to
the Trustee on compliance with such limitations.
15. Defaults and Remedies.
If an Event of Default (other than certain events of
bankruptcy, insolvency or reorganization affecting the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of Securities then outstanding by notice in writing to the Company may
declare all the Securities to be due and payable immediately in the manner and
with the effect provided in the Indenture. If certain events of bankruptcy,
insolvency or reorganization affecting the Company occur under the Indenture,
the Securities will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder of
Securities. Holders of Securities may not enforce the Indenture or the
Securities except as provided in this Indenture. The Trustee is not obligated
to enforce the Indenture or the Securities unless it has received indemnity
reasonably satisfactory to it. The Indenture permits, subject to certain
limitations therein provided, Holders of a majority in aggregate principal
amount of the Securities then outstanding to direct the Trustee in its exercise
of any trust or power. The Trustee may withhold from Holders of Securities
notice of certain continuing Defaults if it determines that withholding notice
is in their interest.
16. Trustee Dealings with Company.
The Trustee under the Indenture, in its individual or any
other capacity, may become the owner or pledgee of Securities and may otherwise
deal with the Company, its Subsidiaries or their respective Affiliates as if it
were not the Trustee.
17. No Recourse Against Others.
No stockholder, director, officer, employee or incorporator,
as such, of the Company or any of its Affiliates shall have any liability for
any obligation of the Company or any of its Affiliates under the Securities or
the Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Security by accepting a
Security waives and releases all such liability. The waiver and release are
part of the consideration for the issuance of the Securities.
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<PAGE> 79
18. Authentication.
This Security shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on this Security.
19. Abbreviations and Defined Terms.
Customary abbreviations may be used in the name of a Holder of
a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
20. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused CUSIP
numbers to be printed on the Securities as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of such numbers as
printed on the Securities and reliance may be placed only on the other
identification numbers printed hereon.
21. Governing Law.
The laws of the State of New York shall govern the Indenture and this Security.
A-7
<PAGE> 80
ASSIGNMENT FORM
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee or transferee)
- --------------------------------------------------------------------------------
(Insert Social Security or other identifying number of assignee or transferee)
and irrevocably appoint
---------------------------------------------------------
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Dated: Signed:
------------------------- ---------------------------------
(Signed exactly as name appears
on the other side of this
Security)
Signature Guarantee:
------------------------------------------------------------
Participant in a recognized Signature Guarantee
Medallion Program (or other signature guarantor
program reasonably acceptable to the Trustee)
<PAGE> 81
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the
Company pursuant to Section 4.10 or Section 4.16 of the Indenture, check the
appropriate box:
Section 4.10 [ ]
Section 4.16 [ ]
If you want to elect to have only part of this Security
purchased by the Company pursuant to Section 4.10 or Section 4.16 of the
Indenture, state the amount: $_____________
Dated: Signed:
------------------------- ---------------------------------
(Signed exactly as name appears
on the other side of this
Security)
Signature Guarantee:
------------------------------------------------------------
Participant in a recognized Signature Guarantee
Medallion Program (or other signature guarantor
program reasonably acceptable to the Trustee)
<PAGE> 82
EXHIBIT B
FORM OF LEGEND FOR GLOBAL SECURITIES
Any Global Security authenticated and delivered hereunder
shall bear a legend in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY.
THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE
NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN
THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER
OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE
DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY
BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B-1
<PAGE> 1
EXHIBIT 10.14
GLOBAL TELESYSTEMS GROUP, INC.
AMENDED AND RESTATED
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
February 10, 1998
[Share amounts reflect 3-for-2 stock split that took effect December 1, 1997.]
1. Purpose of the Plan.
The purpose of this Plan is to permit Eligible Directors of the Company
to share in the growth of the value of the Company through the grant and
exercise of Options.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set
forth below:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
"Common Stock" means the Common Stock of the Company, par value $.10
per share.
"Company" means Global TeleSystems Group, Inc., a Delaware corporation,
including any wholly owned subsidiary or affiliate, or any successor
organization.
"Disability" means permanent and total disability within the meaning of
Section 22(e)(3) of the Code.
"Eligible Director" means a person who is a non-employee member of the
Board.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means the fair market value of the Common Stock as
determined objectively by the Board, in good faith, using such criteria as it
deems relevant; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the average of the last
reported bid and asked prices of the Common Stock on the date of grant, as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("NASDAQ") System) or, in the event the Common Stock is listed on a national
securities exchange, within the meaning of Section 6 of the Exchange Act, the
fair market value per Share shall be the closing price on such exchange on the
date of grant of the Option, as reported in The Wall Street Journal.
"Incentive Stock Option" means any Option intended to be designated as
an "incentive stock option" within the meaning of Section 422 of the Code.
<PAGE> 2
"Nonqualified Stock Option" means any Option that is not an Incentive
Stock Option.
"Option" means any option to purchase shares of the Common Stock of the
Company granted pursuant to this Plan.
"Option Agreement" means a written agreement between the Company and
the Optionee regarding the grant and exercise of Options to purchase shares of
Common Stock and the terms and conditions thereof.
"Optionee" means an Eligible Director who receives an Option under the
Plan.
"Plan" means this Company's Amended and Restated Non-Employee
Directors' Stock Option Plan, as amended from time to time.
"Rules" means the regulations promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the
definition of any term herein in the singular shall also include the plural and
vice versa.
3. Stock Subject to the Plan.
(a) Aggregate Number of Shares. The aggregate number of shares of
Common Stock that may be issued or transferred under the Plan is 1,275,000,
subject to adjustment pursuant to Section 3(b) below. Such shares may include
authorized but unissued shares of Common Stock or reacquired shares of Common
Stock. In the event the number of shares of Common Stock issued under the Plan
and the number of shares of Common Stock subject to outstanding awards (taking
into account the share counting requirements established under the Rules) equals
the maximum number of shares of Common Stock authorized under the Plan, no
further awards shall be made unless the Plan is amended (in accordance with the
Rules, if necessary) or additional shares of Common Stock become available for
further awards under the Plan. If and to the extent that Options granted under
the Plan terminate, expire or are canceled without having been exercised, such
shares shall again be available for subsequent awards under the Plan.
(b) Adjustments Upon Changes in Capitalization. If any change is made
to the Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of shares or exchange
of shares or any other change in capital structure made without receipt of
consideration), then unless such event or change results in the termination of
all outstanding awards under the Plan, the Board shall preserve the value of the
outstanding awards by adjusting the maximum number and class of shares available
under the Plan to reflect the effect on such event or change in the Company's
capital structure, and by making appropriate adjustments to the number and class
of shares subject to an outstanding award or the Option price of each
outstanding Option, except that any fractional shares resulting from such
adjustments shall be eliminated by rounding any portion of a share equal to .500
or greater up, and any portion of a share equal to less than .500 down, in each
case to the nearest
2
<PAGE> 3
whole number.
4. Administration of the Plan.
The Plan shall be administered by the Board. Subject to the provisions
of the Plan, the Board shall be authorized to:
(a) adopt, revise and repeal such administrative rules, guidelines and
practices governing this Plan as it shall from time to time deem advisable;
(b) interpret the terms and provisions of the Plan and any Option
issued under the Plan (and any agreements relating thereto), and otherwise
settle all claims and disputes arising under the Plan;
(c) delegate responsibility and authority for the operation and
administration of the Plan, appoint employees and officers of the Company to act
on its behalf, and employ persons to assist in the fulfilling of its
responsibilities under the Plan; and
(d) otherwise supervise the administration of the Plan; provided,
however, that the Board shall have no discretion with respect to the selection
of Eligible Directors to receive Options hereunder, the number of shares of
Common Stock covered by such Option or the price or timing of any Options
granted hereunder; provided, further, that any action by the Board relating to
the Plan will be taken only if approved by the affirmative vote of a majority of
the directors who are not then eligible to participate under the Plan.
5. Option Grants.
(a) Number of Options Granted. The following number of Options are
hereby granted to each Eligible Director under the Plan:
Initial Grant
(i) As of the effective date of the Plan, an Option to purchase
18,000 shares of Common Stock is granted to each person who on that date is an
incumbent Eligible Director.
(ii) With respect to each person who first becomes an Eligible
Director after the effective date of the Plan but prior to February 10, 1998, an
Option to purchase 18,000 shares of Common Stock is granted as of the date such
person first becomes an Eligible Director.
(iii) With respect to each person who first becomes an Eligible
Director on or after February 10, 1998, an Option to purchase 22,500 shares of
Common Stock is granted as of the date such person first becomes an Eligible
Director.
3
<PAGE> 4
Subsequent Grant
(iv) As of the date of the third annual meeting of the Company's
shareholders following the grant of an Option to an Eligible Director pursuant
to subsections 5(a)(i) or (ii) above, provided the date of such third annual
meeting is prior to February 10, 1998, and provided further that such Eligible
Director remains an incumbent on such date and will serve as an Eligible
Director during the next following year, an Option to purchase 13,500 shares of
Common Stock is granted to such Eligible Director.
(v) As of the date of each annual meeting of the Company's
shareholders on or after February 10, 1998 and following the grant of an Option
to an Eligible Director pursuant to subsections 5(a)(i), (ii), or (iii) above,
provided that such Eligible Director remains an incumbent on such date and will
serve as an Eligible Director during the next following year, an Option to
purchase 9,000 shares of Common Stock is granted to such Eligible Director.
(b) Nonqualified Options. All Options granted hereunder shall be
Nonqualified Stock Options. No Option granted pursuant to this Plan may be
designated as an Incentive Stock Option.
(c) Amendments to this Section 5. Notwithstanding any other provision
of the Plan, this Section 5 may not be amended more then once every six months,
except for amendments necessary to conform the Plan to changes in the provisions
of, or the regulations relating to, the Code.
6. Terms and Conditions of Options.
(a) Option Agreement. Each Option granted hereunder shall be evidenced
by an Option Agreement.
(b) Option Price. The Option price per share of Common Stock covered by
an Option granted hereunder shall be the Fair Market Value of the Common Stock
as of the date of grant.
(c) Option Term. The term of each Option shall be ten years. No Option
shall be exercised by any person after expiration of the term of the Option.
(d) Exercisability. An Option shall be exercisable during its term,
subject to the following provisions of this Section 6(d):
(i) Initial Grants Made Prior to February 10, 1998. With respect to any
Option granted prior to February 10, 1998 to an Eligible Director pursuant to
Section 5(a)(i) or 5(a)(ii), such Option shall become exercisable with respect
to 9,000 shares of Common Stock on the date six months following the relevant
date of grant, with respect to an additional 4,500 shares on the date six months
following the first annual meeting of the Company'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 the Company shareholders to occur
after such date of grant.
4
<PAGE> 5
(ii) Initial Grants Made On Or After February 10, 1998. With respect to
any Option granted on or after February 10, 1998 to an Eligible Director
pursuant to Section 5(a)(iii), such Option shall become exercisable with respect
to 11,250 shares of Common Stock on the date six months following the relevant
date of grant, with respect to an additional 5,625 shares on the date six months
following the first annual meeting of the Company's shareholders to occur after
such date of grant, and with respect to the final 5,625 shares on the date six
months following the second annual meeting of the Company shareholders to occur
after such date of grant.
(iii) Subsequent Grants Made Prior to February 10, 1998. With respect
to any Option granted prior to February 10, 1998 to an Eligible Director
pursuant to Section 5(a)(iv), such Option shall become exercisable with respect
to 4,500 shares of Common Stock on the date six months following the relevant
date of grant, with respect to an additional 4,500 shares on the date six months
following the first annual meeting of the Company'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 the Company's shareholders to
occur after such date of grant.
(iv) Subsequent Grants Made On Or After February 10, 1998. With respect
to any Option granted on or after February 10, 1998 to an Eligible Director
pursuant to Section 5(a)(v), such Option shall become exercisable with respect
to 3,000 shares of Common Stock on the date six months following the relevant
date of grant, with respect to an additional 3,000 shares on the date six months
following the first annual meeting of the Company's shareholders to occur after
such date of grant, and with respect to the final 3,000 shares on the date six
months following the second annual meeting of the Company's shareholders to
occur after such date of grant.
(e) Method of Exercise. Options may be exercised, in whole or in part,
at any time and from time to time during the Option exercise period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either in cash or by certified or bank check, or such other instrument as
the Board may accept. Payment in full or in part may also be made in the form of
unrestricted Common Stock already owned by the Optionee (and based upon the Fair
Market Value of the Common Stock so tendered as of the date the Option is
exercised, as determined by the Board). No shares of Common Stock shall be
issued until full payment therefor has been made. Eligible Directors shall
generally have the rights to dividends or other rights of a stockholder with
respect to shares subject to the Option when the Eligible Director has given
notice as to exercise, has paid in full for such shares and, if requested, has
given any representations required by the Board.
(f) Non-transferability. No Option shall be transferable by the
Optionee otherwise than by will, by the laws of descent and distribution,
pursuant to a qualified domestic relations order or as permitted under the
Rules, and all Options shall be exercisable, during the Optionee's lifetime,
only by the Optionee.
(g) Termination by Reason of Death. If an Optionee ceases to be an
Eligible Director by reason of death, any Option held by such Optionee may
thereafter be exercised to the extent then exercisable, by the legal
representative of the estate or by the legatee of the Optionee under
5
<PAGE> 6
the will of the Optionee, for a period of one year from the date of such death
or until the expiration of the stated term of such Option, whichever period is
shorter.
(h) Termination by Reason of Disability. If an Optionee ceases to be an
Eligible Director by reason of Disability, any Option held by such Optionee may
thereafter be exercised by the Optionee, to the extent it was exercisable at the
time of termination, for a period of one year from the date of such termination
or until the expiration of the stated term of such Option, whichever period is
shorter; provided, however, that if the Optionee dies within such one-year
period, any unexercised Option held by such Optionee shall thereafter be
exercisable to the extent it was exercisable at the time of death for a period
of one year from the date of such death or until the expiration of the stated
term of such Option, whichever period is shorter.
(i) Other Termination. If an Optionee ceases to be an Eligible Director
for any reason other than death or Disability (except as a result of becoming an
employee of the Company), any Option held by such Optionee may thereafter be
exercised by the Optionee, to the extent it was exercisable at the time of such
termination, for a period of three months from the date of such termination or
the expiration of the stated term of such Option, whichever period is shorter;
provided, however, that if the Optionee dies within such three-month period, any
unexercised Option held by such Optionee shall thereafter be exercisable, to the
extent to which it was exercisable at the time of death, for a period of one
year from the date of such death or until the expiration of the stated term of
the Option, whichever period is shorter. If an Optionee ceases to be an Eligible
Director by reason of his becoming an employee of the Company and his employment
with the Company is subsequently terminated, any Option held by such Optionee
may thereafter be exercised by the Optionee, to the extent that it was
exercisable at the time of such termination, for a period of three months from
the date of such termination or the expiration of the stated term of the Option,
whichever period is shorter; provided, however, that if the Optionee dies within
such three-month period, any unexercised Option held by such Optionee shall
thereafter be exercisable, to the extent to which it was exercisable at the time
of death, for a period of one year from the date of such death or until the
expiration of the stated term of the Option, whichever period is shorter.
7. Amendment and Termination.
The Board may amend, alter or discontinue the Plan at any time and from
time to time (either by resolution or unanimous consent), but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
Optionee under an Option theretofore granted, without the Optionee's consent, or
which, without the approval of the Company's stockholders, would require
stockholder approval under the Rules or under the requirements of any applicable
federal or state law or regulation; provided, however, that in no event may the
provisions of the Plan respecting eligibility to participate be amended more
frequently than once every six months, other than to comport with changes in the
Code, or the Employee Retirement Income Security Act of 1974, as amended, and
any rules or regulations thereunder; provided, further, that any amendment
which, under the requirements of applicable federal or state law or regulation
or the rules of any stock exchange or automated quotation system on which the
Common Stock may then be listed or quoted must be approved by the stockholders
of the Company, shall not be
6
<PAGE> 7
effective unless and until such stockholder approval has been obtained in
compliance with such law; and provided, further, that any amendment that must be
approved by the stockholders of the Company in order to maintain the continued
qualification of the Plan under Rule 16b-3(c)(2)(ii) under the Exchange Act, or
any successor provision, shall not be effective unless and until such
stockholder approval has been obtained in compliance with such Rule. The
Committee may amend the terms of any Option theretofore granted, prospectively
or retroactively, but no such amendment shall impair the rights of any Optionee
without the Optionee's consent. Notwithstanding any provision herein to the
contrary, the Board shall have broad authority to amend the Plan or any Option
to take into account changes in applicable tax laws, securities laws, accounting
rules and other applicable state and federal laws.
8. Unfunded Status of the Plan.
The Plan is intended to constitute an unfunded plan for incentive
compensation. With respect to any payments not yet made to an Optionee by the
Company, nothing contained herein shall give any such Optionee any rights that
are greater than those of a general creditor of the Company. In its sole
discretion, the Board may authorize the creation of trusts or other arrangements
to meet the obligations created under the Plan to deliver Common Stock or
payments in lieu thereof or with respect to awards hereunder.
9. General Provisions.
(a) Representations by Optionees. The Board may require each Optionee
to represent to and agree with the Company in writing that the Optionee is
acquiring the shares of Common Stock without a view to distribution thereof. The
certificates for such shares may include any legend that the Company deems
appropriate to reflect any restrictions on transfer.
(b) No Restrictions on Adoption of Other Compensation Arrangements.
Nothing contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements (subject to stockholder approval, if such
approval is required) and such arrangements may be either generally applicable
or applicable only in specific cases.
(c) No Right to Continuing Employment or Re-election. The adoption of
the Plan shall not confer upon any Optionee any right to continued employment
with the Company nor shall it interfere in any way with the right of the Company
to terminate its relationship with any of its employees, directors, or
independent contractors at any time.
(d) Tax Withholding. No later than the date as of which an amount first
becomes includable in the gross income of the Optionee for applicable income tax
purposes with respect to any award under the Plan, the Optionee shall pay to the
Company or make arrangements satisfactory to the Board regarding the payment of
any federal, state or local taxes of any kind required by law to be withheld
with respect to such amount. Unless otherwise determined by the Board, the
minimum required withholding obligations may be settled with Common Stock,
including Common Stock that is part of the award that gives rise to the
withholding requirement. The obligation of the Company under the Plan shall be
conditional upon such payment or arrangements and the Company shall to the
extent permitted by law have the right to deduct any
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such taxes from any payment of any kind otherwise due to the Optionee.
(e) Right of First Refusal. At the time of grant, the Board may provide
in connection with any grant made under this Plan that the shares of Common
Stock received as a result of such grant shall be subject to a right of first
refusal pursuant to which the Optionee shall be required to offer to the Company
any shares that the Optionee wishes to sell with the price being the then Fair
Market Value of the Common Stock, subject to such other terms and conditions as
the Board may specify at the time of grant.
(f) Designation of a Beneficiary. The Board shall establish such
procedures as it deems appropriate for an Optionee to designate a beneficiary to
whom any amounts payable in the event of the Optionee's death are to be paid.
(g) Applicable Law. The Plan shall be governed by and subject to the
laws of the State of Delaware and to all applicable laws and to the approvals by
any governmental or regulatory agency as may be required.
(h) Severability. If any provision of this Plan shall be held illegal
or invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but this Plan shall be construed and enforced
as if such illegal or invalid provision had never been included herein.
(i) Compliance with Rule 16b-3. It is the intent of the Company that
this Plan comply in all respects with applicable provisions of Rule 16b-3 under
the Exchange Act in connection with any grant of Options. Accordingly, if any
provision of this Plan or any agreement hereunder does not comply with the
requirements of Rule 16b-3 as then applicable to any such Optionee, or would
cause any Optionee to no longer be deemed a "disinterested person" within the
meaning of Rule 16b-3, such provision shall be construed or deemed amended to
the extent necessary to conform to such requirements with respect to such
Optionee. In addition, the Board shall have no authority to make any amendment,
alteration, suspension, discontinuation, or termination of the Plan or any
agreement hereunder to take other action if and to the extent such authority
would cause an Optionee's transactions under the Plan not to be exempt, or
Optionees no longer to be deemed "disinterested persons," under Rule 16b-3 of
the Exchange Act.
10. Effective Date and Term of the Plan.
The Plan shall be effective as of November 14, 1994. No Options shall
be granted pursuant to the Plan on or after November 14, 2004, but Options
granted prior to such date may extend beyond that date.
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EXHIBIT 10.24
THIRD AMENDED AND RESTATED
1992 STOCK OPTION PLAN GLOBAL TELESYSTEMS GROUP, INC.
(as of September 25, 1997)
1. PURPOSES OF THE PLAN. The purposes of the Third Amended and Restated
1992 Stock Option Plan of Global TeleSystems Group, Inc. are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentives to Employees of the Company and its Parent or
Subsidiaries, and to promote the success of the business of the Company and its
Parent or Subsidiaries. At the discretion of the Committee, Options granted
hereunder may be either Incentive Stock Options or Nonstatutory Stock Options.
2. DEFINITIONS. As used herein, and in any Option granted hereunder,
the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company,
par value $.0001 per share.
(d) "Company" shall mean Global TeleSystems Group, Inc, a
Delaware corporation, including any Parent, Subsidiary or
affiliate, and except as provided in Section 11 below, its
successors in interest.
(e) "Committee" shall mean the Compensation Committee
appointed by the Board in accordance with Section 4 of the
Plan. If the Board does not appoint or ceases to maintain
a Committee, the term "Committee" shall refer to the
Board.
(f) "Continuous Employment" shall mean the absence of any
interruption or termination of service as an Employee by
the Company. For purposes of the preceding sentence,
service shall not be considered interrupted during any
period of vacation, sick leave, military leave or any
other absence approved by the Board and shall not be
considered terminated as a result of a transfer between
locations within the Company or its Parent or any
Subsidiary or among the Company, its Parent and any
Subsidiary.
(g) "Employee" shall mean any person, including any officer
(whether or not he or she is a director of the Company),
employed by the Company.
<PAGE> 2
(h) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(i) "Incentive Stock Option" shall mean any option granted
under this Plan and any other option granted to an
Employee in accordance with the provisions of Section 422
of the Code and the regulations promulgated thereunder.
(j) "Non-Employee Director" shall mean a "non-employee
director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
(k) "Nonstatutory Stock Option" shall mean any Option granted
under the Plan that is not an Incentive Stock Option.
(l) "Option" shall mean a stock option granted pursuant to the
Plan.
(m) "Option Agreement" shall mean a written agreement between
the Company and the Optionee or the Trust regarding the
grant and exercise of Options to purchase Shares and the
terms and conditions thereof as determined by the
Committee pursuant to the Plan.
(n) "Optioned Shares" shall mean the Common Stock subject to
an Option.
(o) "Optionee" shall mean an Employee who receives an Option
under the Plan, either directly or as a beneficiary of the
Trust.
(p) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the
Code.
(q) "Plan" shall mean this Third Amended and Restated 1992
Stock Option Plan of Global TeleSystems Group, Inc.
(r) "Registration Date" shall mean the effective date of the
first registration statement filed by the Company,
pursuant to Section 12(g) of the Exchange Act, with
respect to any class of the Company's equity securities.
(s) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(t) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
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(u) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section
424(f) of the Code.
(v) "Trust" shall mean the GTS Employee Stock Option Plan
Trust, as may be amended from time to time.
(w) "Trustee" shall mean the trustee of the Trust, as may be
designated from time to time in accordance with the terms
and provisions of the Trust.
3. STOCK SUBJECT TO THE PLAN. Without limiting the application of
Section 11 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 18.5% of the total number of Shares
outstanding at the beginning of each calendar year. The Shares may include
authorized but unissued or reacquired Common Stock. If an Option is surrendered
for cash or other consideration or expires or becomes unexercisable for any
reason without having been exercised in full, the Shares which were subject to
the Option but as to which the Option was not exercised shall become available
for future Option grants under the Plan, unless the Plan shall have been
terminated. Shares subject to an Option that is forfeited or settled in cash or
otherwise terminated without a delivery of Shares to the Optionee, including
Shares withheld in payment of taxes relating to awards and the number of Shares
equal to the number of Shares surrendered in payment of the exercise price of
Options (or any other awards in the nature of purchase rights) or taxes relating
to awards, will again be available for awards under the Plan.
The Committee may adopt reasonable counting procedures to
ensure appropriate counting, avoid double counting and make adjustments if the
number of Shares actually delivered differs from the number of Shares previously
counted in connection with an award.
The Company intends that as long as it is not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act and is not an
investment company registered or required to be registered under the Investment
Company Act of 1940, all offers and sales of Options and Common Stock issuable
upon exercise of any Option shall be exempt from registration under the
provisions of Section 5 of the Securities Act, and the Plan and the Trust shall
be administered in such a manner so as to preserve such exemption. The Company
intends that the Plan shall constitute a written compensatory benefit plan
within the meaning of Rule 701(b) of 17 CFR Section 230.701 promulgated by the
Securities and Exchange Commission pursuant to such Act. The Committee shall
designate which Options granted under the Plan by the Company are intended to be
granted in reliance on Rule 701.
4. ADMINISTRATION OF THE PLAN.
(a) Procedure. The Plan shall be administered by the Board.
The Board may appoint a Compensation Committee consisting
of not less than two (2) members of the Board to
administer the Plan, subject to the direction of the
Board and such terms and conditions as the Board may
prescribe.
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Once appointed, the Committee shall continue to serve
until otherwise directed by the Board.
From time to time, the Board may increase the size of the
Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in
substitution therefor, fill vacancies, however caused, and
remove all members of the Committee and, thereafter,
directly administer the Plan. Members of the Board or
Committee who are either eligible for Options or have been
granted Options (either directly or as a beneficiary of
the Trust) may vote on any matters affecting the
administration of the Plan or the grant of Options
pursuant to the Plan, except that no such member shall act
upon the granting of an Option to such member (either
directly or as a beneficiary of the Trust) but any such
member may be counted in determining the existence of a
quorum at any meeting of the Board or the Committee during
which action is taken with respect to the granting of an
Option to such member (either directly or as a beneficiary
of the Trust).
The Committee shall meet at such times and places and upon
such notice as the Chairperson determines. A majority of
the Committee shall constitute a quorum. Any acts by the
Committee may be taken at any meeting at which a quorum is
present and shall be by majority vote of those members
entitled to vote. Additionally, any acts reduced to
writing or approved in writing by all of the members of
the Committee shall be valid acts of the Committee.
(b) Procedure After Registration Date. Notwithstanding
subsection (a) above, after the Registration Date, the
Plan shall be administered either by: (i) the full Board;
or (ii) a Committee of two (2) or more directors, each of
whom is a Non-Employee Director. After the Registration
Date, the Board shall take all action necessary to
administer the Plan in accordance with the then effective
provisions of Rule 16b-3 promulgated under the Exchange
Act, provided that any amendment to the Plan required for
compliance with such provisions shall be made in
accordance with Section 13 of the Plan.
(c) Powers of the Committee. Subject to the provisions of the
Plan, the Committee shall have discretionary authority:
(i) to determine, upon review of relevant information, the
fair market value of the Common Stock; (ii) to determine
the exercise price of Options to be granted, the persons
(including the Trust) to whom and the time or times at
which Options shall be granted, and the number of Shares
to be represented by each Option; (iii) to interpret the
Plan; (iv) to prescribe, amend and rescind rules and
regulations relating to the Plan; (v) to establish the
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<PAGE> 5
terms and conditions of each Option granted under the Plan
(which terms and conditions need not be identical in any
two Options) and, with the consent of the holder thereof,
to modify or amend any Option; (vi) to authorize any
person to execute on behalf of the Company any instruments
required to effect the grant of an Option awarded by the
Committee; (vii) to accelerate or (with the consent of an
Optionee) to defer an exercise date of any Option subject
to the provisions of Section 9(a) of the Plan; (viii) to
determine whether Options granted under the Plan will be
Incentive Stock Options or Nonstatutory Stock Options; and
(ix) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall
be final and binding on all potential or actual Optionees,
any other holder of an Option or other equity security of
the Company and all other persons. In any controversy
regarding the administration of the Plan, any arbitrator
or court reviewing any decision, determination or
interpretation by the Committee shall not set aside or
modify such decision, determination or interpretation
unless it is arbitrary, capricious or clearly contrary to
the terms of the Plan.
5. ELIGIBILITY.
(a) Persons Eligible to Participate. Options under the Plan
may be granted only to Employees or the Trust for the
benefit of Employees whom the Committee may designate from
time to time. Each Employee in certain jurisdictions, as
designated by the Committee from time to time, must be a
beneficiary of the Trust in order to be a participant
under this Plan. Incentive Stock Options may be granted
only to Employees. An Optionee who has been granted an
Option may receive an additional Option or Options, if he
or she is otherwise eligible for such grant. Such
additional Option or Options may be granted to the Trust
for the benefit of such eligible Optionee. However, the
aggregate fair market value (determined in accordance with
the provisions of Section 8(a) of the Plan) of the Shares
subject to one or more Incentive Stock Options that are
exercisable for the first time by an Optionee during any
calendar year (under all stock option plans of the
Company) shall not exceed $100,000 (determined as of the
grant date).
(b) No Right to Continuing Employment. Neither the
establishment nor operation of the Plan or the Trust shall
confer upon any Optionee or any other person any right
with respect to continuation of employment or other
service with the Company, nor shall the Plan or the Trust
interfere
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<PAGE> 6
in any way with the right of the Optionee or other person
or the right of the Company to terminate such employment
or service at any time.
6. TERM OF PLAN. This Third Amended and Restated Plan shall become
effective upon its adoption by the Board. The Plan shall continue until November
14, 2004 unless sooner terminated under Section 13 of the Plan.
7. TERM OF OPTION. Unless the Committee determines otherwise, at the
time of the grant of an Option, the term of each Nonstatutory Stock Option
granted under the Plan shall be ten (10) years and one (1) day from the date of
grant; and the term of each Incentive Stock Option shall be ten (10) years from
the date of grant. No Option shall be exercisable after the expiration of its
term. In all cases the terms of an Option shall be set forth in the Option
Agreement.
8. OPTION PRICE, CONSIDERATION AND RESTRICTIONS.
(a) Option Price. Except as provided in subsection 8(b),
the option price for the Shares to be issued pursuant
to any Option shall be such price as is determined by
the Committee which, in the case of Incentive Stock
Options, shall in no event be less than the fair
market value of such Shares on the date the Option is
granted. Fair market value of the Common Stock shall
be determined by the Committee using such criteria as
it deems relevant; provided, however, that where there
is a public market for the Common Stock, the fair
market value per Share shall be the average of the
last reported bid and asked prices of the Common Stock
on the date of grant, as reported in The Wall Street
Journal (or, if not so reported, as otherwise reported
by the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System; or, in the
event the Common Stock is listed on a national
securities exchange, within the meaning of Section 6
of the Exchange Act, the fair market value per Share
shall be the closing price on such exchange on the
date of grant of the Option, as reported in The Wall
Street Journal.
(b) Ten Percent Shareholders. No Incentive Stock Option
shall be granted to any Employee who, at the date such
Option is granted, owns (within the meaning of Section
424(d) of the Code) more than ten percent (10%) of the
total combined voting power of all classes of stock of
the Company, its Parent or any Subsidiary, unless the
option price for the Shares to be issued pursuant to
such Incentive Stock Option is equal to at least 110
percent (110%) of the fair market value of such Shares
on the grant date as determined by the Committee in
the manner set forth in subsection (a) above.
(c) Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall
be payment in cash or by check or with
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<PAGE> 7
Shares of the Company's Common Stock. The Committee
may also, in its discretion, authorize at the time of
the grant of the Option payment in some other
consideration or method (such as by promissory note)
for the issuance of Shares as may be permitted under
Section 157 of the General Corporation Law of the
State of Delaware. Any cash or other property received
by the Company from the sale of Common Stock pursuant
to the Plan shall constitute part of the general
assets of the Company.
9. EXERCISE OF OPTION.
(a) Vesting Period. Any Option granted hereunder shall be
exercisable at such times and under such conditions as
determined by the Committee and as shall be
permissible under the terms of the Plan, which times
and conditions shall be specified in the Option
Agreement evidencing the grant of the Option. Unless
the Committee specifically determines otherwise in the
Option Agreement, each Option shall vest and become
exercisable, cumulatively, by an Optionee or by the
Trust on behalf of an Optionee, to the extent of (i)
one-third (1/3) of the Optioned Shares as of the first
anniversary of the date on which the Option is
granted, (ii) two-thirds (2/3) of the Optioned Shares
as of the second anniversary of the date on which the
Option is granted, and (iii) all of the Optioned
Shares as of the third anniversary of the date on
which the Option is granted, subject to the Optionee's
Continuous Employment; provided, however, that the
Optionee must complete twelve (12) months of
employment to exercise an Incentive Stock Option. An
Option may not be exercised for fractional Shares or
for less than ten (10) Shares.
(b) Exercise Procedures. An Option shall be deemed to be
exercised when written notice of such exercise has
been given to the Company in accordance with the terms
of the Option Agreement by an Optionee or by the Trust
on behalf of an Optionee and full payment for the
Shares with respect to which the Option is exercised
has been received by the Company. As soon as
administratively practicable following the exercise of
an Option in the manner set forth above, the Company
shall issue or cause its transfer agent to issue stock
certificates representing the Shares purchased. Until
the issuance of such stock certificates (as evidenced
by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect
to the Optioned Shares notwithstanding the exercise of
the Option. Except as provided in Section 11 below, no
adjustment will be made for a dividend or other rights
for which the record date occurs prior to the date the
stock certificates are issued.
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<PAGE> 8
(c) Exercise of Option with Stock or Net of Exercise
Price. The Committee, in its discretion, may permit
an Optionee or the Trust on behalf of an Optionee to
exercise an Option in whole or in part by (i)
delivering whole Shares of the Company's Common Stock
previously owned by such Optionee or the Trust on
behalf of an Optionee (whether or not acquired
through the prior exercise of a stock option) having
a fair market value equal to the option price; or
(ii) directing the Company to withhold from the
Shares that would otherwise be issued upon exercise
of the Option that number of whole Shares having a
fair market value equal to the Option price. Shares
of the Company's Common Stock so delivered or
withheld shall be valued at their fair market value
at the close of the last business day immediately
preceding the date of exercise of the Option, as
determined by the Committee. Any balance of the
Option price shall be paid in cash. Any Shares
delivered or withheld in accordance with this
provision shall again become available for purposes
of the Plan and for Options subsequently granted
thereunder.
(d) Termination of Status as Employee. If an Optionee
shall cease to be an Employee for any reason other
than permanent and total disability (within the
meaning of Section 22(e)(3) of the Code as determined
in the sole discretion of the Committee), retirement
or death, such individual's Option (irrespective of
whether such Option has been transferred to the
Trust) shall automatically terminate thirty (30) days
following the date he or she ceases to be an
Employee, unless the Committee, in its discretion,
determines to permit a longer post-employment
exercise period (which shall in no event extend
beyond the term of the relevant Option). Prior to
such termination of the Option, the Optionee or the
Trust on behalf of an Optionee may exercise such
Option to the extent that the Optionee or the Trust
on behalf of an Optionee was entitled to exercise on
the exercise date, subject to the condition that no
Option shall be exercised after the expiration of the
term of the Option.
(e) Disability of Optionee. In the event of the
permanent and total disability (within the meaning of
Section 22(e)(3) of the Code as determined in the
sole discretion of the Committee) during the term of
the Option of an Optionee who is at the time of such
disability, or was within the 90-day period prior
thereto, an Employee and who was in Continuous
Employment as such from the date of the grant of the
Option until the date of disability or termination,
the Option may be exercised at any time within one
(1) year following the date of disability (or such
longer period as may be established by the Committee,
in its discretion), but only to the extent that the
Optionee or the Trust was entitled to exercise the
Option at the time of the termination or disability,
whichever comes
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<PAGE> 9
first, subject to the condition that no Option shall
be exercised after the expiration of the term of the
Option.
(f) Retirement of Optionee. In the event of the
retirement during the Option period of an Optionee
who is at the time of such retirement, or was within
the 90-day period prior thereto, an Employee and who
was in Continuous Employment as such from the date of
the grant of the Option until the date of the
retirement, the Option may be exercised by the
Optionee or the Trust on behalf of an Optionee at any
time within ninety (90) days following the retirement
date (or such longer period as may be established by
the Committee, in its discretion), but only to the
extent that the Optionee or the Trust was entitled to
exercise the Option at the time of the Optionee's
retirement, subject to the condition that no Option
shall be exercised after the expiration of the Option
period. For purposes of this Section 9, the term
"retirement" shall mean voluntary termination of
employment by an Employee who is at least age
fifty-five (55) and who has completed five (5) years
of employment with the Company.
(g) Death of Optionee. In the event of the death during
the term of the Option of an Optionee who is at the
time of his or her death, or was within the 90-day
period immediately prior thereto, an Employee and who
was in Continuous Employment as such from the date of
the grant of the Option until the date of death, the
Option may be exercised for a period up to one (1)
year following the date of death (or such longer
period as may be established by the Committee, in its
discretion), at any time prior to the expiration of
the term of the Option, by the Optionee's estate or
by a person who acquired the right to exercise the
Option by bequest, inheritance or otherwise as a
result of the Optionee's death, or by the Trust for
the benefit of such estate or person, but only to the
extent that the Optionee or Trust was entitled to
exercise the Option at the time of the death, subject
to the condition that no Option shall be exercised
after the expiration of the Option period.
(h) Tax Withholding. When an Optionee or the Trust on
behalf of an Optionee is required to pay to the
Company an amount with respect to income or
employment tax withholding obligations in connection
with the exercise of an Option granted under the
Plan, the Optionee or the Trust on behalf of an
Optionee may elect, prior to the date the amount of
such withholding is determined (the "Tax Date") to
make such payment, or such increased payment as the
Optionee or the Trust on behalf of an Optionee elects
to make up to the maximum federal, state and local
marginal tax rates (including any related obligation
under the Federal Insurance Contribution Act)
applicable to the Optionee and the particular
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transaction, by (i) delivering cash; (ii) delivering
part or all of the payment in previously owned stock
(whether or not acquired through the prior exercise
of a stock option); or (iii) subject to the consent
of the Committee, irrevocably directing the Company
to withhold from the Shares that would otherwise be
issued upon exercise of the Option that number of
whole Shares having a fair market value equal to the
amount of tax required or elected to be withheld (a
"Withholding Election"). If an Optionee's Tax Date is
deferred beyond the date of exercise and the Optionee
or the Trust on behalf of an Optionee makes a
Withholding Election, the Optionee or the Trust on
behalf of an Optionee will receive the full amount of
Shares otherwise issuable upon exercise of the Option
minus the number of Shares necessary to satisfy the
minimum withholding requirements measured on the date
the Option is exercised (or such higher payment as
the Optionee or the Trust may have elected to make)
with adjustments to be made in cash after the Tax
Date.
Any adverse consequences incurred by an Optionee with
respect to his or her participation in the Plan or
the Trust, the use of Shares to pay any part of the
Option price or income or employment tax arising in
connection with the exercise of an Option (including
without limitation any adverse tax consequences
arising as result of a disqualifying disposition
within the meaning of Section 422 of the Code) shall
be the sole responsibility of the Optionee or Trust.
The Company does not warrant or represent to the
Optionee any tax consequence of any transaction under
this Plan or the Trust, including the initial and
continuing satisfaction of the conditions for an
Incentive Stock Option under Section 422 of the Code.
10. NON-TRANSFERABILITY OF OPTIONS AND SHARES OF COMMON STOCK.
(a) Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of
descent and distribution and may be exercised, during
the lifetime of the Optionee, only by the Optionee.
Notwithstanding the preceding sentence, (i) an
Optionee who is eligible to participate in the Trust
may transfer or direct the Company to transfer
Options or Optioned Shares to the Trust, subject to
the terms and conditions of this Plan and the Trust,
and (ii) the Option may be transferred to a spouse of
the Optionee only upon approval of the Committee,
providing all the conditions of exercisability and
vesting have been met. If the Option Agreement
permits, the Optionee may designate a beneficiary who
may (i) exercise an Option under Section 9(g) above,
or (ii) receive Shares issued pursuant to the
exercise of an Option where the death of an
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Optionee occurs between the date on which the
Optionee exercises the Option and the date the
Company issues the Shares.
(b) Shares of Common Stock. The Committee may impose
such other restrictions on Shares issued under this
Plan as it deems advisable. Except as otherwise
provided by the Committee, and except for transfers
of Optioned Shares to the Trust, Optioned Shares
acquired under an Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of
descent and distribution (provided the assigns or
successors in interests to such Optioned Shares
remain subject to the terms and conditions of this
Plan and the Trust including the Company's right of
first refusal to repurchase the Optioned Shares)
without the Optionee first offering to the Company
the right to purchase the Optioned Shares at the fair
market value of the Shares on the date such offer is
received by the Secretary of the Company. If the
Company fails to accept the offer to purchase such
Shares within seven (7) days after receipt of such
offer, the Optionee shall be free to sell or transfer
such Shares at the same fair market value at which
they were offered to the Company. If the Optionee
does not sell or transfer such Shares within ninety
(90) days, then the restrictions of this Section 10
shall remain in effect. The certificates representing
the Optioned Shares shall bear a legend which shall
give notice of such restrictions on the
transferability of the Optioned Shares.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the shareholders of the Company, the number of Shares of
Common Stock covered by each outstanding Option and the per share price thereof
in each such Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, combination, reclassification, the payment of a
stock dividend on the Common Stock or any other increase or decrease in the
number of such Shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall affect
(and no adjustment by reason thereof shall be made with respect to) the number
or price of Shares subject to an Option.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the number or class of securities
covered by any Option, as well as the price to be paid therefor, in the event of
the Company's effecting one or more reorganizations, recapitalizations, rights
offerings, or other increases or reductions of the number of Shares of
11
<PAGE> 12
its outstanding Common Stock, or in the event of the Company's being
consolidated with or merged into any other corporation.
Unless otherwise determined by the Board, upon the dissolution or
liquidation of the Company or upon any merger or consolidation, if the Company
is not the surviving corporation, the Options (irrespective of whether such
Options have been transferred to the Trust) granted hereby shall terminate and
thereupon become null and void; provided, however, that the Optionee and the
Trust shall be given not less than ten (10) days' notice of such event and the
exercisability of each outstanding Option shall be accelerated so that the
Optionee and the Trust may within such period exercise up to the entire
unexercised portion of their respective options. Upon the occurrence of any such
event, any Option not exercised pursuant thereto shall terminate.
12. TIME OF GRANTING OPTIONS. Unless otherwise specified by the
Committee or as may be required by applicable law, regulation or rule (including
rules of stock exchanges or other self-regulatory organizations), the date of
grant of an Option under the Plan shall be the date on which the Committee makes
the determination to grant such Option or, if later, the date on which are
satisfied any conditions precedent to such grant. As soon as feasible after the
Committee makes its determination regarding the grant of an Option, the
Committee shall notify the individual or class of persons who are the recipients
of the grant.
13. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable, except that amendments or modifications to the Plan shall be subject
to shareholder approval (a) if such amendment or modification increases the
Shares available for issuance under the Plan or (b) to the extent required by
applicable law, regulation or rule (including rules of stock exchanges or other
self-regulatory organizations). Any amendment or termination of the Plan shall
not adversely affect any Option already granted without the relevant Optionee's
consent; and if no such consent is secured such Option shall remain in full
force and effect as if the Plan had not been amended or terminated.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an Option granted under the Plan unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance. As a condition to the exercise of an Option, the Company may
require the Optionee to represent and warrant, at the time of any such exercise,
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
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<PAGE> 13
15. RESERVATION OF SHARES. During the term of this Plan, the Company
will at all times reserve and keep available the number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain from any regulatory body having jurisdiction and authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect to the
nonissuance or sale of such Shares as to which such requisite authority shall
not have been obtained.
16. INFORMATION TO OPTIONEE. During the term of any Option granted
under the Plan, the Company shall provide or otherwise make available to each
Optionee and the Trust a copy of its annual report to shareholders and financial
information which is provided to its shareholders in accordance with the
provisions of the Company's Bylaws and applicable law.
17. OPTION AGREEMENT. All Options granted under Plan shall be evidenced
by Option Agreements.
18. BEST PAYMENTS. If the gross amount of any payment or benefit under
the Plan, either separately or in combination with any other payment or benefit
payable by the Company or pursuant to a plan of the Company would constitute a
parachute payment within the meaning of Code Section 280G, then the total
payments and benefits accrued and payable under this Plan shall not exceed the
amount necessary to maximize the amount received by the Optionee after payment
of all employment, income and excise taxes imposed on the Optionee with respect
to such payments and benefits. The Optionee may elect, by written notice to the
Board, which items of compensation, if any, shall be reduced so as to meet the
requirements of the preceding sentence. If there is a dispute between the
Company and the Optionee regarding (i) the extent, if any, to which any payments
or benefits to the Optionee are parachute payments or excess parachute payments,
under Code Section 280G, (ii) the base amount of such Optionee's compensation,
under Code Section 280G, or (iii) the status of such Optionee as a disqualified
individual, under Code Section 280G, such dispute shall be resolved as provided
in Section 20 below. Within 30 days of the Optionee's receiving notice of (a) a
change of control of the Company within the meaning of Code Section 280G or (b)
the Optionee's termination of service with the Company or the Company's
receiving notice of such termination, either the Optionee or the Company may
request, in accordance with Section 19 below, (a) a determination of the amount
of any parachute payment, excess parachute payment, or base amount of
compensation, or (b) a determination of the reduction necessary to maximize the
amount receivable by the Optionee as described above. Any fees, costs or
expenses incurred by the Optionee or the Trust in connection with such
determinations shall be paid by the Optionee.
19. MANDATORY ARBITRATION. Any dispute arising out of or relating to
this Plan or any Option Agreement shall be resolved solely by arbitration before
one arbitrator in accordance with the Employee Benefit Plan Claim Rules of the
American Arbitration Association. The location of the arbitration proceeding
shall be in Washington, D.C. Judgment on the award rendered by the arbitrator
may be entered in any court having
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<PAGE> 14
jurisdiction. Each party to any dispute regarding the Plan or an Option
Agreement shall pay the costs and fees (including attorneys' fees) of presenting
his, her or its case in arbitration. All other costs of arbitration, including
the costs of any transcript of the proceedings, administrative fees and the
arbitrator's fees, shall be borne equally by the parties. All statutes of
limitation which would otherwise be applicable shall apply to any arbitration
proceeding. The provisions of this Section 20 are exclusive for all purposes and
applicable to any and all disputes arising out of or relating to the Plan or any
Option Agreement. The arbitrator who hears and decides any dispute shall have
jurisdiction and authority to award only compensatory damages to make whole a
person or entity sustaining foreseeable economic loss, and shall not have
jurisdiction or authority to make any other award of any type, including,
without limitation, punitive damages, unforeseeable economic damages, adverse
tax consequences, damages for pain, suffering or emotional distress, or any
other kind or form of damages. The remedy, if any, awarded by the arbitrator
shall be the sole and exclusive remedy for any dispute which is subject to
arbitration under this Plan.
20. GOVERNING LAW. The validity, construction and effect of the Plan
and any agreement hereunder shall be determined in accordance with the laws of
the State of Delaware and applicable federal law.
21. COMPLIANCE WITH RULE 16B-3. It is the intent of the Company that
this Plan and the Trust comply in all respects with applicable provisions of
Rule 16b-3 under the Exchange Act in connection with any grant of Options.
Accordingly, if any provision of this Plan or the Trust or any agreement
hereunder does not comply with the requirements of Rule 16b-3 as then applicable
to any such Optionee, such provision shall be construed or deemed amended to the
extent necessary to conform to such requirements with respect to such Optionee.
In addition, the Board shall have no authority to make any amendment,
alteration, suspension, discontinuation, or termination of the Plan or the Trust
or any agreement hereunder to take other action if and to the extent such
authority would cause an Optionee's transactions under the Plan or the Trust not
to be exempt under Rule 16b-3 of the Exchange Act.
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<PAGE> 1
EXHIBIT 10.43
KEY EMPLOYEE STOCK OPTION PLAN
OF
HERMES EUROPE RAILTEL B.V.
1. PURPOSES OF THE PLAN. The purposes of the Key Employee Stock Option
Plan are to attract and retain the best available personnel for
positions of substantial responsibility; to replace the GTS-Hermes,
Inc., 1994 Stock Option Plan, and convert options granted to the
Employees under the GTS-Hermes, Inc., 1994 Stock Option Plan to options
granted under this Plan; to provide additional incentives to the key
employees of the Company; and to promote the success of the business of
the Company and its subsidiaries and divisions.
2. DEFINITIONS. As used herein, and in any Option granted hereunder, the
following definitions shall apply:
(a) "Board" shall mean the Supervisory Board of Directors of the
Company.
(b) "Cause" shall mean any action of the Optionee or any
failure to act by the Optionee which constitutes:
(i) fraud, embezzlement or any felony in connection with
the Optionee's duties as an Employee of the Company or
any parent, subsidiary or affiliate of the Company, or
willful misconduct or the commission of any other act
which causes or may reasonably be expected to cause
substantial economic or reputational injury to the
Company or any such subsidiary or affiliate of the
Company, including any violation of the United States
Foreign Corrupt Practices Act;
(ii) a continuing conflict of interest or continuing
failure to follow reasonable directions or
instructions of the Board or Managing Director of the
Company. A conflict of interest or a failure to follow
directions of the Company shall be deemed to be
continuing if the Optionee shall have received written
notice thereof and shall have not terminated the
conflict of interest or failure to follow directions
within thirty days after receipt of such notice; or
(iii) an extended period of absence by the Optionee from the
performance of the obligations of the Optionee under
the Optionee's employment contract with the Company,
which absence shall be for a reason other than a
disability, and which has not been approved in writing
in advance by the Company.
(c) "Company" shall mean Hermes Europe Railtel B.V., a Dutch
corporation.
<PAGE> 2
(d) "Committee" shall mean the Compensation Committee appointed by
the Board in accordance with Section 4 of the Plan. If the
Board does not appoint or ceases to maintain a Committee, the
term "Committee" shall refer to the entire Board.
(e) "Continuous Employment" shall mean the absence of any
interruption or termination of service as an employee of the
Company, or any parent, subsidiary or division, if the
employee is seconded to such parent, subsidiary or division.
For purposes of the preceding sentence, service shall not be
considered interrupted during any period of vacation, sick
leave, military leave or any other absence approved by
management and shall not be considered terminated as a result
of a transfer between locations within the Company, any
parent, subsidiary or division or among the Company, any
parent, subsidiary or division.
(f) "Disability" shall mean any physical or mental illness,
condition, or incapacity that:
(i) prevents the Employee from reasonably discharging
required services and employment duties;
(ii) shall be attested to in writing by a physician
acceptable to the Company; and (iii) continues during
any period of three consecutive months or for periods
aggregating three months in any eighteen month period.
"Disability" shall be deemed to have occurred on the last day
of such applicable three month period.
(g) "Employee" shall mean any person who is an employee of the
Company and whose participation in the Plan is determined by
the Committee to be in the best interest of the Company.
(h) "Fair Market Value" shall mean:
(i) if the Company is a private company at the time of
issue of Options or the subsequent sale of Option
Shares pursuant to Section 8(b) of the Plan, the fair
market value as of the relevant date, determined by an
internationally recognized investment banking firm
selected and approved by the Committee; and
(ii) if the Company is a public company and its Stock is
traded on a national securities exchange or similar
market at the time of the issue of Options or
subsequent sale of Option Shares pursuant to Section
8(b) of the Plan, the daily closing price averaged
over a period of twenty (20) days consisting of the
day as of which Fair Market Value is being determined
and the nineteen (19) consecutive trading days
preceding such day.
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<PAGE> 3
(i) "Initial Options" shall mean those Options granted to certain
Employees in consideration for the cancellation and return of
all Original Options granted to such Employees under the
Original Plan.
(j) "Option" shall mean an option to purchase Receipts
representing a beneficial interest in Option Shares granted
pursuant to the Plan and held by the Trust.
(k) "Option Agreement" shall mean a written agreement between the
Company and the Optionee setting forth the terms and
conditions of the grant and exercise of Options by the
Optionee as determined by the Committee pursuant to the Plan.
(l) "Option Shares" shall mean the shares of Stock held by the
Trust.
(m) "Optionee" shall mean an Employee who is granted an Option
under the Plan.
(n) "Original Option" shall mean an option granted to an Optionee
under the Original Plan, and which is to be replaced by an
Initial Option granted pursuant to the Plan.
(o) "Original Plan" shall mean the GTS-Hermes, Inc., 1994 Stock
Option Plan.
(p) "Plan" shall mean this Key Employee Stock Option Plan of the
Company.
(q) "Purchase Office" shall mean the foundation under Dutch law:
"(Stichting) Purchase, Sales and Deposit Office Hermes" to
perform as a depository for, and to buy and sell, receipts.
(r) "Retirement" shall mean a voluntary termination of employment
by an Employee who is at least age fifty-five (55) and who has
completed five (5) years of Continuous Employment with the
Company.
(s) "Receipt" shall mean a depository receipt representing a
beneficial interest in a share of Option Stock, such receipt
being issued by the Trust.
(t) "Share" shall mean a share of the Stock, as adjusted in
accordance with Section 7 of the Plan.
(u) "Stock" shall mean the common stock of the Company authorized
under the articles of association of the Company.
(v) "Trust" shall mean the foundation under Dutch law: "(Stichting
Administratiekantoor) Hermes Foundation" to hold Option Shares
and issue Receipts formed by the Company on November __, 1997.
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<PAGE> 4
3. STOCK SUBJECT TO THE PLAN.
(a) Receipts and Option Shares Subject to Grant. Without limiting
the application of Section 7 of the Plan, the maximum
aggregate number of Receipts for Option Shares into which
Options may be exercised at any time shall not exceed 24,760
Receipts for an identical number of Option Shares. The
Committee may adopt reasonable counting procedures to ensure
appropriate counting of Receipts and Option Shares, avoid
double counting of Receipts and Option Shares, and make
adjustments if the number of Receipts and Option Shares
actually delivered differs from the number of Shares
previously counted in connection with an award.
(b) Cancelled and Similar Receipts and Option Shares. In the event
of a lapse, expiration, termination, forfeiture or
cancellation of any Option granted under the Plan without the
issuance of Receipts, the Option Shares (underlying such
Receipts) subject to or reserved for such Option may be used
again for new grants of Options hereunder; provided that in no
event may the number of Option Shares for which Receipts will
be issued hereunder exceed 24,760. Any Receipts and Option
Shares withheld or surrendered to arrange for the payment of
withholding taxes pursuant to Section 7(n) or withheld or
surrendered in full or partial payment of the exercise price
of an Option pursuant to Section 7(e) may be used again in
connection with the grant of new Options, subject to the
maximum limitation of 24,760 Receipts and Option Shares.
(c) Future Value Determinations. So long as the Company is
privately-owned, an internationally recognized investment
banking firm annually shall determine the Fair Market Value of
the Option Shares as at December 31, and deliver to the
Company and the Participants a certificate setting forth the
fair market value of the Option Shares as soon as practicable
after the completion of the audit of the financial statements
of the Company, but no later than March 15 of the immediately
following year, such Fair Market Value shall be applicable for
purposes of the Plan for the immediately following
twelve-month period..
4. ADMINISTRATION OF THE PLAN.
(a) Procedure. The Plan shall be administered by the Committee
which shall consist of three (3) members of the Board and who
shall serve subject to the direction of the Board and such
terms and conditions as the Board may prescribe. Members of
the Committee may not hold or receive an Option. Once
appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time, the Board
may increase the size of the Committee, remove members (with
or without cause), and appoint replacement or additional
members of the Committee. The Board also may remove all
members of the Committee and, thereafter, directly administer
the Plan.
(b) Powers of the Committee. Subject to the provisions of the
Plan, the Committee shall have discretionary authority to: (i)
grant Options to Employees; (ii) determine the number of
Shares represented by Receipts to be issued upon exercise of
each Option; (iii) interpret the Plan; (iv) prescribe, amend
and rescind
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<PAGE> 5
rules and regulations relating to the Plan; (v) establish the
terms and conditions of each Option granted under the Plan
(which terms and conditions need not be identical in any two
Options); (vi) with the consent of the holder thereof, modify
or amend any Option; (vii) authorize any person to execute on
behalf of the Company any instruments required to effect the
grant of an Option awarded by the Committee; (viii) accelerate
or (with the consent of an Optionee) defer an exercise date of
any Option subject to the provisions of Section 7(a) of the
Plan; (ix) make changes to the Plan which are required to
comply with any applicable securities law; and (x) to make all
other determinations deemed necessary or advisable for the
administration of the Plan. The Committee shall also
constitute the governing board of the Trust.
(c) Indemnification. No member of the Committee shall be liable
for any action or determination made in good faith with
respect to the Plan or any Option awarded under it. To the
maximum extent permitted by applicable law, each member of the
Committee shall be indemnified and held harmless by the
Company against any cost or expense (including legal fees) or
liability (including any sum paid in settlement of a claim
with the approval of the Company) arising out of any act or
omission to act in connection with the Plan unless arising out
of such member's own fraud or bad faith. Such indemnification
shall be in addition to any rights of indemnification the
members may have as members of the Board or under the by-laws
of the Company.
(d) Effect of the Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be
final and binding on all potential or actual Optionees, any
other holder of an Option, Receipt or other equity security of
the Company, and all other persons. The Committee may employ
counsel to advise it on any matter. In any controversy
regarding the administration of the Plan, any arbitrator or
court reviewing any decision, determination or interpretation
of the Committee shall not set aside or modify such decision,
determination or interpretation unless it is arbitrary,
capricious or clearly contrary to the terms of the Plan.
5. ELIGIBILITY.
(a) Persons Eligible to Participate. Options under the Plan shall
be granted only to Employees. Each Employee who is nominated
for a grant of Initial Options shall, as a condition to such
grant, surrender and agree to the termination of any Original
Options granted pursuant to the Original Plan.
(b) No Right to Continuing Employment. Neither the establishment
nor operation of the Plan shall confer upon any Optionee or
any other person any right with respect to continuation of
employment or other service with the Company, any parent,
subsidiary or division, nor shall the Plan interfere in any
way with the right of the Optionee or other person or the
right of the Company, parent, subsidiary or division to
terminate such employment or service at any time.
5
<PAGE> 6
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board and shall continue in effect until 6 December, 2004, unless terminated
earlier by the Board pursuant to Section 10 of the Plan.
7. TERM AND CONDITIONS OF OPTIONS. Each Option shall be evidenced by an
Option Agreement, in form and substance as shall be determined by the Committee,
and shall be subject to the following terms and conditions and to such other
terms and conditions determined by the Committee:
(a) Term. The term of each Option, except Initial Options, granted
under the Plan shall be ten (10) years from the date of grant
of such Option unless terminated earlier under the terms
hereof or the applicable Option Agreement. The term of any
Initial Option shall be ten (10) years from the date of grant
of the Original Option it replaces. Upon the expiration of the
term of each Option and without any action by the Company or
Committee, no Option shall be exercisable after the expiration
of its term.
(b) Exercise Price. The price at which a Receipt for an Option
Share may be purchased pursuant to the exercise of an Option
shall be determined by the Committee at the time of grant of
such Option provided that except with respect to the Initial
Options, such exercise price shall not be less than the Fair
Market Value of that underlying Option Share on the date of
the grant of the Option
(c) Vesting Period. Any Option granted hereunder shall be
exercisable at such times and under such conditions as
determined by the Committee and as shall be permissible under
the terms of the Plan, but only after the Optionee shall have
satisfied all applicable conditions to such exercise. Unless
the Committee specifically determines otherwise in the Option
Agreement at the time of the grant of the Option, each Initial
Option shall vest and become exercisable in accordance with
the vesting provision of the Original Options granted to each
Employee under the Original Plan.
(d) Exercise Procedures. An Option shall be deemed to be exercised
when written notice of such exercise has been given to the
Company and to the member (designated by the Company) of the
Committee (which also serves as governing Board of the Trust)
in accordance with the terms of the applicable Option
Agreement by the person entitled to exercise the Option, and
full payment for the Receipts for Option Shares with respect
to which the Option is exercised has been received by the
Company. As soon as administratively practicable following the
exercise of an Option in the manner set forth herein, the
Committee shall cause the Trust to issue Receipts for the
Option Shares represented thereby. An Optionee shall be deemed
to be the beneficial holder of the number of the Option Shares
underlying the Receipts acquired pursuant to the exercise of
an Option as of the date of exercise of the Option. When
Options have been duly exercised hereunder and under the
Option Agreements, the Company shall issue to the Trust for
the benefit of the Optionee a number of Option Shares to the
Trust equal to the number of Receipts issued to such Optionee.
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<PAGE> 7
(e) Consideration. The consideration to be paid for the Receipts
upon exercise of an Option shall be made either (i) in cash or
cash equivalent, including cashiers' check; (ii) by surrender
to the Purchase Office of previously-acquired Receipts of
which underlying Option Shares have a Fair Market Value at the
time of such surrender at least equal to the Exercise Price of
the Options; (iii) through the withholding by the Company of
Receipts of which underlying Option Shares have a Fair Market
Value at the time of withholding at least equal to the
Exercise Price of the Options; or (iv) by a combination of the
foregoing.
(f) Adjustments Upon Changes in Capitalization.
(i) Subject to any required action by the shareholders of
the Company, the number of Receipts for Option Shares
covered by each outstanding Option and the per-Receipt
exercise price for each such Option, shall be
proportionately adjusted for any increase or decrease
in the number of issued Shares resulting from a stock
split, reverse stock split, combination,
reclassification, the payment of a stock dividend on
the Stock of the Company, or any other increase or
decrease in the number of Shares of the Company
effected without receipt of consideration by the
Company; provided, however, that conversion of any
convertible securities of the Company shall not cause
such adjustment. Such adjustments shall be made by the
Committee, whose determination in that respect shall
be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of
stock of any class, or securities convertible into
shares of stock of any class, shall affect (and no
adjustment by reason thereof shall be made with
respect to) the number and price of Receipts subject
to an Option or the number or price of related Option
Shares.
(ii) The Committee may, if it so determines in the exercise
of its sole discretion, also make provision for
adjusting the number of Receipts or number or class of
securities underlying Receipts covered by any Option,
as well as the price paid therefor, in the event of
the Company's effecting one or more reorganizations,
recapitalizations, rights offerings, or other
increases or reductions of the number of Shares of its
outstanding Stock, or in the event of the Company's
consolidation with or merger into any other
corporation.
(iii) Unless otherwise determined by the Board, upon the
dissolution or liquidation of the Company, the Options
granted hereby shall terminate and thereupon become
unexercisable, null and void. Optionees shall be given
not less than ten (10) days' notice of an anticipated
dissolution or liquidation and exercisability of each
outstanding Option shall be accelerated so that the
Optionee may within such period exercise up to the
entire unexercised portion of his or her Option.
Optionees shall not be entitled hereunder to any
payment, severance, consideration or damages
whatsoever as a result of such dissolution or
liquidation.
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<PAGE> 8
(g) Disability of Optionee. In the event of an Optionee's
Disability during the Term of an Option, any vested Option
held by the Optionee at the time of Disability may be
exercised at any time within one (1) year following the date
of Disability to the extent that the Optionee was entitled to
exercise the Option at the date of the Disability provided
that such Optionee is at the time of such Disability, or was
within the 90-day period prior thereto, an Employee of the
Company in Continuous Employment of the Company from the date
of the grant of the Option until the date of such Disability,
and provided further that no Option may be exercised after the
expiration of the term of the Option.
(h) Retirement of Option. In the event of the Retirement of an
Optionee during the Term of a vested Option, such Option may
be exercised by the Optionee at any time within ninety (90)
days following the Retirement date to the extent that the
Optionee was entitled to exercise the Option at the time of
his or her retirement; provided that such Optionee is at the
time of such Retirement, or was within the 90-day period
immediately prior thereto, an Employee of the Company in
Continuous Employment with the Company from the date of the
grant of the Option until the date of Retirement; and provided
further that no Option may be exercised after the expiration
of the Term of the Option.
(i) Death of Optionee. In the event of the death of an Optionee
during the Term of a vested Option, the Option may be
exercised by the estate or other legal representative of the
Optionee for a period of up to one (1) year following the
Optionee's date of death to the extent that the Optionee was
entitled to exercise the Option at the time of the death
provided that no Option may be exercised after the expiration
of the Term of the Option.
(j) Optionee's Termination for Cause. In the event that an
Optionee is terminated as an Employee of the Company for Cause
during the Term of an Option, all Options previously granted
to the Employee shall immediately terminate and become
unexercisable, null and void, and no Receipts for Option
Shares shall be issued with respect to any Option held by the
Optionee.
(k) Other Termination. Unless otherwise determined by the
Committee at or after a grant of an Option, if an Optionee
shall cease to be an Employee for any reason other than
Disability, Retirement, death, or for Cause, such individual's
Option shall automatically terminate; provided that, if the
Optionee is involuntarily terminated without Cause, any vested
Options held by such Optionee may be exercised for the lesser
of three months or the balance of such Option's Term. Except
as specifically set forth herein, all Options held by an
Employee shall automatically terminate and no longer be
exercisable as of the date of such Employee's termination of
employment with the Company.
(l) Change in Control. An Option Agreement may contain provisions
for accelerated vesting of the Option upon certain
circumstances arising subsequent to a change
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<PAGE> 9
in control of or over the Company. The existence and terms and
conditions of such provisions shall be at the sole and
absolute discretion of the Committee as determined at the time
the Option is granted and set forth in the applicable Option
Agreement.
(m) Tax Withholding. When an Optionee is required to pay to the
Company an amount with respect to income or employment tax
withholding obligations in connection with the exercise of an
Option granted under the Plan, the Optionee may elect, prior
to the date the amount of such withholding is determined (the
"Tax Date") to make such payment, or an increased payment by
delivering cash or irrevocably directing the Trust to withhold
from the Receipts, which would otherwise be issued upon
exercise of the Option, such number of Receipts representing
Option Shares having a Fair Market Value equal to the amount
of tax required or elected to be withheld (a "Withholding
Election"). If an Optionee's Tax Date is deferred beyond the
date of exercise and the Optionee makes a Withholding
Election, the Optionee will receive the full number of
Receipts otherwise issuable upon exercise of the Option minus
the number of Receipts necessary to satisfy his or her minimum
withholding requirements measured on the date the Option is
exercised (or such higher payment as he or she may have
elected to make) with adjustments to be made in cash after the
Tax Date. Optionees shall be responsible for any income or
other taxes triggered by the grant, exercise or transfer of
Options and for any such taxes resulting from the Trust's sale
of Option Shares.
8. NON-TRANSFERABILITY OF OPTIONS AND RECEIPTS FOR OPTION SHARES.
(a) Options. An Option may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent and distribution and
may be exercised, during the lifetime of the Optionee, only by
the Optionee. If the Option Agreement permits, the Optionee
may designate a beneficiary who may (i) exercise an Option
under Section 7(d) above, or (ii) receive Receipts for Option
Shares issued pursuant to the exercise of an Option where the
death of an Optionee occurs between the date on which the
Optionee exercises the Option and the date the Company issues
the Receipt.
(b) Receipts and Option Shares.
(i) The Committee may impose such other restrictions on
Receipts and Option Shares as it deems advisable. The
certificates, if any, representing the Receipts or
Option Shares shall bear a legend which shall give
notice of such restrictions on the transferability of
the such Receipts or Option Shares.
(ii) Except as otherwise provided by the Committee, if
there is no public market for the Option Shares at the
time the Optionee wishes to sell any Receipts, the
Optionee shall first offer to sell such Receipts to
the Purchase Office at the Fair Market Value of the
Option Shares represented
9
<PAGE> 10
by such Receipts. If the Purchase Office fails to
accept the offer to purchase such Receipts within
forty-five (45) days after receipt of such offer, the
Optionee shall be free to sell or transfer such
Receipts in compliance with applicable law. If the
Optionee does not sell or transfer such Receipts
within ninety (90) days, then the Optionee may not
sell such Receipts without again offering the Receipts
to the Purchase Office pursuant to the terms of this
Paragraph. If the Purchase Office accepts the
Optionee's initial or later offer(s), the Purchase
Office shall pay the Optionee the purchase price for
all accepted Receipts within thirty six (36) months of
the Receipts tendered payable, such payment to be made
in four equal annual installments commencing on the
date of such acceptance by the Purchase Office. The
Purchase Office may make payments for purchasing the
Receipts in cash, stock of Global TeleSystems Group,
Inc. (provided its stock is publicly traded) or both.
Determinations by the Purchase Office whether to
accept the offer of an Optionee to purchase Receipts
shall be made by the Committee.
(iii) If there is a public market for the Option Shares,
then the Receipts shall be freely transferable by the
Optionee to the extent permitted by applicable law.
9. TIME OF GRANTING OPTIONS. Unless otherwise specified by the Committee,
the effective date of grant of an Option under the Plan shall be the later of
(i) the date on which the Committee makes the determination to grant such
Option; or (ii) the date on which any conditions precedent to such grant are
satisfied; provided that, notwithstanding the foregoing or any contrary
provision herein, the deemed date of grant of an Initial Option for the purposes
of calculating its vesting and termination date(s) shall be the date of grant of
the Employee's Original Option replaced by such Initial Option.
10. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable,
except that, without approval of the Company's shareholders, no such amendment
or modification shall increase the number of Shares subject to the Plan or add
any material rights or modifications to Options under the Plan. The Committee
may amend the Plan from time to time to ensure the Plan's compliance with
applicable securities laws, regulations or rulings. Any amendment or termination
of the Plan, other than any amendment required by applicable securities laws,
regulations or rulings, shall not affect Options already granted; and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated.
11. CONDITIONS UPON ISSUANCE OF RECEIPTS, OPTION SHARES. Notwithstanding
anything to the contrary herein, Receipts shall not be issued unless the
exercise of the associated Option and the issuance and delivery of such Receipts
pursuant thereto shall comply with all relevant provisions of law and the
requirements of any stock exchange upon which the related Option Shares may then
be listed. The Company reserves the right to obtain the approval of counsel for
the Company with respect to such compliance prior to the issuance of any
Receipts.
10
<PAGE> 11
12. RESERVATION OF OPTION SHARES. During the term of this Plan, the
Company will keep available and reserve the number of Option Shares required to
satisfy its obligations hereunder. No Optionee (individually or as a member of a
group), and no beneficiary or other person claiming under or through such
Optionee, shall have any right, title or interest in or to any Stock allocated
or reserved for purposes of the Plan or subject to any Option, except as to
Shares , if any, as shall have been issued to the Trust.
13. INFORMATION TO OPTIONEE. During the term of any Option, the Company
shall provide or otherwise make available to each Optionee a copy of its annual
report and such other financial information that is provided to its shareholders
in accordance with the provisions of the Company's Bylaws and applicable law.
14. SHAREHOLDER APPROVAL. This Plan shall be subject to approval by the
affirmative vote of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at a meeting duly held.
15. BINDING EFFECT. This Plan and any Option Agreement issued hereunder
shall be binding upon the Company, its legal representatives, successors and
assigns.
16. GOVERNING LAW. The construction and effect of the Plan and any
agreement hereunder shall be determined in accordance with the laws of The
Netherlands.
11
<PAGE> 1
Exhibit 21.1
List of Subsidiaries
1. GTS Group, Inc. (Delaware)
2. TeleSystems Services, Inc. (Delaware)
3. San Francisco/Moscow Teleport, Inc. (Delaware)
4. San Francisco International Teleport, Inc. (Delaware)
5. SFMT, Inc. (Delaware)
6. GTS Finance, Inc. (Delaware)
7. SFMT-China, Inc. (Delaware)
8. SFMT-CIS, Inc. (Delaware)
9. SFMT (Cyprus) Limited (Cyprus)
10. GTS-Czech, Inc. (Delaware)
11. SFMT-Datacom, Inc. (Delaware)
12. GTS-Europe South, Inc. (Delaware)
13. GTS-Hermes, Inc. (Delaware)
14. GTS-Hungaro, Inc. (Delaware)
15. GTS-Poland, Inc. (Delaware)
16. SFMT-Rusnet, Inc. (Delaware)
17. SFMT-Sovintel 1, Inc. (Delaware)
18. SFMT-Sovintel 2, Inc. (Delaware)
19. GTS Cellular, Inc. (Delaware)
20. GTS Transpacific Ventures Limited (Delaware)
21. GTS-India, Inc. (Delaware)
22. GTS-Bulgaria, Inc. (Delaware)
23. Sovinet (Virginia General Partnership)
24. Telecom Consulting & Advisory Services, Inc. (Delaware)
25. C-Datacom International, Inc. (Delaware)
26. GTS Management Services, Inc. (Delaware)
27. Global Telesystems, Inc. (Delaware)
28. GTS Equipment, Inc. (Delaware)
29. CellUkraine Limited (Delaware)
30. GTS-Romania, Inc. (Delaware)
31. Archangelsk Cellular Network (Russia)
32. Astrakhan Mobile (Russia)
33. Chuvashi Mobile (Russia)
34. EDN Sovintel (Russia)
35. Lipetsk Mobile (Russia)
36. Mar Mobile (Russia)
37. Penza Mobile (Russia)
38. Prymtelefon (Russia)
39. Saratov Mobile (Russia)
40. SFIT, Ltd., Co. (Russia)
41. SFMT-Irkutsk (Russia)
42. SFMT-Krasnodar
43. TeleRoss (Russia)
44. TeleRoss Samara (Russia)
45. SFMT-Novosibirsk (Russia)
46. SFMT-Tiumen (Russia)
47. SFMT-Ufa (Russia)
<PAGE> 2
48. SFMT-Vladivostok (Russia)
49. Sovam Teleport (Russia)
50. Volgograd Mobile (Russia)
51. Votec Mobile (Russia)
52. Murmansk Mobile (Russia)
53. Saratov Mobile (Russia)
54. Parma Mobile (Russia)
55. Unicel Bryansk (Russia)
56. Unicel Kostroma (Russia)
57. BashUnicel (Russia)
58. GTS Cellular (Russia)
59. SFMT-Ekaterinburg (Russia)
60. SFMT-Siktivkar (Russia)
61. SFMT-Nizhny Novgorod (Russia)
62. SFMT-Archangelsk (Russia)
63. SFMT-Khabarovsk (Russia)
64. TeleRoss Voronezh (Russia)
65. TeleCommunications of Moscow (Russia)
66. Sovam Teleport Kiev Division L.L.C. (Ukraine)
67. Eurohivo (Hungary)
68. Montana Telecom Ltd. (Hungary)
69. GTS-Hungary (Hungary)
70. GTS-System Ltd. (Hungary)
71. CzechCom s.r.o. (Czech Republic)
72. SFMT-Czech Net, spol. s.r.o. (Czech Republic)
73. GTS-Ukraine (Ukraine)
74. GTS Ukrainian Telesystems L.L.C. (Delaware)
75. SIPF Bancomsviaz (Ukraine)
76. Hermes Europe Railtel, B.V. (The Netherlands)
77. Beheer-en Beleggingsmaatschappij Vesto B.V. (The Netherlands)
78. Hermes Europe Railtel (Ireland) Limited (Ireland)
79. Hermes Europe Railtel (Network) Limited (Ireland)
80. HER Network Services B.V.B.A. (Belgium)
81. Hermes Europe Railtel (UK) Limited (United Kingdom)
82. Hermes Europe Railtel (Germany) GmbH (Germany)
83. Hermes Europe Railtel (France) Sarl (France)
84. Hermes Europe Railtel (Italy) s.r.l. (Italy)
85. Hermes Europe Railtel (Spain) S.L. (Spain)
86. Vostok Mobile, B.V. (The Netherlands)
87. VM Resources, B.V. (The Netherlands)
88. CommStruct International B.V. (The Netherlands)
89. GTS S.A.M. (Monaco)
90. GTS Monaco Access S.A.M. (Monaco)
91. Shanghai V-Tech Telecommunications and Engineering Limited Liability
Company (China)
92. Beijing Global Tong DaTelecommunications Systems Corporation Limited
(China)
93. Shanghai Global Intelligent TeleSystems Co., Ltd. (China)
94. American China Investment Corporation (Canada)
95. Beijing Tianmu Satellite Communications Technology Company, Ltd. (China)
96. GTS China Investments L.L.C. (Delaware)
<PAGE> 3
97. C-Datacom International (France)
98. GTS-Bulgaria EOOD (Bulgaria)
99. Sitel-VSAT s.r.o. (Slovakia)
100. GTS-Vox Limited (England and Wales)
101. Global TeleSystems (UK) Limited (England and Wales)
<PAGE> 1
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference, in the Registration Statements
(Forms S-8 No. 333-45669 and No. 333-47573), of our report dated February 26,
1998 with respect to the financial statements and schedules of Global TeleSytems
Group, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.
Ernst & Young LLP
Vienna, Virginia
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/97
AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 318,766
<SECURITIES> 0
<RECEIVABLES> 17,079
<ALLOWANCES> 4,085
<INVENTORY> 0
<CURRENT-ASSETS> 387,139
<PP&E> 253,025
<DEPRECIATION> 16,128
<TOTAL-ASSETS> 780,461
<CURRENT-LIABILITIES> 101,873
<BONDS> 639,359
0
0
<COMMON> 3,761
<OTHER-SE> 23,206
<TOTAL-LIABILITY-AND-EQUITY> 780,461
<SALES> 5,798
<TOTAL-REVENUES> 47,098
<CGS> 5,513
<TOTAL-COSTS> 42,719
<OTHER-EXPENSES> 91,183
<LOSS-PROVISION> 3,303
<INTEREST-EXPENSE> 39,086
<INCOME-PRETAX> (118,181)
<INCOME-TAX> 2,482
<INCOME-CONTINUING> (116,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (116,986)
<EPS-PRIMARY> (3.26)
<EPS-DILUTED> 0
</TABLE>
