<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998
REGISTRATION NO. 333-52735
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 94-3068423
(State or other jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
1751 PINNACLE DRIVE
NORTH TOWER -- 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
GRIER C. RACLIN, ESQ.
1751 PINNACLE DRIVE
NORTH TOWER -- 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4573
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. BEVERIDGE, ESQ. JAMES J. CLARK, ESQ.
SHEARMAN & STERLING CAHILL GORDON & REINDEL
199 BISHOPSGATE 80 PINE STREET
LONDON EC2M 3TY, ENGLAND NEW YORK, NEW YORK 10005
(44) 171-920-9005 (212) 701-3000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ------------------.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] ------------------.
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
- - - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.10 par value......................... $586,301,625 $172,953
===============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act. Payment of $169,525 was
made by the registrant on May 14, 1998. Additional filing fee of $3,334,
corresponding to the additional aggregate offering price of $11,301,625, has
been paid herewith. At the closing sale price per share on the Nasdaq
National Market on June 30, 1998 of $48.75, the aggregate amount of
securities offered (including shares subject to the underwriters'
over-allotment option) would be 12,026,700 shares of Common Stock. If the
price to the public is lower than $48.75, the volume of shares offered may
increase.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering in the United States and
Canada of 6,274,800 shares (the "U.S. Prospectus"), and one to be used in a
concurrent underwritten public offering outside the United States and Canada of
4,183,200 shares (the "International Prospectus"). The two prospectuses are
identical except for the front and back cover pages and the section entitled
"Underwriting." The form of U.S. Prospectus is included herein and is followed
by the alternate pages to be used in the International Prospectus. Each of the
alternate pages for the International Prospectus included herein is labeled
"International Prospectus -- Alternate Page." Final forms of each Prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b)
under the Securities Act of 1933.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 1, 1998
PROSPECTUS
10,458,000 SHARES
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
---------------------
Of the 10,458,000 shares of Common Stock, par value $.10 per share (the
"Common Stock"), offered hereby (the "Offered Securities"), 2,614,500 shares are
being offered by Global TeleSystems Group, Inc. (the "Company") and 7,843,500
shares are being offered by certain of the Company's stockholders (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling Stockholders"
and "Underwriting."
Of the 10,458,000 shares of Common Stock offered hereby, 6,274,800 shares
are being offered in the United States and Canada (the "U.S. Offering") and
4,183,200 shares are being offered outside the United States and Canada (the
"International Offering" and, together with the U.S. Offering, the "Stock
Offerings"). The initial offering price per share and the underwriting discount
per share are identical for both Stock Offerings. See "Underwriting."
The Company has also filed a registration statement with respect to the
offering of $350,000,000 of its % Convertible Senior Subordinated Debentures
due 2010 (the "New Convertible Bonds"), and such offering (the "New Convertible
Bond Offering" and, together with the Stock Offerings, the "Offerings") is being
made by a separate prospectus. The consummation of the Stock Offerings is not
conditioned upon the consummation of the New Convertible Bond Offering, and
there can be no assurance that the New Convertible Bond Offering will be
consummated.
The Common Stock is traded on the Nasdaq National Market and the European
Association of Securities Dealers Automated Quotation ("EASDAQ") under the
symbol "GTSG." On June 30, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $48.75 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDERS
- - - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share............ $ $ $ $
- - - - ---------------------------------------------------------------------------------------------------------------------
Total(3)............. $ $ $ $
=====================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters (as defined herein) against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,494,780.
(3) The Selling Stockholders have granted to the U.S. Underwriters (as defined
herein) and the International Managers (as defined herein) options,
exercisable within 30 days of the date hereof, to purchase up to an
additional 941,220 and 627,480 shares of Common Stock, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Underwriting."
---------------------
GLOBAL COORDINATOR
MERRILL LYNCH & CO.
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
---------------------
MERRILL LYNCH & CO.
---------------------
BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
---------------------
BT ALEX. BROWN
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
ARNHOLD AND S. BLEICHROEDER, INC.
---------------------
The date of this Prospectus is , 1998.
<PAGE> 4
[HER MAP]
CERTAIN PERSONS PARTICIPATING IN THE STOCK OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THE OFFERINGS, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
103 OF REGULATION M. SEE "UNDERWRITING."
ii
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (as
amended, the "Registration Statement") of which this Prospectus is a part under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
summaries of the material terms of such contract, agreement or other document.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit. The
Registration Statement (including the exhibits and schedules thereto) may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C.
20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov. The Company's Common Stock is
traded on the Nasdaq National Market and EASDAQ and reports, proxy statements
and other information concerning the Company can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006 which supervises the Nasdaq National Market.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the addresses set forth above.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions or future events or performance (often,
but not always, through the use of words or phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimated,"
"intends," "plans," "projection" and "outlook") are not historical facts and may
be forward-looking and, accordingly, such statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Accordingly,
any such statements are qualified in their entirety by reference to, and are
accompanied by, the factors discussed throughout this Prospectus, and
particularly in the risk factors set forth herein under "Risk Factors." Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus.
The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company, and investors, therefore, should
not place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
---------------------
Russia On Line(TM) is a trademark of the Company.
iii
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
(this "Prospectus"). Unless otherwise indicated, (i) the term "GTS" or the
"Company" refers to Global TeleSystems Group, Inc. (and, when appropriate, to
its predecessor) and its subsidiaries and (ii) references to the number of
shares of common stock outstanding after the Stock Offerings assume the
Underwriters' over-allotment option has not been exercised. See "Exhibit
A -- Glossary of Telecommunications Industry Terms" for definitions of acronyms
and technical telecommunications terms used in this Prospectus.
THE COMPANY
GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia,
the Commonwealth of Independent States ("CIS") and Central Europe. Through its
subsidiary Hermes Europe Railtel B.V. ("HER"), GTS is developing, and operating
the initial segments of, a pan-European high capacity fiber optic network that
is designed to interconnect a majority of the largest Western and Central
European cities and to transport international voice, data and multimedia/image
traffic for other carriers throughout Western and Central Europe. GTS's strategy
to develop its businesses generally has been to establish joint ventures with a
strong local partner or partners while maintaining a significant degree of
operational control. The Company's business activities consist of the ownership
and operation of (i) international long distance businesses, which operate
through international gateways that provide international switching services and
transmission capacity, (ii) local access networks, which provide local telephone
service, (iii) cellular networks, which provide wireless telecommunications
services, (iv) a domestic long distance business, (v) data networks and (vi)
carriers' carrier networks, which provide high volume transmission capacity to
other carriers. In addition, the Company has recently developed a business plan
to offer facilities-based telecommunications products and services to businesses
and other high usage customers in certain metropolitan markets throughout
Europe. See "-- Business Strategy."
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 27 oblasts
(regions) and the city of Moscow in Russia, as well as in 13 additional cities
in the CIS, and believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. These businesses include: (i) EDN
Sovintel ("Sovintel"), which provides Moscow, and recently St. Petersburg, with
international long distance and local telephone services and access to the major
domestic long distance carriers; (ii) TeleCommunications of Moscow ("TCM"),
which provides local access services in Moscow; (iii) TeleRoss (as defined
herein), which provides domestic long distance services in fourteen cities in
Russia, including Moscow, as well as Very Small Aperture Terminal ("VSAT")
service to customers outside its primary long distance satellite network; (iv)
Sovam Teleport ("Sovam"), which provides data services, including high-speed
data transmission, electronic mail, Internet access services, as well as Russia
On Line, the first Russian language Internet service; and (v) the Company's
cellular operations ("GTS Cellular"), which operate cellular networks in
thirteen regions in Russia and also in Kiev, Ukraine, with licenses covering
regions with an aggregate population of approximately 28 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 approximately 442 million and 147 million minutes of
traffic for the year ended December 31, 1997, and the three months ended March
31, 1998, respectively, and had approximately 38,000 customers, including
approximately 27,500 cellular subscribers, as of March 31, 1998. See
"Business -- Russia and the CIS."
In Western Europe, GTS believes that it is well-positioned to establish
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
1
<PAGE> 7
providing centrally managed cross-border 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 high
capacity fiber optic network designed to interconnect a majority of the largest
Western and Central European cities. As of April 30, 1998, HER's network linked
Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg,
Zurich and Geneva. In the second quarter of 1998, the network connected
approximately 3,000 kilometers of fiber optic cable, established service to
Stuttgart and commenced testing the links to Dusseldorf 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 satisfy the needs of its European customers with respect to outgoing traffic
and attract additional non-European customers with traffic terminating in
Europe. HER commenced commercial service over the Brussels-Amsterdam portion of
the network in late 1996 and the London-Paris portion in November 1997.
GTS-Monaco Access operates an international gateway in Monaco in partnership
with, and utilizing the existing gateway infrastructure of, the Principality of
Monaco and provides transit and routing of international calls to other
telecommunications operators. Through its HER and GTS-Monaco Access ventures,
GTS is building a new network for transporting voice, data and multimedia/image
traffic for other carriers throughout Western and Central Europe and for
worldwide international voice, data and multimedia/image traffic that either
originates or terminates in, or transits through, Western and Central Europe.
See "Business -- Western Europe."
In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company provides
outgoing voice services and operates an international gateway and a data
services network. In Hungary, GTS operates a VSAT network, which GTS believes is
the largest VSAT network in Central Europe as measured by number of VSAT sites.
The Company has also signed an agreement to provide international data services
in Poland, subject to the receipt of necessary governmental approvals. GTS's
strategy is to expand its service offerings as the regulatory environment
permits, leverage its existing VSAT and international gateway infrastructure
where possible and provide a broad range of services to its target markets. See
"Business -- Central Europe."
GTS does not currently own or operate significant telecommunication assets
in Asia. GTS's objective is to capitalize on opportunities as they arise in the
telecommunications markets in China and India. See "Business -- Asia."
2
<PAGE> 8
The following table sets forth certain information, as of March 31, 1998,
for the principal ventures through which the Company conducts its business:
<TABLE>
<CAPTION>
COUNTRY/REGION GTS PRINCIPAL
COMPANY NAME OF OPERATIONS OWNERSHIP PARTNER(S) BUSINESS
------------ -------------- ------------ ------------------- ------------------
<S> <C> <C> <C> <C>
CIS
Sovintel.................................... Russia 50% Rostelecom International Long
Distance; Local
Access
TCM......................................... Russia 50%(1) MTU Inform and Local Access Lines
others
TeleRoss.................................... Russia 50%(2) Various local PTOs Domestic Long
Distance
Sovam....................................... Russia 100%(3) N/A Data and Internet
GTS Cellular................................ CIS 25-70%(4) Primarily various Basic Cellular
local PTOs
WESTERN EUROPE
HER......................................... Western Europe 89%(5) Two railways Carriers' Carrier
GTS-Monaco Access........................... Monaco 50% Principality of Carriers' Carrier;
Monaco International
Gateway
CENTRAL EUROPE
GTS-Hungary................................. Hungary 99% -- VSAT Network
EuroHivo.................................... Hungary 70%(6) Microsystems Paging Services
Telecom Rt.;
Gerard Aircraft
Sales and Leasing
Company
CzechNet.................................... Czech Republic 100% -- International Long
Distance; 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.(7)
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. The Company is currently
engaged in negotiations to purchase the remaining minority ownership
interest in GTS-Vox Limited. If such purchase is consummated, the Company
would have a 95% interest in TCM.
(2) TeleRoss consists of (i) a wholly owned subsidiary that operates a domestic
long distance network (the "TeleRoss Operating Company") and (ii) fourteen
joint ventures that are 50% beneficially-owned by GTS (the "TeleRoss
Ventures"). See "Business -- Russia and the CIS -- TeleRoss."
(3) During the first quarter of 1998, GTS purchased its minority partner's 33.3%
interest in Sovam, 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 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. The Company is currently
implementing a restructuring of the capital and ownership of Bancomsvyaz.
GTS intends to enter into the cellular markets of additional Russian regions
through Vostok Mobile. See "Business -- Russia and the CIS -- GTS Cellular."
(5) As a result of the sale in March 1998 by one of the other shareholders in
HER of its ownership interest, GTS currently owns approximately 89% of HER.
See "Business -- Western Europe -- HER -- HER Recapitalization." The
Company's interest may decrease by up to 4.5% due to the outstanding stock
options for common shares of HER issued to certain HER executives under the
new HER stock option plan established in the fourth quarter of 1997. See
"Executive Compensation and Other Information -- HER 1994 Stock Option
Plan."
(6) The Company has reached a definitive agreement to sell its ownership
interest in EuroHivo. The closing of this transaction is conditioned upon
regulatory approval of the share transfer and customary conditions
precedent. The Company does not anticipate that the closing of this
transaction will have a material effect on the Company's results from
operations and financial condition.
(7) GTS owns 75% of GTS China Investments LLC ("GCI"), which owns 90% of
American China Investment Corporation ("ACIC"). ACIC owns 70% of the Beijing
Tianmu China joint venture company.
3
<PAGE> 9
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western and Central Europe through the development of a pan-European
fiber optic network and an international gateway in Monaco. In addition, the
Company has recently developed a business plan to offer facilities-based
telecommunications products and services to businesses and other high usage
customers in certain metropolitan markets throughout Europe.
GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
- Identify and Seize Early Market Opportunities. GTS's primary strategy is
to identify less developed markets in which the incumbent operator offers
inadequate service and where liberalization of telecommunications
regulations may be pending or has occurred. The Company believes that
entering these less developed markets quickly is a key competitive
advantage in the global telecommunications market. GTS leverages its
management's knowledge of the markets in which the Company operates to
assess and react quickly when attractive business opportunities arise.
- Establish Joint Ventures with Experienced Local Partners. GTS seeks to
establish and maintain strategic partnerships and relationships with key
telecommunications operators and service providers in the countries in
which it operates. The Company believes that these relationships increase
its ability to anticipate and respond to changes in the regulatory and
legal environment and assist with license renewal and expansion of its
operating companies.
- Retain Significant Operational Control. In general, GTS actively
participates in the management of its ventures by (i) providing most of
the funding for the ventures' operations, (ii) selecting key members of
the local management team, (iii) developing business plans and marketing
strategies together with local management, (iv) monitoring operating
functions, (v) maintaining close working relationships with local
partners and (vi) integrating its networks and businesses in a manner
which is consistent with the Company's overall strategic objectives.
- Build Infrastructure to Provide High Quality Services. GTS continues to
develop and expand its network infrastructure. The Company believes that
its networks offer service, quality and cost advantages over incumbent
providers as a result of the Company's customer support, network
monitoring, management systems and its ability to integrate and co-market
its service offerings.
- Leverage Management Depth and Experience. GTS's management has
significant experience in the development and operation of
telecommunications businesses outside the United States. The Company
believes that this experience, together with the Company's extensive
operations, has provided its management with the ability to identify,
evaluate and pursue international telecommunications business
opportunities. Additionally, GTS has assembled a management team
comprised of executives with extensive experience managing
telecommunications companies in the respective local markets. GTS
believes that its management team possesses a broad knowledge of relevant
political and regulatory structures, as well as the cultural awareness
and fluency with international and local business practices necessary to
implement the Company's objectives.
- Access Capital Effectively. 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 ("IPO") of Common Stock in which the Company sold
4
<PAGE> 10
12,765,000 shares and realized aggregate net proceeds of approximately
$235.6 million. On the same date, the Company also sold $105 million
aggregate principal amount of 9 7/8% Senior Notes due 2005 (the "9 7/8%
Notes") and realized aggregate net proceeds of approximately $100.5
million, of which $19.6 million was placed in escrow to cover the first
four scheduled payments of interest on the 9 7/8% Notes.
In addition to its overall business strategy, GTS has developed market
strategies to achieve its goals in emerging markets and Western Europe as well
as its preliminary business plan to offer comprehensive telecommunications
services in Europe.
Emerging Markets. The Company pursues its goals in emerging markets through
a three-stage approach of market entry, market expansion and market integration.
- Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii) the
provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or are expected 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 the
Company 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 the
Company with a competitive advantage in entering that market. When
entering a new market, GTS's strategy is to provide its customers with
service of higher quality than that provided by incumbents.
- 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 and providing a bundled service
offering, the Company expects to both expand its customer base and
increase the Company's share of each customer's telecommunications
spending. GTS also expects to achieve increased economies of scale
through the common use of administrative and operating functions already
in place. The Company also seeks to expand its targeted geographic market
by forming new partnerships and installing infrastructure and offering
services in additional geographic regions, allowing the Company to
further enhance its operating leverage and ability to service its
customers' telecommunications needs.
- Market Integration. GTS ultimately intends to integrate and co-market its
service offerings in each of the markets in which it operates. The
Company believes such integration will enable it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure,
networks and management information systems. As customers develop a need
for a broader variety of telecommunications services, the Company
believes that GTS's integrated operations will represent an attractive
service alternative for customers seeking a single provider that can meet
all their telecommunications needs.
Western Europe. The Company believes it is well-positioned to establish
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. HER and
GTS-Monaco Access seek 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 has been able to enter the market ahead of
competition and encourage a wide variety of carriers to use its network with
service offerings that meet their needs. To establish itself as the leading
carriers' carrier for international telecommunications within Europe, HER
intends to provide its customers with significantly higher quality transmission
and advanced network capabilities at a competitive price by utilizing advanced,
uniform technology across the region and providing redundant routing for higher
levels of reliability.
5
<PAGE> 11
European Services Strategy
In addition, the Company has recently developed a business plan to offer,
through one or more new subsidiaries, facilities-based telecommunications
products and services to businesses and other high usage customers in certain
metropolitan markets throughout Europe (the "European Services Strategy"). The
Company believes that the size and growth potential of the European market
combined with increasing liberalization of European telecommunications
regulations provides the Company with the opportunity to successfully develop
local networks and other end-user services. The Company is evaluating developing
competitive local exchange carriers ("CLECs") in up to 12 European cities.
Implementation of this strategy may involve one or more of the following: (i)
the construction of fiber loop networks, (ii) the purchase or lease of dark
fiber, (iii) obtaining of high frequency microwave licenses for "wireless
fiber," or (iv) partnership with, or acquisition of, resellers or
facilities-based CLECs. In evaluating potential markets the Company will
consider, among other factors, the following characteristics of each market: (i)
its business concentration, (ii) the national and local regulatory environment,
(iii) the technical difficulties of local network construction and (iv) the
extent of existing competition. Due to the preliminary nature of the Company's
business plan with respect to its European Services Strategy, the Company cannot
estimate with certainty the amount and timing of the Company's future capital
requirements to implement such strategy. Management believes, however, that if
the European Services Strategy is implemented it is likely that the Company will
need to raise additional capital above that being raised in the Offerings. See
"Risk Factors -- Risks Relating to European Services Strategy" and
"Business -- Western Europe -- European Services Strategy."
FINANCING PLAN
In general, the Company's strategy is to finance general corporate cash
needs, the development of start-up ventures and acquisitions through the parent
company and, when possible and cost effective, to finance ongoing operations at
the venture level.
The Company believes that its existing cash balances and cash flow from
operations will be sufficient to fund its expected capital needs under its
current business plan, excluding any funds expended in connection with the
potential implementation of the Company's European Services Strategy. The
Company contemplates that following the consummation of the Offerings, it will
raise additional debt financing through a newly formed subsidiary of the
Company, the proceeds of which will be applied toward the implementation of the
Company's European Services Strategy. The size and timing of such financing have
not yet been determined by the Company. The actual amount and timing of the
Company's future capital requirements, however, may differ materially from
management's estimates and, therefore, GTS 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, part of which may be provided with proceeds of the
Offerings. Management expects that GTS and its ventures will incur over $510
million of capital expenditures during the next three years, of which
approximately $171 million will be incurred in the last three quarters of 1998.
Of these amounts, approximately $290 million will be used to fund construction
of the HER network and approximately $180 million will be applied to the
expansion of the Company's businesses in the CIS, with the remainder to be used
for the development of the Company's other businesses. The Company also will
need to fund operating losses for a number of its ventures for at least the next
12 months. In addition, as part of its business strategy, the Company regularly
evaluates potential acquisitions and joint ventures. The Company believes that
attractive acquisition opportunities currently exist in the markets in which it
operates in Western and Central Europe and the CIS. The Company continuously
considers a number of potential transactions, some of which may involve the
contribution of certain of its Russian businesses in exchange for an interest of
equivalent or greater value in the surviving entity and, if consummated, may be
material to the Company's operations and financial condition. The Company has no
definitive agreement with respect to any acquisition or joint venture, although
from time to time it has discussions with other companies and assesses
opportunities on an on-going basis. The Company expects to use the net proceeds
of the Offerings primarily to implement the Company's European Services
Strategy. In addition, a portion of the net proceeds may be used to further
develop the Company's businesses in Central Europe and Russia, as well as for
potential acquisitions, other business development opportunities and general
corporate purposes. If the New Convertible Bond Offering is not consummated, the
Company will need to find additional sources of capital to replace the
6
<PAGE> 12
funding that would have been provided by the New Convertible Bond Offering. See
"Risk Factors -- Additional Capital Requirements," "Risk Factors -- Risks
Relating to European Services Strategy", "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Use of Proceeds."
As of March 31, 1998, certain affiliates of George Soros, Alan B. Slifka
and certain affiliates, and certain affiliates of Capital Research International
beneficially owned approximately 19.2%, 10.6% and 9.7% of the Common Stock
(including rights to acquire Common Stock), respectively. See "Principal and
Selling Stockholders."
* * *
The Company was founded in 1983 as a not-for-profit company under the name
San Francisco/Moscow Teleport, Inc. The Company was incorporated as a California
for-profit corporation on September 25, 1986, and by way of a reincorporation
merger, merged with and into SFMT, Inc., a Delaware corporation formed for that
purpose on September 13, 1993. The Company was renamed Global TeleSystems Group,
Inc., on February 22, 1995. The Company's principal business office is located
at 1751 Pinnacle Drive, North Tower-12th Floor, McLean, Virginia 22102, United
States, and its telephone number is (703) 918-4500.
7
<PAGE> 13
THE STOCK OFFERINGS
<TABLE>
<S> <C>
Common Stock offered hereby:
U.S. Offering...................................... 6,274,800 shares
International Offering............................. 4,183,200 shares
----------
Total...................................... 10,458,000 shares
Common Stock offered by:
The Company........................................ 2,614,500 shares
Selling Stockholders............................... 7,843,500 shares
----------
Total...................................... 10,458,000 shares
Common Stock to be outstanding after the
Offerings(1)....................................... 54,654,640 shares
Use of Proceeds to the Company....................... The net proceeds of the Stock Offerings will
be approximately $119.9 million (at an assumed
offering price of $48.75 per share), after
deducting estimated commissions and offering
expenses. The Company intends to use the net
proceeds from the Offerings primarily toward
the implementation of the Company's European
Services Strategy. In addition, a portion of
the net proceeds may be used to further
develop the Company's businesses in Central
Europe and Russia as well as for business
development opportunities, potential
acquisitions and for general corporate
purposes. The consummation of the Stock
Offerings is not conditioned upon the
consummation of the New Convertible Bond
Offering. If the New Convertible Bond Offering
is not consummated, the Company will need to
find additional sources of capital to replace
the funding that would have been provided by
the New Convertible Bond Offering. See "Use of
Proceeds."
Trading.............................................. The Common Stock is traded on the Nasdaq
National Market and the EASDAQ Market
authority under the symbol "GTSG."
</TABLE>
- - - - ---------------
(1) Excludes at March 31, 1998 (i) 7,777,776 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants at an exercise price of $9.33
per share, (ii) 5,918,972 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options at a weighted average exercise price
of $12.01 per share, (iii) 713,311 shares of Common Stock reserved for
issuance upon exercise of a put right associated with a 1996 financing
agreement, as amended, (iv) 6,921,850 shares issuable upon conversion of the
Convertible Bonds (as defined hereinafter), (v) 560,820 shares of Common
Stock reserved for issuance pursuant to the TCM business partnership
agreement as deferred consideration to TCM's partners and (vi)
shares of Common Stock issuable in connection with the New Convertible
Bonds. See "Certain Related Party Transactions."
RISK FACTORS
See "Risk Factors" beginning on page 11 for a discussion of certain factors
that should be considered by prospective investors in evaluating an investment
in the Common Stock.
8
<PAGE> 14
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data as of and for
the years ended December 31, 1995, 1996 and 1997 are derived from the Company's
audited Consolidated Financial Statements. The following unaudited summary
historical consolidated financial data as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 are derived from the Company's unaudited
Consolidated Financial Statements. The summary historical consolidated financial
data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Prospectus.
Under generally accepted accounting principles, a majority of the Company's
ventures are accounted for by the equity method of accounting. Under this
method, the operating results of the ventures are included in the Company's
Consolidated Statement of Operations as a single line item, "Equity in (losses)
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 -- Summary Historical Financial Data -- Combined Equity
Investments."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1995 1996 1997(1) 1997 1998
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net.......................... $ 8,412 $ 24,117 $ 47,098 $ 8,387 $ 22,817
Gross margin........................... 16 5,176 4,379 1,963 3,794
Operating expenses..................... 41,014 52,955 78,410 13,021 22,686
Equity in earnings (losses) of
ventures............................. (7,871) (10,150) (14,599) (3,420) 3,412
Other income (expense)................. 11,034 (8,729) (29,551) (2,866) (10,794)
Loss before extraordinary loss......... (40,400) (67,991) (116,986) (17,733) (24,473)
Extraordinary loss(2).................. -- -- -- -- (12,704)
Net loss............................... (40,400) (67,991) (116,986) (17,733) (37,177)
Loss per share before extraordinary
loss................................. (1.61) (2.22) (3.26) (0.51) (0.54)
Extraordinary loss per share........... -- -- -- -- (0.28)
Net loss per share..................... (1.61) (2.22) (3.26) (0.51) (0.82)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 318,766 $ 507,895
Property and equipment, net................................. 236,897 270,641
Investments in and advances to ventures..................... 76,730 88,083
Total assets................................................ 780,461 1,048,550
Total debt.................................................. 639,359 685,009
Minority interest and stock subject to repurchase........... 31,255 12,470
Shareholders' equity........................................ 26,967 254,841
</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 Company recognized a $12.7 million extraordinary charge to earnings in
the three months ended March 31, 1998, as a result of the Company's early
extinguishment of certain related party debt obligations. The nature of the
charge is comprised of the write-off of $11.6 million of unamortized debt
discount and $1.1 million of unamortized debt issuance costs that were
deferred as financing costs and were being amortized over the original
maturity of the debt.
9
<PAGE> 15
SUPPLEMENTAL INFORMATION -- SUMMARY HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS
The following unaudited summary historical financial data -- equity
investments for the years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1997 and 1998 are derived from the Company's
financial records. It is intended to supplement the aforementioned summary
historical consolidated financial data, which were derived from the Company's
audited Consolidated Financial Statements.
The Company believes that this information provides additional insight on
the Company's unconsolidated equity method investments. Generally accepted
accounting principles prescribe inclusion of revenues and expenses for
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line within the income statement. More
detailed financial information about the Company's equity investments is
included under "Supplemental Information -- Selected Historical Financial
Data -- Combined Equity Investments."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net............................ $54,051 $143,472 $226,160 $48,026 $63,683
Cost of revenues......................... 33,011 80,426 127,732 26,821 36,387
Operating expenses....................... 22,958 55,018 74,845 14,145 12,792
Net (loss) income........................ (6,380) (5,220) 4,330 1,966 8,985
Income (loss) recognized by GTS.......... (7,871) (10,150) (14,599) (3,420) 3,412
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(1):
Revenues, net............................ (2,270) (15,385) (24,927) (5,933) (8,890)
Cost of revenues......................... (2,215) (13,562) (23,250) (4,760) (8,105)
Operating expenses....................... (6,967) (8,083) (8,357) (2,875) 4,158
</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."
10
<PAGE> 16
RISK FACTORS
ADDITIONAL CAPITAL REQUIREMENTS
The Company anticipates that the implementation of its European Services
Strategy may require significant amounts of capital in addition to that portion
of the net proceeds of the Offerings anticipated to be expended in connection
therewith. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" "Business -- Western
Europe -- European Services Strategy." In addition, as part of its business
strategy, the Company regularly evaluates potential acquisitions and joint
ventures. The Company believes that attractive acquisition opportunities
currently exist in the markets in which it operates in Western and Central
Europe and the CIS. The Company continuously considers a number of potential
transactions, some of which may involve the contribution of certain of its
Russian businesses in exchange for an interest of equivalent or greater value in
the surviving entity and, if consummated, may be material to the Company's
operations and financial condition. The Company has no definitive agreement with
respect to any material acquisition or joint venture, although from time to time
it has discussions with other companies and assesses opportunities on an
on-going basis. The Company may fund such acquisitions or joint ventures with a
portion of the net proceeds from the Offerings or may require additional capital
to fund such acquisitions or joint ventures.
The Company believes that its existing cash balances and cash flows from
operations will be sufficient to fund its expected capital needs under its
current business plan excluding any funds expended in connection with the
potential implementation of the Company's European Services Strategy. The actual
amount and timing of the Company's future capital requirements, however, may
differ materially from management's estimates. In particular, the accuracy of
management's estimates are subject to changes and fluctuations in the Company's
revenues, operating costs and development expenses, which can be affected by the
Company's ability to (i) effectively and efficiently manage the expansion of the
HER network and operations, (ii) obtain infrastructure contracts, rights-of-way,
licenses and other regulatory approvals necessary to complete and operate the
HER network, (iii) negotiate favorable contracts with suppliers, including large
volume discounts on purchases of capital equipment and (iv) access markets,
attract sufficient numbers of customers and provide and develop services for
which customers will subscribe. The Company's revenues and costs are also
dependent upon factors that are not within the Company's control such as
regulatory changes, changes in technology, increased competition and various
factors such as strikes, weather, and performance by third-parties in connection
with the Company's operations. Due to the uncertainty of these factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the Company's future capital
requirements. Historically, GTS has experienced liquidity problems resulting in
part from the Company's need to meet the capital requirements of certain of its
joint ventures in excess of forecast amounts. In addition, certain of the
Company's joint ventures have not met management's financial performance
expectations or have not been able to secure local country financing and thus
have not been able to generate the expected cash inflows. In addition, if the
Company expands its operations at an accelerated rate or consummates
acquisitions, the Company's funding needs will increase, possibly to a
significant degree, and it will expend its capital resources sooner than
currently expected. In addition, due to the preliminary nature of the Company's
business plan with respect to its European Services Strategy, the Company cannot
estimate with any degree of certainty the amount and timing of the Company's
future capital requirements to implement such strategy, which the Company
anticipates will be dependent on a number of factors including, among others,
the demand for the Company's services, the markets in which the Company builds
or buys networks and regulatory, technological and competitive developments. As
a result of its acquisition on June 24, 1998 of a majority interest in Ebone A/S
("Ebone"), a Tier 1 Internet backbone provider in Europe, HER may be required to
provide funds to support Ebone to the extent Ebone is not self-funding in
accordance with its business plan. The Company may also be required to repay its
Convertible Bonds upon maturity in the year 2000 to the extent such Convertible
Bonds are not converted into Common Stock. Furthermore, the consummation of the
Stock Offerings is not conditioned upon the consummation of the New Convertible
Bond Offering, and there can be no assurance that the New Convertible Bond
Offering will be consummated. If the New Convertible Bond Offering is not
consummated, the Company will need to find additional sources of capital to
replace the funding that would have been provided by the New Convertible
11
<PAGE> 17
Bond Offering. As a result of the foregoing, or if the Company's capital
resources otherwise prove to be insufficient, the Company may need to raise
additional capital. See "-- Government Regulation," "-- Competition,"
"-- Technology," "-- HER Network Roll-out," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Use of Proceeds"
and "Business -- Western Europe -- HER."
If the Company decides to raise additional funds through the incurrence of
debt, it may become subject to additional or more restrictive financial
covenants and its interest obligations will increase. If the Company decides to
raise additional funds through the issuance of equity, the interests of holders
of the Common Stock will be diluted. The Company presently contemplates that
following the consummation of the Offerings, it will raise additional debt
financing through a newly formed subsidiary of the Company, the proceeds of
which will be applied toward the implementation of the Company's European
Services Strategy. The size and timing of such financing have not yet been
determined by the Company. There can be no assurance that additional financing
will be available to GTS on favorable terms or at all, and failure to generate
sufficient funds in the future, whether from operations or by raising additional
debt or equity capital, may require the Company to delay or abandon some or all
of its anticipated expenditures, to sell assets, or both, and could affect the
Company's ability to compete, either of which could have a material adverse
effect on the operations of the Company, and could adversely affect the value of
the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Use of Proceeds."
SUBSTANTIAL LEVERAGE
GTS is, and will continue to be, highly leveraged as a result of the
substantial indebtedness it has incurred and intends to incur to pursue the
implementation of its business plans. On a pro forma consolidated basis, after
giving effect to the issuance of the New Convertible Bonds, the Company would
have had approximately $1.0 billion aggregate principal amount of indebtedness
outstanding at March 31, 1998. GTS's debt instruments permit the Company and its
subsidiaries to incur certain additional indebtedness to fund expansion of the
Company's businesses and for other permitted purposes. In addition, the Company
contemplates that following the consummation of the Offerings, it will raise
additional debt financing through a newly formed subsidiary of the Company, the
proceeds of which will be applied toward the implementation of the Company's
European Services Strategy. The size and timing of such financing have not yet
been determined by the Company. The degree to which the Company is leveraged
could have important consequences for holders of the Common Stock, including (i)
limiting the Company's ability to refinance its existing indebtedness or obtain
additional financing to fund future working capital, capital expenditures and
other general corporate requirements, (ii) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures or
other general corporate purposes, (iii) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the telecommunications
industry, (iv) limiting the Company's ability to obtain additional financing to
make capital expenditures and acquisitions, (v) limiting the Company's ability
to withstand adverse economic conditions or take advantage of significant
business opportunities that may arise, (vi) limiting the Company's ability to
invest in new or developing technologies, (vii) limiting the Company's ability
to respond to changes affecting the implementation of its financing,
construction or operating plans and (viii) placing the Company at a competitive
disadvantage with respect to less-leveraged competitors. In addition, the
Company's operating and financial flexibility will be limited by covenants
contained in agreements governing the indebtedness of the Company. Among other
things, these covenants limit or may limit the ability of the Company and its
subsidiaries to incur additional indebtedness, make capital expenditures, pay
dividends or make distributions on capital stock of the Company or make certain
other restricted payments, create certain liens upon assets, dispose of certain
assets or enter into certain transactions with affiliates. There can be no
assurance that such covenants will not materially and adversely affect the
Company's ability to finance its future operations or capital needs or to engage
in other business activities which may be in the interest of the Company.
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations. If the Company is unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if it
12
<PAGE> 18
otherwise fails to comply with the various covenants under its indebtedness, it
would be in default under the terms thereof, which would permit the holders of
such indebtedness to accelerate the maturity of such indebtedness and could
cause defaults under other indebtedness of the Company which would adversely
affect the value of the Common Stock.
HISTORY OF OPERATING LOSSES
The Company has historically sustained substantial operating and net
losses. The Company had net losses of $40.4 million in 1995, $68.0 million in
1996, $117.0 million in 1997 and $37.2 million for the three months ended March
31, 1998. The Company's cumulative net losses totalled $280.1 million from
inception through March 31, 1998. The Company's net losses in the first quarter
of 1998 exceeded those in the comparable prior period in 1997, and the Company
expects this trend to continue in the second quarter of 1998. Further
development of the Company's business, including the Company's European services
business, will require significant additional expenditures and the Company
expects that it will have significant operating and net losses and will record
significant net cash outflow, before financing, in coming years. There can be no
assurance that the Company's operations, including the Company's European
services business, will achieve or sustain profitability or positive cash flow
in the future. If the Company cannot achieve and sustain operating profitability
or positive cash flow from operations, it may not be able to meet its debt
service obligations or working capital requirements which would have a material
adverse effect on the operations of the Company and would adversely affect the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
HER NETWORK ROLL-OUT
HER's ability to achieve its strategic objective will depend in large part
on the successful, timely and cost-effective completion of the HER network.
Although HER currently operates commercially over a portion of the network
linking Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt,
Strasbourg, Zurich and Geneva, the development of the remainder of the network
may be delayed or adversely affected by a variety of factors, uncertainties and
contingencies. Many of these factors, such as strikes, natural disasters and
other casualties, are beyond HER's control. In addition, HER will need to
negotiate and conclude additional agreements with various parties regarding,
among other things, rights-of-way and development and maintenance of the network
infrastructure and equipment. 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) timely performance by various third
parties of their contractual obligations to engineer, design and construct
portions of the network and (ii) HER's ability to obtain and maintain applicable
governmental approvals.
HER is operational in Belgium, the Netherlands, the UK, France, Germany and
Switzerland, and HER expects that the 18,000 kilometer network will 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 operations of the Company.
Development of the HER network is capital intensive. Management expects
that approximately $290 million in capital expenditures will be incurred in
connection with the buildout of the HER network. 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). In addition, in connection with the HER Recapitalization
(as defined below), the Company, through a subsidiary, GTS-Hermes, made a
contribution of approximately $51.8 million to HER. The Company believes that
the net proceeds of such note sale, combined with the $51.8 million contribution
and HER's projected internally generated funds, should be sufficient to fund
HER's expected capital expenditures. However, the actual amount and timing of
HER's future capital requirements may differ materially from management's
estimates. Thus, additional financing may be needed to construct the HER network
and there can be no assurance that
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such additional financing will be available on terms acceptable to the Company
or at all. 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 and would adversely affect the value of the Common Stock. 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." HER must obtain additional infrastructure provider
agreements for the long-term lease of dark fiber, rights-of-way and other
permits to install fiber optic cable from railroads, utilities and governmental
authorities to build out the network. There can be no assurance that HER will be
able to maintain all of its existing agreements, rights and permits or to obtain
and maintain the additional agreements, rights and permits needed to implement
its business plan on acceptable terms. Loss of substantial agreements, rights
and permits or the failure to enter into and maintain required arrangements for
the HER network could have a material adverse effect 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. To the
extent that HER is unable to enter into or maintain such arrangements, such
inability could have a material adverse effect on HER's business, as well as on
the operations of the Company and could adversely affect the value of the Common
Stock.
In order to operate and, in the case of some countries, even to construct
the network in accordance with current plans, HER must obtain the necessary
regulatory approvals. To date, HER has obtained licenses, authorizations and/or
registrations in the United Kingdom, the Netherlands, Belgium, Germany and
France and has obtained a provisional concession to operate in Switzerland. HER
expects to obtain a permanent concession from the Swiss regulatory authority by
the end of the third quarter 1998. In addition, HER intends to file applications
in other countries in anticipation of service launch in accordance with the HER
network roll-out plan. The terms and conditions of these licenses,
authorizations or registrations may limit or otherwise affect HER's scope of
operations. There can be no assurance that HER will be able to obtain, maintain
or renew licenses, authorizations or registrations to provide the services it
currently provides and plans to provide, that such licenses, authorizations or
registrations will be issued or renewed on terms 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 could adversely affect the value of the Common Stock. See
"Business -- Western Europe -- HER -- Licenses and Regulatory Issues."
RISKS RELATING TO EUROPEAN SERVICES STRATEGY
Preliminary Nature of European Services Strategy. The Company's European
Services Strategy is preliminary. The Company's determination to proceed with
its European Services Strategy will depend on its ability to assess potential
markets, obtain required governmental authorizations, franchises and permits,
identify appropriate acquisition candidates, implement efficient information
processing systems for billing and customer service and develop a sufficient
customer base. The failure of any of the foregoing may require the Company to
modify, delay or abandon some or all of its preliminary plans with respect to
its European Services Strategy. In addition, due to the preliminary nature of
its European Services Strategy, the Company
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cannot estimate with certainty the amount and timing of the Company's future
capital requirements to implement such strategy. Furthermore, if the New
Convertible Bond Offering is not consummated, the Company may not have
sufficient funding to satisfy the capital requirements of the European Services
Strategy and may require alternative sources of funding. There can be no
assurance that the failure to consummate the New Convertible Bond Offering will
not cause delays and limitations or not have a material adverse effect on the
implementation of the European Services Strategy. Further development of the
Company's business, including the Company's European Services business, will
require significant additional expenditures, and the Company expects that it
will have significant operating and net losses and will record significant net
cash outflow, before financing, in coming years. There can be no assurance that
the Company's operations, including the Company's European Services business,
will achieve or sustain profitability or positive cash flow in the future. See
"-- Additional Capital Requirements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business -- Western
Europe -- European Services Strategy."
Regulatory. The Company's plans to provide an expanded array of
telecommunications services in Europe, including local, long distance,
international, data and Internet services, will subject the Company to
significant additional regulation at the EU, national and local levels. Delays
in receiving required regulatory approvals, or the enactment of adverse
regulations or regulatory requirements, may delay or prevent the Company from
offering its services in many European markets, restrict the types of services
offered by the Company, constrain the Company's deployment of its networks and
otherwise adversely affect the Company's operations. There can be no assurance
that the Company will be able to obtain the necessary regulatory approvals on a
timely basis or that the Company will not otherwise be affected by regulatory
developments, any of which may have a material adverse effect on the Company.
Competition. The provision of telecommunications services in Europe is
extremely competitive and the Company's success will depend upon its ability to
compete with a variety of telecommunications providers in each of its markets.
The Company's competitors will include PTOs, alliances among telecommunications
companies (such as Global One, an alliance among Sprint, Deutsche Telekom and
France Telecom), facilities-based competitors (including WorldCom Inc.
("WorldCom"), Viatel Inc. ("Viatel"), Esprit Telecom Group plc ("Esprit"),
Econophone, Inc. ("Econophone"), Primus Telecommunications Group, Incorporated
("Primus") and Cable & Wireless, plc ("Cable & Wireless"), resellers, data
providers, Internet service providers and other bundled services providers. The
Company may also face competition in one or more of its markets from competitors
utilizing new or alternative technologies or new applications of existing
technologies, including cable television companies, wireless telephone
companies, microwave carriers and satellite companies. Many of the Company's
competitors will have established customer bases and extensive brand name
recognition, and many of such competitors will have greater financial,
management and other resources than the Company.
The Company will compete primarily on the basis of price and, to a lesser
extent, on the type and quality of services it offers. Many of the Company's
potential competitors have the ability to use their substantial financial
resources to cause severe price competition in the markets in which the Company
plans to operate, which would force the Company to lower its prices to remain
competitive. The Company also expects to experience significant customer
attrition as a result of the highly competitive nature of its markets, and it
may be difficult for the Company to attract and retain a sufficient customer
base. There can be no assurance that the Company will be able to effectively
market its expanded service offerings or that competitive pressures will not
have a material adverse effect on the Company.
Entering New Markets. The Company will have to make significant operating
and capital investments in order to implement its European Services Strategy and
there are numerous operating complexities associated with providing these
services. The Company will be required to develop new products and services and
will need to establish direct and/or indirect sales channels to market its
offerings. Sophisticated information and processing systems will be vital to the
Company's success and the Company will need to implement and integrate the
necessary provisioning, billing and collection systems for its services. The
Company has no prior experience in offering expanded services in Europe or in
targeting the European business and government customers. The Company may also
rely upon third party vendors and contractors for network buildouts and
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<PAGE> 21
information systems upgrades, and will need to obtain rights of way and other
consents to develop its networks. There can be no assurance that the Company
will successfully be able to implement its European Services Strategy on a
timely basis, or at all, and any delays in one or more of the Company's targeted
markets may have a material adverse effect on the Company.
Reliance on PTOs and Other Telecommunications Service Providers. In order
to compete successfully with its expanded European services offerings, the
Company will need to negotiate interconnection agreements with, and may need to
negotiate collocation agreements and lease trunking capacity from, the PTOs and
other local service providers operating in the Company's target markets. There
can be no assurance that such interconnection and other agreements with the
local service providers can be reached on terms that are satisfactory to the
Company.
With respect to its long distance and international services, the Company
will need to negotiate resale agreements with long distance and international
carriers. Such agreements frequently contain minimum volume commitments and the
Company may be obligated to pay underutilization charges if it overestimates its
need for transmission capacity. If the Company underestimates its need for
transmission capacity, it may be required to obtain capacity through more
expensive means.
Acquisition-Related Risks. The Company may enter its targeted markets
through acquisitions. If acquisitions are consummated, the Company will be
subject to certain risks, including, among others, the difficulty of
assimilating the acquired operations and personnel, the potential disruption of
the Company's ongoing business and diversion of resources and management time
and the potential impairment of relationships with employees or customers as a
result of changes in management. In addition, the Company's ability to
consummate acquisitions may be constrained by its high degree of leverage and by
the terms of its outstanding indebtedness. There can be no assurance that any
acquisitions will be made, that the Company will be able to obtain any
additional financing needed to finance such acquisitions and, if any
acquisitions are made, that the acquired business will be successfully
integrated into the Company's operations or that they will perform as expected.
Potential Adverse Impact on HER. Many of the Company's planned service
offerings will compete with the services offered by the PTOs, New Entrants and
other customers HER targets as an independent carrier's carrier. To the extent
that the Company's subsidiaries offering such services contract with HER for
capacity, the Company expects that such arrangements will be entered into on an
arms' length basis. However, the Company's European Services Strategy could
affect the perception of HER as an independent operator and could negatively
impact HER's ability to attract and retain customers which could, in turn, have
a material adverse effect on the Company.
RISKS RELATING TO REORGANIZATION OF RUSSIAN TELECOMMUNICATIONS INDUSTRY
Svyazinvest was established by the Russian government in 1994 to hold the
government's interest in 88 regional telecommunication companies. In April 1997,
President Yeltsin approved the transfer of additional government-owned
telecommunications assets, including the government's 51% stake in Rostelecom
(the government controlled international and long distance operator), to
Svyazinvest. On July 30, 1997, Mustcom Ltd., a Cyprus-based company that
represents the interests of a consortium which includes ICFI Cyprus, Renaissance
International Ltd., Deutsche Morgan Grenfell, Morgan Stanley, and an affiliate
of George Soros, purchased a 25% stake in Svyazinvest for $1.87 billion. As of
March 31, 1998, affiliates of George Soros beneficially owned 19.2% of the
Company's Common Stock. The President has also authorized the sale of another
24% of Svyazinvest at a future date. This sale is scheduled to occur in the
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
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adverse changes in the business relationships between the Company and such
partners, which business relationships represent a material component of the
Company's business strategy in Russia. There can be no assurance that the
continuing privatization of Svyazinvest, or the evolution of government policy
regarding Svyazinvest and Rostelecom, will not have a material adverse effect on
the Company or its ventures. See "-- Competition," "-- Dependence on Certain
Local Parties; Absence of Control" and "Business -- Russia and the
CIS -- Overview" and "Principal and Selling Stockholders."
MANAGING RAPID GROWTH
As a result of the Company's past and expected continued growth and
expansion, significant demands have been placed on the Company's management,
operational and financial resources and on its systems and controls. The Company
continues to construct segments of the HER network, expand its operations within
Russia and the CIS and expand into additional geographic and service markets
when business and regulatory conditions warrant. In order to manage its growth
effectively, the Company must continue to implement and improve its operational
and financial systems and controls, purchase and utilize additional
telecommunications facilities and expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of market demand could result in
insufficient or excessive telecommunications facilities and disproportionate
fixed expenses for certain of its operations. There can be no assurance that the
Company will be able to construct and operate the entire HER network as
currently planned, expand with the markets in which its ventures are currently
operating or expand into additional markets at the rate presently planned by the
Company, or that any existing regulatory barriers to such expansion will be
reduced or eliminated. As the Company proceeds with its development and
expansion, there will be additional demands on the Company's customer support,
sales and marketing and administrative resources and network infrastructure.
There can be no assurance that the operating and financial control systems and
infrastructure of the Company and its ventures will be adequate to maintain and
effectively manage future growth. The failure to continue to upgrade the
administrative, operating and financial control systems or the emergence of
unexpected expansion difficulties could materially and adversely affect the
Company's business, results of operations and financial condition.
RISKS RELATING TO EMERGING MARKETS
Substantially all of the Company's revenue to date has been 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 not entirely free from doubt. Accordingly, there can be no
assurance that difficulties in protecting and enforcing rights in emerging
market countries will not have a
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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
the Company, the ability of the Company to pay the principal of, and the
interest on, its indebtedness and could adversely affect the value of the Common
Stock. 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. See "Business."
RISKS RELATING TO RUSSIA AND THE CIS
Substantially all of the Company's revenue to date have been derived from
operations in Russia and the CIS. Foreign companies conducting operations in the
former Soviet Union face significant political, economic, and legal risks. The
Company continuously evaluates a number of potential transactions, some of which
may involve the contribution of certain of its Russian businesses in exchange
for an interest of equivalent or greater value in the surviving entity and, if
consummated, may be material to the Company's operations and financial condition
and could increase its exposure to such 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 during the
period 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 operations of
the Company and would adversely affect the value of the Common Stock.
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 is unclear, however, how the change will affect
governmental policy. In addition, it is 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. 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.
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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 financial
performance and the viability of the Company's receivables, as well as on the
operations of the Company, and could adversely affect the value of the Common
Stock.
In May and early June 1998, the Russian Central Bank and other Russian
governmental authorities adopted a number of measures, including increasing the
inter-bank lending rate charged by the Russian Central Bank and the rate offered
on sovereign debt obligations, in order to maintain the value of the ruble and
reduce the risk of the flight of foreign capital from the Russian economy.
Although these measures appear to have stabilized the ruble to date, there can
be no assurance that there will not be a significant and sudden decline in the
value of the ruble and consequent loss of investor confidence in the Russian
economy. Such a devaluation of the ruble could have a material adverse effect on
the Company and its financial condition and results of operations and the
Russian economy generally. See "-- Currency and Exchange Rates."
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 Ministry of Communications (the "MOC") has adopted the
position that licensees may enter into agreements with third parties in
connection with the provision of services under the licensee's license; however,
the MOC does not generally review agreements entered into by licensees. There
can be no assurances that the current or future regulation of the Russian
telecommunications systems will not have a material adverse effect on the
Company.
Current Russian legislation governing foreign investment activities does
not prohibit or restrict foreign investment in the telecommunications industry.
However, on February 28, 1997, the State Duma, the lower house of parliament,
approved, on the first reading, draft foreign investment legislation which would
restrict any significant future foreign investment in numerous sectors of the
Russian economy, including telephone and radio communications. It is unlikely
that such restrictive legislation will be enacted, unless the political climate
changes dramatically. See "-- Political." More likely is the emergence of
restrictions on foreign investment in strategic industries, which could result
in foreign ownership limitations in industries such as telecommunications which
are not uncommon in many countries. The draft legislation has been referred to
the Russian government for comment. For such draft legislation to become Federal
law, it must be passed by a majority vote of the State Duma at another two
readings, then be approved by a majority of the Federation Council, the upper
house of parliament, and signed by the President of the Russian Federation.
Rejection of such legislation by the Federation Council can be overridden by a
two-thirds majority of the State Duma. Rejection of such legislation by the
President can be overridden by a two-thirds majority of each of the Federation
Council and the State Duma. 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.
On June 10, 1998, Vostok Mobile (as defined herein) received a letter dated
June 8, 1998 (the "RFCCI Letter") from the Russian Federation Committee for
Communications and Information (the successor to the MOC) addressed generally to
the management of cellular operators utilizing the AMPS and D-AMPS
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standards. The RFCCI Letter stated that the offering of roaming services by such
operators is at variance with certain normative documents referenced in the
letter and is in breach of the licenses granted to such operators. The Company
is in the process of evaluating the implications of the RFCCI Letter. Although
the matter is not free from doubt, the Company believes, based on its
preliminary review, that the "normative documents" referred to in the letter
represent policy statements rather than legally binding legislative
pronouncements. However, the RFCCI Letter may signal a potential future change
in the application of Russian telecommunications policy toward the provision of
roaming services by AMPS and D-AMPS based cellular providers. The Company is
unable to predict whether and in what form the positions set forth in the Letter
will be implemented as new regulation or directly applied as a basis for
suspension, revocation or renewal of current licenses in whole or in part. If
regulations were adopted implementing the positions set forth in the RFCCI
Letter, or other actions were taken to directly apply such positions, such
regulations or actions could adversely affect Vostok Mobile's ability to compete
with GSM or NMT-based cellular providers not bound by the prohibition on roaming
activities applicable to operators using the AMPS and D-AMPS standard. There can
be no assurance that such regulation will not be adopted or such actions will
not be taken and that, if adopted or taken, as applicable, they will not have a
material adverse effect on Vostok Mobile or the Company. See "Business -- Russia
and the CIS -- GTS Cellular -- Vostok Mobile," "-- Licenses and Regulatory
Issues" and "Competition."
In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to
Russia, there can be no assurance that recent government policies liberalizing
control over the telecommunications industry will continue. Any change in or
reversal of such governmental policies could have a material adverse effect on
the Company. See "Business -- Russia and the CIS -- Licenses and Regulatory
Issues."
Legal Risks. As part of the effort to transform their economies into more
market-oriented economies, the Russian and other CIS governments have rapidly
introduced laws, regulations and legal structures intended to give participants
in the economy a greater degree of confidence in the legal validity and
enforceability of their obligations. Risks associated with the legal systems of
Russia and the other independent republics of the CIS include (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influence; (ii) the relative inexperience of judges
and courts in commercial dispute resolutions and generally in interpreting legal
norms; (iii) inconsistencies among laws, presidential decrees, government
resolutions and ministerial orders; (iv) frequently conflicting local, regional
and national laws, rules and regulations; (v) the lack of legislative, judicial
or administrative guidance on interpreting the applicable rules; and (vi) a high
degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly in
areas such as company law, commercial and contract law, securities and antitrust
law, foreign trade and investment law and tax law. Accordingly, there can be no
assurance that the Company will be able to enforce its rights in any disputes
with its joint venture partners or other parties in Russia or the CIS or that
its ventures will be able to enforce their respective rights in any disputes
with partners, customers, suppliers, regulatory agencies or other parties in
Russia or that the Company can be certain that it will be found to be in
compliance with all applicable laws, rules and regulations.
Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. Although the Company believes it has complied with
loan licensing requirements with respect to certain intercompany loans and
capital contributions, there can be no assurance that Russian government
authorities will not take an unexpected adverse position with respect to such
loans 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
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subject to Russian taxes at each level. Currently, dividends are taxed at 15%
and the payor is required to withhold the tax when paying the dividend, except
with respect to dividends to foreign entities that qualify for an exemption
under treaties on the avoidance of double taxation. To date, the system of tax
collection has been relatively ineffective, resulting in the continual
imposition of new taxes in an attempt to raise government revenues. This
history, plus the existence of large government budget deficits, raises the risk
of a sudden imposition of arbitrary or onerous taxes, which could adversely
affect the Company.
Because of uncertainties associated with the laws and regulations of the
Russian tax system and the increasingly aggressive interpretation, enforcement
and collection activities of the Russian tax authorities, the Company's Russian
taxes may be in excess of the estimated amount expensed to date and accrued on
the Company's balance sheets. It is the opinion of management that the ultimate
resolution of the Company's Russian tax liability, to the extent not previously
provided for, will not have a material adverse effect on the financial condition
of the Company. However, depending on the amount and timing of an unfavorable
resolution of this contingency, it is possible that the Company's future results
of operations or cash flows could be materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay VAT on
the purchase or importation of assets, and for certain other transactions. In
many instances, VAT can be offset against VAT which the Company collects and
otherwise would remit to the tax authorities, or may be refundable. Because the
law in some jurisdictions is unclear, the local tax authorities could assert
that the Company is obligated to pay additional amounts of VAT. In the opinion
of management, any additional VAT which the Company may be obligated to pay
would not be material.
ADEQUACY OF MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN EMERGING MARKETS
Many of the emerging market countries in which the Company operates,
particularly in Russia and the CIS where the Company has to date derived most of
its revenues, are deficient in management and financial reporting concepts and
practices, as well as in modern banking, computer and other control systems. The
Company historically has had difficulty in hiring and retaining a sufficient
number of qualified employees to work in these markets. As a result of these
factors, the Company has experienced difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
The Company has a policy worldwide of complying with all applicable laws
and seeks to ensure that all persons in its employ comprehend and comply with
such laws. The application of the laws of any particular country, however, is
not always clear, particularly in emerging market countries where commercial
practices differ significantly from practices in the United States and other
Western countries and the legal and regulatory frameworks are less developed. In
addition, some practices, such as the payment of fees for the purpose of
obtaining expedited customs clearance and other commercial benefits, that may be
common methods of doing business in these markets might be unlawful under the
laws of the United States. As a result of the difficulty the Company
historically has experienced in emerging markets in instituting business
practices that meet Western reporting and control standards, it historically has
been unable to ascertain whether certain practices by its ventures, which were
not in accordance with Company policy, were in compliance with applicable U.S.
and foreign laws. If it were to be determined that the Company or any of its
ventures were involved in unlawful practices and were the factual and legal
issues relating thereto to be resolved adversely, the Company or its ventures
could be exposed, among other things, to significant fines, risk of prosecution
and loss of its licenses. See "-- Risks Relating to Emerging Markets" and
"-- Government Regulation."
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
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Company also appointed a Compliance Officer responsible for monitoring
compliance with such laws and training Company personnel around the world. In
connection with these developments, the Company expanded its corporate business
practices policy to include, in addition to compliance with U.S. laws such as
the FCPA, compliance with applicable local laws such as the conflict of interest
rules under the 1996 Russian Joint Stock Company Law, currency regulations and
applicable tax laws.
In early 1997, the Company retained special outside counsel to conduct a
thorough review of certain business practices of the Company in the emerging
markets in which the Company operates in order to determine whether deficiencies
existed that needed to be remedied. As a result of this review, the Company
replaced certain senior employees in Russia and instituted additional and more
stringent management and financial controls. As a result of the review, the
Company has not identified any violations of law that management believes would
have a material adverse effect on the Company's financial condition. There can
be no assurances, however, that if the Company or any of its ventures were found
by government authorities to have committed violations of law that, depending on
the penalties assessed and the timing of any unfavorable resolution, the
Company's future results of operations and cash flows would not be materially
adversely affected in a particular period.
Although the Company believes that this review was properly conducted and
was sufficient in scope, there can be no assurance that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated by the Company will be effective. If the Company or any of
its ventures are ever found to have committed violations of law, depending on
the penalties assessed and the timing of any unfavorable resolution, the
Company's future results of operations and cash flows could be materially
adversely affected in a particular period. Management believes, however, that
the actions taken during the past twelve months to strengthen the Company's
management, financial controls and legal compliance, coupled with the
implementation of the recent recommendations from the review and the oversight
provided through the Audit Committee of the Board of Directors of the Company to
ensure compliance, will be adequate to address the recurrence of any past
possible deficiencies.
DEPENDENCE ON CERTAIN LOCAL PARTIES; ABSENCE OF CONTROL
Many GTS operations including Sovintel, TeleRoss and GTS Cellular have been
developed in cooperation or partnership with key local parties, such as regional
PTOs. The Company is substantially dependent on its local partners to provide
marketing expertise and knowledge of the local regulatory environment in order
to facilitate the acquisition of necessary licenses and permits. Any failure by
the Company to form or maintain alliances with local partners, or the preemption
or disruption of such alliances by the Company's competitors or otherwise, could
adversely affect the Company's ability to penetrate and compete successfully in
the emerging markets it operates in or enters. In addition, in the uncertain
legal environments in which GTS operates, certain GTS businesses may be
vulnerable to local government agencies or other parties who wish to renegotiate
the terms and conditions of, or terminate, their agreements or other
understandings with GTS.
While the Company may have the right to nominate key employees, direct the
operations and determine the strategies of such joint ventures, under the terms
of their respective constituent documents, the Company's partners in some of the
ventures have the ability to frustrate the exercise of such rights. Significant
actions by most of GTS's ventures, such as approving budgets and business plans,
declaring and paying dividends, and entering into significant corporate
transactions effectively require the approval of GTS's local partners. Further,
the Company would be unlikely as a practical matter to want to take significant
initiatives without the 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 operations of the Company
and could affect the value of the Common Stock.
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
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with its partners may lead to conflicts of interest for GTS and its partners in
the operations of their ventures. There can be no assurance that any such
conflicts will be resolved in favor of GTS. In addition, the combination under
Svyazinvest of the Russian government's majority interest in Rostelecom and 85
of the regional telephone companies gives Svyazinvest a majority interest in
entities that provide international and domestic long distance and local
telecommunications services throughout Russia and may expose the Company to more
coordinated competition from its partners in the Russian telecommunications
market. See "-- Risks Relating to Reorganization of Russian Telecommunications
Industry."
GOVERNMENT REGULATION
As a multinational telecommunications company, GTS through its ventures is
subject to varying degrees of regulation in each of the jurisdictions in which
its ventures provide services. Local laws and regulations, and the
interpretation of such laws and regulations, differ significantly among the
jurisdictions in which the Company and its ventures operate. There can be no
assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on the Company, that regulators or third parties will
not raise material issues with regard to the Company's or its ventures'
compliance or noncompliance with applicable regulations or that any changes in
applicable laws or regulations will not have a material adverse effect on the
Company or any of its ventures.
Many of GTS's ventures require telecommunications licenses, most of which
have been granted for periods of three to ten years. The terms and conditions of
these licenses may limit or otherwise affect the ventures' scope of operations.
The Company has had favorable experience obtaining, maintaining and renewing
licenses in the past. However, there can be no assurance that it will be able to
obtain, maintain or renew licenses to provide the services it currently provides
and plans to provide, that such licenses will be issued or renewed on terms or
with fees that are commercially viable, or that licenses required by future
ventures can be obtained by the Company or its partners. The loss of or a
substantial limitation upon the terms of these telecommunications licenses could
have a material adverse effect on the Company. See each section under "Business"
entitled "Licenses and Regulatory Issues."
A substantial portion of HER's strategy is based upon the timely
implementation of regulatory liberalization of the European Union ("EU")
telecommunications market on January 1, 1998 under existing European Community
("EC") directives. Although EU member states have a legal obligation to
liberalize their markets in accordance with their requirements, certain more
detailed aspects of the EU regulatory framework to apply in the liberalized
environment after January 1, 1998 still remain to be adopted. In addition,
Ireland, Portugal, Spain, Luxembourg and Greece have been granted extensions
from the January 1, 1998 deadline. Ireland has stated in announcements in the
second quarter of 1998 that its telecommunications market will be fully
liberalized by December 1, 1998. There can be no assurance that each EU member
state will proceed with the expected liberalization on schedule, or at all, or
that the trend toward liberalization will not be stopped or reversed in any of
the countries. Accordingly, HER faces the risk that it will establish the HER
network and make capital expenditures in a given country in anticipation of
regulatory liberalization which does not subsequently occur.
In order to give effect to EC directives in each member state, national
governments must pass legislation liberalizing their respective markets. This
applies not only to the liberalization requirements set out in existing EC
directives, but also to requirements set out in directives which have yet to be
adopted. The implementation of EC directives in the telecommunications sector
has been inconsistent or ambiguous in some EU member states. Such implementation
could limit, constrain or otherwise adversely affect HER's ability to provide
certain services. Furthermore, national governments may not necessarily pass
legislation implementing an EC directive in the form required, or at all, or may
pass such legislation only after a significant delay. Even if a national
legislature enacts appropriate regulation within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from PTOs, regulators, trade unions and other 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
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HER's operations by preventing HER from establishing its network as currently
intended, as well as a material adverse effect on the Company.
COMPETITION
GTS faces significant competition in all of its existing telecommunications
businesses and for the types of acquisition and development opportunities it
seeks in both emerging and Western European markets. GTS's competition in these
markets includes national PTOs, multinational telecommunications carriers, other
telecommunications developers and certain niche telecommunications providers. In
addition, certain of the Company's joint venture partners, including Rostelecom
and the regional telephone companies in Russia, certain of HER's rail-based
shareholders and other entities in the emerging markets in which the Company
operates, are also competitors of the Company. As a result of the recent
combination under Svyazinvest of the government's majority interest in
Rostelecom and 85 of the regional telephone companies, the Company may in the
future be subject to more coordinated competition from its partners in the
Russian telecommunications market. Although the Company believes it has a
favorable and cooperative relationship with its joint venture partners, there
can be no assurance that these partners will continue to cooperate with the
Company in the future or that they will not increase competitive pressures on
the Company. Any measures taken by the partners that reduce the level of
cooperation with the Company could jeopardize the Company's ability to
participate in the management and operation of its joint ventures and could have
a material adverse effect on the Company.
WorldCom recently announced the construction of a pan-European fiber
network, the first phase of which is expected to connect London, Amsterdam,
Brussels, Frankfurt and Paris. Although the Company believes that the proposed
WorldCom pan-European network is primarily intended to carry WorldCom traffic,
WorldCom has stated that any excess capacity on such network will be used to
provide a competitive "carriers' carrier" service.
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 and certain key business centers in Germany. Excess capacity
would be available for other carriers. Viatel has stated that it expects
construction to begin in spring 1998 and the network to become operational
during the first quarter of 1999.
In addition, Esprit plc also recently announced plans to construct an SDH
fiber optic ring that will connect the United Kingdom, France, the Netherlands
and Belgium. PTT Netherlands has announced similar plans to build a pan-European
network.
HER also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through International
Private Leased Circuits. In addition, the liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets. There can be no assurance
that HER will compete effectively against its current or future competitors.
Many of the Company's competitors have technical, financial, marketing and
other resources substantially greater than those of GTS. There can be no
assurance that the Company will be able to overcome successfully the competitive
pressures to which it is subject, both in the markets in which it currently
operates and in markets into which it might expand. See each section under
"Business" entitled "Competition." In addition, many of the Company's current
and potential competitors are not subject to, or constrained by the prohibitions
of, the FCPA, including the prohibition against making payments to government
officials in order to obtain commercial benefits. The Company is subject to and
seeks to comply with the limitations and prohibitions of such law, and
accordingly may be subject to competitive disadvantages to the extent that its
competitors are able to secure business, licenses or other preferential
treatment through the making of such payments. Accordingly, there can be no
assurances that the Company will be able to compete effectively against
companies free from such limitations in the emerging markets where such
commercial practices are commonplace. See "-- Adequacy of Management, Legal and
Financial Controls in Emerging Markets."
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SIGNIFICANT INFLUENCE BY CERTAIN STOCKHOLDERS
Certain persons control substantial portions of the Company's voting stock.
At March 31, 1998, Soros Foundation-Hungary and certain of its affiliates
(collectively the "Soros Foundations"), Alan B. Slifka and certain of his
affiliates, and affiliates of Capital Research International beneficially owned
approximately 19.2%, 10.6% and 9.7%, respectively, of the Common Stock
(including rights to acquire Common Stock). See "Principal and Selling
Stockholders." In addition, two persons affiliated with the Soros Foundations
currently serve on the Company's Board of Directors (the "Board of Directors").
Consequently, these entities are in a position to exercise significant influence
over the outcome of matters submitted for stockholder actions, including the
election of members to the Board of Directors, and are able to influence the
management and affairs of the Company. The Company has agreed to register within
45 days after the consummation of the Stock Offerings pursuant to a shelf
registration statement all of the shares of the Company's Common Stock (and
securities convertible into or exercisable for shares of Common Stock) owned by
Alan B. Slifka and his affiliates and the affiliates of George Soros that are
not sold in the Stock Offerings. See "-- Shares Eligible for Future Sale;
Registration Rights; Potential Adverse Impact on Market Price from Sales of
Common Stock," "Management," and "Principal and Selling Stockholders."
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 historically has not
entered into hedging transactions to limit its foreign currency risk exposure.
In April 1998, the Company's subsidiary, HER, executed a currency swap
transaction to limit its currency exposure associated with the $265 million
aggregate principal amount of 11.5% senior notes that HER issued in August 1997.
There can be no assurance that GTS's operations will not be adversely affected
by such factors. In addition, these factors may limit the ability of the Company
to reinvest earnings from ventures in one country to fund the capital
requirements of ventures in other countries.
In Russia, where the Company has derived most of its revenue to date, 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 although, in
late April 1998, the Chicago Mercantile Exchange announced that the ruble is a
currency that will be available for futures and options trading. 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 the Russian economy generally.
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EXCHANGE CONTROLS AND REPATRIATION RISKS RELATING TO RUSSIAN SECURITIES
Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. The Company is resolving licensing issues with
respect to certain intercompany loans and capital contributions with the
applicable government agencies and believes that any licensing irregularities
that may arise will not have a material adverse effect on its financial
condition or results of operations. There can be no assurance, however, that
Russian government authorities will not take an unexpected adverse position
which could materially affect the Company's business.
No assurance can be given that Russian foreign investment and currency
legislation will continue to permit repatriation of the proceeds from
investments. Furthermore, no assurance can be given that further restrictions
will not be imposed on the conversion of ruble earnings into foreign currency
for purposes of making dividend payments or on the repatriation of profits. If
any such further restrictions were imposed, they would have a material adverse
effect on the Company's interests in Russia.
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. The Company has also
replaced or reassigned executive officers and senior personnel. The competition
for qualified personnel in the telecommunications industry is intense,
particularly in emerging markets where the Company operates and, accordingly,
there can be no assurance that the Company will be able to hire and retain
qualified personnel. Although the Company believes it has maintained a strong
management team, despite the change of personnel in Russia and the CIS, there
can be no assurance as to what effect such personnel changes will have on the
Company's operations in Russia and the CIS.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, the Company must record and process massive
amounts of data quickly and accurately. While the Company believes its ventures'
management information systems are currently adequate, certain of such systems
will have to grow as the ventures' businesses expand. The Company believes that
the successful expansion of its information systems and administrative support
will be important to its continued growth, its ability to monitor and control
costs, to bill customers accurately and in a timely fashion and to achieve
operating efficiencies. There can be no assurance that the Company will not
encounter delays or cost-overruns or suffer adverse consequences in implementing
these systems. Any such delay or other malfunction of the Company's management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
TAXES; AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
The tax rules and regimes prevailing in certain emerging market countries
in which the Company operates or plans to operate are, in many cases, new and
rapidly changing. Repatriation of profits may result in additional taxes. In
addition, other forms of taxation, including VAT, excise taxes and import
duties, change at an unpredictable pace and may have an adverse effect on the
Company's operations.
Availability of tax holidays and provisions of tax treaties with the United
States are subject to changes which may affect GTS's utilization of certain tax
benefits in the countries in which it operates as well as in the United States.
Certain ventures in the CIS and Hungary are operating under tax holidays granted
by local governments. Tax holidays are for periods ranging from five to several
years after achieving profitability under local tax regulations. In addition to
these holidays, certain of the Company's foreign ventures have foreign tax loss
carryforwards in excess of $60.0 million.
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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 carryforwards will be subject to an annual limitation as a result of the
consummation of the IPO and the Offerings.
The Company's financial statements do not reflect any provision for
benefits that might be associated with the U.S. and non-U.S. loss carryforwards.
There can be no assurance that such loss carryforwards will be allowed, in part
or full, by local tax authorities against future income.
TECHNOLOGY
The telecommunications industry is subject to rapid and significant changes
in technology and such technological advances may reduce the relative
effectiveness of existing technology and equipment. The Company obtains
telecommunications equipment from a number of vendors, upon whom it is dependent
for the adaptation of such equipment to meet varying local telecommunications
standards. The cost of implementation of emerging and future technologies could
be significant. There can be no assurance that the Company will maintain
competitive services or that the Company will obtain appropriate new technology
on a timely basis or on satisfactory terms. Any failure by the Company to
maintain competitive services or obtain new technologies could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Development and operation of the HER network are also subject to certain
technological risks. The network has been designed to utilize SDH technology.
While SDH represents an advanced, new transmission technology, HER's ability to
upgrade technology from this platform may be important in establishing and/or
maintaining a cost advantage over competitive carriers. There can be no
assurance that the HER network will achieve the technical specifications for
which it was designed or that HER will be able to upgrade the network as
technological improvements in telecommunications equipment are introduced.
Failure to achieve current specifications for, or future upgrades of, the
network may materially and adversely affect the viability of the HER network and
could have a material adverse effect on the prospects of GTS and the operations
of the Company and could affect the value of the Common Stock.
DIFFICULTY IN OBTAINING RELIABLE MARKET INFORMATION
The Company operates in markets in which it is difficult to obtain reliable
market information. The Company's business planning has been based on certain
assumptions concerning subscriber base, usage levels, pricing and operating
expenses based on the Company's experience and the Company's own investigation
of market conditions in the emerging market countries in which it operates. No
assurances can be given as to the accuracy of such assumptions, and such
assumptions may not be indicative of the actual performance of the Company's
operations.
DILUTION
The offering price per share of the Common Stock offered hereby may exceed
the net tangible book value per share of the Common Stock. In addition, the net
tangible book value per share of the Common Stock will decrease upon the
exercise of outstanding options and warrants. Accordingly, purchasers of the
Common Stock offered hereby may incur an immediate and substantial dilution. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE FROM SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market following
the Stock Offerings could adversely affect the market price of the Common Stock
and adversely affect the Company's ability to raise capital at a time and on
terms favorable to the Company.
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As of March 31, 1998, after giving effect to the Stock Offerings, there
would have been 54,654,640 shares of Common Stock outstanding, (i) assuming no
exercise of the Underwriters' over-allotment options and (ii) excluding (w)
10,488,807 shares for which outstanding warrants and vested options are
exercisable, (x) 713,311 shares reserved for issuance upon exercise of a put
right, (y) 6,921,850 shares into which the Convertible Bonds are convertible and
(z) the shares into which the New Convertible Bonds are convertible.
Of the 54,654,640 shares, (i) the 12,765,000 shares registered in the IPO
and the 10,458,000 shares registered in the Stock Offerings will be freely
tradable without restriction under the Securities Act (except that any shares
held by "affiliates" of the Company may generally be resold only in compliance
with applicable provisions of Rule 144, as described below) and (ii) 16,974,029
additional shares may be resold under Rule 144 without restriction under the
Securities Act and an additional 18,136,552 shares may be resold under Rule 144
subject to the volume and manner limitations therein (in each case, subject to
the lock-up agreements entered into in connection with the IPO, which agreements
prohibit the sale of such shares until August 5, 1998). In addition, the
shares into which the New Convertible Bonds are convertible will be
freely tradable without restriction under the Securities Act.
In addition, the Company has caused to become effective (i) a shelf
registration statement on Form S-1 covering the resale of the Convertible Bonds
and the shares of Common Stock into which the Convertible Bonds are convertible
and (ii) two registration statements on Form S-8 covering the resale of shares
of Common Stock issued to employees, officers and directors of the Company
pursuant to employee benefit plans. Furthermore, the Company has agreed to
register within 45 days after consummation of the Stock Offerings pursuant to a
shelf registration statement all of the shares of the Company's Common Stock
(and securities convertible into or exercisable for shares of Common Stock)
owned by Alan B. Slifka and his affiliates and affiliates of George Soros that
are not sold in the Stock Offerings (the "Affiliate Shares") in consideration of
such shareholders' undertaking to be bound by certain restrictions on their
ability to resell such Affiliate Shares under such shelf registration statement
for specified periods after the consummation of the Offerings (the
"Restrictions"). Under the Restrictions, holders of Affiliate Shares will be
prevented, subject to certain exceptions, from selling any such shares during
the first six months after the closing date of the Offerings and will be able to
sell (i) 50% of such shares after the six month anniversary of the closing date
of the Offerings, (ii) 75% of such shares after the nine month anniversary of
the closing date of the Offerings and (iii) 100% of such shares after the twelve
month anniversary of the closing date of the Stock Offerings. Certain limited
partners of partnerships affiliated with Alan B. Slifka and currently in
dissolution may, upon advance notice to the Company, withdraw some or all of
their shares of Common Stock from registration under the shelf registration
statement and from the Restrictions. The number of shares of Common Stock
subject to this withdrawal may not exceed the total of 726,953 shares of Common
Stock minus the number of shares sold by such members in the Stock Offerings.
Holders of approximately 29,623,784 shares of Common Stock and warrants to
purchase 7,777,776 shares of Common Stock, and an affiliate of the Company with
an option with respect to 438,311 shares of Common Stock, have certain demand
and piggy-back registration rights for shares that are not being sold in the
Stock Offerings.
No predictions can be made about the effect, if any, that future sales of
Common Stock or the availability of the Common Stock for sale would have on the
market price for the Common Stock. Sales of large numbers of shares of Common
Stock in the public market pursuant to Rule 144 or pursuant to an effective
registration statement under the Securities Act, or the perception that sales
could occur, may have an adverse effect on the market price for the Common
Stock. See "Shares Eligible for Future Sale" and "Description of Capital
Stock -- Prior Purchase Agreements -- Registration Rights."
ABSENCE OF DIVIDENDS
The Company has not paid any dividend on its Common Stock and does not
intend to pay dividends in the foreseeable future. In addition, the indenture
governing the 9 7/8% Notes, dated February 10, 1998, currently prohibits the
payment of dividends. This indenture contains dividend restrictions. In the
event that the Company and/or certain operating companies of the Company enter
into future financings, the terms of such financings may include dividend
restrictions. See "Dividend Policy."
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ANTI-TAKEOVER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law that contains certain anti-takeover provisions which prohibit a "business
combination" between a corporation and an "interested stockholder" within three
years of the stockholder becoming an "interested stockholder" except in certain
limited circumstances. The business combination provisions of Section 203 of the
Delaware General Corporation Law may have the effect of deterring merger
proposals, tender offers or other attempts to effect changes in control of the
Company that are not negotiated and approved by the Board of Directors.
Accordingly, stockholders of the Company could be prevented from realizing a
premium on their shares in a transaction not approved by the Board of Directors.
In addition, the Company's Certificate of Incorporation and/or By-Laws have
several provisions that could also have the effect of delaying or preventing a
change of control of the Company. Specifically, the Company's Certificate of
Incorporation and/or By-Laws provide for a classified Board of Directors serving
staggered three-year terms, restrictions on who may call a special meeting of
stockholders, a prohibition on stockholder action by written consent,
restrictions on the removal of directors and supermajority voting requirements
with respect to certain amendments to the Certificate of Incorporation. The
Company's Certificate of Incorporation also grants the Board of Directors the
authority to issue up to 10,000,000 shares of preferred stock in one or more
series and to determine the rights, voting powers, dividend rate, conversion
rights, redemption price, liquidation preference and other terms of such
preferred stock without any further vote or action by the stockholders. Further,
the Company has adopted a stockholders rights plan and in connection therewith,
200,000 shares of preferred stock have been authorized as Series A Preferred
Stock (as defined herein). The foregoing provisions, and any issuance of
preferred stock (including Series A Preferred Stock) with voting or conversion
rights, may adversely affect the voting power of the holders of Common Stock and
may have the effect of delaying or preventing a change of control of the Company
or adversely affect the market price of the Common Stock. See "Description of
Capital Stock -- Certain Charter and By-Law Provisions."
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.
VOLATILITY OF STOCK PRICE
The market price for the Common Stock could be subject to significant
fluctuations in response to various other factors such as announcements of new
contracts, technological innovations or new products by the Company or its
competitors, other announcements concerning the Company or its competitors,
changes in government regulations, fluctuations in the Company's quarterly and
annual operating results and general market conditions. In addition, the stock
markets have in recent years experienced significant price fluctuations. Those
fluctuations often have been unrelated to the operating performance of the
specific companies whose stock is traded. Market fluctuations, as well as
economic conditions, may adversely affect the market price of the Common Stock.
29
<PAGE> 35
USE OF PROCEEDS
The aggregate net proceeds of the Stock Offerings to the Company are
estimated to be approximately $119.9 million after deducting estimated expenses
of the Stock Offerings payable by the Company. The Company will not receive any
of the proceeds from shares of Common Stock sold by the Selling Stockholders.
The Company intends to use the net proceeds from the Offerings primarily
toward the implementation of the Company's European Services Strategy. In
addition, a portion of the net proceeds may be used to further develop the
Company's businesses in Central Europe and Russia, for other business
development opportunities, and for general corporate purposes. If the New
Convertible Bond Offering is not consummated, the Company will need to find
additional sources of capital to replace the funding that would have been
provided by the New Convertible Bond Offering. Also, as part of its business
strategy, the Company regularly evaluates potential acquisitions and joint
ventures, including the acquisition of minority interests in existing joint
ventures. Some of such transactions may involve the contribution of certain of
the Company's Russian businesses in exchange for an interest of an equivalent or
greater value in the surviving entity and, if consummated, may be material to
the Company's operations and financial condition. The Company has no definitive
agreement with respect to any material acquisition or joint venture, although
from time to time it has discussions with other companies and assesses
opportunities on an ongoing basis. Pending any use of its net proceeds from the
Offerings in the manner described above, the Company intends to invest the
proceeds in short-term investment grade obligations, bank deposits, U.S.
government securities or similar instruments.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq National Market since
February 5, 1998, the date of the IPO, under the symbol "GTSG." The following
table sets forth, for the periods indicated, the high and low closing bid prices
per share of the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Quarter ending March 31, 1998............................... $49.00 $25.94
Quarter ending June 30, 1998................................ $51.25 $35.38
</TABLE>
The closing bid price for the Common Stock as reported on the Nasdaq
National Market on June 30, 1998 was $48.50. As of June 30, 1998, there were
approximately 175 holders of record of the Company's Common Stock.
DIVIDEND POLICY
GTS has not paid any dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. In addition, the indenture governing
the Company's 9 7/8% Notes currently prohibits the payment of dividends. This
indenture 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 certain amounts.
30
<PAGE> 36
DILUTION
At March 31, 1998, the net tangible book value of the Common Stock was
$196.8 million in the aggregate, or $3.78 per share of Common Stock. "Net
tangible book value per share" represents the amount of total tangible assets of
the Company reduced by the amount of total liabilities and divided by the number
of shares of Common Stock outstanding. After giving effect to the Stock
Offerings, the pro forma net tangible book value of the Common Stock would be
$316.7 million in the aggregate, or $5.79 per share. This represents an increase
in net tangible book value of $2.01 per share of Common Stock to existing
shareholders and an immediate dilution per share of $42.96 to new investors
purchasing shares of Common Stock in the Stock Offerings. "Dilution per share"
represents the difference between the price per share to be paid by new
investors and the pro forma net tangible book value per share after the Stock
Offerings. The following table illustrates the dilution per share as described
above:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $48.75
Net tangible book value per share at March 31, 1998......... $3.78
Increase in net tangible book value per share attributable
to the Stock Offerings.................................... 2.01
-----
Pro forma net tangible book value per share after the Stock
Offerings................................................. 5.79
------
Dilution per share to new investors in the Stock
Offerings................................................. $42.96
======
</TABLE>
<TABLE>
<CAPTION>
SHARES OF TOTAL
COMMON STOCK CONSIDERATION AVERAGE PRICE
-------------------- ---------------------- PER SHARE OF
NUMBER PERCENT AMOUNT PERCENT COMMON STOCK
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholders........... 52,040,140 95.2% $554,391,000 81.3% $10.65
New investors.................. 2,614,500 4.8 127,456,875 18.7 $48.75
---------- ----- ------------ -----
Total................ 54,654,640 100.0% $681,847,875 100.0%
========== ===== ============ =====
</TABLE>
The above computations assume no exercise of any outstanding options or
warrants. At March 31, 1998, there were outstanding options to purchase
5,918,972 shares of Common Stock at a weighted average exercise price of $12.01
per share and warrants to purchase 7,777,776 shares of Common Stock at an
exercise price of $9.33 per share. To the extent outstanding options are
exercised, there will be further dilution to new investors. See "Certain Related
Party Transactions," "Management" and Note 7 to the audited Consolidated
Financial Statements of the Company.
31
<PAGE> 37
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and as adjusted to give effect to the Offerings.
The consummation of the Stock Offerings is not conditioned upon the consummation
of the New Convertible Bond Offering, and there can be no assurance that the New
Convertible Bond Offering will be consummated.
<TABLE>
<CAPTION>
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
STOCK NEW CONVERTIBLE FOR THE
ACTUAL OFFERINGS BOND OFFERING OFFERINGS
--------- ----------- --------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 507,895 $ 627,803 $ 846,569 $ 966,477
========= ========== ========== ==========
Related party debt maturing within
one year......................... $ 10,023 $ 10,023 $ 10,023 $ 10,023
Debt maturing within one year...... 8,882 8,882 8,882 8,882
Current portion of capital lease
obligations...................... 19,250 19,250 19,250 19,250
--------- ---------- ---------- ----------
Current debt............. 38,155 38,155 38,155 38,155
Long-term obligations (net of
current portion)
Related party debt, less current
portion....................... 3,530 3,530 3,530 3,530
9 7/8% Senior Notes due 2005..... 105,000 105,000 105,000 105,000
HER Senior Notes due 2007........ 265,000 265,000 265,000 265,000
New Convertible Bonds............ -- -- 350,000 350,000
Convertible Bonds................ 134,907 134,907 134,907 134,907
Capital leases................... 136,988 136,988 136,988 136,988
Other long-term debt, less
current portion............... 1,429 1,429 1,429 1,429
--------- ---------- ---------- ----------
Long term debt........... 646,854 646,854 996,854 996,854
--------- ---------- ---------- ----------
Total debt............... 685,009 685,009 1,035,009 1,035,009
--------- ---------- ---------- ----------
Minority interest.................. 12,470 12,470 12,740 12,470
Shareholders' equity(1):
Common stock, $0.10 par value
(135,000,000 shares
authorized; 52,040,140 shares
issued and outstanding,
actual; 54,654,640 shares
issued and outstanding, as
adjusted)..................... 5,204 5,465 5,204 5,465
Additional paid-in capital......... 539,911 659,557 539,911 659,557
Accumulated deficit................ (280,061) (280,061) (280,061) (280,061)
Other.............................. (10,213) (10,213) (10,213) (10,213)
--------- ---------- ---------- ----------
Total shareholders'
equity................. 254,841 374,749 254,841 374,749
--------- ---------- ---------- ----------
Total capitalization............... $ 952,320 $1,072,228 1,302,320 $1,422,228
========= ========== ========== ==========
</TABLE>
- - - - ---------------
(1) Excludes at March 31, 1998 (i) 7,777,776 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants at an exercise price of $9.33
per share, (ii) 5,918,972 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options at a weighted average exercise price
of $12.01 per share, (iii) 713,311 shares of Common Stock reserved for
issuance upon exercise of a put right associated with a 1996 financing
agreement, as amended, (iv) 6,921,850 shares issuable upon conversion of the
Convertible Bonds, (v) 560,820 shares of Common Stock reserved for issuance
pursuant to the TCM business partnership agreement as deferred consideration
to TCM's partners and (vi) shares of Common Stock issuable in
connection with the New Convertible Bonds. See "Certain Related Party
Transactions."
32
<PAGE> 38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
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 following unaudited
selected historical consolidated financial data as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 are derived from the Company's
unaudited Consolidated Financial Statements. The selected financial data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Prospectus.
Under generally accepted accounting principles, 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>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997(1) 1997 1998
------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net.................................... $ 328 $ 2,468 $ 8,412 $ 24,117 $ 47,098 $ 8,387 $ 22,817
Gross margin..................................... 328 23 16 5,176 4,379 1,963 3,794
Operating expenses............................... 3,340 12,863 41,014 52,955 78,410 13,021 22,686
Equity in earnings (losses) of ventures.......... 472 (135) (7,871) (10,150) (14,599) (3,420) 3,412
Other income (expense)........................... 100 990 11,034 (8,729) (29,551) (2,866) (10,794)
Loss before extraordinary loss................... (2,440) (11,985) (40,400) (67,991) (116,986) (17,733) (24,473)
Extraordinary loss(2)............................ -- -- -- -- -- -- (12,704)
Net loss......................................... (2,440) (11,985) (40,400) (67,991) (116,986) (17,733) (37,177)
Loss per share before extraordinary loss......... (0.26) (0.69) (1.61) (2.22) (3.26) (0.51) (0.54)
Extraordinary loss per share(2).................. -- -- -- -- -- -- (0.28)
Net loss per share............................... (0.26) (0.69) (1.61) (2.22) (3.26) (0.51) (0.82)
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1993 1994 1995 1996 1997(1) 1998
------- -------- -------- -------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents........................ $ 3,641 $ 29,635 $ 9,044 $ 57,874 $ 318,766 $ 507,895
Property and equipment, net...................... 829 8,393 29,523 35,463 236,897 270,641
Investments in and advances to ventures.......... 794 13,841 56,153 104,459 76,730 88,083
Total assets..................................... 5,968 61,957 115,621 237,378 780,461 1,048,550
Total debt....................................... 725 2,152 27,454 85,547 639,359 685,009
Minority interest and stock subject to
repurchase..................................... -- 8 5,273 6,248 31,255 12,470
Shareholders' equity............................. 4,685 54,684 55,322 113,668 26,967 254,841
</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 Company recognized a $12.7 million extraordinary charge to earnings in
the three months ended March 31, 1998, as a result of the Company's early
extinguishment of certain related party debt obligations. The nature of the
charge is comprised of the write-off of $11.6 million of unamortized debt
discount and $1.1 million of unamortized debt issuance costs that were
deferred as financing costs and were being amortized over the original
maturity of the debt.
33
<PAGE> 39
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 and for the
three months ended March 31, 1997 and 1998, 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(1) 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%(2) 4,574 2,834 2,960 (2,165)
Other................................................ 50%(2) 526 957 9,379 (9,874)
-------- -------- ------- -------
Total.......................................... 54,051 33,011 22,958 (6,380)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)...... (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%(2) 25,778 11,883 13,614 (3,406)
Other................................................ 50%(2) 12,063 12,235 21,132 (22,471)
-------- -------- ------- -------
Total.......................................... 143,472 80,426 55,018 (5,220)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)...... (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%(2) 44,275 21,355 17,678 (906)
Other................................................ 50%(2) 14,013 13,757 27,596 (26,591)
-------- -------- ------- -------
Total.......................................... 226,160 127,732 74,845 4,330
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)...... (24,927) (23,250) (8,357)
THREE MONTHS ENDED MARCH 31, 1997
Sovintel............................................. 50% $25,162 $14,763 $ 3,855 $ 4,695
TCM.................................................. 50% 6,326 1,535 600 2,910
TeleRoss............................................. 50% 1,529 284 674 515
Sovam................................................ 66.7% 3,703 2,388 1,359 (118)
GTS Cellular Companies............................... 50%(2) 8,045 3,665 3,590 (877)
Other................................................ 50%(2) 3,261 4,186 4,067 (5,159)
-------- -------- ------- -------
Total.......................................... 48,026 26,821 14,145 1,966
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)...... (5,933) (4,760) (2,875)
THREE MONTHS ENDED MARCH 31, 1998(4)
Sovintel............................................. 50% $32,404 $21,957 $ 4,646 $ 4,345
TCM.................................................. 50% 9,456 2,578 852 3,847
TeleRoss............................................. 50% 2,392 717 978 325
GTS Cellular Companies............................... 50%(2) 14,905 6,775 5,192 1,415
Other................................................ 50%(2) 4,526 4,360 1,124 (947)
-------- -------- ------- -------
Total.......................................... 63,683 36,387 12,792 8,985
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)...... (8,890) (8,105) 4,158
</TABLE>
- - - - ---------------
(1) 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.
(2) 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.
(3) 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."
(4) As a result of the Company's purchase of the minority partner's 33.3%
interest in Sovam during the first quarter of 1998, the Company accounts for
its ownership interest in Sovam under the consolidation method of
accounting. Prior to this date, the Company accounted for Sovam under the
equity method of accounting.
34
<PAGE> 40
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 March 31, 1998 and December 31, 1997 and 1996
and for the three months ended March 31, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 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.
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 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
35
<PAGE> 41
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 "Risk Factors."
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 March 31, 1998, $5.3
million and $8.9 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.
36
<PAGE> 42
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%(1) Equity
TeleRoss Operating Company.................. Russia 100%(2) Consolidated
TeleRoss Ventures........................... Russia 50%(3) Equity
Sovam....................................... Russia 100%(4) Consolidated(4)
GTS Cellular................................ CIS 25%-70%(5) Equity
Western Europe
HER......................................... Western Europe 89%(6) Consolidated(6)
GTS-Monaco Access........................... Monaco 50% Equity
Central Europe
GTS-Hungary................................. Hungary 99% Consolidated
EuroHivo.................................... Hungary 70%(7) Equity
CzechNet.................................... Czech Republic 100% Consolidated
Asia
V-Tech...................................... China 75% Equity
Beijing Tianmu.............................. China 47% Equity
CDI......................................... India 100% Consolidated
</TABLE>
- - - - ---------------
(1) The Company is currently engaged in negotiations to purchase the remaining
minority ownership interest in GTS-Vox Limited. If such purchase is
consummated, the Company would have a 95% interest in TCM.
(2) The TeleRoss Operating Company is comprised of a wholly 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 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.
(3) TeleRoss Ventures is comprised of fourteen 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."
(4) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
result Sovam is now accounted for by the consolidation as opposed to the
equity method of accounting.
(5) 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. The Company is currently
implementing a restructuring of the capital and ownership of Bancomsvyaz.
(6) As of July 16, 1997, HER is accounted for by the consolidation as opposed to
the equity method of accounting. In addition, in March 1998, GTS acquired an
additional 10% interest in HER.
(7) The Company has reached a definitive agreement to sell its ownership
interest in EuroHivo. The closing of this transaction is conditioned upon
regulatory approval of the share transfer and customary conditions
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precedent. The Company does not anticipate that the closing of this
transaction will have a material effect on the Company's results from
operations and financial condition.
RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
Three Months Ended March 31, 1998 compared to Three Months Ended March 31, 1997
Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, Sovam, GTS-Hungary, the Czech
Companies and HER. Although the Company was not able to follow consolidation
method of accounting for Sovam and HER in the three months ended March 31, 1997,
the Company has included, for comparative purposes, a discussion of their
financial performance for the three months ended March 31, 1997 in the
discussion of "Results of Operations -- Consolidated Ventures". See "-- Results
of Operations -- Non-Consolidated Ventures (Equity Investees)" for a discussion
of the operating results of Sovintel, TCM, TeleRoss Ventures, GTS Cellular and
GTS-Monaco Access.
Revenue. The Company's consolidated revenue was $22.8 million and $8.4
million for the three months ended March 31, 1998 and 1997, respectively. The
$14.4 million growth in revenue was primarily attributable to the inclusion of
Sovam and HER in the Company's consolidated financial results, with Sovam and
HER contributing $5.9 million and $4.7 million in revenue, respectively. The
remaining growth was attributable to the TeleRoss Operating Company, as its
revenue increased $2.7 million year over year.
The CIS region's consolidated revenue was $13.8 million and $5.2 million
for the three months ended March 31, 1998 and 1997, respectively. TeleRoss
Operating Company generated revenue of $7.1 million and $4.4 million,
representing 51.4% and 84.6% of the region's consolidated revenue for the three
months ended March 31, 1998 and 1997, respectively. The growth in the TeleRoss
Operating Company revenue from March 1997 to March 1998 was the result of the
increase in traffic volume generated by the TeleRoss Ventures due to the
increase in the number of cities and number of VSAT's installed at customer
locations outside of cities in which they have a presence. Sovam generated
revenue of $5.9 million and $3.7 million for the three months ended March 31,
1998 and 1997 (Sovam was an equity method company in 1997), respectively. The
growth in Sovam revenue is primarily attributable to the expansion of Sovam's
network throughout Russia and the CIS and the wider variety of service
offerings.
HER generated $4.7 million of revenue in the three months ended March 31,
1998, compared to $0.2 million in the same period in 1997 (HER was an equity
method company prior to July 1997). The growth in revenue is attributable to the
deployment of the network; i.e. the Brussels-Amsterdam route generated revenue
in 1997 whereas the Brussels-Amsterdam-London-Paris route generated revenue in
1998.
The Central Europe region's consolidated revenue was $3.9 million in the
three months ended March 31, 1998, compared to $2.8 million in the same period
of 1997. The Company's operations in both Hungary and the Czech Republic
experienced year-over-year revenue growth of 39.3%. This growth is attributable
to the expansion of the customer base and product offerings of these businesses.
Gross Margin. GTS's consolidated gross margin was $3.8 million, or 16.7% of
revenue, for the three months ended March 31, 1998 and $2.0 million, or 23.8% of
revenue, for the three months ended March 31, 1997.
Sovam contributed $2.8 million to consolidated gross margin for the three
months ended March 31, 1998. For comparative purposes, Sovam had a gross margin
of $1.3 million for three months ended March 31, 1997 (Sovam was an equity
method company in 1997). Sovam had gross margin as a percentage of revenues of
47.5% and 35.1%, for the three months ended March 31, 1998 and 1997,
respectively. The increase in gross margin, both amount and as a percentage of
revenue, reflects the higher margin service offerings that Sovam is currently
providing and also management's focus to improve its cost structure; i.e. the
negotiation of improved channel costs from suppliers and controlled growth in
both personnel and capital expenditures. The TeleRoss Operating Company
contributed gross margin of $1.0 million and $1.5 million for the three months
ended March 31, 1998 and 1997, respectively, or 14.1% and 34.1% of TeleRoss
Operating Company revenue for the respective periods. The decrease in margin,
both amount and as a percentage of revenue, reflects the high fixed
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<PAGE> 44
cost component of its network hub in Moscow. The Central European region
contributed $1.3 million to gross margin in both the three months ended March
31, 1998 and March 31, 1997, respectively, or 33.3% and 44.8% of Central
European revenue for the respective periods. The decrease in gross margin as a
percentage of revenue primarily reflects the startup activities of the GTS Net
product offering in Hungary. HER had an unfavorable effect on consolidated gross
margins of $(1.4) million for the three months ended March 31, 1998. For
comparative purposes, HER had an unfavorable gross margin of $(1.2) million for
three months ended March 31, 1997 (HER was an equity method company prior to
July 1997.)
Operating Expenses. Consolidated operating costs were $22.7 million and
$13.0 million for the three months ended March 31, 1998 and 1997, respectively.
The increase in operating costs is attributable to the inclusion of HER and
Sovam in the Company's consolidated financial results, the growth in
expenditures associated with building business infrastructure for primarily the
TeleRoss Operating Company and costs attributable to increasing the corporate
staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized earnings of $3.4
million for its investments in non-consolidated ventures in the three months
ended March 31, 1998 as compared to recognizing losses of $3.4 million in the
same period a year ago. This improvement was primarily the result of HER no
longer being an equity method investee, and TCM's year-over-year net income
improvement. Included in the March 31, 1998 results were $0.1 million of
additional earnings associated with our recovery of prior period excess losses
recognized. Included in the March 31, 1997 results were $2.7 million of
additional losses as a result of the application of the Company's previously
discussed profit and loss accounting. Sovintel and TCM generated combined
earnings of $4.1 million and $3.9 million for the three months ended March 31,
1998 and 1997, respectively, which offset the losses generated by other ventures
that are in the early stages of operations. See "Results of
Operations -- Non-Consolidated Ventures (Equity Investees)" for a discussion of
the results of operations of the Company's significant equity investees.
Interest, Net. GTS incurred interest expense of $16.5 million and $3.7
million for the three months ended March 31, 1998 and 1997, respectively. 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 $7.1 million and $1.3 million for the three
months ended March 31, 1998 and 1997, respectively, primarily as a result of
investing the proceeds from the Company's 1997 and 1998 capital raising efforts.
See "-- Liquidity and Capital Resources."
Provision for Income Taxes. The Company's consolidated tax provision was
$0.6 million and $0.4 million for the three months ended March 31, 1998 and
1997, 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.
Extraordinary Loss. The Company recognized a $12.7 million extraordinary
charge to earnings in the three months ended March 31, 1998, as a result of the
Company's early extinguishment of certain related party debt obligations. The
nature of the charge is comprised of the write-off of $11.6 million of
unamortized debt discount and $1.1 million of unamortized debt issuance costs
that were deferred as financing costs and were being amortized over the original
maturity of the debt.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
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
39
<PAGE> 45
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.
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
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<PAGE> 46
$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.
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)
Three Months Ended March 31, 1998 compared to Three Months Ended March 31,
1997
RUSSIA -- CIS
Sovintel. Sovintel's revenue for the three months ended March 31, 1998 and
1997 was $32.4 million and $25.2 million, respectively. The increase in revenue
was primarily the result of telecommunications service revenue, which increased
to $23.8 million for the three months ended March 31, 1998 from $19.1 million
for the three months ended March 31, 1997, due to the Moscow customer base
growth and traffic from other GTS
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<PAGE> 47
ventures that generated increased volume of outgoing international and domestic
minutes carried by Sovintel. Sovintel realized a 91% increase in outgoing
international and domestic minutes in the three months ended March 31, 1998, as
compared with the same period a year-ago. Revenue from incoming international
minutes decreased slightly to $2.5 million for the three months ended March 31,
1998, from $2.7 million for the three months ended March 31, 1997.
Sovintel's non-traffic-related revenue of $8.6 million and $6.1 million for
the three months ended March 31, 1998 and 1997, respectively, was primarily
attributable to port sales and monthly port fees revenue.
Sovintel's gross margin was $10.4 million in both the three months ended
March 31, 1998 and 1997, respectively, or 32.1% and 41.3% of revenue for the
respective periods. The decrease in gross margin as a percentage of revenue was
attributable to a general price decrease in international and domestic revenue
due to competitive pressures and a higher percentage of domestic minutes, which
yield a lower margin.
Operating expenses were $4.6 million and $3.9 million, or 14.2% and 15.5%
of total revenue, for the three months ended March 31, 1998 and 1997,
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 $1.3 million and $1.7 million for the three months
ended March 31, 1998 and 1997, respectively. The increase in income tax expense
was attributable to Sovintel's profitable operations.
TCM. TCM's revenue was $9.5 million and $6.3 million for the three months
ended March 31, 1998 and 1997, respectively. TCM had a gross margin of $6.9
million and $4.8 million, or 72.6% and 76.2% 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 $0.9 million
and $0.6 million, or 9.5% and 9.5% of total revenue, for the three months ended
March 31, 1998 and 1997, respectively.
TeleRoss Ventures. Revenue for the TeleRoss Ventures for the three months
ended March 31, 1998 and 1997 was $2.4 million and $1.5 million, respectively.
Revenues resulted from settlement fees charged to TeleRoss Operating Company.
The growth in revenue reflects the growth of the customer base.
Gross margins for the three months ended March 31, 1998 and 1997 were $1.7
million and $1.2 million, respectively. Operating expenses of $1.0 million and
$0.6 million were incurred for the three months ended March 31, 1998 and 1997,
respectively.
GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz.
Revenue for Vostok Mobile was $7.3 million and $5.0 million for the three
months ended March 31, 1998 and 1997, respectively. Vostok Mobile's gross margin
was $3.7 million and $2.8 million, or 50.7% and 56.0% of total revenue, and
operating expenses were $2.6 million and $2.1 million for the three months ended
March 31, 1998 and 1997, respectively.
Revenue for PrimTelefone was $3.7 million and $2.5 million for the three
months ended March 31, 1998 and 1997, respectively. PrimTelefone's gross margin
was $2.1 million and $1.7 million, or 56.8% and 68.0% of total revenue, and
operating expenses were $1.1 million and $0.6 million for the three months ended
March 31, 1998 and 1997, respectively.
Revenue for Bancomsvyaz was $4.2 million and $0.6 million for the three
months ended March 31, 1998 and 1997, respectively. Bancomsvyaz's gross margin
was $2.4 million and $(0.04) million, or 57.1% and (6.7)% of total revenue, and
operating expenses were $1.8 million and $1.0 million for the three months ended
March 31, 1998 and 1997, respectively.
WESTERN EUROPE
GTS-Monaco Access: Total revenue was $4.5 million and $1.9 million and
gross margin was $0.2 million and $0.02 million for the three months ended March
31, 1998 and 1997, respectively.
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Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
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.
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
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<PAGE> 49
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 $10.6 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.
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
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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 Company
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 $238.7 million, $36.4 million, $107.7 million, $42.1 million and $62.1
million in 1998, 1997, 1996, 1995 and 1994, respectively, net of placement fees,
for a total of $487.0 million. In addition, the Company and HER received $105.0
million, $409.8 million, $60.0 million and $23.3 million in 1998, 1997, 1996 and
1995, respectively, for a total of $598.1 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 $474.5 million and $23.0 million as of
March 31, 1998 and 1997, respectively. The Company had an accumulated deficit of
$280.1 million as of March 31, 1998, including net losses of approximately $37.2
million and $17.7 million for the three months ended March 31, 1998 and 1997,
respectively. During 1998, 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 $510.0 million of capital expenditures and investments
in ventures during the next three years, of which approximately $171.0 million
will be incurred in the last three quarters of 1998. The Company obtained funds
in 1998 through a variety of financing arrangements, including (i) 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, and (ii) 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 IPO constituted a "Complying Public Equity
Offering" under the Company's Convertible Bonds. As a result, the conversion
price of the Convertible Bonds is $20.00 per share. The Company believes that
its existing cash balances and cash flow from operations will be sufficient to
fund its expected capital needs under its current business plan, excluding any
funds expended in connection with the potential implementation of the Company's
European Services Strategy. The Company contemplates that following the
consummation of the Offerings, it will raise additional debt financing through a
newly formed subsidiary of the Company, the proceeds of which will be applied
toward the implementation of the Company's European Services Strategy. The size
and timing of such financing have not yet been determined by the Company. The
actual amount and timing of the Company's future capital requirements, however,
may differ materially from management's estimates and, therefore, GTS may
require
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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. Furthermore, the consummation of the Stock Offerings is not
conditioned upon the consummation of the New Convertible Bond Offering, and
there can be no assurance that the New Convertible Bond Offering will be
consummated. If the New Convertible Bond Offering is not consummated, the
Company will need to find additional sources of capital to replace the funding
that would have been provided by the New Convertible Bond Offering. 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 will need to raise additional capital.
There can be no assurance that the Company will be able to consummate
additional financing on favorable terms. As a result, the Company may be subject
to additional or more restrictive financial covenants, its interest obligations
may increase significantly and its existing shareholders may be adversely
diluted. Failure to generate sufficient funds in the future, whether from
operations or by raising additional debt or equity capital, may require the
Company to delay or abandon some or all of its anticipated expenditures, to sell
assets, or both, either of which could have a material adverse effect on the
operations of the Company.
HER
Construction of the HER fiber optic network is one of the Company's most
significant business activities. The buildout of the network is expected to
require approximately $290.0 million of capital expenditures. See
"Business -- Western Europe -- HER". Through March 31, 1998, approximately $64.7
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.
The Company believes that the net proceeds of such note sale, combined with
HER's projected internally generated funds, should be sufficient to fund HER's
expected capital expenditures. However, the actual amount and timing of HER's
future capital requirements may differ materially from management's estimates.
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.
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EUROPEAN SERVICES STRATEGY
The aforementioned discussion of capital requirements does not include any
capital spending that will be required for the implementation of the Company's
European Services Strategy. Due to the preliminary nature of the Company's
business plan for such strategy, the Company cannot estimate with any degree of
certainty the amount and timing of the Company's future capital requirements for
such implementation, which will be dependent on many factors, including the
success of the Company's European services business, the rate at which the
Company expands its networks and develops new networks, the types of services
the Company offers, staffing levels, acquisitions and customer growth, as well
as other factors that are not within the Company's control, including
competitive conditions, regulatory developments and capital costs. Management
believes, however, that if the European Services Strategy is implemented it is
likely that the Company will need to raise additional capital above that being
raised in the Offerings. The Company expects that it will have significant
operating and net losses and will record significant net cash outflow, before
financing, in coming years including in connection with its European services
business. There can be no assurance that the Company's operations, including the
Company's European services business, will achieve or sustain profitability or
positive cash flow in the future. See "Risk Factors -- Additional Capital
Requirements."
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of $507.9 million and $30.7
million as of March 31, 1998 and 1997, respectively. The Company had restricted
cash of $77.2 million and $1.5 million as of March 31, 1998 and 1997,
respectively. The restricted cash at March 31, 1998 primarily represents amounts
held in escrow to pay the first two years interest payments on the $105 million
of the 9 7/8% Notes and $265.0 million of the 11 1/2% Senior Notes of HER.
During the three months ended March 31, 1998 and 1997, the Company used
$27.4 million and $13.4 million, respectively, of cash for operating activities.
Cash used for investing activities was $37.0 million and $11.6 million for the
three months ended March 31, 1998 and 1997, respectively. Included in the cash
used for investing activities for the three months ended March 31, 1998 is $10.2
million to acquire an additional 10.3% interest in HER. 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 profitability or positive cash
flow from operations, it may not be able to meet its debt service obligations or
working capital requirements.
In February 1998, as contemplated by the Company approximately $85.2
million of the net proceeds from the IPO and of the 9 7/8% Notes were applied by
the Company to repay $70.0 million plus accrued interest of debt 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.
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, Belgian Franc and the European Currency Unit (ECU). 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 "Risk Factors -- Risks Relating to
Russia and the
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CIS -- Currency and Exchange Risks -- Exchange Controls and Repatriation Risks
Relating to Russian Securities."
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.
In April 1998, HER consummated a transaction to hedge the foreign exchange
exposure resulting from the issuance of $265.0 million 11 1/2% Senior Notes by
HER.
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing its year 2000
compliance costs and of converting its computer systems, where necessary, to
year 2000 compliant software. This process includes obtaining confirmations from
the Company's primary vendors that plans are being developed or are already in
place to address processing of transactions in the year 2000. The Company does
not expect that the cost of converting such systems will be material to its
financial condition or results of operations. The Company currently believes it
will be able to achieve year 2000 compliance by the end of 1999, and currently
does not anticipate any material disruption in its operations as the result of
any failure by the Company to be in compliance or that year 2000 compliance
costs will have a material effect on the Company's earnings.
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BUSINESS
INTRODUCTION
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 addition, the Company
has recently developed a business plan to offer facilities-based
telecommunications products and services to businesses and other high-usage
customers in certain metropolitan markets throughout Europe. See "-- Business
Strategy -- European Services Strategy" and "-- Western Europe -- European
Services Strategy."
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 27 oblasts
(regions) and the city of Moscow in Russia, as well as in 13 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 fifteen cities in
Russia, including Moscow, as well as Very Small Aperture Terminal ("VSAT")
service to customers outside its primary long distance satellite network; (iv)
Sovam Teleport ("Sovam"), which provides data services, including high-speed
data transmission, electronic mail, Internet access services, as well as Russia
On Line, the first Russian language Internet service; and (v) the Company's
cellular operations ("GTS Cellular"), which operate cellular networks in
thirteen regions in Russia and also in Kiev, Ukraine, with licenses covering
regions with an aggregate population of approximately 28 million people at March
31, 1998. 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 approximately 442 million and 147 million minutes of
traffic for the year ended December 31, 1997 and the quarter ended March 31,
1998, respectively, and had approximately 38,000 customers, including
approximately 27,500 cellular subscribers, as of March 31, 1998. See "-- Russia
and the CIS."
In Western Europe, GTS believes that it is well-positioned to establish
itself as the leading independent carriers' carrier through the development of
two ventures, HER and GTS-Monaco Access S.A.M. ("GTS-Monaco Access"). HER's
objective is to become the leading pan-European carriers' carrier by providing
centrally managed cross-border telecommunications transmission capacity to
telecommunications companies including traditional public 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 30, 1998, HER's network linked
Brussels, Antwerp,
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Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich and Geneva.
In the second quarter of 1998, the network connected approximately 3,000
kilometers of fiber optic cable, established service to Stuttgart and commenced
testing the links to Dusseldorf 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 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."
GTS does not currently own or operate significant telecommunication assets
in Asia. GTS's objective is to capitalize on opportunities as they arise in the
telecommunications markets in China and India. See "-- Asia."
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western and Central Europe through the development of a pan-European
fiber optic network and an international gateway in Monaco. In addition, the
Company has recently developed a business plan to offer facilities-based
telecommunications products and services to businesses and other high-usage
customers in certain metropolitan markets throughout Europe. See "-- Western
Europe -- European Services Strategy."
GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
- Identify and Seize Early Market Opportunities. GTS's primary strategy is
to identify less developed markets in which the incumbent operator offers
inadequate service and where liberalization of telecommunications
regulations may be pending. The Company believes that entering these less
developed markets quickly is a key competitive advantage in the global
telecommunications market. GTS leverages its management's knowledge of
the markets in which the Company operates to assess and react quickly
when attractive business opportunities arise.
- Establish Joint Ventures with Experienced Local Partners. GTS seeks to
establish and maintain strategic partnerships and relationships with key
telecommunications operators and service providers in the countries in
which it operates. The Company believes that these relationships increase
its ability to
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anticipate and respond to changes in the regulatory and legal environment
and assist with license renewal and expansion of its operating companies.
- Retain Significant Operational Control. In general, GTS actively
participates in the management of its ventures by (i) providing most of
the funding for the ventures' operations, (ii) selecting key members of
the local management team, (iii) developing business plans and marketing
strategies together with local management, (iv) monitoring operating
functions, (v) maintaining close working relationships with local
partners and (vi) integrating its networks and businesses in a manner
which is consistent with the Company's overall strategic objectives.
- Build Infrastructure to Provide High Quality Services. GTS continues to
develop and expand its network infrastructure. The Company believes that
its networks offer service, quality and cost advantages over incumbent
providers as a result of the Company's customer support, network
monitoring, management systems and its ability to integrate and co-market
its service offerings.
- Leverage Management Depth and Experience. GTS's management has
significant experience in the development and operation of
telecommunications businesses outside the United States. The Company
believes that this experience, together with the Company's extensive
operations, has provided its management with the ability to identify,
evaluate and pursue international telecommunications business
opportunities. Additionally, GTS has assembled a management team
comprised of executives with extensive experience managing
telecommunications companies in the respective local markets. GTS
believes that its management team possesses a broad knowledge of relevant
political and regulatory structures, as well as the cultural awareness
and fluency with international and local business practices necessary to
implement the Company's objectives.
- Access Capital Effectively. 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 IPO of
Common Stock in which the Company sold 12,765,000 shares and realized
aggregate net proceeds of approximately $235.6 million. On the same date,
the Company also sold $105 million aggregate principal amount of 9 7/8%
Notes and realized aggregate net proceeds of approximately $100.5
million, of which $19.6 million was placed in escrow to cover the first
four scheduled payments of interest on the 9 7/8% Notes.
In addition to its overall business strategy, GTS has developed market
strategies to achieve its goals in emerging markets and Western Europe as well
as its preliminary business plan to offer comprehensive telecommunications
services in Europe.
Emerging Markets. The Company pursues its goals in emerging markets through
a three-stage approach of market entry, market expansion and market integration.
- Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii) the
provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or are expected 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 the
Company 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 infrastruc-
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ture, regulatory expertise and personnel that will provide the Company
with a competitive advantage in entering that market. When entering a new
market, GTS's strategy is to provide its customers with service of higher
quality than that provided by incumbents.
- 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 and providing a bundled service
offering, the Company expects to both expand its customer base and
increase the Company's share of each customer's telecommunications
spending. GTS also expects to achieve increased economies of scale
through the common use of administrative and operating functions already
in place. The Company also seeks to expand its targeted geographic market
by forming new partnerships and installing infrastructure and offering
services in additional geographic regions, allowing the Company to
further enhance its operating leverage and ability to service its
customers' telecommunications needs.
- Market Integration. GTS ultimately intends to integrate and co-market its
service offerings in each of the markets in which it operates. The
Company believes such integration will enable it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure,
networks and management information systems. As customers develop a need
for a broader variety of telecommunications services, the Company
believes that GTS's integrated operations will represent an attractive
service alternative for customers seeking a single provider that can meet
all their telecommunications needs.
Western Europe. The Company believes it is well-positioned to establish
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. HER and
GTS-Monaco Access seeks 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 has been able 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.
European Services Strategy
In addition, the Company has recently developed a business plan to offer,
through one or more new subsidiaries, facilities-based telecommunications
products and services to businesses and other high usage customers in certain
metropolitan markets throughout Europe. The Company believes that the size and
growth potential of the European market combined with increasing liberalization
of European telecommunications regulations provides the Company with the
opportunity to successfully develop local networks and other end-user services.
The Company is evaluating developing CLECs in up to 12 European cities.
Implementation of this strategy may involve one or more of the following: (i)
the construction of fiber loop networks, (ii) the purchase or lease of dark
fiber, (iii) obtaining of high frequency microwave licenses for "wireless
fiber," or (iv) partnership with, or acquisition of, resellers or
facilities-based CLECs. In evaluating potential markets the Company will
consider among others the following characteristics of each market: (i) its
business concentration, (ii) the national and local regulatory environment,
(iii) the technical difficulties of local network construction and (iv) the
extent of existing competition. See "Risk Factors -- Risks Relating to European
Services Strategy" and "Business -- Western Europe -- European Services
Strategy."
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
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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 Russian telecommunications industry.
The MOC was later designated as the government's representative for its
ownership share of the 88 regional operating companies, the assets currently
held by Svyazinvest (then the monopoly international and domestic long distance
service provider), and the principal regulatory authority for national radio,
television and satellite operating companies. This enabled the MOC and operating
organizations to begin the privatization process, attract foreign investment and
initiate joint ventures with foreign partners.
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the CIS has
occurred. Under Russian law, state-owned enterprises within the
telecommunications sector were subject to privatization but only pursuant to a
decision of the Russian government in each individual case and with the state
retaining a certain percentage of the stock of the privatized entity for three
years, subject to extension for national security reasons. At present, virtually
all of the former state telecommunications enterprises have been privatized and,
subject to the above restrictions, shares of the newly formed joint stock
companies have been sold to the public. Also, a significant number of private
operators provide a wide variety of telecommunications services pursuant to
licenses from the MOC to a growing number of customers throughout Russia.
According to the MOC, more than 6,000 licenses have been granted to
telecommunications operators in Russia, a large portion of which is assumed to
represent licenses reissued to the same operators as a result of their
reorganization or obligation to hold such licenses on counterfeit-proof paper.
In October 1994, the President authorized the establishment of Svyazinvest
with the stated purpose of fostering greater efficiency and economies of scale
within the industry through competition. As a wholly
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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.
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 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,
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(iii) the local market experience of its local partners, (iv) the extent of its
existing customer base and (v) its extensive range of international and domestic
telecommunications services. GTS believes it is the only operator in Russia
currently capable of providing a broad range of service offerings and marketing
them as a single end-to-end service offering for its customers.
STRATEGY
GTS's objective is to become the premier alternative carrier in Russia and
other key growth markets of the CIS. To attain this objective, the Company has
developed and implemented the following strategy:
- Develop Strong Local Partnerships. The Company has and continues to
develop its Russian and CIS business through alliances with experienced
local partners. These ventures combine the management, financial and
marketing expertise of GTS together with its partner's ability to provide
infrastructure and local regulatory experience. GTS believes that these
relationships lend it credibility and increase its ability to anticipate
and respond to the evolving regulatory and legal environment. GTS
maintains a significant degree of managerial and operational control in
its joint ventures through its foundation documents, which enable GTS to
develop them in a manner consistent with its overall strategic
objectives.
- Expand Customer Base. The Company continues to expand its customer base
through the provision of basic telephone and digital services in markets
where such services are not currently provided. Once they have
established a presence in a market, the Company's ventures seek for
opportunities to expand further into neighboring regions and cities.
- Increase Range of Digital Services. As its business customers expand
their operations throughout Russia and the CIS and as their
telecommunications needs become more sophisticated, the Company seeks to
increase its revenues by expanding the range of integrated digital
services offered to its customers.
- Offer High Quality Telecommunications Service and Customer Service. The
Company continues to invest in and build sophisticated high-speed digital
networks and other infrastructure through which customers can gain local
access to the Company's services. In addition to providing advanced, high
quality network infrastructure, the Company emphasizes and offers its
customers a level of customer service which the Company believes cannot
be found elsewhere in the market.
To date, GTS has made substantial progress employing this strategy. The
Company provides digital voice, data, internet and local services in Moscow
through its Sovintel, Sovam and TCM ventures and provides these same services to
fourteen additional Russian cities through its TeleRoss long distance network.
The Company believes that attractive acquisition opportunities currently exist
in the markets in which it operates in Russia and the CIS. The Company
continuously considers a number of potential transactions, some of which may
involve the contribution of certain of its Russian businesses in exchange for an
interest of equivalent or greater value in the surviving entity and, if
consummated, may be material to the Company's operations and financial
condition.
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.
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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
AT AND FOR THE THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------- --------------
1996 1997 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Cities In Service....................................... 33 40 33 45
Total Voice Minutes (millions)(1)
Inter-city............................................ 15.8 57.1 8.6 22.4
Local................................................. 133.0 269.1 44.9 92.3
International Outgoing................................ 20.5 46.0 8.6 14.8
Incoming.............................................. 33.2 69.9 14.8 17.6
Total Data Customers (thousands)........................ 6.2 9.9 7.2 10.5
Total Cellular Subscribers (thousands).................. 9.8 23.4 11.5 27.5
</TABLE>
- - - - ---------------
(1) Amounts include minutes between Company affiliates. 19.4 million of the
collective Total Voice Minutes of Bancomsvyaz, PrimTelefone and Vostok
Mobile presented for the three months ended March 31, 1998 are based on
historical splits and do not represent actual figures.
SOVINTEL
GTS owns 50% of Sovintel, a joint venture with Rostelecom, the national
long distance carrier. Sovintel was founded in 1990 by GTS, Rostelecom and GTE
Spacenet, with GTS acquiring GTE Spacenet's interest in 1994. Sovintel markets a
broad range of high quality telecommunications services by (i) directly
providing international direct dial access to over 170 countries and private
line dedicated voice channels and (ii) leveraging the infrastructure and
services of the other GTS ventures, including TeleRoss, TCM and Sovam. In
addition, Sovintel provides and installs for its customers equipment such as
PABXs, key systems and wiring and provides maintenance and other value-added
services. Sovintel customers, which primarily consist of businesses, hotels and
Moscow-based cellular operators, are able to access these telecommunications
services through Sovintel's fully-digital overlay network in Moscow. In
addition, Sovintel has recently commenced construction of a limited network in
St. Petersburg that is interconnected to Sovintel's Moscow network and is
intended to support Sovintel's Moscow clients which have a presence in St.
Petersburg. Sovintel serviced over 46,800 Moscow telephone numbers, or "ports,"
for business customers and cellular providers and had over 290 employees as of
March 31, 1998.
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 390 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 390 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.
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[GTS SOVINTEL MOSCOW NETWORK]
After a customer is connected to the Sovintel network, local telephone
services are provided through the Sovintel fiber optic ring's interconnection
with the switches of either TCM or MTU Inform. These switches provide access to
local telephone service in Moscow through interconnections with the Moscow city
telephone network ("MGTS") and the principal Moscow cellular providers. Sovintel
provides its customers access to domestic long distance service through the
TeleRoss long distance network, or through Rostelecom's network in cities not
currently served by TeleRoss. International service is provided primarily
through the Sovintel international gateway, which transmits international
traffic via dedicated international leased long distance channels. Sovintel's
customers also can receive high speed data services through Sovintel's
interconnection with the Sovam data network. Accordingly, from a customer's
perspective, Sovintel offers a broad range of telecommunication services.
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The following table sets forth certain operating data related to Sovintel's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED
AT AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------
1995 1996 1997 1997 1998
-------- ---------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
MINUTES OF USE(1)
International
Number of Minutes......... 10,516 20,839 43,664 8,405 14,080
Average Rate Per Minute... $ 2.06 $ 1.55 $ 1.12 $ 1.39 $ 0.96
Domestic Long Distance
Number of Minutes......... 2,047 10,098 26,606 4,707 10,992
Average Rate Per Minute... $ 0.86 $ 0.65 $ 0.52 $ 0.60 $ 0.46
Moscow (Local) Fixed Line
Number of Minutes......... -- -- 3,501 478 1,245
Average Rate Per Minute... -- -- $ 0.05 $ 0.07 $ 0.03
Moscow (Local) Cellular
Number of Minutes......... 21,478 83,673 118,447 22,639 33,611
Average Rate Per Minute... $ 0.06 $ 0.08 $ 0.08 $ 0.08 $ 0.08
Incoming
Number of Minutes......... 3,839 24,306 43,626 10,690 7,321
Average Rate Per Minute... $ 0.58 $ 0.28 $ 0.30 $ 0.25 $ 0.34
PORTS
Number of Ports
(cumulative).............. 6,079 29,646 43,976 38,491 46,800
NUMBER OF PRIVATE LINE CHANNELS
International................ 26 89 201 105 229
Inter- and Intra-City........ 26 103 243 130 278
APPROXIMATE EQUIPMENT SALES
(THOUSANDS).................. $ 1,400 $ 2,200 $ 3,400 $ 600 $ 1,000
</TABLE>
- - - - ---------------
(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:
- Switched International, Domestic Long Distance and Local
Services. Customers are provided switched international long distance
services directly through Sovintel's international gateway in Moscow and
its leased long distance channels. Domestic long distance services are
marketed by Sovintel and provided either through the TeleRoss long
distance network or, where the call destination is not served by
TeleRoss, through Rostelecom's network. Local call service is provided by
Sovintel indirectly as a result of its interconnection, through TCM or
MTU Inform, with the Moscow city telephone network. Based on its
familiarity with the market, the Company believes that Sovintel's
services are distinguished by a higher level of quality than those of its
competitors, particularly with respect to call completion rates for its
domestic long distance and local call services. In addition, the Company
trains its employees to provide customer service at a level which is
comparable to that provided by Western telecommunications companies. As a
result, the Company believes that customers choose Sovintel over its
competitors because it has earned a reputation for providing high quality
telecommunications services through an experienced and professional
customer service staff.
- Private Line Channels. Private line channels, which are provided over
dedicated leased lines, are principally utilized by customers with
high-volume data traffic needs, such as Sovam and large data providers.
Private line customers have access to intra-city service in Moscow
through Sovintel's fiber optic ring and to inter-city service between
Moscow and St. Petersburg via fiber leased by Sovintel, in each case
benefiting from Sovintel's high quality infrastructure. Private line
domestic long distance
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service is provided through TeleRoss and, for cities not served by
TeleRoss, through Rostelecom. International private line service is
provided through dedicated leased fiber channels from Rostelecom.
- Equipment Sales, Installation Services and Project Planning and
Management Services. In providing the above services to its customers,
Sovintel installs and maintains equipment on its customers' premises,
including PABXs, key systems and wiring. Sovintel also provides project
planning and management services, including system design and management,
to its customers.
- World Access Service. Customers are able to access Sovintel's
international long distance services through the World Access Card, which
provides customers either direct or calling-card-based portable access to
domestic and international long distance service. The calling card can be
used in 16 Russian cities, including Moscow and St. Petersburg, and 23
countries.
Sovintel complements its service offerings by providing a wide range of
value-added services, including operator assistance, maintenance and customer
support and itemized call reporting and billing.
Customers and Pricing. Sovintel's customers consist primarily of
high-volume business and professional customers, such as IBM, Credit Suisse
Group and Reuters, other multinational corporations and Russian enterprises, a
number of premium Moscow hotels and other telecommunications carriers. In
addition, Sovintel is one of the primary providers of domestic and international
long distance service for the major cellular service providers in Moscow,
including VimpelCom, MTS and Moscow Cellular. Sovintel's customers typically
demand a higher level of service than generally available in the market.
Sovintel further provides to its large corporate customers data services such as
frame relay and Internet access contracted from Sovam in order to offer
"one-stop shopping" telecommunications solution to these customers, who
increasingly require this type of service.
The pricing structure for international and domestic long distance calls is
based upon traffic volume and overall market rates, with Sovintel's rates
varying depending on the time and destination of the call. Local calls, other
than calls placed to cellular phones, are completed without charge. Sovintel
expects to continue its practice of not charging to complete local calls unless
and until the MGTS begins to charge for completion of such calls. Sovintel
prices its international long distance services slightly below those of its
principal competitors, and has recently reduced its rates in anticipation of
increased competitive pricing pressures. Sovintel's average revenue per minute
for outgoing international long distance calls has declined from approximately
$2.35 per minute for the year ended December 31, 1994 to approximately $0.96 per
minute for the three months ended March 31, 1998. Sovintel is experiencing
increased pricing pressure from competitors. Sovintel prices domestic long
distance services in line with those of its principal competitors. Due to its
obligations under certain agreements with affiliated entities, however,
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),
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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 March 31, 1998, 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 "Risk Factors -- 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 over 60,000 have been leased. In addition,
TCM expects to lease an additional 30,000 numbers to VimpelCom, TCM's primary
customer, during 1998. TCM is currently negotiating with MGTS for the
construction of up to an additional 50,000 numbers and if these negotiations are
successfully completed TCM may lease up to 25,000 numbers to VimpelCom in the
last three quarters of 1998. Any such construction, however, is subject to
completion of negotiations with TCM, obtaining necessary regulatory approvals
and the availability of such numbers in the portion of the MGTS numbering plan
in which TCM plans to construct such numbers. There can be no assurance that TCM
will obtain additional 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 $360 installation fee and a $15 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
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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. The
Company is currently engaged in negotiations to acquire the ownership interest
from the group of entrepreneurs. If such purchase is consummated, the Company
would have a 95% 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 March 31, 1998, 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 "Risk
Factors -- 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 a wholly owned
subsidiary of GTS that operates a domestic long distance network (the "TeleRoss
Operating Company") and fourteen 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 fifteen major Russian cities,
including Moscow and, through VSAT technology, 25 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 March 31, 1998, TeleRoss employed approximately
210 persons of which approximately 100 people were based in Moscow and
approximately 110 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 fourteen cities in which TeleRoss primarily
operates are regional capitals, with an aggregate population of approximately 13
million. TeleRoss's licenses cover the entire oblast surrounding these cities,
with populations totaling approximately 41 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, Samara, Syktyvkar, Tyumen, Ufa, Vladivostok,
Volgograd and Voronezh.
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 25 customers
in additional cities through VSAT technology which links the customers via
satellite to the Moscow hub.
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The following table sets forth certain operating data related to TeleRoss's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
------------------- ------------------
1996 1997 1997 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
MINUTES OF USE(1)
Domestic Minutes (thousands)................. 4,035 23,233 3,227 9,599
Average Rate Per Domestic Minute............. $ 0.99 $ 0.63 $ 0.81 $ 0.53
International Minutes (thousands)............ 272 744 123 242
Average Rate Per International Minute........ $ 2.76 $ 2.47 $ 2.64 $ 2.22
NUMBER OF CITIES SERVED(2)..................... 13 14 13 15
WORLD CONNECT DIAL/RUSSIA
Number of Connect Dial Ports................. 472 1,112 716 1,514
Average Revenue Per Port Per Month........... $ 767 $ 370 $ 436 $ 400
MOSCOW CONNECT
Number of Ports.............................. 49 78 50 80
Average Revenue Per Port Per Month........... $1,165 $ 1,358 $1,300 $1,409
DEDICATED CIRCUITS
Number of Dedicated Channels................. 33 60 77 70
Average Price Per Channel.................... $4,553 $ 4,140 $5,504 $3,428
WORLD ACCESS SERVICE
Number of World Access Card Users............ 3,929 4,595 4,317 4,708
Average Revenue Per Card Per Month........... $ 52 $ 48 $ 54 $ 43
VSAT SERVICES
Number of VSATs.............................. 12 24 15 25
</TABLE>
- - - - ---------------
(1) Includes minutes among affiliates.
(2) Includes connection to Moscow.
Services. Through its network and VSAT offerings, TeleRoss offers the
following services:
- Carriers' Carrier Services. TeleRoss provides services as a "carriers'
carrier," providing domestic long distance carrier services to cellular
operators, Sovintel, the TeleRoss Ventures' regional partners and
competitive bypass operators from the cities in which the TeleRoss
Ventures operate, and to customers in remote cities using VSAT stations.
These services are provided to and from Moscow, and are provided by
TeleRoss at wholesale rates competitive with those offered by Rostelecom.
TeleRoss also provides private line channels to Sovam in cities where the
TeleRoss Ventures operate. In addition, TeleRoss has recently received a
license to provide international private line service.
- World Connect Dial/Russia Connect Dial. Customers in TeleRoss's cities
are provided dedicated local access to the regional TeleRoss switch
through lines leased from the TeleRoss Venture's regional joint venture
partner. These customers then have access to the domestic long distance
service provided by TeleRoss, international long distance service
provided by Sovintel and are fully integrated into the local phone
networks operated by the applicable TeleRoss Venture's partner and to the
Moscow city telephone network through TCM.
- Moscow Connect. Customers are provided with dedicated last mile
connection over lines leased from the regional joint venture partner
which lines are connected to a local TeleRoss switch. The TeleRoss
network and its interconnection to TCM provide customers with a Moscow
dial tone which allows users in remote locations better access to
Moscow's advanced telecommunications infrastructure. In addition, Moscow
Connect service provides better call quality at lower rates for domestic
and international long distance. Moscow Connect also facilitates
communications between users and their 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.
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<PAGE> 68
- Dedicated Circuits. Customers are provided with point-to-point clear
channel circuits within Russia and internationally through the TeleRoss
backbone and its interconnection with Sovintel's international gateway in
Moscow. Dedicated circuits are generally used by news services, banks and
other commercial customers who require high capacity and high quality
service. This service can be used for voice or data, depending on the
user's needs. In providing dedicated circuits, TeleRoss competes against
other alternative communications providers, however, TeleRoss believes
that it has a distinct price advantage over its competitors because of
the use of its own infrastructure and the bulk purchase of satellite
capacity.
- World Access Service. TeleRoss and Sovintel co-market World Access
Service to their customers in each of the cities they serve through two
products: World Access Direct and World Access Card. Through World Access
Direct, TeleRoss customers can access domestic long distance and
international service anywhere within the customer's city through the
local telephone network. The World Access Card is a calling card which
allows TeleRoss customers portable access to domestic long distance and
international service from 16 Russian cities, including Moscow and St.
Petersburg, and 23 countries. This service is provided through Sovintel's
infrastructure.
- VSAT Services. For customers that are located outside the cities serviced
by TeleRoss or that cannot be physically linked to TeleRoss's regional
switches, TeleRoss offers VSAT service which connects these customers
directly to TeleRoss's Moscow-based hub through a VSAT antenna installed
at the customer's location. Both dedicated and switched services are
provided through these VSAT arrangements.
In addition to continuing the development of its core domestic long
distance business, TeleRoss's strategy includes the development of local access
networks to capitalize on demand for local phone service and to capture
additional customers for its long distance and value-added service offerings.
Outside Moscow, TeleRoss has primarily pursued a strategy whereby it develops
its own intra-city trunking network with copper based or fiber optic facilities
leased from the regional joint venture partners. As of March 31, 1998, TeleRoss,
in conjunction with regional joint venture partners, has installed approximately
30 kilometers of fiber optic cable in three 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 21 to 27 months. Customers who obtain
local phone numbers from TeleRoss's venture partners are directly interconnected
to the local telephone company and to the Company's long distance network and
Sovintel's international gateway and may obtain a broad range of value-added
services offered by the Company.
Customers and Pricing. TeleRoss's customers include businesses and other
telecommunications service providers such as carriers, PTOs, cellular operators,
Sovintel and Sovam. TeleRoss's business customers consist of large multinational
and Russian businesses in each of the regions it services, as well as medium and
small-sized businesses. Between 1993 and mid-1996, consumer prices in TeleRoss's
industry increased significantly as a result of Rostelecom raising its prices in
an effort to raise capital for investment and development of its network
infrastructure, although prices have stabilized over the past nine months and
Rostelecom has indicated that it plans to decrease prices by up to 10% during
1998. During the first quarter of 1998, 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 March 31, 1998, 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
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<PAGE> 69
has a competitive advantage. Through cross-marketing agreements with Sovintel
and Sovam, TeleRoss markets many of the other service offerings of GTS's Russian
businesses to customers throughout its service regions. Billing functions and
the monitoring of quality control and technical issues are performed centrally
through the Moscow-based hub.
Ownership and Control. TeleRoss consists of the TeleRoss Operating Company,
and the 50% beneficially owned TeleRoss Ventures. GTS controls TeleRoss
Operating Company (which holds the network license) and co-manages the TeleRoss
Ventures under the terms of the applicable TeleRoss Ventures' foundation
agreements and charters. Under some of these charters, GTS generally has the
right to designate the Chairman of the board of directors, and GTS's local
partner has the right to designate the Deputy Chairman, for the first two-year
term (and thereafter GTS and the local partner nominate the Chairman and Deputy
Chairman for approval by the entire board on a rotating basis). The foundation
agreements and charters do not have expiration dates. While GTS has significant
influence within these ventures, decisions, including the decision to declare
and pay dividends, are generally subject to GTS's partner's approval. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control." Neither GTS
nor its respective joint venture partners are obligated to fund operations or
capital expenditures of the TeleRoss Ventures. Losses and profits are allocated
to the partners in accordance with their ownership percentages, in consideration
of funds at risk. As of March 31, 1998, GTS and its partners had each made
equity contributions aggregating $1.9 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 and interest of $2.1 million to GTS and $0.45 million to
Citibank as of March 31, 1998. In addition, as of March 31, 1998, GTS had made
equity contributions of $5.8 million to the TeleRoss Operating Company and the
TeleRoss Operating Company had outstanding loans and interest of $32.7 million
to GTS and $4.7 million to Citibank. 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 34 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 March 31, 1998, Sovam had
approximately 1,541 data service customers and approximately 4,560 Russia On
Line customers (which includes approximately 890 trial subscribers). Sovam
employed approximately 148 persons in Moscow and other regions of the CIS as of
March 31, 1998. Sovam provides equipment and maintains marketing and technical
support personnel at each location either through its own infrastructure or
through the infrastructure of partners, including 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 21 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.
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<PAGE> 70
The following table sets forth certain operating data related to Sovam's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
BASIC DATA SERVICE
Percentage of Total Sovam Revenue... 91% 79% 81% 80% 79%
Number of Customers................. 1,587 1,726 1,571 1,779 1,541
Average Revenue Per Month Per
Customer......................... $ 201 $ 446 $ 728 $ 554 $ 940
Number of Cities in Service......... 11 25 30 27 34
EQUIPMENT AND HARDWARE SALES
Percentage of Total Sovam Revenue... 8% 14% 8% 10% 10%
RUSSIA ON LINE SERVICE
Percentage of Total Sovam Revenue... 1% 7% 11% 10% 11%
Number of Subscribers(1)............ 407 1,854 3,159 2,751 3,666
Average Revenue Per Month Per
Subscriber....................... $ 49 $ 52 $ 64 $ 49 $ 63
</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 March 31, 1998, there were approximately 894 such potential
subscribers.
Services. Sovam's service offerings are comprised of data services,
equipment and hardware sales and its Russia On Line services.
- Data Services. Sovam provided high speed connectivity, electronic mail,
database access and fax services to approximately 1,541 customers as of
March 31, 1998, 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 34 cities throughout Russia and the
CIS, including Moscow, St. Petersburg, each of the cities served by
TeleRoss and some cities outside of the TeleRoss network.
- Equipment and Hardware Sales. Sovam sells communications equipment and
hardware, and provides related installation, maintenance and support
functions, to its customers. Sovam's primary customers in the equipment
and hardware market are banking clients who use the equipment to
interface with Sovam's network.
- Russia On Line. Russia On Line is the first Russian language, as well as
the first dual language, graphical user interface online service for
accessing domestic and international information sources designed to
appeal to a wide commercial audience. This service, which is distributed
via GTS's domestic long distance infrastructure, provides customers with
access to international databases (including the Internet), as well as an
array of proprietary Russian and English language information services,
such as news stories and market updates. Sovam had 4,560 Russia On Line
subscribers (which includes approximately 894 trial subscribers) as of
March 31, 1998. 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
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<PAGE> 71
entered into agreements with equipment manufacturers, including an affiliate of
Motorola, 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 users 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 2%
to 5% conversion fee added to ruble-denominated payments.
Sales and Marketing. Sovam employs a dedicated sales and marketing force
comprised of three non-Russian nationals and 30 Russian nationals, 25 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. 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 nine AMPS cellular companies in
Russian regions west of the Urals and three AMPS cellular companies in Siberia
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 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 GSM (DCS-1800) cellular
network in Kiev, and an international overlay network in Ukraine. GTS Cellular
entities possess licenses covering major Russian and Ukrainian markets
(excluding Moscow and St. Petersburg) with an aggregate 1997 population of
approximately 28 million people. The Company is currently engaged in
negotiations to restructure the capital and ownership of Bancomsvyaz.
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<PAGE> 72
GTS currently offers cellular services in the following regions as of March
31, 1998:
<TABLE>
<CAPTION>
GTS'S
OPERATING ECONOMIC NUMBER OF
COMPANY INTEREST(1)(2) CITY SUBSCRIBERS
--------- -------------- ---- -----------
<S> <C> <C> <C>
RUSSIA
Vostok Mobile(2)
Arkhangelsk Mobile Networks.......... 50.0% Arkhangelsk 706
Astrakhan Mobile..................... 50.0% Astrakhan 1,370
Altaisvyaz(3)........................ 50.0% Barnaul 199
Chuvashi Mobile...................... 70.0% Cheboksary 1,348
Lipetsk Mobile....................... 70.0% Lipetsk 1,610
Murmanskaya Mobilnaya Set............ 50.0% Murmansk 1,607
Penza Mobile......................... 60.0% Penza 818
Saratov Mobile....................... 50.0% Saratov 2,218
Parma Mobile......................... 50.0% Syktyvkar 522
Volgograd Mobile..................... 50.0% Volgograd 1,912
Votec Mobile......................... 50.0% Voronezh 2,266
Mar Mobile........................... 50.0% Yoshkar-ola 549
PrimTelefone............................ 50.0% Vladivostok(4) 6,980
UKRAINE
Bancomsvyaz............................. 25.0%(5) Kiev 5,401
------
Total........................... 27,506
======
</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. As of March 31, 1998, the subsidiaries of the Company have
obtained licenses to act as a cellular operator in the cities of Bryansk,
Kostroma, Yaroslavl and Novgorod. As of March 1998, the Company has not yet
begun to provide services in these cities. Moreover, GTS intends to enter
into the cellular markets of additional Russian regions through its Vostok
Mobile venture. In June 1998, the Company entered into a non-binding letter
of intent to acquire an approximately 80% interest in a Russian company
which is operating and developing cellular operations in the Rhdarousk,
Kamchatsk and Amursk regions. The transaction is subject to conditions
including the completion of due diligence, execution of definitive
agreements and Anti-Monopoly Committee approval.
(3) Joint venture acquired in October 1997; cellular operations commenced in
February 1998.
(4) Includes Vladivostok and four other cities in the Primorsky region.
(5) The Company is currently implementing a restructuring of the capital and
ownership of Bancomsvyaz.
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<PAGE> 73
The following table sets forth certain operating data related to GTS
Cellular's operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------ -----------------
1996 1997 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Vostok Mobile
Total Subscribers............................ 6,884 13,561 7,763 15,125
Average Revenue Per Subscriber Per Month..... $ 128 $ 133 $ 135 $ 108
Minutes of Use(1)(thousands)................. 10,561 27,771 5,302 8,453
Population Covered by Licenses (thousands)... 18,400 18,400 18,400 21,100
Population Covered by Networks (thousands)... 6,500 6,500 6,500 6,800
Subscriber Penetration of Population Covered
by Networks............................... 0.11% 0.21% 0.12% 0.21%
PrimTelefone
Total Subscribers............................ 2,822 6,152 3,344 6,980
Average Revenue Per Subscriber Per
Month(2).................................. $ 236 $ 188 $ 192 $ 186
Minutes of Use(1)(thousands)................. 6,919 14,270 2,453 5,697
Population Covered by Licenses (thousands)... 2,200 2,270 2,200 2,270
Population Covered by Networks (thousands)... 1,175 1,175 1,175 1,175
Subscriber Penetration of Population Covered
by Networks(2)............................ 0.24% 0.52% 0.28% 0.59%
Bancomsvyaz
Cellular Network Total Subscribers........... 121 3,664 424 5,401
Average Revenue Per Subscriber Per Month..... $ 62 $ 160 $ 172 $ 130
Minutes of Use(1)(thousands)................. 9 5,085 266 5,302
Population Covered by Licenses (thousands)... 4,500 4,536 4,500 4,536
Population Covered by Networks (thousands)... 1,669 2,507 1,669 2,507
Subscriber Penetration of Population Covered
by Networks............................... 0.01% 0.15% 0.02% 0.22%
Overlay Network
Minutes of Use(1)(thousands)................. -- 4,909 130 3,299
Number of Ports.............................. -- 751 150 1,092
Average Revenue Per Minute................... -- $ 0.34 $ 0.58 $ 0.28
</TABLE>
- - - - ---------------
(1) Includes minutes among affiliates.
(2) Operating data is calculated using active subscribers only.
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, in most cases, regional
telephone companies, 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 and VimpelCom have agreed upon automated roaming standards and Vostok
Mobile expects automated roaming to be available to its subscribers during the
second
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<PAGE> 74
half of 1998 although the introduction of such service may be delayed or even
suspended as a result of the RFCCI Letter as described below.
The Unicel Ventures, collectively, are licensed to provide cellular service
to regions with an aggregate population of approximately 21.1 million people and
the cellular networks of these ventures cover populations of approximately 6.8
million people. Over the next five years, Vostok Mobile plans to expand the
coverage of the cellular networks to approximately 9.8 million people.
Each region in which the Unicel Ventures operates, has the potential for
five licensed operators, including one operator for each of the AMPS, NMT and
GSM cellular standards and two operators in the DCS cellular standard, and the
Company is experiencing increased competition and expects such competition to
increase further. 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 approximately 386 persons as of March 31, 1998,
with 340 persons employed regionally.
On June 10, 1998, Vostok Mobile received a letter from the Russian
Federation Committee for Communications and Informatics (the successor to the
MOC) (the "RFCCI Letter") addressed generally to the management of cellular
operators utilizing the AMPS and D-AMPS standards. The RFCCI Letter stated that
the offering of roaming services by such operators is at variance with the
Concept for the Development of Mobile Radio Communications in Russia by the Year
2010 (the "Concept") and the Main Provisions on the Prospects of Developing an
Interconnected Network of the Russian Federation by the Year 2005 (the "Main
Provisions"), as approved in two decisions of the Russian State Commission on
Electrosvyazes in 1994 and 1995. The RFCCI Letter proposes that (i) such
operators strictly observe the Concept until 2010 and (ii) the State
Communications Supervision Committee consider roaming activity by such operators
to be in violation of their licenses and undertake measures to halt such roaming
activity, including terminating interconnections necessary for such roaming. The
Company is in the process of evaluating the implications of the RFCCI Letter.
Although the matter is not free from doubt, the Company believes, based on its
preliminary review, that the Concept and the Main Provisions referred to in the
RFCCI Letter represent policy statements rather than legally binding legislative
pronouncements. However, the RFCCI Letter may signal a potential future change
in the application of Russian telecommunications policy toward the provision of
roaming services by AMPS and D-AMPS based cellular providers. The Company
intends vigorously to contest the positions expressed in the RFCCI Letter,
particularly if actions are initiated to curtail the roaming services that the
Unicel Ventures currently offer. Currently, revenues derived from roaming
services do not represent a significant portion of Vostok Mobile's total
revenue. The Company is unable to predict whether and in what form the positions
set forth in the Letter will be implemented as new regulation or directly
applied as a basis for suspension, revocation or renewal of current licenses in
whole or in part. If regulations were adopted implementing the positions set
forth in the RFCCI Letter, or other actions were taken to directly apply such
positions, such regulations or actions could adversely affect the Unicel
Ventures' ability to compete with GSM or NMT-based cellular providers not bound
by any such prohibition on roaming activities applicable to operators using the
AMPS and D-AMPS standard. There can be no assurance that such regulation will
not be adopted or such actions will not be taken and that, if adopted or taken,
as applicable, they will not have a material adverse effect on Vostok Mobile or
the Company. See "Risk Factors -- Risks Relating to Russia and the
CIS -- Regulation of the Telecommunications Industry," "Business -- Russia and
the CIS -- Licenses and Regulatory Issues" and "Competition."
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 6,980 (including 5,708
active subscribers) as of March 31, 1998, capturing half of the Vladivostok
cellular market. PrimTelefone has also updated its billing system, which allows
it to offer automated roaming. PrimTelefone competes with a GSM operator and an
AMPS operator, both of which are fully interconnected
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to the city telephone network and provide wide city coverage. PrimTelefone
employs approximately 62 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 2.3 million people and, as of March 31, 1998, 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.
On April 27, 1998 the Primorsky Krai Gossvyaznadzor, the local authority
responsible for monitoring compliance with regulatory and technical norms
("PKGCN"), issued three letters to PrimTelefone concerning certain compliance
irregularities (the "PKGCN Letters"). As requested in the PKGCN Letters, on
April 28, 1998 PrimTelefone's management submitted a compliance plan to the
PKGCN specifying measures to be undertaken to bring PrimTelefone's network into
compliance with Gossvyaznadzor requirements and a timetable for doing so. On
April 29 the PKGCN agreed to the compliance plan. To date, PrimTelefone's
management has timely performed its obligations under the compliance plan and
believes that the plan will be completed on schedule. PrimTelefone's management
has also submitted applications for new frequency plans for the base stations
cited in the PKGCN orders and, although no assurance can be provided, believes
that the new frequency plans will be approved. See "-- Russia and the CIS -- GTS
Cellular -- Licenses and Regulatory Issues."
On May 13, 1998, a local division of the Primorsky Krai Ministry for
Internal Affairs opened a criminal investigation under Article 327 of the
Russian Federation Criminal Code against certain employees of PrimTelefone
concerning the use of forged state documents in connection with an application
for a frequency plan submitted (and subsequently abandoned) by PrimTelefone (the
"PKMIA Investigation"). On June 22, 1998, several employees of PrimTelefone,
among others, were interviewed by a militia investigator in connection with this
matter. PrimTelefone's management intends to cooperate fully in this
investigation.
Although no assurance can be provided, the Company does not believe that
either the PKGCN Letters or the PKMIA Investigation will have a material adverse
effect on the Company's business, results of operations or financial condition.
Bancomsvyaz. GTS owns a 50% economic interest in an intermediate holding
company which holds an approximately 48% interest in Bancomsvyaz, giving GTS an
indirect approximately 24% economic interest in Bancomsvyaz. The remaining
approximately 52% interest in Bancomsvyaz is owned by three Ukrainian companies
and a Ukrainian national. One of the Ukrainian companies, which is a wholly
owned indirect subsidiary of GTS, owns 20% of Bancomsvyaz. The Company is
currently implementing a restructuring of the capital and ownership of
Bancomsvyaz which will increase GTS's economic interest in the intermediate
holding company to 75% and increase GTS's interest in Bancomsvyaz to
approximately 57%. Bancomsvyaz is co-managed by GTS and its Ukrainian partners,
with such partners 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 122 employees, Bancomsvyaz markets its services and closely
monitors technical and quality-related issues.
Cellular network. Bancomsvyaz operates a cellular network in Kiev under the
trade name Golden Telecom GSM. The operation utilizes DCS-1800 cellular
technology and operates under a cellular license that covers Kiev City and 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.
Bancomsvyaz provides GSM cellular roaming with the UK, France, Germany, and the
United States in addition to fourteen other GSM countries. Roaming agreements
have also been signed with another fourteen operators and the Iridium
consortium.
Bancomsvyaz holds a license to provide cellular service to a region having
a population of approximately 4.5 million people and, as of March 31, 1998, its
cellular network covered an area with approximately
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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 local exchange carrier services and
international gateway services through its overlay network in Kiev. Bancomsvyaz
currently owns and operates a partitioned mobile switch for both its cellular
and overlay businesses. A second switch, to be commissioned in July, has been
ordered. All future overlay traffic will be on this switch.
Bancomsvyaz has fourteen central offices in the city and also provides last
mile connections (both copper and fibre optic) from the central offices to
customers. A 24 kilometers fiber optic ring has been constructed in Kiev. By
year end it is planned to incorporate three additional rings bringing the total
fiber optic network to 69 kilometers. Local traffic is routed to the local
telephone network. International outgoing and income traffic is routed via fiber
optic cable to the GTS-Monaco Access international gateway and Sovintel in
Moscow. Bancomsvyaz emphasizes its high quality service and markets primarily to
multinational companies, real estate developers and hotels. Bancomsvyaz is also
negotiating with several international operators to provide other access routes
for international outgoing and incoming traffic.
Sales and Marketing. The GTS Cellular entities have direct sales teams and
have also 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 at least 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. 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 $200 per customer or six to eight weeks of service.
Ownership and Control. GTS Cellular's Russian operations (except for the
Vladivostok operations) are conducted through ventures that are owned between
50% and 70% by Vostok Mobile, a wholly owned subsidiary of GTS. GTS Cellular's
Vladivostok and Ukrainian operations are conducted through ventures which
require partner approval for most decisions. The applicable foundation
agreements and charters do not have expiration dates. See "Risk
Factors-- Dependence on Certain Local Parties; Absence of Control." Neither GTS
nor any of its respective partners in its Vladivostok or Ukrainian operations
are obligated to fund operations or capital expenditures. Losses and profits of
all such ventures are allocated to the partners in accordance with their
ownership percentages, in consideration of funds at risk. As of March 31, 1998,
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
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$21.5 million to GTS as of March 31, 1998. 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.
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 required 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 license. At this time, the
Company has been granted an extension until July 1998 for payment of such fee,
and there is a possibility this fee may be reduced. Issuance of this license is
contingent on the 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.
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GTS's subsidiaries and ventures hold the following licenses in Russia and
Ukraine:
Switched Services. In Russia, the Company holds two licenses. The
first license was reissued to Sovintel in November 1996 and authorizes
Sovintel to operate as an international overlay network with the ability to
interconnect with the Moscow region and St. Petersburg public switched
telecommunications network ("PSTN"). This license ultimately requires
Sovintel to provide service to at least 50,000 subscribers and expires in
May 2000. It was amended in February 1997 to cover the Leningrad region.
The second license was reissued to SFIT, Ltd., a wholly owned subsidiary of
GTS in February 1997, for provision of intercity services in 39 regions and
in Moscow with ability to interconnect with the PSTN. In Kiev, Ukraine, the
company holds a license for provision of overlay network services,
including international services, in the name of its affiliate,
Bancomsvyaz. In addition, Sovintel is an ITU recognized private operating
agency ("RPOA"), which enables it to maintain a separate dialing code
(7-501) that can be directly dialed from over 170 countries. Sovintel's
status as an RPOA also enables it to terminate calls directly with other
operators.
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 500
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 is
currently negotiating with MGTS to provide up to an additional 50,000
numbers. This 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 thirteen 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, five companies initially received an operating license in
1996 and one company initially received an operating license in 1997.
Additionally, Vostok Mobile has received licenses for four cities where it
intends to begin operations later this year.
On June 10, 1998, Vostok Mobile received the RFCCI Letter addressed
generally to the management of cellular operators utilizing the AMPS and
D-AMPS standards. The RFCCI Letter stated that the offering of roaming
services by such operators is at variance with certain normative documents
referenced in the letter and is in breach of the licenses granted to such
operators. The Company is in the process of evaluating the implications of
the RFCCI Letter. Although the issue is not
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free from doubt, the Company believes, based on its preliminary review,
that the "normative documents" referred to in the Letter represent policy
statements rather than legally binding legislative pronouncements. However,
the RFCCI Letter may signal a potential future change in the application of
Russian telecommunications policy toward the provision of roaming services
by AMPS and D-AMPS based cellular providers. See "Risk Factors -- Risks
Relating to Russia and the CIS -- Regulation of the Telecommunications
Industry," "Business -- Russia and the CIS -- GTS Cellular -- Vostok
Mobile" and "-- Competition."
On April 27, 1998 the PKGCN issued the PKGCN Letters to PrimTelefone.
On April 28, 1998, PrimTelefone's management submitted a compliance plan to
the PKGCN specifying measures to be undertaken to bring PrimTelefone's
network into compliance with Gossvyaznadzor requirements and a timetable
for doing so. On April 29 the PKGCN agreed to the compliance plan. To date,
PrimTelefone's management has performed timely its obligations under the
compliance plan and believes that the plan will be completed on schedule.
PrimTelefone's management has also submitted applications for new frequency
plans for certain base stations cited in the PKGCN Letters and, although no
assurance can be provided, believes that the new frequency plans will be
approved. Although no assurance can be provided, the Company does not
believe that the PKGCN Letters will have a material adverse effect on the
Company's business, results of operations or financial condition. See
"-- Russia and the CIS -- GTS Cellular -- PrimTelefone."
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 certain competitive advantages 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 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
electrosvyazs, 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
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Russian joint venture licensed to provide local, long distance and international
service over private and public switched networks; Teleport TP, a satellite
overlay company jointly owned by Rostelecom and Petersburg Long Distance that
provides satellite teleports in cities throughout Russia; and Comincom, a
Russian private venture. In the Russian far east, TeleRoss competes with Vostok
Telecom, which is owned by the Japanese companies KDD and NIC and certain
Russian partners; and Nakhodka Telecom, which is owned by Cable & Wireless and
certain Russian partners.
GTS both cooperates and competes with Rostelecom. Rostelecom provides only
international and long distance services to international carriers and regional
electrosviazs, and does not provide end-to-end customer services. GTS provides
last mile, account management, and transit services for Rostelecom in Moscow,
and uses Rostelecom channels and switches for both international and long
distance services. GTS provides long distance and international services on an
end-to-end basis, using service elements of Rostelecom, the electrosviazs and
its own resources. However, Rostelecom does compete with TeleRoss, in that
TeleRoss provides intercity services to customers, using satellite channels
provided by other state agencies (Intersputnik), and provides transit services
to various electrosviazs, on a traffic overflow basis.
GTS believes that it enjoys a number of competitive advantages in the
Russian domestic long distance market, the most important being the maturity of
its international and data service businesses in Russia. This provides GTS with
access to the services, customers, products, licenses and facilities of its
other businesses. The Company also believes that it has more experienced
management, a more comprehensive strategy to build out a nationwide long
distance network and stronger relationships with many regional telephone
companies and with satellite capacity providers, such as Intersputnik, than most
of its competitors. In addition, the Company believes that it does not have any
significant competitor in the regional inter-city market (i.e., calls between
Russian cities other than Moscow or St. Petersburg).
Data Services. Sovam has several primary competitors in the market for data
services: Global One, which began packet-switched service in Moscow and St.
Petersburg in June 1992, under the Sprint Networks venture; Demos, an Internet
service provider; and Relcom, a cooperative affiliation of computer users that
relies on an older generation of technology that supplies slower and lower-cost
messaging facilities to customers (primarily domestic commodities traders) that
do not require higher levels of service. In addition MCI and Rostelecom have
recently announced their agreement to create a national Internet access network
utilizing Rostelecom's domestic network and MCI's international infrastructure.
Rostelecom has also announced the formation of a new Internet services company
called RTK Internet, with Relcom as its partner. Although Sovam's business has
grown quickly, the Company believes that Global One is the market leader. GTS
believes that other potential competitors, including foreign PSTNs, Infotel,
Infocom and Glasnet, are also active in this market.
Although the Company faces significant competition in this market, it
believes that it enjoys certain competitive advantages, including the ability to
reach a wide area throughout Russia through TeleRoss, innovative service
offerings such as Russia On Line, the maturity of its business in the key
banking services segment, high levels of customer service and support, and high
speed digital channels through TeleRoss.
Local Access Services. The Company believes that its major competition in
the Moscow local access market consists of a number of ventures with Western
partners, including Telmos (which includes AT&T), Comstar (which includes GPT
Plessey), and 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
five licensed operators, including one operator for each of the GSM and NMT-450
cellular standards, which Russia has adopted as national standards, one operator
using the AMPS cellular standard, which has been set as a regional standard and
two operators in the DCS Cellular 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 recently occurred which could result in one or more
CDMA "fixed wireless" providers entering the markets, where GTS has cellular
operations. GTS is currently pursuing the development of
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CDMA operations in the CIS. 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.
On June 10, 1998, Vostok Mobile received the RFCCI Letter addressed
generally to the management of cellular operators utilizing the AMPS and D-AMPS
standards. The RFCCI Letter stated that the offering of roaming services by such
operators is at variance with certain normative documents referenced in the
Letter and is in breach of the licenses granted to such operators. The Company
is in the process of evaluating the implications of the RFCCI Letter. Although
the matter is not free from doubt, the Company believes, based on its
preliminary review, that the "normative documents" referred to in the Letter
represent policy statements rather than legally binding legislative
pronouncements. However, if regulations were adopted implementing the positions
set forth in the RFCCI Letter or other actions were taken to directly apply such
positions, such regulations or actions could adversely affect Vostok Mobile's
ability to compete with GSM or NMT-based cellular providers not bound by any
such prohibition on roaming activities applicable to operators using the AMPS
and D-AMPS standard. See "Risk Factors -- Risks Relating to Russia and the
CIS -- Regulation of the Telecommunications Industry."
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 30, 1998, HER's network connects Belgium, the
Netherlands, the UK, France, Germany and Switzerland linking the cities of
Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg,
Zurich and Geneva. In the second quarter of 1998, the network connected
approximately 3,000 kilometers of fiber optic cable, established service to
Stuttgart and commenced testing the links to Dusseldorf 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 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, the London-Paris portion in November 1997 and
Frankfurt, Zurich and Geneva were added to the network in April 1998. 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 telecommunica-
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tions 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 HER 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. See "Risk Factors -- HER Network Roll-out" and "Risk Factors --
Competition."
HER
HER's objective is to become the leading pan-European carriers' carrier by
providing centrally managed cross-border telecommunications transmission
capacity to telecommunications companies including PTOs and New Entrants. HER
intends to offer these target customers a better transport system than is
currently available in Europe with a higher and more consistent level of
transmission quality, redundancy, network functionality and service across
Europe at lower prices. Development of the HER network is dependent upon, among
other things, HER's continuing ability to obtain the necessary financing,
rights-of-way, licenses and other regulatory approvals in a timely and
cost-effective manner.
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 licenses and authorizations.
HER is operational in Belgium, the Netherlands, the UK, France, Germany and
Switzerland as discussed below, and HER expects that the 18,000 kilometer
network will 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.
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HER expects to continue to roll-out full telecommunications transport
service on the initial network in Belgium, the Netherlands, the UK, France,
Germany and Switzerland linking the additional cities of Dusseldorf, Stuttgart
and Munich. Commercial transport service to Stuttgart has already begun; testing
of the links to Dusseldorf and Munich is in progress with commercial service
expected to begin by the end of the third quarter of 1998. This initial network
is expected to cover 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 of Berlin, Stockholm, Copenhagen, Luxembourg and Milan by the
end 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 Belgium, the Netherlands, the UK,
France, Germany and Switzerland. Additional contracts have been concluded in
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. See "Risk
Factors -- HER Network Roll-out."
On June 24, 1998, HER completed the acquisition of a 75% interest in Ebone
A/S ("Ebone") for ECU 90 million (approximately $99.5 million based on the
ECU/US dollar exchange rate in effect on that date). Headquartered in
Copenhagen, Denmark, Ebone is a Tier 1 Internet backbone provider focused on
connecting Internet service providers in Europe to the Internet. Currently,
Ebone serves more than 90 customers in 22 countries. As part of the transaction,
Ebone will purchase under a transmission capacity agreement long-term capacity
rights on the HER network valued at ECU 90 million. The transmission capacity
agreement is expected to provide for the majority of Ebone's current and
forecasted capacity requirements. HER will provide Ebone with capacity of up to
622 megabits per second between the majority of European cities that Ebone
serves. In addition to the majority interest held by HER, Ebone's new ownership
structure will continue to include many of Ebone's existing customers, which own
the balance of Ebone's shares through an association. It is expected that the
members of the association will have the right to buy shares of Ebone in a
future issuance to occur by the end of 1998, which, if consummated, could reduce
HER's stake in Ebone from 75% to not less than 51%.
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 approximately 89% by purchasing a portion of HIT Rail's
ownership interest in HER. GTS-Hermes is a wholly owned subsidiary of GTS. In an
effort to expand its presence in Europe, HER has formed wholly owned
subsidiaries in the Netherlands, Ireland, the United Kingdom, Germany, France,
Italy and Spain to conduct marketing and other activities. In Belgium, the
activities of the Network Operations Center have been transferred to HER Network
Services B.V.B.A. (formerly Hermes Europe Railtel N.V.), a wholly owned
subsidiary of HER. Following the development of its corporate structure, HER
will be a holding company with limited assets and will operate its business
through subsidiaries.
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
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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 Wavelength Division Multiplexing ("WDM") upgrades, HER's
fiber deployment plan provides for a minimum of 120 optical wavelengths.
- Uniform Network Architecture. The HER network is designed to offer
managed transport services from country to country and across multiple
countries utilizing a single uniform network, in contrast to services
currently available that use multiple providers over several networks
with varying technologies and each under the control of separate, not
necessarily compatible, network control systems. The HER network's
uniform technology enhances service by providing quality and reliability
as well as uniformity of features throughout the network.
- Diverse Routing. The HER network architecture includes diverse, redundant
routes that are designed to provide high levels of reliability. The
network is designed to provide availability of over 99.98% for most
routes and to provide customers with a wide range of telecommunications
transmission capacity. To achieve this level of reliability without the
use of a network similar to the HER network, HER believes that carrier
customers would need to purchase additional dedicated circuits to provide
for redundancy.
- Rapid Provisioning. HER services provide access to the network, such that
additional capacity can be provided to customers on the HER network on a
rapid basis. This access provides a level of capabilities that HER
believes is unavailable in Europe today. This ability to rapidly provide
service is largely due to HER's development of capacity substantially in
excess of HER's forecasted requirements.
- Flexibility. HER services are focused on providing customers flexibility
across the network through which the customer may minimize risk by
enabling network rerouting, eventually even under customer direct
control.
- Advanced Technology. HER is deploying SDH and WDM technology which 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.
- Innovative Pricing. Currently the price of high-bandwidth 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.
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The Company intends to offer comprehensive, facilities-based
telecommunications products and services to business and other high-usage
customers in certain metropolitan markets in Europe. See "-- European Services
Strategy." Many of the Company's planned service offerings will compete directly
with services offered by HER's customers, which may affect the perception of HER
as an independent carrier's carrier. There can be no assurance that the
Company's European Services Strategy will not negatively impact HER's ability to
attract and retain customers which would have a material adverse affect on HER
and the Company.
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, based on SDH and WDM technology,
provides for digital transmission capability upon which a broad range of
advanced functionality may be built and which offers network availability,
flexibility, bandwidth speeds and error performance not otherwise available to
carriers for transport of telecommunications traffic across national borders in
Western and Central Europe. The network is designed to provide customers with a
wide variety of bandwidth speeds, ranging from VC12/E1 Standard (equivalent to
2.048 Mbps) to STM-1/E4 Standard (equivalent to 155 Mbps) and beyond.
HER will provide high quality cross-border transmission services for
licensed or otherwise authorized telecommunications providers. Services are
based on the principle of adding greater value than currently available in the
market while retaining competitive prices.
Point-to-Point Transmission Capacity. 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 Transmission Capacity 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 Transmission Capacity 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 discount schemes designed to ensure that HER remains
a cost-effective solution.
Virtual Infrastructure Service. Carriers and operators that plan to expand
their operations to become pan-European service providers as the European
marketplace is liberalized require a flexible and cost-effective means of
telecommunications transport. To date such service providers obtain
international transport service by leasing IPLCs. Leasing IPLCs requires a
carrier to lease channels on a segment-by-segment basis from multiple PTOs,
linking the target cities under arrangements having fixed capacity and pricing
structure for each segment of the carrier's network. Leasing IPLCs has several
disadvantages, including (i) difficulty in obtaining discount/volume pricing
schemes since there is no single provider of pan-European coverage, (ii) delays
in implementation due to numerous contractual negotiations and having to
interconnect numerous IPLCs, (iii) limited availability of pan-European leased
capacity at high bandwidth and (iv) variability of quality due to multiple
operators and the absence of a single uniform network. Operators could also
construct
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their own network, which is expensive, time-consuming and complex and which may
not be justified by such operators' traffic volume. See "Risk
Factors -- Competition."
HER's Virtual Infrastructure Service will offer a new solution and an
attractive alternative to leasing IPLCs or building infrastructure. This service
will enable HER's customers to obtain a uniform pan-European or cross-border
network under one service agreement by allowing the customer to select any
number of cities along the HER network at a pricing structure based on the
overall amount of leased capacity for the customer's entire network. The key
feature behind Virtual Infrastructure Service is that it gives the customer the
ability to add or reconfigure capacity in 24 hours between locations connected
in the Virtual Infrastructure Service, thereby enabling the customers to respond
almost immediately to changes in traffic. By being able to transfer capacity
among the network routes, HER's customers are able to avoid over- and
under-utilization of leased channels. This service offering provides a customer
with the benefits of ownership (rapid provisioning, freedom to rearrange and
control) with a "pay-as-you-go" managed service offering, without the burdens of
up-front investment and costs required to build a network, and without having to
manage the on-going maintenance and operation of the network.
The service would be delivered through pre-installed physical facilities at
each of the customer locations. These facilities are designed to ensure that
most growth or changes in customer requirements can be addressed purely by
remote logical reconfiguration from the HER Network Operations Center. This
remote network management ability is inherent in SDH technology and allows rapid
provisioning and high quality of service.
Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements, and prefer to have physical
configuration control over their networks. The HER Ring Service connects
multiple customer locations with multiple VC-4 paths in a ring configuration.
The customer has direct control over the configuration of the VC-3 and VC-12
paths within the ring, and has exclusive control over the routing. Additional
ring capacity can be added with no service interruption and additional customer
locations may be added to the ring with minimal service interruption. Because
HER is not required to configure 'idle' bandwidth or to manage the 'SDH subnet'
this service can be provided at a very competitive rate vis-a-vis other
point-to-point services.
Sales of HER's Services are conducted through its subsidiary Hermes Europe
Railtel (Ireland) Limited. HER is exploring the development of additional
distribution channels using local or regional network access providers.
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 June 30, 1998, 37 customers were under contract
for service on the HER network including PTOs, global consortia of PTOs,
internet service providers, alternative carriers, an international carrier,
value added networks ("VANs") and resellers. HER has sold capacity of
approximately 1,221 E1 equivalents (cumulative through end of contract) as of
March 31, 1998. The type and quality of HER's customers validates the concept of
the HER network, and
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illustrates the type of customers who will be attracted to the full network. The
success of this limited network also demonstrates the demand for cross-border
transport services. In total, HER is targeting seven major market segments or
customer groups which can be characterized as follows:
- Existing PTOs. This customer segment consists of the traditional European
PTOs that generally participate in the standard bilateral agreements for
cross-border connectivity. Hermes provides a vehicle for PTOs to compete
in non-domestic markets both before and after January 1, 1998. As of
January 1, 1998, both reserved and non-reserved traffic can be
transported by alternative infrastructure providers, thus vastly
expanding the available PTO market for HER.
- Global Consortia of Telecommunications Operators. Many of the largest
PTOs and international carriers have pooled resources and formed
consortia in order to compete more effectively in important
telecommunications markets such as those in Western Europe particularly
outside their home markets. Prior to liberalization of the provision of
switched voice services in Western European markets, one of the primary
objectives of these consortia is to provide non-reserved pan-European
services to multinational business customers, including X.25/frame relay
(high speed data network) service and closed-user group voice services.
Under the current regulatory framework, consortia would otherwise be
required to purchase leased lines at negotiated retail rates, even within
their home countries. HER believes that it provides an attractive
alternative at better pricing in those environments where such a
consortium does not already own its infrastructure. Furthermore, HER
believes that it is well positioned to provide cross-border connectivity
between different domestic infrastructures of these alliances.
- International Carriers. This customer segment consists of non-European
carriers with traffic between European and other international gateways.
Such carriers include Teleglobe, GTS-Monaco Access and eventually the
U.S. Regional Bell Operating Companies. HER can provide these customers a
pan-European distribution network to gather and deliver traffic to and
from their own and other hubs.
- Alternative Carriers. This segment consists of second carriers, cable TV
and mobile carriers and competitive access providers. These new carriers
have chosen to compete with the incumbent PTOs in their respective
countries, and the Company believes that they would look favorably to an
alternative such as HER. HER believes that this segment will sustain the
largest growth as competition emerges in Europe. HER also believes that
non-PTO competitors in Europe will prefer to use a non-PTO alternative
like HER to meet their cross-border telecommunication transport needs.
- Internet Backbone Networks. Internet backbone networks are a fast
emerging segment and are expected to generate significant requirements
for the services HER offers. These require large capacity international
connectivity services between Internet nodes (point of interconnection
between local Internet service providers) in all local European markets.
The Internet segment is experiencing significant growth in demand for
transmission capacity. On June 24, 1998, HER entered into an agreement
with Ebone, a Tier 1 Internet backbone provider serving more than 90
Internet service providers in 22 European countries, to provide long-term
transmission capacity of up to 622 megabits per second between the
majority of European cities that Ebone serves. As part of the
transaction, HER purchased a majority interest in Ebone.
- 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.
- 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.
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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 enables rerouting of traffic at
electronic speeds in the event of a network failure. This approach also lowers
network cost by enabling 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
enabling 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 potential service impacting problems and
reroute traffic much more quickly than networks controlled by separate network
centers operated by PTOs in different countries. HER primarily uses Alcatel for
the supply of transmission equipment and will use CIENA Communications Inc.
("CIENA") for initial WDM deployment. 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
equipment vendors and infrastructure providers and other third parties to supply
and/or maintain the equipment for the HER network. See "Risk Factors -- HER
Network Roll-out."
Network Capacity. The initial network consists 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. 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. Furthermore,
fibers will be multiplexed using WDM, also as required. HER has entered into an
agreement with CIENA for the supply of WDM equipment which, if fully utilized,
is capable of increasing the networks capacity by 40 times (from 2.5 Gb/s to 100
Gb/s). Additional capacity can also 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
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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, HER has contracted with local access providers to
connect the HER network to intra-city networks in each city on the network.
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. Set forth below is
an illustration of the connection between the HER network and local access
providers.
[SDH/WDM NETWORK CHART]
Network Routes. 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.
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The routes to be completed by the end 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. See "Risk Factors -- HER
Network Roll-out."
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.
See "Risk Factors -- HER Network Roll-Out."
COMPETITION
The European and international telecommunications industries are
competitive. HER's success depends upon its ability to compete with a variety of
other telecommunications providers offering or seeking to offer cross-border
services, including (i) the respective PTO in each country in which HER operates
and (ii) global alliances among some of the world's largest telecommunications
carriers. HER expects that some of these potential competitors may also become
its customers. HER believes that the ongoing liberalization of the European
telecommunications market will attract New Entrants to the market and increase
the intensity of competition. Competitors in the market compete primarily on the
basis of price and quality. HER intends to focus on these factors and on service
innovation as well. HER business plan anticipates substantial head-to-head
competition as well as indirect competition.
WorldCom recently announced plans to construct a pan-European fiber
network, the first phase of which is expected to connect London, Amsterdam,
Frankfurt, Brussels and Paris. 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 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 and certain key business centers in Germany. Excess capacity
would be available for other carriers. Viatel has stated that it expects
construction to begin in spring 1998 and the network to become operational
during the first quarter of 1999.
In addition, Esprit also recently announced plans to construct an SDH fiber
optic ring network that will connect the United Kingdom, France, the Netherlands
and Belgium. PTT Netherlands has announced similar plans to build a pan-European
network.
HER also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through International
Private Leased Circuits. In addition, the liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets.
If HER's competitors, many of whom possess greater technical, financial and
other resources than HER, devote significant resources to the provision of
pan-European, cross-border telecommunications transport services to carriers,
such action could have a material adverse effect on HER's business, financial
condition and results of operations. There can be no assurance that HER will be
able to compete successfully against such new or existing competitors. See
" Risk Factors -- Competition."
HER RECAPITALIZATION
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
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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 owned 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, respectively, 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 Rail
of all of 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
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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.
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 Belgium, the Netherlands, UK, France,
Germany and Switzerland.
HER requires licenses, authorizations or registrations in all countries to
operate the network. There can be no assurance that HER will be able to obtain
such licenses, authorizations or registrations or that HER's operations will not
become subject to other regulatory, authorization or registration requirements
in the countries in which it plans to operate. Licenses, authorizations or
registrations have been obtained in the United Kingdom, the Netherlands,
Belgium, France and Germany and a trial concession has been granted in
Switzerland. HER intends to file applications in other countries in anticipation
of service launch in accordance with the network roll-out plan.
On June 28, 1990, the European Commission, in an effort to promote
competition and efficiency in the European Union, issued a directive (the "1990
Directive") requiring EU member states to immediately liberalize all
telecommunication services with the exception of voice telephony to the general
public (basic voice services provided over the public switched voice network).
This step liberalized value added services and voice services over corporate
networks and/or "closed user groups," although the exact definitions of the
terms used in the 1990 Directive were not altogether clear.
On July 22, 1993, the Council of EU agreed that all voice telephony
services in EU member states should be liberalized by January 1, 1998 subject to
additional transitional periods of up to five years to allow member states with
less developed networks to achieve the necessary adjustments. It was agreed that
such exemptions would be granted to Spain, Ireland, Greece and Portugal, subject
to formal application and satisfaction of certain requirements. Luxembourg,
because of the small size of its market, would be eligible for a special
transitional period of up to two years.
On November 5, 1997, the Commission initiated several infringement
proceedings against those Member States which had not notified the relevant
transposition measures of the 1990 Directive and other liberalization
directives. The Member States concerned were Denmark, Greece, Italy, Luxembourg,
Germany, Portugal and Belgium. The Commission also decided to continue the
infringement procedure it had already opened against Spain. Subsequently, in
March 1998, it was reported in the press that several of these infringement
proceedings had been closed because the Member States concerned had properly
implemented the relevant provisions. The identity of the Member States for whom
such proceedings had been closed has not been made public.
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)
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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.
On June 11, 1997, the European Parliament and the Council of Ministers
adopted a Directive on interconnection with regard to ensuring universal service
and interoperability through application of Open Network Provision ("ONP")
principles; among other things this requires Member States to ensure that PTOs
with significant market power should provide interconnection on the basis of
cost-oriented charges.
On February 26, 1998, the European Parliament and the Council of Ministers
adopted a Directive on the application of ONP to voice telephony and on
universal service.
The Commission has also recently initiated infringement proceedings for
incomplete or wrong transposition into national law of the April 1997 Licensing
Directive (against Austria, Italy, Belgium, France and Luxembourg) and the June
1997 ONP Interconnection Directive (against Belgium, France and Luxembourg).
Notwithstanding the above-mentioned infringement proceedings, HER believes
that many European countries have revised telecommunications regulations to
comply with the 1990 Directive and the Full Competition Directive and that such
changes will enhance HER's ability to obtain other necessary regulatory
approvals for its operations.
As a multinational telecommunications company, HER is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which HER operates.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on HER, that domestic or
international regulators or third parties will not raise material issues with
regard to HER's compliance or noncompliance with applicable regulations or that
regulatory activities will not have a material adverse effect on HER. See "Risk
Factors -- Government Regulation." The regulatory framework in certain
jurisdictions in which HER provides its services is briefly described below.
United Kingdom
Since the elimination in 1991 of the United Kingdom telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the United Kingdom telecommunications regulatory
authority, to create a competitive marketplace from which detailed regulation
could eventually be withdrawn. The United Kingdom has already liberalized its
market beyond the requirements of the Full Competition Directive, and most
restrictions on competition have been removed in practice as well as in law. HER
has received a license from the Secretary of State for Trade and Industry which
grants it the right to run a telecommunications system or systems in the United
Kingdom connected to an overseas telecommunications system and to provide
international services over such systems. Like the licenses granted to other
providers of international facilities-based services, the license granted to HER
on December 18, 1996 was for an initial six months' duration and thereafter is
subject to revocation on one month's notice in writing. The short duration of
these initial licenses was adopted for administrative convenience on the
opening-up of the United Kingdom market for international facilities-based
services. The Department of Trade and Industry ("DTI") has confirmed that it
intends to replace the initial licenses with new licenses and that it would not
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.
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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 an authorization 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
and is expected to be enacted in the near future. 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. Most of the EC telecommunications
liberalization package was adopted at the end of December 1997. The implementing
legislation (Royal Decrees) regarding the licensing regimes for the provision of
voice telephony services and the establishment of public network infrastructure
was approved by the Council of Ministers at the end of June 1998. The official
publication and the entry into force of that implementing legislation is
expected to take place during Summer 1998. Until such entry into force, the
Belgian Telecommunication Authority will continue to work with the system of
provisional licenses. HER has already obtained, through a wholly owned
subsidiary, a license in February 1997 from the Belgian regulatory authority to
build infrastructure between major Belgian population centers and the relevant
border crossings. HER also has an authorization to provide liberalized services
using alternative infrastructure. 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 has applied for a license
covering all of Germany 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. HER filed an application with ART for a
geographical extension of its license in order to extend its network in France
to reach Italy and Spain, although there is no assurance that the extension will
be granted. 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 shareholder. HER has notified the ART of the Company's IPO and of
the March 1998 increase to approximately 89% of GTS-Hermes' ownership interest
in HER.
Switzerland
The Swiss Parliament has passed a Telecommunications Law which entered 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
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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 creating an
independent national regulatory authority for the telecommunications and
audiovisual sectors. The regulatory authority has been established and is
expected to start work in the very near future. On September 19, 1997, Italy
enacted a regulation implementing all EC directives in the telecommunications
sector and since then specific laws relating to licensing and interconnection
have been approved. HER applied for a license to provide its services on May 25,
1998.
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 by 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. In April 1998,
Spain adopted its new telecommunications law ("LGT"). The LGT will be
implemented through the use of secondary legislation that should be adopted by
August 1998. The LGT and the secondary legislation should result in the full
liberalization of the Spanish telecommunications market. 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 as of 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.
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.
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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
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 through its network. GTS believes that
this partnership provides it with the opportunity to build a strong
international gateway presence 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. 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 March 31, 1998, 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 $2.7 million to GTS as of March 31, 1998. 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. MT, 50% partner in GTS-Monaco Access and the local telephone
operator for the Principality of Monaco, is presently seeking a partner to
purchase a minority stake in MT. The sale of such stake, if undertaken, should
not be dilutive to the economic interest of the Company in GTS-Monaco Access
although the impact of such sale on the strategic view of MT toward GTS-Monaco
Access cannot be determined at this time.
BUSINESS AND MARKETING STRATEGY
GTS's strategy for developing GTS-Monaco Access into an international
gateway hub includes the following:
- Develop Advanced Carrier Services Offerings. GTS-Monaco Access may
develop its "advanced carrier services" offerings to include global 0800
services and international free phone services, which GTS believes will
broaden customer relationships, enhance revenues and help to protect it
from price-based competition.
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- Develop Relationships to Broaden Service Offerings. GTS-Monaco Access may
develop relationships to broaden its service offerings. GTS-Monaco Access
has entered into agreements with UUNET, one of its gateway customers, to
provide wholesale Internet access to GTS-Monaco Access's carrier
customers in a number of Western European countries. The agreement allows
these services to be "cobranded" with GTS's affiliates.
- Pricing. Price is a critical factor in the market for international
switching as competition increases due to expanding international
capacity, advances in technology and falling regulatory barriers. GTS-
Monaco Access intends to price its services competitively with the
prevailing price for comparable inter-PTO transit and gateway services.
GTS-Monaco Access is not bound by legacy systems, infrastructure and
personnel levels and can, therefore, manage competitive cost operations.
- Leverage Non-Aligned Position. Because GTS's Western European activities
are not allied with any of the major consortia or large Western European
telecommunications companies, GTS-Monaco Access may be considered an
attractive service provider for Western European carriers who may
otherwise be reluctant to obtain services from the larger operators of
international gateways that are often their competitors in the retail
market.
- Exploit GTS Synergies. GTS-Monaco Access may ally with other GTS
companies in Europe and the CIS. GTS-Monaco Access is expected to realize
significant reductions in its cost structure through access to low-cost
pan-European transmission capacity through alternative infrastructure
providers such as HER, Sovintel and C-Datacom International, Inc., GTS's
Indian venture, already route international traffic through GTS-Monaco
Access's gateway.
CUSTOMERS
Targeted customers for GTS-Monaco Access include:
- Non-Aligned PTOs. GTS believes that various large American and Western
European PTOs that lack adequate international switching and transport
facilities of their own may be persuaded to purchase international
services from GTS-Monaco Access, rather than from competing PTOs or
consortia.
- Mobile Carriers. GTS believes that some of the non-PTO mobile carriers,
which currently provide only a small percentage of Western European
mobile telecommunications traffic, may prefer the "independent"
international gateway service offerings of GTS-Monaco Access to those of
their PTO competitors.
- Internet Service Providers. Growth in Internet usage creates a
significant opportunity for a nonaligned Internet access provider such as
GTS-Monaco Access, since many Internet service providers will be in
direct competition with PTO-owned services in large European markets.
- Second Carriers/Resellers. GTS believes that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity.
- Established ("Aligned") PTOs. This customer segment will be a niche
market for GTS-Monaco Access. As markets are deregulated and carriers
become increasingly competitive, traditional friendly correspondent
relations may become strained, and opportunities may emerge to leverage
GTS's non-aligned status to route traffic between rivals or to displace
incumbents for transit relationships.
- 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.
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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 directly
subject to European Community law. However, GTS-Monaco Access will have to
comply with EU regulation to the extent it does business in EU member states or
its business has an effect on trade between EU member states. The regulatory
requirements established by the EU create general guidelines under which the
national agencies of EU member states regulate. Accordingly, local laws and
regulations may differ significantly among these jurisdictions, and the
interpretation and enforcement of such laws and regulations may vary. Local
rules are sometimes based on the informal views of the local ministries which,
in some cases, are subject to influence by the local PTOs. In certain of the
Company's existing and target markets, there are laws and regulations which
affect the number and types of customers which the Company can address. For
instance, certain countries may and do require licenses for communication
companies to interconnect to the public network to originate traffic.
In addition, one of the services provided by GTS-Monaco Access is a form of
transit service, known in the industry as "re-filing." Re-filing is the practice
of routing traffic through a third country in order to take advantage of
disparities in settlement rates between different countries, allowing traffic to
a potential country to be treated as if it originated in the third country that
enjoys lower settlement rates with the destination country, thereby resulting in
lower overall costs on an end-to-end basis. Re-filing is prevalent in the
industry even though the practice is technically in contravention of ITU
regulations. In practice, because of the widespread non-observance of these
regulations, such a contravention normally does not give rise to specific legal
problems. However, their enforceability essentially depends on the status given
to ITU obligations by Member countries' domestic laws. Accordingly, there can be
no assurance that GTS-Monaco Access's re-filing services might not be disrupted
or be the subject of legal process at some time in the future. In such event,
within the EU a defense may be available that the ITU regulations are
anti-competitive and contravene the Treaty of Rome, although there can be no
certainty that such a defense would succeed.
COMPETITION
GTS-Monaco Access faces competition from consortia of telecommunications
operators, large PTOs and other international telephone operators with advanced
network infrastructures, access to large quantities of long-haul capacity and
established customer bases. PTOs currently providing large amounts of
international 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-Monaco Access 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-Monaco Access plans to locate these prospective points of
presence in cities served by HER and to allow the termination of traffic through
HER.
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GTS-Monaco Access may benefit from the establishment of these points of presence
by incurring reduced transmission expenses.
While the Company 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, the Company intends
continually to review the competitiveness of GTS-Monaco Access with respect to
its competitors.
EUROPEAN SERVICES STRATEGY
General. In order to capitalize on the increasing liberalization of
telecommunications regulation in Europe, GTS intends to offer through one or
more subsidiaries facilities-based telecommunications products and services
primarily to business and other high-usage customers in certain metropolitan
markets throughout Europe. GTS presently provides end user services in Russia,
the CIS and Central Europe and carriers' carrier services in Western Europe and
has experience in developing cross-border networks in Western Europe through
HER. Management has developed a business plan for the Company's European
Services Strategy that calls for the Company to leverage its experience in
developing and operating local, national and international telecommunications
networks by building, acquiring or leasing technologically advanced fiber optic
networks and establishing CLEC service capabilities in up to 12 metropolitan
markets throughout Europe, as regulatory conditions permit, within three years
after the Company commences implementing its European Services Strategy.
Currently the regulatory regimes in Europe vary from country to country and some
countries do not permit competitive local exchange carriers to operate. See
"Risk Factors -- Risks Relating to European Services Strategy."
Market and Business Strategy. GTS believes that the size and growth
potential of the European telecommunications market, and the increasing
liberalization of telecommunications regulations in Europe, offer considerable
opportunities to expand into end-user services into metropolitan markets
throughout Europe.
The size of the European telecommunications services market is estimated to
be approximately $188 billion in 1998. The Company estimates that the total
European addressable market (defined as non-residential core voice, enhanced
voice, non-residential international voice, data, leased line voice and
internet) in 1998 is approximately $96.5 billion, which is estimated to grow at
a compound annual growth rate of approximately 13.7% to approximately $306.7
billion by 2007.
Through construction of owned facilities or acquisition or partnership with
other providers, GTS intends to enter up to 12 European metropolitan markets.
The Company's strategy with respect to entry into a specific market will be
determined through an analysis of a number of demographic, economic and
telecommunications demand and spending characteristics, including business
concentration; presence of governmental, financial and business end-user
customers; local economic trends and prospects; demand for switched and
non-switched telecommunications services; feasibility of construction; presence
of existing and potential competitors; the regulatory environment; the market's
proximity to HER's network; and the presence of potential CLEC or reseller
acquisition candidates. In targeting cities in which its entry strategy will be
the construction of a fiber network, the Company will initially focus on cities
in which there are no CLEC competitors or only one other such competitor.
Management's current intention is to enter two metropolitan markets within 12
months after the Company initiates implementing the European Services Strategy
and to provide services in all 12 target metropolitan markets within three years
after such commencement date.
The Company expects to use one or more of the following strategies to enter
a market: (i) construction of a fiber-loop network; (ii) purchase or long-term
lease of dark fiber; (iii) obtaining of high frequency microwave licenses for
"wireless fiber," (iv) partnership with or acquisition of a local
facilities-based CLEC or (v) acquisition or development of a local reseller. In
the case of market entry through a reseller, it is the Company's objective to
build or acquire facilities when economically justifiable. There are a number of
risks
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attendant with each of these strategies and there can be no assurance that the
Company will be successful in pursuing any of these strategies. See "Risk
Factors -- Risks Relating to European Services Strategy."
Customers. The Company plans to offer its products and services primarily
to telecommunications-intensive businesses for which reliable telecommunications
services are critical, using the Company's facilities where available and/or
reselling other carriers' facilities as needed. These business segments include
financial services companies, multi-national companies, governmental agencies,
resellers, internet service providers ("IPs"), disaster recovery service
providers and wireless communications companies.
Products and Services. The Company intends to offer a broad array of
competitively priced, comprehensive services to meet customer telecommunications
service requirements, including private line services, local, national and
international switched telephony services, high-speed LAN interconnection
services, virtual private network services, video transmission services and IP
based services, including IP telephony and data transmission services. According
to industry sources, bandwidth demand for data in the United States is currently
growing significantly faster than voice and the Company expects that this trend
will develop in Europe as competitively priced capacity becomes available.
Additionally, the Company intends to develop competitively priced value-added
telecommunications services that are tailored to the specific needs of
individual customers. The types of services that the Company intends to offer
include:
- Switched Services. Switched services involve the transmission of voice,
data or video to locations specified by end-users or carriers. The
Company expects to have the technological capability to offer a full
range of switched service, including local, national and international
calls as well as enhanced services. The Company intends to own and
operate switches and enter into interconnection agreements with other
telecommunication service providers, including HER, in order to offer to
customers cost-effective local, national and international calling
services. Switched service features are expected to include, as allowed
by local regulations, enhanced services such as conference calling, call
forwarding, analog or digital connectivity, desk-to-desk calling, four
digit dialing full network monitoring and maintenance, caller ID, voice
mail/messaging and E-mail to voice-mail conversion.
- Non-Switched Services. Non-switched services involve a fixed, dedicated
communications link between two or more specific locations. Commonly this
service is utilized by an end-user to provide a private communications
medium between multiple business facilities or to another
end-user/carrier. The Company expects to provide high capacity, advanced
technology to deliver customer traffic with a lower cost and higher
reliability as compared to the local PTO. Through its high capacity, high
reliability and cost-efficient network, the Company intends to provide
non-switched voice, data and video transmission between (i) end users,
(ii) end users and carriers and (iii) multiple carriers, allowing its
customers the option to bypass the older, less efficient technology and
higher-priced services of the incumbent PTOs.
- Other Services. The Company also intends to develop service offerings to
take advantage of emerging market opportunities. Such services are
expected to involve one or more of the following: frame relay, ISDN and
ATM services; IP-based services, including intranet and extranet
services, high capacity internet for multi-media applications, voice over
IP and the establishment of a pan-European IP backbone in alliance with
others; calling card services; and enhanced voice services. These
products are expected to be developed and offered as customer demand
dictates and as the relevant regulatory environment permits. The Company
believes that there will be substantial demand for data and internet
services by large business and other high-usage customers, and that a
bundled service offering of national and international data and voice
services will be attractive to this targeted customer base.
Regulatory. The Company's preliminary plans with respect to its European
Services Strategy will subject the Company to significant additional regulation
at the EU, national and local level. The Company's determination as to which
markets it may enter will depend in part on the Company's evaluation of the
regulatory regime in such market. The detailed regulation varies from country to
country. Delays in receiving required regulatory approvals and licenses, or the
enactment of adverse regulations or regulatory requirements, may delay or
prevent the Company from entering a particular market or offering its services
in any European market, restrict the types of services offered by the Company,
constrain the Company's deployment of its
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networks or otherwise adversely affect the Company's operations. There can be no
assurance that the Company will be able to obtain the necessary regulatory
approvals on a timely basis or that the Company will not otherwise be affected
by regulatory developments, either of which may have a material adverse affect
on the Company. See "Risk Factors -- Risks Relating to European Services
Strategy."
Competition. The telecommunications industry is highly competitive.
Competition in the telecommunications industry is based largely on price,
customer service, network quality, value-added services and customer
relationships. Competition for the provision of local services in Europe is in
its early stages of development. Generally, PTOs offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. PTOs generally have a number of competitive
advantages over emerging competitors, such as the Company and other CLECs, due
to substantially greater economic and human resources, close ties to local and
national regulatory authorities and control over virtually all local
telecommunications connectivity. Additionally, GTS believes that the market for
the provision of local services is sufficiently attractive to cause additional
CLECs, including multi-national carriers, to enter the market to offer products
and services which would compete with the Company.
The Company will compete with PTOs and, in certain markets, CLECs in the
provision of high quality, integrated telecommunications services to end-users
and resellers. CLEC competitors include, among others, COLT Telecom Group plc,
which is providing service through networks in London, Frankfurt, Munich,
Hamburg and Paris; and WorldCom, which has commenced the construction of a
Pan-European fiber network, the first phase of which is expected to connect
London, Amsterdam, Brussels, Frankfurt and Paris. GTS believes, based on its
experience in providing end-user services in Russia, the CIS and Central Europe
and carrier's services in Western Europe and in developing cross-border networks
in Western Europe through HER, that it has the knowledge and ability to develop
products and services which will be competitive with other CLECs in terms of
content, quality and price. However, there can be no assurance that the Company
will be able to translate such experience in other markets in order to compete
effectively with PTOs or CLECs in the European markets it has targeted. See
"Risk Factors -- Risks Relating to European Services Strategy."
Network. In the markets which the Company determines to enter as a
facilities-based CLEC, the Company intends to construct, acquire or lease
facilities to operate advanced, competitive local telecommunications networks
employing current transmission technology with dual ring architecture and
central system monitoring and maintenance. The Company believes that a base of
uniform, reliable networks, which employ the most current technology and support
a broad array of high quality services, will allow the Company to compete
cost-effectively against products and services offered by PTOs and, in certain
markets, other CLECs.
The Company's plan for its basic transmission platform is optical fiber
deployed in rings, equipped with high-capacity SDH equipment. Such rings will
provide redundancy by using dual paths for telecommunications transmissions and
will extend to a customer facility either directly or on a point-to-point link
from the rings. Such rings will finally connect to the customer through
customer-dedicated or shared electronics on or near the customer premises.
Network Construction. Prior to undertaking acquisition or construction of a
network in a particular market, the Company will undertake an analysis of a
number of factors, as discussed above, to determine whether such acquisition or
construction is economically justifiable. Wherever appropriate, the Company will
seek to purchase or lease dark fiber or utilize high-frequency short-haul
microwave as a method of accelerated entry into a selected market.
GTS expects that construction and installation services will be provided by
independent contractors selected through a competitive bidding process. Company
personnel are expected to provide project management services, including
contract negotiation, construction supervision, testing and certification of
installed facilities. The construction period of a network is expected to vary
greatly, depending on such factors as network route kilometers, number of
buildings involved in the initial installation and local construction
regulations. Upon completion of the first phase of construction, or the initial
loop, the Company expects to commence generating revenue. Further expansion of
the network will be dictated by customer growth and customers' relative
proximity to the initial loop.
The initial capital requirement for implementing the European Services
Strategy will be financed with a majority of the proceeds of the Offerings
received by the Company. In addition, the Company contemplates
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that following the consummation of the Offerings, it will raise additional debt
financing through a newly formed subsidiary of the Company, the proceeds of
which will be applied toward the implementation of the Company's European
Services Strategy. The size and timing of such financing has not yet been
determined by the Company. The proceeds will be applied toward the
implementation of the Company's European Services Strategy. Due to the
preliminary nature of the Company's business plan for such strategy, the Company
cannot estimate with any degree of certainty the amount and timing of the
Company's future capital requirements for such implementation, which will be
dependent on many factors, including the success of the Company's European
services business, the rate at which the Company expands its networks and
develops new networks, the types of services the Company offers, staffing
levels, acquisitions and customer growth, as well as other factors that are not
within the Company's control including competitive conditions, regulatory
developments and capital costs. Management believes, however, that if the
European Services Strategy is implemented, it is likely that the Company will
need to raise additional capital above that being raised in the Offerings. If
the New Convertible Bond Offering is not consummated, the Company will need to
find additional sources of capital to replace the funding that would have been
provided by the New Convertible Bond Offering. See "Risk Factors -- Additional
Capital Requirements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- European Services Strategy."
Sales and Marketing. In each of its target markets, the Company intends to
establish its own direct sales force. As the Company will be targeting large
financial, corporate and governmental customers with demanding
telecommunications service requirements, the Company expects that its internal
sales force will include dedicated sales and customer service representatives.
Billing and Information Systems. Sophisticated information and processing
systems will be vital to the Company's success. Specifically, the Company will
need to develop systems to enter, schedule, provision, and track a customer's
order from the point of sale to the initiation of service and such systems will
need to include, or interface with, trouble-shooting systems, management,
billing, collection and customer service systems. The Company expects the
development of its systems to require substantial capital and management
resources.
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 March 31, 1998, GTS-Hungary's VSAT network consisted of approximately
997 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
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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 and plans
to develop two fiber loops in Budapest. The expansion will increase
GTS-Hungary's revenue base in the region and provide opportunities to leverage
further its other service offerings. There can be no assurance, however, that
the expansion will be completed on a timely and commercially feasible basis.
The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 50% of GTS-Hungary's total revenue for the year ended December 31,
1997 and the three months ended March 31, 1998. 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 is 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 March 31, 1998, 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 $2.0 million to GTS as of March 31, 1998. 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. During 1997, GTS concluded that EuroHivo was
not a core business and was 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. In April 1998, GTS entered
into a definitive agreement to sell its interest in EuroHivo. Closing of such
sale is subject to customary conditions precedent. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Consolidated Ventures."
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Czech Republic
Czechnet. Czechnet, a wholly owned subsidiary of GTS, offers 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, Czechnet provides all of the same VSAT services offered by
GTS-Hungary. In addition, Czechnet offers high-speed Internet access service and
is among the leading Internet access providers in the Czech Republic. Czechnet
seeks to become the second carrier in the Czech Republic and is also targeting
opportunities in Slovakia, based upon the historic relationship between the
Czech and Slovak markets.
The Czechnet network consists 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 Czechnet and individual VSATs based on, and controlled by,
GTS-Hungary's hub in Budapest.
Czechnet's 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. Czechnet provides outgoing international voice services and
high-speed Internet access to large commercial buildings in Prague. As of March
31, 1998, Czechnet had concluded agreements with building owners to convert
PABXs in 29 buildings in Prague. International voice services are offered at
prices similar to those of the Czech PTO. Czechnet plans to pursue customers who
require value-added services which may be offered at higher prices and better
margins.
Czechnet is licensed to provide international satellite and domestic
private voice and data services. It received its 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.
Czechnet is the only alternative international telephony provider licensed
in the Czech Republic. As such, its only competitor is SPT Telecom, the Czech
PTO. Should SPT decide to compete aggressively with Czechnet, it has the ability
to discount prices below those which could be easily sustained by Czechnet. In
data services, Telenor, GITY and Nextel (a subsidiary of SPT Telecom) are
Czechnet's 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 Czechnet 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
Czechnet is 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.
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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." 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.
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."
The Company is currently engaged in negotiations to sell its ownership
interest in one of the Chinese ventures in consideration of an interest in the
purchaser of the Company's interest in such venture.
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 March 31, 1998, GTS, its consolidated subsidiaries and joint ventures in
which GTS participates, employed approximately 1,715 persons. The Company
believes its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. The Company believes that its
relations with its employees are good.
Although GTS's employees are not unionized, unions represent employees of
the Company's railroad partners in HER. Under the agreements contemplated
between HER and its railroad partners, some of these employees will be required
to construct and maintain certain portions of the HER network. There can be no
assurances that unionized employees of HER's partners will not experience labor
unrest.
PROPERTIES
The Company 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 has entered into a new lease for its headquarters in McLean covering
33,000
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square feet, which lease will expire September, 2005. The Company expects to
relocate to the new space in the first quarter 1999 and plans to sublease its
current offices. The Company maintains regional headquarters offices in Moscow
and Budapest, as well as facilities in McLean, Virginia and London. HER is
headquartered just outside of Brussels, Belgium.
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."
LITIGATION
In addition to routine legal proceedings incidental to the conduct of its
business, the Company, GTS-Hungaro and GTS-Hungary are named as defendants in an
action captioned USH Ventures and USH Telecom, L.L.C. v. Global TeleSystems
Group, Inc. and GTS-Hungaro, Inc., Civil Action No. 97C-08-86, commenced in
August 1997, which is currently pending in the Superior Court of the State of
Delaware in and for New Castle County. The complaint alleges breach of contract
and interference with a business relationship. On May 21, 1998, the Superior
Court of the State of Delaware denied the Company's motion to dismiss the claim.
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. On June 2, 1998 Gilat filed a counterclaim
against V-Tech seeking the balance due under the contract and other alleged
damages, in the aggregate amount of $685,000. Gilat has stated its intention to
join the Company as a third-party respondent to its counterclaim. Although it is
not possible at this time to make an assessment of the outcome of the
arbitration proceeding, the Company does not believe that Gilat's counterclaim,
even if successfully asserted against the Company, would have a material adverse
effect upon the Company's financial condition.
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MANAGEMENT
The directors, executive officers and key employees of the Company, their
positions and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Alan B. Slifka(1)(4)(6)................ 68 Chairman of the Board of Directors
Gerald W. Thames(1)(5)................. 51 President, Chief Executive Officer and Director
Bruno d'Avanzo......................... 56 Executive Vice President and Chief Operating Officer
William H. Seippel..................... 41 Executive Vice President of Finance and Chief Financial Officer
Jan Loeber............................. 54 Senior Vice President -- HER
Raymond I. Marks....................... 51 Senior Vice President -- Asia
Stewart P. Reich....................... 53 Senior Vice President -- Russia
Louis T. Toth.......................... 55 Senior Vice President -- Central Europe
Grier C. Raclin........................ 45 Senior Vice President, General Counsel and Secretary
Eileen K. Sweeney...................... 46 Senior Vice President -- Human Resources Corporate
Kevin Power............................ 44 Managing Director -- GTS-Monaco Access
Michael A. Greeley(2)(3)(5)............ 35 Director
Bernard McFadden(1)(3)(4)(6)........... 64 Director
Stewart J. Paperin(2)(3)(4)(6)......... 50 Director
W. James Peet(1)(5).................... 43 Director
Jean Salmona(2)(7)..................... 62 Director
Joel Schatz(2)(5)...................... 61 Director
Adam Solomon(1)(3)(7).................. 45 Director
David Dey(2)(3)(7)..................... 60 Director
Roger W. Hale(1)(4)(7)................. 54 Director
Robert J. Amman(1)(4)(6)............... 60 Director
</TABLE>
- - - - ---------------
(1) Member of Executive Committee
(2) Member of Audit and Budget Committee
(3) Member of Compensation Committee
(4) Member of Governance Committee
(5) Term expires at annual meeting of stockholders in 1999
(6) Term expires at annual meeting of stockholders in 2000
(7) Term expires at annual meeting of stockholders in 2001
Biographical information on each of the foregoing officers follows:
Alan B. Slifka, Chairman of the Board of Directors. Mr. Slifka has served
as a director of GTS since 1990. Mr. Slifka is a New York investment banker and
the Managing Principal of Halcyon/Alan B. Slifka Management Company LLC, an
equity asset management firm specializing in nontraditional investments,
specifically corporate event investing. Previously, Mr. Slifka was a partner of
L.F. Rothschild, Unterberg, Towbin from 1961 to 1982. He is a director of Pall
Corporation and is active in other business, civic and philanthropic affairs as
founder, director or officer of numerous for-profit and not-for-profit
corporations and foundations. Mr. Slifka served as acting Chief Executive
Officer of GTS during most of 1993.
Gerald W. Thames, President, Chief Executive Officer and Director. Mr.
Thames joined GTS as Chief Executive Officer in February 1994, and has served as
a director of GTS since February 1994. From 1990 to 1994, Mr. Thames was
President and Chief Executive Officer for British Telecom North America and
Syncordia, a joint venture company focused on the international outsourcing
market. Mr. Thames has spent over 18 years in senior positions with
telecommunications companies, where he was responsible for developing start-up
telecommunications companies, including 15 years with AT&T, where he rose to the
position of General Manager of Network Services for the Northeast Region of AT&T
Communications.
Bruno d'Avanzo, Executive Vice President and Chief Operating Officer. Mr.
d'Avanzo joined GTS as Executive Vice President and Chief Operating Officer in
August 1996. From 1994 to 1996, Mr. d'Avanzo was
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<PAGE> 108
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, Executive Vice President of Finance and Chief Financial
Officer. Mr. Seippel joined GTS as Executive Vice President of Finance and Chief
Financial Officer in October 1996. From July 1992 to October 1996, Mr. Seippel
was Vice President -- Finance and Chief Financial Officer of Landmark Graphics
Corporation. From August 1990 to July 1992, Mr. Seippel was Director of Finance
for Covia, Inc., an affiliate of United Airlines. From April 1984 to August
1990, Mr. Seippel held the positions of Group Business Controller (1989 to
1990), Group Controller Sales/Marketing (1986 to 1989), and Product Line
Controller (1984 to 1986) with Digital Equipment Corporation, a diversified
computer manufacturer.
Jan Loeber, Senior Vice President -- HER. Mr. Loeber joined GTS in January
1995. From October 1992 to December 1994, Mr. Loeber was a Managing Director of
BT Securities Corporation. From April 1990 to September 1992, Mr. Loeber held
positions as Managing Director of Unitel Ltd. (now One 2 One) in the United
Kingdom, Group President of Nokia North America Inc., Vice President of ITT
Corporation, and Marketing and Product Management Director of ITT Europe. Mr.
Loeber also spent almost 10 years with AT&T, where his last position was
Executive Director, Bell Laboratories. Mr. Loeber has over 22 years of
experience in the telecommunications industry and an additional 9 years of
experience in information technology with the Pentagon, IBM and Chemical Bank of
New York.
Raymond I. Marks, Senior Vice President -- Asia. Mr. Marks joined GTS as
Senior Vice President -- Asia in July 1994. From October 1986 to June 1994, Mr.
Marks served as Vice President and General Manager of GTE Spacenet Corporation,
where he had overall responsibility for strategic planning, domestic and
international business development, creation of joint ventures and international
alliances, as well as the worldwide management of the marketing, sales and
technical support organizations. Mr. Marks has also served as Vice President for
the Digital Information Group for MCI Communications Corporation. Mr. Marks has
28 years of experience in the telecommunications and computer industries.
Grier C. Raclin, Senior Vice President, General Counsel and Corporate
Secretary. Mr. Raclin joined GTS as its Senior Vice President and General
Counsel in September, 1997, and was elected Corporate 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, 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, 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, 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
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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.
Kevin Power, Managing Director -- GTS Monaco Access. Prior to joining GTS
Monaco Access in October 1995, Mr. Power was Vice President, Carrier Relations
for the Company beginning in November 1994, where he was responsible for
assisting and coordinating the carrier activities of the GTS group of companies.
In 1988, Mr. Power was one of a group of five people who started the commercial
operations of Orion Network Systems and he stayed with the company until the
launch of its first satellite in 1994. His last position there was Vice
President of Carrier Services. Prior to that, he held positions with INTELSAT,
National Economic Research Associates (NERA) and the U.S. Department of
Commerce.
Biographical data on each of the directors, other than Mr. Thames, are as
follows:
Michael A. Greeley, Director. Mr. Greeley has served as a director of GTS
since September 1996. Mr. Greeley is the Senior Vice President of GCC
Investments, Inc., the investment group of GC Companies, Inc. From June 1989 to
July 1994, Mr. Greeley was a Vice President at Wasserstein Perella & Co., Inc.,
an international investment bank, specializing in mergers and acquisitions and
corporate finance transactions. Mr. Greeley is also a director of Teletrac,
Inc., Crescent Communications, American Capital Access Holdings, LLC and
Fuelman, Inc. By contractual arrangement, GCC Investments, Inc. has the right to
designate one person for nomination to the Board of Directors as long as it
holds not less than two and one-half percent of the issued and outstanding
shares of the Common Stock on a fully diluted basis. Mr. Greeley is the designee
of GCC Investments, Inc. to the Board of Directors.
Bernard McFadden, Director. Mr. McFadden has served as a director of GTS
since February 1994. Mr. McFadden currently serves as an independent consultant
for GTS and is a GTS representative on the supervisory board of HER. Mr.
McFadden's career in international telecommunications includes 32 years with ITT
Corporation, where he served as President and Chief Executive Officer of ITT's
Telecom International Group, and a four and one-half year assignment as
President and Chief Operating Officer of Alcatel Trade International, S.A.
Stewart J. Paperin, Director. Mr. Paperin has served as a director of GTS
since March 1997. Mr. Paperin serves as Executive Vice President of the Soros
Foundations (The Open Society Institute). In addition, he has served as the
President of Capital Resource East since October 1993. Prior to that, Mr.
Paperin was President of Brooke Group International from 1990 to 1993 where he
was responsible for investments in the former Soviet Union. Mr. Paperin also
served as Chief Financial Officer of Western Union Corporation from 1989 to
1990. Mr. Paperin serves as a director of the Board of Penn Octane Corporation.
W. James Peet, Director. Mr. Peet has served as a director of GTS since
January 1996. Mr. Peet has been affiliated with The Chatterjee Group, an
investment firm, since 1991. Mr. Peet is a director of Viatel Global
Communications, a public company, and several private companies. Immediately
prior to joining The Chatterjee Group, Mr. Peet spent six years with McKinsey &
Company. By contractual arrangement, The Chatterjee Group has the right to
designate one person for nomination to the Board of Directors to serve a term of
five years. Mr. Peet is the designee of The Chatterjee Group to the Board of
Directors.
Jean Salmona, Director. Mr. Salmona has served as a director of GTS since
March 1996. Since 1989, Mr. Salmona has been Chairman and Chief Executive
Officer of CESIA Consulting Group ("CESIA"), a consulting concern based in
France that specializes in information and communications systems and
technologies. Mr. Salmona is also Chairman and Director General, Data for
Development International Association, a nongovernmental organization with
consultative status to the United Nations Economic and Social Council. Mr.
Salmona is a graduate of Ecole Polytechnique, Paris, Institut d'Etudes
Politiques, Paris, and Ecole Nationale de la Statistique et de l'Administration
Economique, Paris.
Joel Schatz, Director. Mr. Schatz has served as a director of GTS since the
inception of the Company. Mr. Schatz was a founder of the Company and served as
its President from 1985 to 1991. Mr. Schatz is presently the Chairman and Chief
Executive Officer of Datafusion, Inc., a company developing software to
accelerate knowledge synthesis.
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Adam Solomon, Director. Mr. Solomon has served as a director of the Company
since June 1995. Mr. Solomon is also Chairman of Shaker Investments, Inc., a
growth equity investment firm and Chairman of Signature International, L.P., a
venture/development firm whose initial focus is redeveloping existing
residential/golf communities, and a member of the board of directors of MetaSolv
Software, Inc. Prior to that, Mr. Solomon spent eleven years with E.M. Warburg,
Pincus & Co., Inc., where he was Managing Director from 1988 to 1992. While at
E.M. Warburg, Pincus & Co., Inc., Mr. Solomon served as a member of the board of
directors of LCI International, Inc., a regional long-distance carrier.
David Dey, 60. Since 1995, Mr. Dey has served as an independent consultant,
particularly to high technology start-up companies in Europe. In that capacity,
he has served as Chairman of The Connections Group, a provider of branded
Internet services and Web-based electronic mail, and as Chairman of STARTECH
Scotland, a high technology incubator that focuses on telecommunications and
software start-up companies. From 1992 to 1995, Mr. Dey served as Chief
Executive Officer of Energis Communications, which grew from a start-up company
to become the United Kingdom's third national telecommunications operation
during his tenure. Mr. Dey was employed by British Telecom plc from 1987 to
1991, most recently as Managing Director of its Business Communications
Division, and he held various management positions at IBM Corporation where he
was employed from 1961 to 1985.
Roger W. Hale, 54. Mr. Hale is Chairman, President and Chief Executive
Officer of LG&E Energy Corp., a diversified energy services and marketing
company with businesses in retail gas and electric utility services, energy
marketing and trading, and power generation and project development. Mr. Hale
has served in that capacity since August 1990. Previously, Mr. Hale served as
Executive Vice President of Bell South Enterprises, Inc. from 1986 to 1989 and
with AT&T Corporation from 1966 to 1986, serving in various management positions
including Vice President of Marketing, Southern Region. Mr. Hale is a Director
of H&R Block, Inc. and PNC Bank, Kentucky, Inc.
Robert J. Amman, 60. Mr. Amman was elected to the Company's Board of
Directors in May 1998. Mr. Amman was Chairman, President and Chief Executive
Officer of John H. Harland Company, a printing firm, from 1995 to 1998.
Previously, from 1994 to 1995, he served as Vice Chairman of First Financial
Management Corporation, where he was responsible for the merchant services
businesses consisting of Western Union, NaBanco, Telecheck, Nationwide Credit
and International Banking Technologies. From 1988 to 1994, Mr. Amman served as
President and Chief Executive Officer of Western Union Corporation, where he
oversaw the transformation of the firm from a telecommunications to a financial
services company. Mr. Amman is a member of the Executive and Governance
Committees of the Board of Directors of the Company.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director of GTS, except Mr. Thames, receives an annual directors' fee
of $15,000. In addition, the fee paid to each Director, except for Mr. Thames,
for attending any meeting of the Board of Directors is $1,500 per meeting,
except for telephonic Board of Directors meetings of two hours or less, where
the fee is $750 for each such meeting. Each Director, except Mr. Thames, who
attends a committee meeting is entitled to a directors' fee of $1,000 per
meeting, except for telephonic committee meetings of a duration of two hours or
less, for which a fee of $500 is paid.
For the year ended December 31, 1997, the aggregate compensation paid by
the Company to its directors and executive officers for services in all
capacities was approximately $4.7 million.
GTS maintains the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan that permits directors to share in the growth of the value of
GTS through the grant and exercise of nonqualified stock options. See "-- Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan." In addition,
on February 27, 1998 the Board of Directors granted to each of certain of its
then incumbent members options to purchase 15,000 shares of Common Stock at an
exercise price of $20 per share. Such grants are subject to approval of the
Company's shareholders at its May 20, 1998 annual meeting.
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GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The purpose of the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") is to permit eligible non-employee
directors of GTS (each a "Non-Employee Director") to share in the growth of the
value of GTS through the grant and exercise of nonqualified stock options.
The total number of shares of Common Stock presently reserved and available
for delivery under the Directors' Plan is 1,275,000. The Directors' Plan is
administered by the compensation committee of the Board of Directors (the
"Committee"). Only directors of GTS who are not employees of GTS or any
subsidiary of GTS on the date on which an option is to be granted are eligible
to participate in the Directors' Plan on such date.
An option (a "Directors' Option") to purchase shares of Common Stock was
granted to each Non-Employee Director on the effective date of the Directors'
Plan and a Director's Option is granted to each new Non-Employee Director when
he or she is first elected or appointed to serve as a director of GTS. One-half
of the Directors' Options vests six months after the date of grant. An
additional one quarter become exercisable on the date six months following the
first annual meeting of GTS's shareholders to occur after such date of grant,
and the remaining one quarter shares become exercisable on the date six months
following the second annual meeting of GTS's shareholders to occur after such
date of grant. An initial Directors' Option represents 22,250 shares of Common
Stock. On the date of each annual meeting of GTS's shareholders, an additional
Directors' Option to purchase 9,000 shares will be granted each year on the date
of the Company's annual meeting to the individuals who will serve as elected
Non-Employee Directors of the Company during the next year.
Directors' Options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of Common Stock purchasable under a Directors' Option will be
equal to 100% of the fair market value of Common Stock on the date of grant.
Each Directors' Option will expire upon the earliest of (a) the tenth
anniversary of the date of grant, (b) one year after the Non-Employee Director
ceases to serve as a director of GTS due to death or disability (except that, in
the case of disability, if the Non-Employee Director dies within that one-year
period, the Directors' Option is exercisable for a period of one year from the
date of death), (c) three months after the Non-Employee Director ceases to serve
as a director of GTS for any reason other than death or disability (except that,
if the Non-Employee Director dies within that three-month period, his or her
Directors' Options are exercisable for a period of one year from the date of
such death), and (d) three months after the Non-Employee Director ceases to be
employed by GTS if such Non-Employee Director had become an employee of GTS
(except that, if the Non-Employee Director dies within that three-month period,
his or her Directors' Options are exercisable for a period of one year from the
date of such death). Each Directors' Option may be exercised in whole or in part
by giving written notice of exercise to GTS specifying the Directors' Option to
be exercised and the number of shares to be purchased. Such notice must be
accompanied by payment in full of the exercise price in cash or by surrender of
shares of Common Stock or a combination thereof. Directors' Options granted
under the Directors' Plan may not be sold, pledged, assigned or otherwise
disposed of in any manner other than by will or by the laws of descent and
distribution.
At the time of grant, the Board of Directors may provide in connection with
any grant made under the Directors' Plan that the shares of Common Stock
received as a result of such grant are subject to a right of first refusal by
GTS.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
The following table sets forth certain information regarding ownership of
the Common Stock and rights to acquire Common Stock by (i) each of the Company's
directors and (ii) each of the named officers and all
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<PAGE> 112
directors and executive officers of the Company as a group as of March 31, 1998.
For the purposes of this table, a person or a group of persons is deemed to have
"beneficial ownership" of any shares which such has the right to acquire within
60 days after such date, but such shares are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
BENEFICIAL STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) OWNED(1)
------------------------ ----------- --------
<S> <C> <C>
Alan Slifka and affiliates................................. 5,564,325(3) 10.6%
Bernard McFadden........................................... 37,500 *
Michael A. Greeley......................................... 13,500(5) *
Stewart J. Paperin......................................... 9,000(4) *
W. James Peet.............................................. 13,500(4) *
Jean Salmona............................................... 13,500 *
Joel Schatz................................................ 500,250 *
Adam Solomon............................................... 57,414 *
Gerald W. Thames........................................... 740,924 1.4%
Bruno d'Avanzo............................................. 44,419 *
Jan Loeber................................................. 30,000(6) *
Raymond I. Marks........................................... 299,687 *
Louis T. Toth.............................................. 293,023 *
David Dey.................................................. 400(7) *
Roger W. Hale.............................................. 300(7) *
Robert J. Amman............................................ 3,000(7) *
Other officers............................................. 169,376 *
All Directors and Executive Officers as a group (22
persons)................................................. 8,096,074 15.0%
</TABLE>
- - - - ---------------
* Less than 1%
(1) The percentage of ownership is based upon 59,817,916 shares, comprised of
52,040,140 shares of Common Stock issued and outstanding, and warrants to
purchase 7,777,776 shares of Common Stock. Excluded from the calculation
are: 5,159,972 shares of Common Stock issued to employees under the Third
Amended and Restated 1992 Stock Option Plan of the Company (the "Stock
Option Plan"), of which 2,016,031 are vested at March 31, 1998; 759,000
options to purchase shares of Common Stock issued to employees prior to the
adoption of the Stock Option Plan and options issued pursuant to the Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") and the SFMT, Inc. Equity Compensation Plan (the "Equity
Compensation Plan"); and an option to convert a debt put right to 713,311
shares of Common Stock.
(2) Includes shares of Common Stock issuable upon the exercise of stock options
and stock warrants within 60 days of March 31, 1998.
(3) Includes 2,514,284 shares of Common Stock owned by Mr. Slifka, 49,500 shares
of Common Stock held in trust for a minor child and options to purchase
225,000 shares of Common Stock; 2,563,041 shares of Common Stock owned by
various Halcyon Partnerships which are managed by Halcyon/Alan B. Slifka
Management Company LLC, of which Mr. Slifka is the Managing Principal and
over which Mr. Slifka disclaims beneficial ownership; 67,500 shares of
Common Stock held by GTS 1995 Partners, LP; and 145,000 shares of Common
Stock issuable upon the conversion of Convertible Bonds held by various
Halcyon Partnerships which are managed by Halcyon/Alan B. Slifka Management
Company LLC, over which Mr. Slifka disclaims beneficial ownership.
(4) Excludes the shares of Common Stock held by the George Soros affiliates over
which Gary Gladstein, Stewart J. Paperin and W. James Peet disclaim
ownership.
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(5) Excludes the 1,819,149 shares of Common Stock owned by Chestnut Hill Telecom
Inc., an affiliate of Michael A. Greeley, over which Mr. Greeley disclaims
ownership.
(6) Includes 10,000 restricted shares of Common Stock.
(7) These directors were elected at the Company's May 20, 1998 annual
shareholders' meeting. Share ownership of those directors listed above is
after such date.
EXECUTIVE COMPENSATION
The following table sets forth each component of compensation paid or
awarded to, or earned by, the Chief Executive Officer and the four other most
highly compensated executive officers serving as of December 31, 1997
(collectively, the "Named Executive Officers") for the years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------------------
RESTRICTED SECURITIES
PAID OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) (#) ($)(9)
--------------------------- ---- -------- -------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald W. Thames............... 1997 $375,417 $140,000 (1) -0- 141,195(5) $ 19,850
President and Chief Executive 1996 $325,000 $113,750 (1) -0- 112,500(5) $ 9,954
Officer
Bruno d'Avanzo................. 1997 $340,000 $ 83,313(2) -0- -0- 104,475(5) $ 21,675
Executive Vice President and 1996 $141,667 $ 33,333(2) -0- -0- 83,025(5) $ 5,650
Chief Operating Officer
Jan Loeber..................... 1997 $235,000 $ 78,608 $46,598(3) -0- 4,812(6) $179,450
Senior Vice President -- HER 1996 $235,000 $ 78,608 $42,806(3) 30,000(4) 3.5(7) $ 12,986
Raymond I. Marks............... 1997 $231,008 $ 49,826 (1) -0- 27,750(5) $ 12,250
Senior Vice President -- Asia 1996 $230,091 $ 46,200 (1) -0- 55,500(5) $ 13,788
Louis T. Toth.................. 1997 $204,750 $ 50,307 $60,106(8) -0- 45,000(5) $ 14,550
Senior Vice 1996 $203,937 $ 40,950 $ 33,602(8) -0- 43,500(5) $ 13,004
President -- Central Europe
</TABLE>
- - - - ---------------
(1) Perquisites and other personal benefits paid to the Named Executive Officer
were less than the lesser of $50,000 and 10 percent of the total of annual
salary and bonus reported for the Named Executive Officer.
(2) Mr. D'Avanzo's bonuses in 1997 and 1996 include the first two installments
of a $100,000 sign-on bonus that the Company agreed to pay in three equal
annual installments when he was hired in 1996.
(3) For 1997, the amount listed represents the sum of a cost of living
allowance of $16,450, a tax equalization payment of $13,953 that
compensates Mr. Loeber for the higher taxes he pays because he resides in
Belgium instead of the United States, use of a car, which was valued at
$4,547, and a gross-up payment of $11,648 for certain tax liabilities. For
1996, the amount listed represents the sum of a cost of living allowance of
$16,450, paid home leave of $9,031, use of a car valued at $4,547 and a
gross-up payment of $12,778 for certain tax liabilities.
(4) Shares of restricted stock that vest in an amount of one-third each year on
the three anniversary dates of grant, beginning on January 2, 1997.
(5) Stock options awarded under the Stock Option Plan.
(6) Stock options awarded under The Key Employee Stock Option Plan of Hermes
Europe Railtel B.V.(the "HER Stock Option Plan").
(7) Stock options awarded under the GTS-Hermes, Inc. Stock Option Plan (the
"GTS-Hermes Stock Option Plan"), which will be terminated. The stock
options granted to Mr. Loeber in 1997 and described in footnote (6) are in
substitution for the 3.5 stock options granted to Mr. Loeber in 1996, which
have been cancelled.
(8) For 1997, the amount listed represents the sum of a cost of living
allowance of $30,000, use of a car valued at $10,800, paid home leave of
$12,501, and a gross-up payment for certain tax liabilities in the
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amount of $6,805. For 1996, the amount listed represents the sum of a cost
of living allowance of $27,500 and paid home leave of $6,102 paid to Mr.
Toth.
(9) Amounts hereunder represent the sum of premiums paid by GTS for $1,000,000
in term life insurance for each Named Executive Officer and contributions
by GTS under the 401(k) Plan, as defined below, to each Named Executive
Officer's account, except for Mr. D'Avanzo who does not participate in the
401(k) plan because of his foreign citizenship. In the case of Mr. Loeber,
the amount also includes $156,700 which represents the value, as of
December 31, 1997 of 10,000 shares of restricted stock which vested in
1997.
THE GTS 401(k) PLAN
The GTS 401(k) Plan (the "401(k) Plan") is a defined contribution
retirement benefit plan that is qualified for favorable tax treatment under
Section 401 of the Code. All employees of GTS, subject to certain regulatory
qualifications, including the Named Executive Officers, who are at least 21
years of age and have completed the minimum service requirement are eligible to
participate in the 401(k) Plan. The 401(k) Plan participants may defer pre-tax
income by contributing to the plan up to the maximum amount permitted by law.
After-tax contributions are also permitted under the 401(k) Plan. GTS matches
50% of each participant's pre-tax contribution to the 401(k) Plan up to 5% of
the participant's total compensation. In addition, GTS may, in its sole
discretion and in a nondiscriminatory manner, contribute additional amounts as
profit sharing to each participant's account. The amounts that are deposited
into each participant's account are invested among various investment options
according to the direction of the participant. Each participant's pre-tax and
after-tax contributions are immediately vested and nonforfeitable. GTS's
matching contribution and profit sharing allocations to each participant's
account do not vest until the participant has completed three years of service
with GTS, at which time the matching contribution and profit sharing allocations
become 100% vested. Each participant is eligible to begin receiving benefits
under the 401(k) Plan on the first day of the month coincident with or following
the attainment of normal retirement age. There is no provision for early
retirement benefits under the 401(k) Plan.
THE SFMT, INC. EQUITY COMPENSATION PLAN
The purpose of the SFMT, Inc. Equity Compensation Plan (the "Equity
Compensation Plan") is to attract, retain and motivate key employees, officers
and eligible independent contractors of GTS and to enable such individuals to
own Common Stock and to have a mutuality of interest with other shareholders of
GTS through the grant of restricted stock and other equity-based awards.
The total number of shares of Common Stock that may be issued or
transferred under the Equity Compensation Plan is four percent of the total
number of shares of Common Stock outstanding at the beginning of the calendar
year, subject to certain adjustments, which are described below. This threshold
number may be increased by the number of shares (a) that were issued under the
Equity Compensation Plan with respect to which no dividends were paid and (b)
that were subsequently forfeited, in accordance with the terms of the Equity
Compensation Plan.
The Equity Compensation Plan is administered by the Committee. The chief
executive officer of GTS has the authority to recommend the individuals to whom
awards will be granted, subject to approval by the Committee. The Committee has
full and binding authority to determine the fair market value of the Common
Stock and the number of shares included in any awards, to establish terms and
conditions of any award, to interpret the Equity Compensation Plan, to prescribe
rules relating to the Equity Compensation Plan and to make all other
determinations necessary to administer the Equity Compensation Plan. The
Committee may condition the vesting of restricted stock upon the attainment of
specified performance goals or such other factors as the Committee may determine
in its sole discretion. In the event that the Committee determines, in its sole
discretion, that an award of restricted stock would not be appropriate with
respect to any individual who has been recommended for an award by the chief
executive officer, the Committee has the authority to grant to any such
individual any other variety of equity-based compensation award, including, but
not limited to, phantom stock, phantom units, stock appreciation rights,
performance shares and performance units. The
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Committee does not, however, have the authority to grant stock options pursuant
to the Equity Compensation Plan.
Grants under the Equity Compensation Plan are determined by the Committee
in its sole discretion. For this reason, it is not possible to determine the
benefits or amounts that will be received by any individual employee or group of
employees in the future. The Equity Compensation Plan will remain effective
until November 14, 2004, unless earlier terminated by GTS. No restricted stock
may be granted under the Equity Compensation Plan on or after November 14, 2000.
During a specified period set by the Committee commencing with the date of
any restricted stock award, the participant is not permitted to sell, transfer,
pledge or otherwise encumber shares of restricted stock. Within these limits,
the Committee, in its sole discretion, may provide for the lapse of such
restrictions or may accelerate or waive such restrictions in whole or in part,
based on service, performance and such other factors. Unless the Committee
specifically determines otherwise, a restricted stock award granted under the
Equity Compensation Plan vests one-third on the second anniversary of the date
of grant, one-third on the third anniversary of the date of grant and one-third
on the fourth anniversary of the date of grant.
The Committee may impose such other restrictions on shares of Common Stock
issued under the Equity Compensation Plan, including a right of first refusal by
GTS that requires the participant to offer GTS any shares that the participant
wishes to sell.
The Equity Compensation Plan provides that, in the event of a change to the
Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or exchange of
shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will preserve the value of outstanding
awards by making certain equitable adjustments in its discretion.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Equity Compensation Plan at any time, except that any such action will be
subject to the approval of GTS shareholders at the first annual meeting
following such action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
THE AMENDED AND RESTATED 1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS GROUP,
INC.
The 1992 Stock Option Plan of Global TeleSystems Group, Inc. (the "1992
Option Plan") was adopted by the Board of Directors of GTS and approved by
stockholders in 1992 and has been subsequently amended, among other things, to
increase the number of shares available for grant. The Board of Directors of GTS
adopted the Fourth Amended and Restated Plan on April 9, 1998 (the "Amended 1992
Stock Option Plan"), subject to stockholder approval at the May 20, 1998 annual
stockholders meeting: (i) to modify the provisions relating to the number of
shares with respect to which options to purchase shares of Common Stock may be
granted under the 1992 Stock Option Plan; (ii) to extend eligibility under the
1992 Stock Option Plan to nonemployee directors and independent contractors of
the Company (as defined in the 1992 Stock Option Plan), its subsidiaries and
affiliates; (iii) to provide the Stock Option Committee (as defined in the 1992
Stock Option Plan) with more flexibility to specify the terms of options granted
under the 1992 Stock Option Plan; (iv) to specify that the options covering not
more than 1.5 million shares of Common Stock may be granted to any employee
during any calendar year; (v) to extend the term of the 1992 Stock Option Plan,
as amended, to April 9, 2008 and (vi) to eliminate certain provisions that are
not necessary or desirable in an option plan of a public company. As of March
31, 1998, there were approximately 1,800 employees, non-employee directors and
independent contractors of GTS and its subsidiaries and affiliates who were
eligible to participate in the Amended 1992 Stock Option Plan. The Amended 1992
Stock Option Plan received stockholder approval at the May 20, 1998 annual
stockholders meeting.
The principal provisions of the Amended 1992 Stock Option Plan, as amended,
are summarized below. A copy of the Amended 1992 Stock Option Plan is an exhibit
to the Registration Statement in which this
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Prospectus is included and this summary does not purport to be complete and is
qualified in its entirety by the terms of the Amended 1992 Stock Option Plan.
The Amended 1992 Stock Option Plan provides for the grant of options to
employees, non-employee directors, and independent contractors of GTS and any
subsidiary or affiliate of GTS. A total of 9,568,688 shares of Common Stock are
reserved for issuance to employees, non-employee directors and independent
contractors under the Amended 1992 Stock Option Plan representing 18.5% of the
outstanding shares of Common Stock on March 31, 1998. The Amended 1992 Stock
Option Plan provides that the number of shares available for issuance under
options granted pursuant to the Amended 1992 Stock Option Plan is the greater of
9,568,688 shares or 18.5% of the outstanding shares of Common Stock at the time
of grant. A total of 1 million shares of Common Stock may be issued pursuant to
options qualifying for tax purposes as incentive options under the Amended 1992
Stock Option Plan.
The Amended 1992 Stock Option Plan is administered by the Stock Option
Committee, which consists of not less than two directors appointed by the Board
of Directors. The Stock Option Committee selects the employees, independent
contractors and directors of GTS and its subsidiaries and affiliates to whom
options will be granted. Options covering not more than 1.5 million shares of
Common Stock may be granted to any employee during any calendar year.
The option exercise price under the Amended 1992 Stock Option Plan may not
be less than the exercise price determined by the Stock Option Committee (or
110% of the fair market value of the Common Stock on the date of grant of the
option in the case of an incentive option granted to an optionee beneficially
owning more than 10% of the outstanding Common Stock). The maximum option term
is 10 years and one day (or five years in the case of an incentive option
granted to an optionee beneficially owning more than 10% of the outstanding
Common Stock). Options become vested and exercisable at the time and to the
extent provided in the option agreement related to such option. The Stock Option
Committee has the discretion to accelerate the vesting and exercisability of
options.
There is a $100,000 limit on the value of stock (determined at the time of
grant) covered by incentive options that first become exercisable by an optionee
in any calendar year. No option may be granted more than 10 years after the
effective date of the Amended 1992 Stock Option Plan. Generally, during an
optionee's lifetime, only the optionee (or a guardian or committee if the
optionee is incapacitated) may exercise an option except that, upon approval by
the Stock Option Committee, nonqualified options may be transferred to the
spouse of the optionee and certain nonqualified options may be granted or
transferred to the GTS Employee Stock Option Plan Trust for the benefit of one
or more designated foreign employees, independent contractors or directors.
Incentive stock options are non-transferable except at death.
Payment for shares purchased under options granted pursuant to the Amended
1992 Stock Option Plan may be made either in cash or by exchanging shares of
Common Stock of GTS (which shares have been held by the optionee for at least
six months) with a fair market value of up to the total option exercise price
and cash for any difference. Options may be exercised by directing that
certificates for the shares purchased be delivered to a licensed broker-dealer
as agent for the optionee, provided that the broker-dealer tenders to GTS cash
or cash equivalents equal to the option exercise price plus the amount of any
taxes that GTS may be required to withhold in connection with the exercise of
the option.
If an optionee's employment or service with GTS or a subsidiary or
affiliate terminates by reason of death, retirement or permanent and total
disability, his or her vested options may be exercised within one year after
such death, retirement or disability, unless otherwise provided with respect to
a particular option (but not later than the date the option would otherwise
expire). If the optionee's employment or service with GTS or a subsidiary or
affiliate terminates for any reason other than death, retirement or disability,
options held by such optionee terminate 90 days after such termination, unless
otherwise provided with respect to a particular option (but not later than the
date the options would otherwise expire), except that options terminate
immediately upon termination of an employee or independent contractor for
"cause" (as defined), unless the Stock Option Committee determines otherwise.
Each option would be exercisable to the extent it had become vested before the
termination of employment or service (unless otherwise provided in the option
agreement).
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If the outstanding shares of Common Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of GTS, by reason of merger, consolidation, reorganization, recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend, spin-off or other distribution payable in capital stock, or
other increase or decrease in such shares without receipt of consideration by
GTS, an appropriate and proportionate adjustment will be made in the number and
kinds of shares subject to the Amended 1992 Stock Option Plan, and in the
number, kinds and per share exercise price of shares subject to the unexercised
portion of options granted prior to any such change, in order to preserve the
value of any granted options. Any such adjustment in an outstanding option,
however, will be made without a change in the total price applicable to the
unexercised portion of the option, but with a corresponding adjustment in the
per share option price.
Upon any dissolution or liquidation of GTS, or upon a reorganization,
merger or consolidation in which GTS is not the surviving corporation, or upon
the sale of substantially all of the assets of GTS to another corporation, or
upon any transaction (including, without limitation, a merger or reorganization
in which GTS is the surviving corporation) approved by the Board of Directors
which results in any person or entity owning 80% or more of the total combined
voting power of all classes of stock of GTS, the Amended 1992 Stock Option Plan
and the options issued thereunder will terminate, unless provision is made in
connection with such transaction for the continuation of the Amended 1992 Stock
Option Plan, the assumption of such options or for the substitution for such
options of new options covering the stock of a successor corporation or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kinds
of shares and the per share exercise price. In the event of such termination,
all outstanding options shall be exercisable in full during such period
immediately prior to the occurrence of such termination as the Board of
Directors in its discretion shall determine.
The Board of Directors may further amend the Amended 1992 Stock Option Plan
with respect to shares of the Common Stock as to which options have not been
granted. However, GTS's stockholders must approve any amendment that would (i)
change the requirements as to eligibility to receive incentive options; or (ii)
increase the maximum number of shares in the aggregate for which incentive
options may be granted (except for adjustments upon changes in capitalization);
or (iii) otherwise to the extent required by applicable law, rule or regulation.
The Board of Directors at any time may terminate or suspend the Amended
1992 Stock Option Plan. Unless previously terminated, the Amended 1992 Stock
Option Plan will terminate automatically on April 9, 2008. No termination,
suspension or amendment of the Amended 1992 Stock Option Plan may, without the
consent of the person to whom an option has been granted, adversely affect the
rights of the holder of the option.
No grants of options have been made under the Amended 1992 Stock Option
Plan.
THE GTS 1996 TOP TALENT RETENTION PROGRAM
GTS implemented the GTS 1996 Top Talent Retention Program (the "Program")
which, for 1996 only, alters the terms offered to certain employees under the
1992 Option Plan. Employees who are offered participation in the Program must
sign a "retention agreement," the terms of which are described below, in order
to receive any 1992 Options during 1996. The Program has been offered to
approximately 28 employees, and it provides that any 1992 Options granted to
such participants will vest as follows: (i) one-half of any 1992 Option granted
under the Program will vest at a rate of 25% per year beginning on the first
anniversary of the initial date of grant and (ii) the remaining portion of any
1992 Option granted under the Program will vest one-quarter according to the
achievement of performance revenue levels, and one-quarter according to the
achievement of price levels of Common Stock, provided that all options will vest
on the fifth anniversary of the date of grant regardless of whether such
performance revenue and pricing levels are attained.
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OPTION GRANTS IN THE LAST FISCAL YEAR
The following table provides information on stock option grants to the
Named Executive Officers in 1997 under the Stock Option Plan.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE VALUE($)(2)
---- ---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Gerald W. Thames..................... 88,695(1) 4.11 $13.33 02-03-07 $597,000
52,500(1) 2.43 15.67 10-10-07 415,300
Bruno d'Avanzo....................... 66,975(1) 3.11 13.33 02-03-07 450,700
37,500(1) 1.74 15.67 10-10-07 296,600
Jan Loeber........................... -- -- -- -- --
Raymond I. Marks..................... 27,750(1) 1.29 13.33 02-03-07 186,800
Louis T. Toth........................ 22,500(1) 1.04 13.33 02-03-07 151,400
22,500(1) 1.04 15.67 10-10-07 178,000
</TABLE>
- - - - ---------------
(1) Each option vests one-fourth on each of the first four anniversaries of the
date of grant.
(2) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of 0.50, risk-free
interest rate of 5.79% and expected life of five years.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information on the number of options under the
Stock Option Plan held by the Named Executive Officers at December 31, 1997, and
the value of all unexercised options held by such persons as of that date.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FY-END(#)(1) AT FY-END($)(2)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------------------
<S> <C> <C>
Gerald W. Thames..................................... 676,562/327,133 $7,539,655/$1,321,913
Bruno d'Avanzo....................................... 27,675/159,825 64,676/285,874
Jan Loeber........................................... -- --
Raymond I. Marks..................................... 246,937/121,313 2,671,519/675,211
Louis T. Toth........................................ 256,537/97,613 3,090,927/355,013
</TABLE>
- - - - ---------------
(1) No options were exercised during the year ended December 31, 1997.
(2) Based on $15.67 per share value of Common Stock as of December 31, 1997 less
the exercise price.
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OPTION GRANTS IN THE LAST FISCAL YEAR -- HER STOCK OPTION PLAN (1)
The following table provides information on stock option grants to one of
the Named Executive Officers, Jan Loeber, in 1997 under the HER Stock Option
Plan. As of December 31, 1997, Mr. Loeber was not granted in 1997, and does not
hold, any options to purchase Common Stock.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR GRANT DATE
OPTIONS IN FISCAL BASE EXPIRATION PRESENT
NAME GRANTED(#) YEAR PRICE($/SH.) DATE VALUE($)(2)
---- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Jan Loeber............................. 4,812 47.3 $83.12 2006 $2,234,019
</TABLE>
- - - - ---------------
(1) Each stock option vests one-third on each of the first three anniversaries
of the date of grant. During the fourth quarter of 1997, HER established the
HER Stock Option Plan to replace the GTS-Hermes Stock Option Plan. The
options outstanding under the GTS-Hermes Plan were cancelled and replaced by
options under the HER Stock Option Plan.
(2) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of 0.50, risk-free
interest rate of 5.79% and expected life of five years.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-ENDED OPTION VALUES -- HER STOCK OPTION PLAN
The following table provides information on the number of options held by
Mr. Loeber under the HER Stock Option Plan at December 31, 1997, and the value
of all unexercised options held by Mr. Loeber as of that date.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(1)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ---------------------------- ----------------------------
<S> <C> <C>
Jan Loeber.................................... 3,208/1,604 $1,417,551/$708,775
</TABLE>
- - - - ---------------
(1) No options were exercised during the year ended December 31, 1997.
(2) Based on $525.00 per share value of common stock as of December 31, 1997
less the exercise price.
HER STOCK OPTION PLAN
In the fourth quarter of 1997, HER established a stock option plan (the
"New Plan") to replace the GTS-Hermes Plan for the purpose of incentivizing HER
key employees. The aggregate number of shares of HER stock subject to the New
Plan is approximately 13% of the total shares of HER stock issued and
outstanding including options. During 1997, HER issued 10,166 options in
replacement of those outstanding under a stock option plan maintained by HER's
parent, GTS-Hermes, Inc., a wholly owned subsidiary of the Company, as well as
additional options to certain employees. The issuance of these options will
result in a non-cash charge of $3.7 million of which $2.6 million is expected to
be recorded during the fourth quarter and the remaining $1.1 million will be
recognized principally ratably over fiscal 1998. The GTS-Hermes Plan is intended
to be terminated. The Company is considering whether to eliminate, and
alternative ways of eliminating, share option plans in subsidiaries, such as the
HER Stock Option Plan. The Company may eliminate such Plans in the future while
incorporating such beneficiaries into the Company's Employee Stock Option Plan
or providing them with alternative equivalent value.
EMPLOYMENT AGREEMENTS
GTS has executed employment agreements (together, the "Employment
Agreements") with all the Named Executive Officers. The agreements with Messrs.
Thames, and Marks include a three-year term of employment commencing on February
1, 1997 and April 1, 1996, respectively. Mr. D'Avanzo's employment agreement has
a three-year term commencing on March 1, 1997. The agreements with Mr. Toth and
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Mr. Loeber include a two-year term of employment commencing on April 1, 1996 and
January 3, 1995, respectively. All the Employment Agreements, except for Mr.
Thames' and Mr. D'Avanzo's agreements, provide for the automatic renewal of the
term for additional one-year periods after the initial term unless written
notice of intent to terminate is provided by either party within a stated period
of between 120 days and six months prior to the renewal date. Mr. Thames'
agreement provides for an automatic renewal each year for a new three-year
period. Mr. D'Avanzo's agreement terminates on March 1, 2000, unless either GTS
or Mr. D'Avanzo requests an extension 180 days prior to such termination and the
parties agree upon an extension. The salary of each Named Executive Officer is
reviewed yearly and may be increased at the sole discretion of the Board of
Directors. In addition to salary, each Named Executive Officer is eligible for a
performance-based annual bonus, to participate in the Stock Option Plan (with
the exception of Mr. Loeber whose employment agreement provides him with an
option grant under the HER Stock Option Plan), to receive standard health and
insurance benefits that are provided to executives of GTS, to receive certain
other fringe benefits and to be reimbursed for all reasonable expenditures
incurred in the execution of each Named Executive Officer's respective duties.
In addition, Mr. Loeber's employment agreement provides him with 30,000 shares
of restricted stock that vest in an amount of one-third each year for three
years beginning on January 2, 1997.
The Employment Agreements provide for severance payments in the event of
(a) termination without cause, as defined, or (b) resignation for good reason,
as defined, following a change of control event, as defined. Mr. Thames would be
eligible for severance payments of base salary for the greater of 24 months or
the remaining term of his agreement. Severance arrangements with other named
officers are for a period of six to eighteen months of base salary. If the Named
Executive Officer is terminated for cause or if he voluntarily terminates his
employment other than for good reason after a change of control event, he shall
not be entitled to any salary, bonus or severance payments (other than accrued
salary).
Each Employment Agreement includes noncompetition and nonsolicitation
clauses that are effective during the term of employment and for a period of
from four months to one year thereafter. In addition, the Employment Agreements
include an unlimited covenant of confidentiality and nondisclosure. Any dispute
arising under an employment agreement must be resolved through arbitration,
except that each agreement also provides for specific performance and for a
court injunction in the event of a breach by the Named Executive Officer.
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CERTAIN RELATED PARTY TRANSACTIONS
Alan B. Slifka, the Chairman of the Board of Directors, owns an interest in
an office building in New York in which GTS leased office space until the
corporate headquarters were moved to McLean, Virginia on March 1, 1995. Until
April 1, 1998, GTS retained a small office space in New York City that it leased
from Mr. Slifka on a monthly basis, and the annual expense for 1997 was $30,690.
Mr. Slifka also has a consulting agreement with GTS pursuant to which he is paid
consulting fees of $100,000 per year.
Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 225,000 stock options
to purchase Common Stock that were granted in 1991 pursuant to a stock option
agreement that is not subject to any stock option plan. The options have an
exercise price of $0.533 per share and are fully vested. Any of the stock
options that remain unexercised after November 30, 2001 shall lapse and become
void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination. The shares of Common Stock underlying such
options have been registered under a registration statement that has been
declared effective by the Commission.
In addition, Joel Schatz, a director of GTS, and Ms. Sandler, the wife of
Morris A. Sandler, a former director of GTS were granted in 1991 stock options
to purchase Common Stock pursuant to stock option agreements that are not
subject to any stock option plan. Mr. Schatz holds 50,250 of such stock options
to purchase Common Stock with an exercise price of $0.533 per share. Mr.
Schatz's options are fully vested and any unexercised options he holds after
November 4, 2001 shall lapse and become void. Generally, in the event that Mr.
Schatz ceases to be an employee or nonemployee director of GTS any of his
unexercised stock options shall lapse thirty days after such termination. The
stock options held by the spouse of Mr. Sandler were granted to Mr. Sandler in
November 1991 and, with the approval of the Board, were immediately assigned to
his spouse, whom the stand-alone stock option agreement names as the optionee.
Pursuant to such stock option agreement, the spouse of Mr. Sandler was granted
225,000 stock options to purchase Common Stock at an exercise price of $.533 per
share. The options are fully vested and any unexercised options held after
November 4, 2001 shall lapse and become void. Generally, in the event that Mr.
Sandler ceases to be an employee or nonemployee director of GTS, any of such
unexercised stock options shall lapse thirty days after such termination. The
shares of Common Stock underlying such options have been registered under a
registration statement that has been declared effective by the Commission.
Bernard McFadden, Director, has a consulting agreement with GTS pursuant to
which he is paid $100,000 in consulting fees each year.
In August and September 1997, affiliates of George Soros and Mr. Slifka
purchased 319,149 and 57,015 shares of Common Stock, respectively, at a price of
$15.67 per share in the Company's private stock offering. In addition,
affiliates of Mr. Slifka purchased $2.9 million of Convertible Bonds in
September 1997. Pursuant to the terms of the indenture related to the
Convertible Bonds, the Convertible Bonds will be convertible into such shares of
Common Stock as is equal to the principal amount of such Convertible Bonds
divided by the applicable conversion price, which conversion price shall be
equal to the public offering price of the Common Stock in the Offerings. See
"Principal and Selling Stockholders."
Affiliates of Soros Fund Management purchased $40 million of notes from GTS
in 1996, which notes bore interest at 10% per annum, in partial consideration of
which (i) W. James Peet was appointed to the Board of Directors and (ii) the
affiliates received warrants to purchase 4,444,443 shares of Common Stock.
Together with their prior equity interests in GTS, these affiliates currently
hold, on a fully diluted basis (excluding shares underlying stock options), in
excess of 20.3% of the Company's Common Stock. In accordance with the terms of
the warrant agreement, the exercise price of the warrants was reduced from
$10.27 per share to $9.33 per share as the outstanding debt had not been repaid
prior to December 31, 1996. In February 1998, the Company repaid the $40 million
of notes, plus accrued interest, using part of the proceeds of an offering of
senior notes and IPO completed at that time. In addition, these affiliates
collect a monitoring fee of $40,000 per month. Under certain agreements, these
affiliates have the right to co-invest with GTS in all of its new ventures
throughout Asia, excluding countries in the former Soviet Union, and pursuant to
this right, one of these affiliates holds a 25% interest in GTS China
Investments LLC. See "Business -- Asia."
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The Company has agreed to register within 45 days after the consummation of
the Stock Offerings pursuant to a shelf registration statement all of the
Affiliate Shares owned by the affiliates of Mr. Slifka and the affiliates of Mr.
Soros that are not sold in the Stock Offerings in consideration of such
shareholders' undertaking to be bound by the Restrictions. It is the Company's
belief, after consultation with its financial advisors, that this agreement
relating to the Affiliate Shares will contribute toward assuring the market of
an orderly manner for such Affiliate Shares to be sold over a period of time.
Under the Restrictions, holders of Affiliate Shares will be prevented from
selling any such shares during the first six months after the closing date of
the Offerings and will be able to sell (i) 50% of such shares after the six
month anniversary of the closing date of the Offerings, (ii) 75% of such shares
after the nine month anniversary of the closing date of the Offerings and (iii)
100% of such shares after the twelve month anniversary of the closing date of
the Offerings. In connection with this agreement, the Company also has agreed to
permit certain of the Soros affiliates to resell, immediately after the closing
date of the Stock Offerings, up to 100,000 of any shares that they are unable to
resell in the Stock Offerings as a result of any cut-back that may be imposed by
the underwriters (subject to a waiver by the underwriters in the Company's IPO
of the lockup agreement entered into by such affiliates to the extent of such
100,000 shares). Certain limited partners of partnerships affiliated with Alan
B. Slifka and currently in dissolution may, upon advance notice to the Company,
withdraw some or all of their shares of Common Stock from registration under the
shelf registration statement and from the Restrictions. The number of shares of
Common Stock subject to this withdrawal may not exceed the total of 726,953
shares of Common Stock minus the number of shares sold by such limited partners
in the Stock Offerings.
Affiliates of Capital Research International purchased $30 million of notes
from GTS in 1996, which notes bore interest at 10% per annum, in partial
consideration of which it received warrants to purchase 3,333,333 shares of
Common Stock. In accordance with the terms of the warrant agreement, the
exercise price of the warrants was reduced from $10.27 per share to $9.33 per
share as the outstanding debt had not been repaid prior to December 31, 1996. In
February 1998, the Company repaid the $30 million of notes, plus accrued
interest, using part of the proceeds of an offering of senior notes and IPO
completed at that time. Affiliates of Capital Research International exercised
their warrants on June 3, 1998 under a cashless exercise procedure and will
receive approximately 2.5 million shares in accordance therewith.
Jean Salmona, a director of GTS, is the Chairman and Chief Executive
Officer of CESIA. CESIA also provides consultancy services for CDI and for HER.
The Company paid $37,500 in 1997 to CESIA for consulting services related to
CDI. In addition, HER paid $405,893 in 1997 to CESIA for consulting services.
Further, the Company paid $5,843 to CESIA in 1997, pursuant to the purchase
agreement with CESIA related to the CDI business.
Pursuant to a 1995 purchase agreement, the Company received its interest in
GTS-Vox Limited, the intermediate holding company of TCM, in exchange for a note
in the principal amount of $693,380 issued to the sellers and certain additional
consideration to its partners payable in the form of either cash or Common Stock
based upon its financial performance. The Company paid the note in 1996. On
January 17, 1997, the agreement was amended such that the consideration would
only be in the form of the issuance of Common Stock and as such, GTS is
obligated under these arrangements to issue up to a maximum of 1,121,640 shares
of Common Stock. In the first quarter of 1997, pursuant to this agreement the
Company issued 504,600 common shares, which was valued at the Company's current
fair market value of $13.33 per share. In addition, the Company was credited
37,480 shares of Common Stock under the amended agreement, for purposes of
applying against the 1,121,640 maximum number of shares of Common Stock, for the
Company's payment of its note to the sellers in 1996. Common Stock issued
pursuant to the agreement must be held for a minimum holding period. In certain
circumstances, if GTS's partners are unable to sell their shares of Common
Stock, GTS is obligated to assist in locating a purchaser for the Common Stock,
and, if unable to do so, to repurchase these shares. GTS's repurchase
obligations are at the following prices: (i) if shares of Common Stock are then
being publicly traded, at the average trading price of such shares for the 10
trading days preceding such repurchase or (ii) if shares of Common Stock are not
then publicly traded, at the price shares of Common Stock were most recently
offered to individual investors in a private placement, or, if no such private
placement has occurred within the three months preceding the repurchase of such
shares, at a price determined by an independent financial institution to be
agreed upon by GTS and the seller. As a result of their receipt of shares of
Common Stock in 1997, the sellers became shareholders of GTS.
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<PAGE> 123
Affiliates of Baring International Investment Management Limited
("Barings"), which affiliates consist primarily of investment funds and trusts,
are shareholders of the Company. In April 1996, GTS entered into an agreement
with First NIS Regional Fund SICAF, an affiliate of Barings, to organize GTS
Ukrainian TeleSystems, L.L.C. (the "LLC"), a Delaware limited liability company
60% owned by GTS, which in turn entered into a stock purchase agreement to
acquire 49% of all the ownership interests in Bancomsvyaz, a Ukrainian limited
liability company. See "Business -- Russia and the CIS." Such acquisition closed
in May 1996. By contractual arrangement, Barings designates one member of the
board of directors of Bancomsvyaz. Barings funded $4.5 million to be applied
towards the LLC's purchase of the interest in Bancomsvyaz and for the LLC's $1.5
million contribution to the registered capital of Bancomsvyaz. Prior to March 1,
1999, Barings may exercise an option (the "Initial Option") to convert its
initial investment into 438,311 shares of Common Stock at an exercise price of
$10.27. In June 1997 the agreement was amended, such that Barings funded an
additional $4.1 million to be applied toward Bancomsvyaz's capital expenditure
and operating capital requirements. On September 30, 2000, Barings may exercise
an option (the "2000 Option") to convert such additional investment into 275,000
Shares of Common Stock at an exercise price of $15.00. In connection with the
contemplated restructuring of Bancomsvyaz, which is underway, the agreement was
further amended in June 1998 to restructure the capital and ownership of the
LLC. See "Business -- Russia and the CIS -- Bancomsvyaz." Pursuant to such
amendment Barings exercised the Initial Option and the 2000 Option (the
exercisability of which was accelerated by the Company) and received 713,311
Shares of Common Stock and made an additional investment of $5.75 million to be
applied toward Bancomsvyaz's capital expenditure and operating capital
requirements. Barings has no put right in connection with such additional
investment. As a result of the June 1998 amendment, GTS increased its ownership
interest in the LLC to 75% and in Bancomsvyaz to approximately 57%.
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<PAGE> 124
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding ownership of
the Common Stock and rights to acquire Common Stock by (i) stockholders that
manage or own, either beneficially or of record, five percent or more of the
Common Stock of the Company and (ii) each of the Selling Stockholders. For the
purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares which such has the right to acquire within
60 days after such date, but such shares are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
SHARES BENEFICIALLY OWNED AFTER THE STOCK
PRIOR TO THE STOCK OFFERINGS NUMBER OF OFFERINGS
----------------------------- SHARES --------------------
NUMBER OF BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES(1)(2) PERCENT(1) OFFERED SHARES PERCENT
------------------------ -------------- ------------ --------- ---------- -------
<S> <C> <C> <C> <C> <C>
George Soros affiliates....... 10,837,791(3) 19.2% 623,894(4) 10,213,897 17.5%
c/o Soros Fund Management
888 Seventh Avenue,
31st Floor
New York, NY 10106
Alan B. Slifka and
affiliates.................. 5,564,325(5) 10.6% 698,159(6) 4,866,165 8.8%
c/o Halcyon/Alan B. Slifka
Management Company LLC
477 Madison Avenue,
8th Floor
New York, NY 10022
Capital Research
International............... 5,347,620(7) 9.7% 1,874,151(8)(9) 3,473,469 6.0%
c/o Capital Research
International
25 Bedford Street
London WC2E England
Emerging Markets Management
LLC......................... 2,007,450(10) 3.9% 1,170,501 836,949 1.5%
1001 19th Street North,
16th Floor
Arlington, VA 22209
The Emerging Markets Investors
Fund........................ 759,596 1.5% 442,904 316,692 *
American International
Underwriters Overseas,
Ltd......................... 555,555 1.1% 155,555 400,000 *
John Bader.................... 24,006 * 11,461 12,545 *
Banca Del Ceresio............. 22,500 * 13,119 9,381 *
Bancroft Central Europe,
L.P. ....................... 510,639 * 99,248 411,391 *
Baring Chrysalis Fund......... 408,628 * 158,422 250,206 *
Bonarco Ltd................... 9,000 * 5,248 3,752 *
Caisse Centrale Des Banques
Populaires.................. 159,575 * 93,044 66,530 *
Citibank (Switzerland)
Zurich...................... 1,581,069 3.0% 382,551 1,198,518 2.2%
Creditanstalt-Bankverein...... 363,638 * 37,803 325,835 *
DLJ Capital Corporation....... 90,188 * 16,836 73,351 *
EXE Asia Co., Ltd............. 37,500 * 21,865 15,635 *
First NIS Regional Fund....... 971,163 1.9% 145,770 825,393 1.5%
Majid Harirchi................ 1,500 * 292 1,208 *
Hirokazu Hasegawa............. 37,500 * 10,933 26,567 *
</TABLE>
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<PAGE> 125
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
SHARES BENEFICIALLY OWNED AFTER THE STOCK
PRIOR TO THE STOCK OFFERINGS NUMBER OF OFFERINGS
----------------------------- SHARES --------------------
NUMBER OF BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES(1)(2) PERCENT(1) OFFERED SHARES PERCENT
------------------------ -------------- ------------ --------- ---------- -------
<S> <C> <C> <C> <C> <C>
M. Kingdon Offshore, N.V...... 450,000 * 262,385 187,615 *
Kevah Konner.................. 5,500 * 2,041 3,459 *
Morgan Stanley Asset
Management.................. 2,243,316 4.3% 1,062,035 1,181,281 2.2%
Permal Emerging Growth IV
Ltd......................... 166,667 * 97,180 69,487 *
Permal Private Equity
Holdings, L.P............... 25,884 * 15,092 10,792 *
Piedmont Harbor -- Piedmont
Associates L.P. ............ 75,000 * 21,865 53,135 *
Private Equity Holdings,
L.P......................... 29,672 * 17,301 12,371 *
Sandladder & Co. (J.P.
Morgan)..................... 127,659 * 74,435 53,224 *
Sandlines & Co. (J.P.
Morgan)..................... 143,618 * 83,740 59,877 *
Sperry Futures Fund, LTD...... 63,830 * 37,218 26,612 *
Toronto Dominion Investments,
Inc......................... 375,000 * 109,327 265,673 *
Whiting & Co. (J.P. Morgan)... 638,298 1.2% 99,123 539,175 1.0%
</TABLE>
- - - - ---------------
* Less than 1%
(1) The percentage of ownership is based upon 59,817,916 shares, comprised of
52,040,140 shares of Common Stock issued and outstanding, and warrants to
purchase 7,777,776 shares of Common Stock. Excluded from the calculation
are: 5,159,972 shares of Common Stock issued to employees under the Third
Amended and Restated 1992 Stock Option Plan of the Company (the "Stock
Option Plan"), of which 2,016,031 are vested at March 31, 1998; 759,000
options to purchase shares of Common Stock issued to employees prior to the
adoption of the Stock Option Plan and options issued pursuant to the Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") and the SFMT, Inc. Equity Compensation Plan (the "Equity
Compensation Plan"); and an option to convert a debt put right to 713,311
shares of Common Stock.
(2) Includes shares of Common Stock issuable upon the exercise of stock options
and stock warrants within 60 days of March 31, 1998.
(3) Comprised of 3,074,199 shares of Common Stock held by the Soros
Foundation-Hungary; 1,125,000 shares of Common Stock held by the Soros
Charitable Foundation; 319,149 shares of Common Stock held by Soros
Humanitarian Foundation; 1,125,000 shares and warrants to purchase
3,333,333 shares of Common Stock held by Soros Foundation (The Open Society
Institute); 500,000 and 250,001 shares of Common Stock held by Winston
Partners II LDC and Winston Partners II LLC, respectively; warrants to
purchase 370,371, 185,184 and 555,555 shares of Common Stock held by
Winston Partners II LDC, Winston Partners II LLC and Chatterjee Fund
Management, respectively, all of which are affiliates of George Soros.
Information in the above entry excludes 9,000 and 13,500 shares of, and
options for the purchase of, Common Stock held by Stewart J. Paperin and W.
James Peet, respectively, over which the George Soros affiliates disclaim
ownership. The Company has agreed to register all of the shares presented
in the above table (other than shares sold in the Stock Offerings) pursuant
to a shelf registration statement in consideration of the Soros affiliates'
undertaking not to sell such shares thereunder for specified periods of
time after the consummation of the Stock Offerings. See "Shares Eligible
for Future Sale."
(4) The entry in the table reflects the sale by Soros Foundation (The Open
Society Institute) of 84,671 shares, Soros Charitable Foundation of 254,011
shares, Soros Humanitarian Foundation of 186,089
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<PAGE> 126
shares, Winston Partners II LDC of 65,421 shares and Winston Partners II
LLC of 33,702 shares. See "Certain Related Party Transactions" and "Shares
Eligible for Future Sale."
(5) Includes 2,514,284 shares of Common Stock owned by Mr. Slifka, 49,500
shares of Common Stock held in trust for a minor child and options to
purchase 225,000 shares of Common Stock; 2,563,041 shares of Common Stock
owned by various Halcyon Partnerships which are managed by Halcyon/ Alan B.
Slifka Management Company LLC, of which Mr. Slifka is the Managing
Principal and over which Mr. Slifka disclaims beneficial ownership; 67,500
shares of Common Stock held by GTS 1995 Partners, LP; and 145,000 shares of
Common Stock issuable upon the conversion of Convertible Bonds held by
various Halcyon Partnerships which are managed by Halcyon/Alan B. Slifka
Management Company LLC, over which Mr. Slifka disclaims beneficial
ownership. Furthermore, the Company has agreed to register all of the
shares presented in the above table (other than shares sold in the Stock
Offerings) pursuant to a shelf registration statement in consideration of
the undertaking by Mr. Slifka and certain funds and partnerships affiliated
with him not to sell such shares thereunder for specified periods of time
after the consummation of the Stock Offerings. Certain limited partners of
partnerships affiliated with Alan B. Slifka and currently in dissolution
may, upon advance notice to the Company, withdraw some or all of their
shares of Common Stock from registration under the shelf registration
statement and from the Restrictions. The number of shares of Common Stock
subject to this withdrawal may not exceed the total of 726,953 shares of
Common Stock minus the number of shares sold by such members in the Stock
Offerings. See "Shares Eligible for Future Sale."
(6) The entry in the table reflects the sale by Halcyon Arbitrage, L.P. of
220,510 shares, Halcyon Distressed Securities, L.P. of 185,851 shares,
Halcyon SFMT 1994, L.P. of 74,927 shares, Halcyon Special Situations, L.P.
of 104,986 shares and Halcyon/Slifka Balanced Multi-Manager Fund, L.P. of
111,885 shares. See "Certain Related Party Transactions" and "Shares
Eligible for Future Sale."
(7) Includes 2,014,287 shares of Common Stock and warrants to purchase
3,333,333 shares of Common Stock held by funds managed by affiliates of
Capital Research International.
(8) The entry in the table reflects the sale by New Europe East Investment Fund
of 391,438 shares, Emerging Markets Growth Fund of 185,339 shares and
Capital International Emerging Markets Fund of 1,297,374 shares.
(9) The sale of these shares is subject to the conditions that (a) other
stockholders with greater than 1% beneficial ownership of shares also sign
lock-up agreements and (b) the Stock Offerings be consummated by August 31,
1998.
(10) Emerging Markets Management LLC ("EMM") does not beneficially own shares of
Common Stock. The entry in the table reflects the sale by certain advisory
clients of EMM of shares of Common Stock over which EMM has investment
discretion.
121
<PAGE> 127
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CONVERTIBLE BONDS DUE 2010
Concurrently with the offering hereby, the Company will issue $400.0
million of convertible senior subordinated notes ("New Convertible Bonds"). The
New Convertible Bonds will have a 12-year maturity and will be unsecured senior
subordinated obligations of the Company. In the event of a change of control of
the Company, holders of the New Convertible Bonds will have the right to require
GTS to purchase such holder's New Convertible Bonds at a price equal to 100% of
the principal amount plus accrued interest. The New Convertible Bonds will bear
interest payable semiannually at a rate of % per annum.
Each New Convertible Bond will be convertible into such number of shares of
Common Stock as is equal to the principal amount of such New Convertible Bond
divided by $ .
The Company, at its option, may elect to redeem all or a portion of the New
Convertible Bonds commencing on , 2001, at redemption prices beginning at
% of principal amount for the twelve-month period commencing , 2001
declining to par at and thereafter.
The consummation of the Stock Offerings is not conditioned upon the
consummation of the New Convertible Bond Offering, and there can be no assurance
that the New Convertible Bond Offering will be consummated.
SENIOR NOTES DUE 2005
Concurrently with the IPO, the Company offered $105 million of 9 7/8%
Notes. The 9 7/8% Notes were issued pursuant to an indenture (the "9 7/8% Notes
Indenture") between the Company and The Bank of New York as trustee, dated
February 10, 1998. The 9 7/8% Notes mature in 2005 and bear interest, payable
semi-annually, at 9 7/8% per annum. The 9 7/8% Notes Indenture does not provide
for a sinking fund. The 9 7/8% Notes are subject to redemption at any time on or
after February 15, 2002, at the option of the Company, in whole or in part, in
integral multiples of $1,000 principal amount at declining redemption prices set
forth in the 9 7/8% Notes Indenture. Notwithstanding the foregoing, during the
first three years after the date of the 9 7/8% Notes Indenture, the Company will
be permitted to redeem up to 33 1/3% of the aggregate principal amount of the
9 7/8% Notes with the net proceeds of any Public Equity Offerings (as defined in
the 9 7/8% Notes Indenture) or Strategic Equity Investments (as defined in the
9 7/8% Notes Indenture) at 109.875% of the principal amount thereof. The Company
placed net proceeds of $19.6 million from the offering of the 9 7/8% Notes
representing funds that, together with the proceeds from the investment thereof,
are sufficient to pay the first four scheduled interest payments (but not
additional interest) on the 9 7/8% Notes, into an escrow account (the "Escrow
Account") to be held by the Trustee for the benefit of the holders of the 9 7/8%
Notes. The Company granted to the Trustee for the benefit of the holders of the
9 7/8% Notes, a first priority and exclusive security interest in the Escrow
Account and the proceeds thereof. Funds will be disbursed from the Escrow
Account for interest payments (but not additional interest) on the 9 7/8% Notes.
Pending such disbursement, all funds contained in the Escrow Account are
invested in Cash Equivalents (as defined in the 9 7/8% Notes Indenture).
Upon a Change of Control (as defined in the 9 7/8% Notes Indenture) of the
Company, or in the event of Asset Sales (as defined in the 9 7/8% Notes
Indenture) in certain circumstances, the Company is required by the terms of the
9 7/8% Notes Indenture to make an offer to purchase the outstanding 9 7/8% Notes
at a purchase price equal to 101% and 100%, respectively, of the principal
amount thereof.
The indebtedness of the Company evidenced by the 9 7/8% Notes ranks pari
passu in right of payment with all other existing and future unsubordinated
indebtedness of the Company and senior in right of payment to all existing and
future obligations of the Company expressly subordinated in right of payment to
the 9 7/8% Notes. The 9 7/8% Notes Indenture contains a number of covenants
restricting the operations of the Company and its Restricted Group Members (as
defined in the 9 7/8% Notes Indenture), including those restricting: the
incurrence of indebtedness; the making of restricted payments (in the form of
the declaration or payment of certain dividends or distributions, the purchase,
redemption or other acquisition of any capital stock of the Company, the
voluntary prepayment of pari passu or subordinated indebtedness and the making
of certain investments, loans and advances) unless no Default or Event of
Default (each, as defined in the 9 7/8% Notes
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<PAGE> 128
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 the 9 7/8% Notes
Indenture); transactions with stockholders and affiliates; the incurrence of
liens; sale-leaseback transactions; issuances and sales of capital stock of
subsidiaries; the incurrence of guarantees by subsidiaries; dividend and other
payment restrictions affecting subsidiaries; consolidation, merger or sale of
substantially all of the Company's assets; and requiring the purchase of 9 7/8%
Notes, at the option of the holder, upon the occurrence of a Change of Control
and certain Asset Sales.
The events of default under the 9 7/8% Notes Indenture include provisions
that are typical of senior debt financings, including a cross-acceleration to a
default by the Company or any Restricted Group Member on any indebtedness that
has an aggregate principal amount in excess of certain levels. Upon the
occurrence of such an event of default, the trustee or the holders of not less
than 25% in principal amount at maturity of the outstanding 9 7/8% Notes may
immediately accelerate the maturity of all the Notes as provided in the 9 7/8%
Notes Indenture.
CONVERTIBLE BONDS
The Company sold approximately $144.8 million bonds ("Convertible Bonds")
in the Convertible Bond Offering in July 1997. The Convertible Bonds have a
three year maturity and are unsecured, senior subordinated obligations of the
Company. The Convertible Bonds bear interest payable semiannually at a stated
rate of 8.75% until maturity on June 30, 2000. The Company has granted to the
holders of the Convertible Bonds certain rights with respect to the registration
of the shares of Common Stock issuable upon conversion of the Convertible Bonds.
Each Convertible Bond is convertible into such number of shares of Common
Stock as is equal to the principal amount of such Convertible Bond divided by
$20.00.
Outstanding Convertible Bonds are, subject to certain conditions,
redeemable at the option of the Company on or after the second anniversary of a
Complying Public Equity Offering, at the principal amount thereof plus accrued
interest, if any. At maturity the Convertible Bonds will be redeemed at their
principal amount plus accrued interest. The IPO constituted a Complying Public
Equity Offering under the terms of the Convertible Bonds.
As a result, 7,239,350 shares of Common Stock became issuable upon
conversion of the Convertible Bonds. As of March 31, 1998, 317,500 shares have
been issued upon conversion of $6,350,000 aggregate principal amount of
Convertible Bonds.
HER NOTES
HER sold $265 million aggregate principal amount of 11 1/2% Senior Notes
due 2007 ("HER Notes") in August 1997. The HER Notes have a ten year maturity
and are unsecured, senior obligations of HER. HER placed approximately $56.6
million of the net proceeds in escrow for the first two years' interest payments
on the HER Notes. The HER Notes were issued pursuant to an indenture containing
certain covenants for the benefit of the holders of HER Notes, including, among
other things, covenants limiting the incurrence of indebtedness, restricted
payments, liens, payment restrictions affecting certain subsidiaries and joint
ventures, transactions with affiliates, assets sales and mergers. The HER Notes
are redeemable in whole or part, at the option of HER at any time on or after
August 15, 2002 at a price ranging from 105.75 percent to 100.0 percent of the
principal amount.
A portion of the HER Notes are also redeemable at any time or from time to
time prior to August 15, 2000 at a redemption price equal to 111.5% of the
principal amount of the HER Notes so redeemed, plus accrued and unpaid interest
thereon, if any, to the date of redemption with the net cash proceeds of one or
more public equity offerings or strategic equity investments resulting in
aggregate gross cash proceeds to HER of at least $75 million. In the event of a
change of control of HER, holders of the HER Notes have the right to require HER
to purchase such holder's HER Notes at a price equal to 101% of the aggregate
principal amount.
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<PAGE> 129
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 135,000,000 shares of
Common Stock, par value $0.10 per share, of which 52,040,140 shares were issued
and outstanding as of March 31, 1998, and 10,000,000 shares of preferred stock,
par value $0.0001 per share (the "Preferred Stock"), none of which is
outstanding. The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares issued by the Company does not
purport to be complete and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Certificate of Incorporation and
By-laws, and to the applicable provisions of the General Corporation Law of the
State of Delaware (the "DGCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for one share held of
record on all matters upon which shareholders have the right to vote. There are
no cumulative voting rights. All issued and outstanding shares of Common Stock
are, and the Offered Shares, when issued and paid for, will be, validly issued,
fully paid and non-assessable. Holders of Common Stock are entitled to such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available for that purpose. See "Dividend Policy." Upon
dissolution, holders of Common Stock are entitled to share pro rata in the
assets of the Company remaining after payment in full of all of its liabilities
and obligations, including payment of the liquidation preference, if any, of any
Preferred Stock then outstanding.
PREFERRED STOCK
The Board of Directors may authorize the issuance of one or more series of
Preferred Stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine, without further action by the stockholders of the
Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
Preferred Stock could result in a series of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, enjoy all the rights
appurtenant to the Common Stock. As of the date of the Offerings, the Company
has authorized 200,000 shares of Series A Junior Participating Preferred Stock,
par value $.0001 per share (the "Series A Preferred Stock"). No other series of
Preferred Stock has been authorized. There are no issued and outstanding shares
of Series A Preferred Stock and no such shares are being offered hereby. A Right
(as defined below) to purchase shares of Series A Preferred Stock, however, is
attached to each share of Common Stock pursuant to the Rights Agreement
discussed below. The Company has authorized 200,000 shares of Series A Preferred
Stock initially for issuance upon exercise of such Rights.
The Units (as defined herein) of Series A Preferred Stock that may be
acquired upon exercise of the Rights will be nonredeemable and subordinate to
any other shares of preferred stock that may be issued by the Company. Each Unit
of Series A Preferred Stock will have a minimum preferential quarterly dividend
of $.01 per Unit or any higher per share dividend declared on the Common Stock.
In the event of liquidation, the holder of a Unit of Series A Preferred Stock
will receive a preferred liquidation payment equal to the greater of $.01 per
Unit and the per share amount paid in respect of a share of Common Stock.
Each Unit of Series A Preferred Stock will have one vote, voting together
with the Common Stock. The holders of Units of Series A Preferred Stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Series A Preferred Stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each Unit of Series A Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
Common Stock. The rights of holders of the Series A Preferred Stock to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions. Because of
the nature of the Series A Preferred Stock's dividend, liquidation and voting
rights, the economic value of one Unit of Series A Preferred Stock that may be
acquired upon the exercise of each Right is expected to approximate the economic
value of one share of Common Stock.
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<PAGE> 130
PRIOR PURCHASE AGREEMENTS
The Company and certain investors ("Prior Shareholders") have previously
entered into stock purchase agreements on (i) April 23, 1993 (the "1993 Stock
Purchase Agreement"), (ii) April 22, 1994 and June 17, 1994 (collectively, the
"1994 Stock Purchase Agreements"), (iii) a series of dates in 1995 (the "1995
Stock Purchase Agreements"), (iv) a series of dates in 1996 (the "1996 Stock
Purchase Agreements"), (v) a series of dates in 1997 (the "1997 Stock Purchase
Agreements" and, together with the 1993 Stock Purchase Agreement, the 1994 Stock
Purchase Agreements, the 1995 Stock Purchase Agreements and the 1996 Stock
Purchase Agreements, the "Prior Purchase Agreements"). The Prior Purchase
Agreements contain, among other things, certain registration and other rights
granted by the Company with respect to such Common Stock described below.
Registration Rights. Pursuant to the terms of the Prior Purchase
Agreements, Prior Shareholders holding an aggregate of 29,623,784 shares of
Common Stock are entitled to certain demand registration rights with respect to
the Common Stock held by them ("Demand Registration Rights") following the
consummation of the IPO. In addition to the Demand Registration Rights, Prior
Shareholders are, subject to certain limitations, entitled to register shares of
Common Stock in connection with a registration statement prepared by the Company
to register its equity securities. Holders who purchased pursuant to the 1993
Stock Purchase Agreement may also register their shares of Common Stock in
connection with a registered sale of Common Stock by a Major Shareholder (as
that term is defined in the 1993 Stock Purchase Agreement). All of the
registration rights of the Prior Shareholders are subject to certain conditions
and limitations described in the Prior Purchase Agreements.
Rights of First Refusal and Tag-Along Rights. Under the Prior Purchase
Agreements, Prior Shareholders have certain rights of first refusal to purchase
pro rata any issue of New Securities (as that term is defined in the Prior
Purchase Agreements) which the Company thereafter may from time to time propose
to issue and sell, other than in connection with certain types of transactions
and to certain types of excluded purchasers. Termination of such rights will
occur upon the earlier of the closing of an initial public offering pursuant to
an effective registration statement under the Act or, as to any Prior
Shareholder, when such Prior Shareholder no longer owns all the shares it
originally purchased.
The Prior Purchase Agreements further provide that, in the case of a sale
by the Major Shareholders as a group of all their Major Shareholders' Shares (as
those terms are defined in the Prior Purchase Agreements), holders under the
Prior Purchase Agreements may elect to participate in that sale as well.
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Section 145 further provides that a corporation similarly
may indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
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the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation provides that the Company's
Directors shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director provided, however, that such
exculpation from liabilities is not permitted with respect to liability arising
from items described in clauses (i) through (iv) in the preceding paragraph. The
Certificate and the Company's By-Laws further provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by the
DGCL.
The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Certain provisions of the Certificate
of Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest, although certain of such provisions in the By-laws are subject to
final approval by the Company's Board of Directors. Such provisions may also
adversely affect prevailing market prices for the Common Stock. See "Risk
Factors -- Anti-takeover Provisions."
Classified Board of Directors and Related Provisions. The Certificate of
Incorporation provides that the Board of Directors of the Company be divided
into three classes of directors serving staggered three-year terms. The classes
of directors (designated Class I, Class II and Class III) shall be, as nearly as
possible, equal in number. Accordingly, one-third of the Company's Board of
Directors will be elected each year. The terms of the Initial Class I directors
terminated at the May 20, 1998 annual meeting of stockholders and such directors
were re-elected to a three-year term terminating on the date of the 2001 annual
meeting of stockholders; the term of the initial Class II directors shall
terminate on the date of the 1999 annual meeting of stockholders; and the term
of the initial Class III directors shall terminate on the date of the 2000
annual meeting of stockholders. At each annual meeting of stockholders beginning
in 1998, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. The classified board provision
may prevent a party who acquires control of a majority of the outstanding voting
stock of the Company from obtaining control of the Board of Directors until the
second annual shareholders meeting following the date such party obtains the
controlling interest.
Subject to the rights of the holders of any series of Preferred Stock or
any other class of capital stock of the Company (other than the Common Stock)
then outstanding, directors may only be removed for cause by a majority vote of
the holders of capital stock of the Company issued and outstanding and entitled
to vote generally in the election of directors, voting together as a single
class.
No Shareholder Action by Written Consent; Special Meetings. The Certificate
of Incorporation prohibits shareholders from taking action by written consent in
lieu of an annual or special meeting, and thus shareholders may take action at
an annual or special meeting called in accordance with the By-laws. The
Certificate of Incorporation and By-laws provide that special meetings of
shareholders may only be called only by the Chairman of the Board of Directors,
the Chief Executive Officer or a majority of the Board of Directors. Special
meetings may not be called by the shareholders, except as permitted by the
Shareholder Rights By-law described below.
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Amendments to the Certificate of Incorporation. The provisions of the
Certificate of Incorporation described above may not be amended, altered,
changed or repealed without the affirmative vote of the holders of at least 75%
of the shares of capital stock of the Company issued and outstanding and
entitled to vote.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder,
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
In addition, the Company's Certificate of Incorporation grants the Board of
Directors of the Company the authority to issue up to 10,000,000 shares of
preferred stock in one or more series and to determine the rights, voting
powers, dividend rate, conversion rights, redemption price, liquidation
preference and other terms of such preferred stock without any further vote or
action by the stockholders. The foregoing provisions of Section 203 of the DGCL
and the Company's Certificate of Incorporation, and any issuance of preferred
stock with voting or conversion rights, may adversely affect the voting power of
the holders of Common Stock and may have the effect of delaying or preventing a
change of control of the Company or adversely affect the market price of the
Company's Common Stock.
SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
Shareholder Rights Plan. The Company has entered into a Rights Agreement
(the "Rights Agreement"). In connection with the Rights Agreement, the Board of
Directors of the Company declared a distribution of one right (a "Right") for
each outstanding share of Common Stock, each share of Common Stock offered
hereby and each share of Common Stock issued (including shares distributed from
treasury) by the Company thereafter and prior to the Distribution Date (as
defined below). Each Right will entitle the registered holder, subject to the
terms of the Rights Agreement, to purchase from the Company one one-thousandth
of a share (a "Unit") of Series A Preferred Stock at a purchase price of $75 per
Unit, subject to adjustment.
Initially, the Rights will attach to all certificates representing shares
of outstanding Common Stock, and no separate Rights Certificates will be
distributed. The Rights will separate from the Common Stock and the
"Distribution Date" will occur upon the earlier of (i) 10 days following a
public announcement (the date of such announcement being the "Stock Acquisition
Date") that a person or group of affiliated or associated persons (other than
the Company, any subsidiary of the Company or any employee benefit plan of the
Company or such subsidiary) (an "Acquiring Person") has acquired, obtained the
right to acquire, or otherwise obtained beneficial ownership of 15% or more of
the then outstanding shares of Common Stock and (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person becomes an Acquiring Person) following the commencement
of a tender offer or exchange offer that would result in a person or group
beneficially owning 15% or more of the then outstanding shares of Common Stock.
George Soros and his affiliates and Alan B. Slifka and his affiliates are
excluded from the definition of "Acquiring Person" under the Rights Agreement
unless such persons increase the aggregate percentage of their ownership
interest in the Company to 20%.
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Until the Distribution Date, (i) the Rights will be evidenced by Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after date of
consummation of the Offerings (also including shares distributed from treasury)
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates representing outstanding
Common Stock will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates.
The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights Agreement
unless earlier redeemed by the Company as described below.
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of Common Stock shall remain outstanding,
(ii) a Person becomes an Acquiring Persons, (iii) an Acquiring Person engages in
one or more "self-dealing" transactions as set forth in the Rights Agreement or
(iv) during such time as there is an Acquiring Person, an event occurs which
results in such Acquiring Person's ownership interest being increased by more
than 1% (e.g., by means of a recapitalization), then, in each such case, each
holder of a Right (other than such Acquiring Person) will thereafter have the
right to receive, upon exercise, Units of Series A Preferred Stock (or, in
certain circumstances, Common Stock, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the Right. The
exercise price is the Purchase Price multiplied by the number of Units of Series
A Preferred Stock issuable upon exercise of a Right prior to the events
described in this paragraph.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
and the Company is not the surviving corporation (other than a merger described
in the preceding paragraph), (ii) any Person consolidates or merges with the
Company and all or part of the Common Stock is converted or exchanged for
securities, cash or property of any other Person or (iii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(other than an Acquiring Person) shall thereafter have the right to receive,
upon exercise, common stock of the ultimate parent of the Acquiring Person
having a value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of Units of Series A Preferred
Stock issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A Preferred Stock,
(ii) if holders of the Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or convertible securities at
less than the current market price of the Series A Preferred Stock or (iii) upon
the distribution to the holder of the Series A Preferred Stock of evidences of
indebtedness, cash or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
At any time until ten business days following the Stock Acquisition Date,
either (i) 75% of the Company's Board of Directors or (ii) a majority of the
Company's Board of Directors and a majority of the Continuing Directors (as
defined below), may redeem the Rights in whole, but not in part, at a nominal
price. Immediately upon the action of a majority of the Company's Board of
Directors ordering the redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive such redemption
price. As used in the Rights Agreement, a Continuing Director means any person
(other than an Acquiring Person or an affiliate or associate of an Acquiring
Person or a representative of an Acquiring Person or of any such affiliate or
associate) who was a director prior to the date of the Rights Agreement and any
person (other than an Acquiring Person or an affiliate or associate of an
Acquiring Person or a representative of an Acquiring Person or of any such
affiliate or associate) nominated for selection or elected to the Board of
Directors pursuant to the approval of a majority of the Continuing Directors.
At its option, either (i) 75% of the Company's Board of Directors or (ii) a
majority of the Company's Board of Directors and a majority of the Continuing
Directors, may exchange each Right for (i) one Unit of Series A Preferred Stock
or (ii) such number of Units of Series A Preferred Stock as will equal the
spread between the market price of each Unit to be issued and the purchase price
of such Unit set forth in the Rights Agreement.
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Any of the provisions of the Rights Agreement may be amended without the
approval of either (i) 75% of the Company's Board of Directors or (ii) a
majority of the Company's Board of Directors and a majority of Continuing
Directors in order to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the Rights Agreement; provided, however, that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable.
Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all the Company's outstanding shares of Common Stock for
cash or Marketable Securities (as defined below) at a price that is at least 40
percent greater than the average closing price of such shares on the principal
exchange on which such shares are listed during the 30 days prior to the date on
which such offer is first published or sent to security holders (the "Offer
Date") and the Board of Directors opposes such offer, the holders of more than
50% of the outstanding shares of Common Stock may, at any time subsequent to the
date that is nine calendar months after the Offer Date, call a special meeting
of the stockholders, notwithstanding the provisions described in "-- Certain
Charter and By-Law Provisions -- No Shareholder Action by Written Consent;
Special Meetings," at which meeting stockholders may be asked to vote upon a
proposal to request that the Board of Directors amend the Rights Agreement to
exempt such offer from the terms of the Rights Agreement; provided, however, if
prior to the expiration of such nine-month period, the Board of Directors
determines that it is in the best interests of the shareholders to undertake
efforts to sell the Company, such period shall be extended as long as the Board
of Directors continues its efforts to solicit, evaluate and negotiate
alternative bids to acquire the Company. If the proposal to amend the Rights
Agreement is approved by a vote of 70% of the votes cast for or against such
proposal at such meeting of stockholders at which a quorum is present, the Board
of Directors shall amend the Rights Agreement to exempt such offer from its
terms no later than 60 days after the date of such stockholders' meeting.
"Marketable Securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.
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SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1998, after giving effect to the Stock Offerings, there
would have been 54,654,640 shares of Common Stock outstanding, (i) assuming no
exercise of the Underwriters' over-allotment options and (ii) excluding (w)
10,488,807 shares for which outstanding warrants and vested options are
exercisable, (x) 713,311 shares reserved for issuance upon exercise of a put
right (y) the 6,921,850 shares into which the Convertible Bonds are convertible
and (z) the shares into which the New Convertible Bonds are convertible.
Of the 54,654,640 shares, (i) the 12,765,000 shares sold in the IPO and the
10,458,000 shares registered in the Stock Offerings will be freely tradable
without restriction under the Securities Act (except that any shares held by
"affiliates" of the Company may generally be resold only in compliance with
applicable provisions of Rule 144, as described below) and (ii) 16,974,029
additional shares may be resold under Rule 144 without restriction under the
Securities Act and any additional 18,136,552 shares may be resold under Rule 144
subject to the volume and manner limitations therein (in each case, subject to
the lock-up agreements described below). In addition, the shares into
which the New Convertible Bonds are convertible will be freely tradable without
restriction under the Securities Act.
In addition, the Company has caused to become effective, (i) a registration
statement on Form S-1 covering the resale of the Convertible Bonds and the
shares of Common Stock into which the Convertible Bonds are convertible and (ii)
two registration statements on Form S-8 covering the resale of shares of Common
Stock issued to employees, officers and directors of the Company pursuant to
employee benefit plans. Holders of approximately 29,623,784 shares of Common
Stock and warrants to purchase 7,777,776 shares of Common Stock, and an
affiliate of the Company with an option with respect to 438,311 shares of Common
Stock, have certain demand and piggy-back registration rights for shares that
are not being sold in the Stock Offerings.
The Company has agreed to register within 45 days after consummation of the
Offerings pursuant to a shelf registration statement all of the Affiliate Shares
owned by Mr. Slifka and his affiliates and the affiliates of Mr. Soros that are
not sold in the Stock Offerings (the "Affiliate Shares") in consideration of
such shareholders' undertaking to be bound by the Restrictions on their ability
to resell such Affiliate Shares under such shelf registration statement for
specified periods after the consummation of the Offerings. It is the Company's
belief, after consultation with its financial advisors, that this agreement
relating to the Affiliate Shares will contribute toward assuring the market of
an orderly manner for such Affiliate Shares to be sold over a period of time.
Under the Restrictions, holders of Affiliate Shares will be prevented, subject
to certain exceptions, from selling any such shares during the first six months
after the closing date of the Offerings and will be able to sell (i) 50% of such
shares after the six month anniversary of the closing date of the Offerings,
(ii) 75% of such shares after the nine month anniversary of the closing date of
the Offerings and (iii) 100% of such shares after the twelve month anniversary
of the closing date of the Offerings. In connection with this agreement, the
Company also has agreed to permit certain of the Soros affiliates to resell,
immediately after the closing date of the Stock Offerings, up to 100,000 of any
shares that they are unable to resell in the Stock Offerings as a result of any
cut-back that may be imposed by the underwriters (subject to a waiver by the
underwriters in the IPO of the lockup agreement entered into by such affiliates
to the extent of such 100,000 shares). Certain limited partners of partnerships
affiliated with Alan B. Slifka and currently in dissolution may, upon advance
notice to the Company, withdraw some or all of their shares of Common Stock from
registration under the shelf registration statement and from the Restrictions.
The number of shares of Common Stock subject to this withdrawal may not exceed
the total of 726,953 shares of Common Stock minus the number of shares sold by
such limited partners in the Stock Offerings.
The Company and its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to (i) grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other agreement or transaction that transfers, in whole or in
part, the economic consequences of ownership of the Common Stock without the
prior written consent of Merrill Lynch, on behalf of the Underwriters for a
period of 90 days after the date of this Prospectus. See "Underwriting."
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In general, under Rule 144 as currently in effect, a person (or persons
whose shares of the Company are required to be aggregated) who has been deemed
to have owned shares of an issuer for at least one year, including an
"affiliate," is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding number of
shares of such class or the average weekly trading volume in composite trading
in all national securities exchanges during the four calendar weeks preceding
the filing of the required notice of such sale. A person (or persons whose
shares of the Company are required to be aggregated) who is not deemed an
affiliate of an issuer at the time of the sale and for at least three months
prior to the sale and who has owned shares for at least two years is entitled to
sell such shares under Rule 144 without regard to the volume limitations
described above. Affiliates continue to be subject to such limitations. As
defined in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such issuer.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. STOCKHOLDERS
The following is a summary of the principal United States federal income
and estate tax considerations with respect to the ownership and disposition of
shares of Common Stock by "Non-U.S. Holders." This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations thereunder and administrative and judicial interpretations
thereof (all as currently in effect and all of which are subject to change,
possibly with retroactive effect). This summary does not address all United
States federal income and estate tax consequences that may be relevant to a
non-U.S. Holder in light of its particular circumstances or to certain Non-U.S.
Holders that may be subject to special treatment under United States federal
income tax laws, such as banks, insurance companies, tax-exempt entities and
certain United States expatriates. Furthermore, the following discussion does
not discuss any aspects of foreign, state or local taxation. As used herein, the
term "Non-U.S. Holder" means a holder of Common Stock that for U.S. federal
income tax purposes is not (i) a citizen or individual resident of the United
States; (ii) a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof; (iii) an estate
the income of which is subject to United States federal income tax regardless of
its source; or (iv) a trust if both: (A) a court within the United States is
able to exercise primary supervision over the administration of the trust and
(B) one or more United States persons have the authority to control all
substantial decisions of the trust. EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF OWNING AND DISPOSING OF SHARES OF COMMON STOCK, AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER
TAXING JURISDICTION.
DIVIDENDS
Dividends that are paid by a U.S. corporation to a Non-U.S. Holder and that
are not effectively connected with a trade or business carried on by such
Non-U.S. Holder in the United States (or, if one or more of certain tax treaties
apply, are attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder) generally are subject to a 30% U.S.
withholding tax. An exemption from such withholding exists with respect to
dividends paid to Non-U.S. Holders by a U.S. corporation (an "80/20 company") if
at least 80% of the gross income derived by such corporation (either directly or
through certain of its subsidiaries) during the applicable testing period is
"active foreign business income," as defined in section 861 of the Code. Under
the provisions of the Code applicable to 80/20 companies, the proportion of an
80/20 company's dividends equal to such company's total gross income from
foreign sources over its total gross income is exempt from U.S. withholding tax.
At present, the Company believes that it qualifies as an 80/20 company. However,
the 80% active foreign business income test is applied on a periodic basis, and
operations and business plans of the Company may change in subsequent taxable
years. Therefore, no assurances can be made regarding the Company's future
status as an 80/20 company. If, for any period or periods, the Company fails to
satisfy the requirements applicable to an 80/20 company, then, for payments made
prior to January 1, 2000, the withholding agent generally would be required to
withhold tax from all distributions paid on the Common Stock regardless of the
Company's earnings and profits. For payments made after January 1, 2000, a
withholding agent may elect not to withhold on a distribution to the extent it
is not paid out of current or accumulated earnings and profits, based on the
Company's reasonable estimate of the extent to which the distribution will be
out of such earnings and profits. Holders could, however, apply for refunds if
such Common Stock's share of the Company's earnings and profits is less than the
amount of the distributions. Additionally, the rate of withholding may be
reduced to the extent provided by a tax treaty between the United States and the
country of which the Non-U.S. Holder is a resident for tax purposes.
In order to claim the benefit of an applicable tax treaty rate, a
Non-United States Holder may have to file with the Company or its dividend
paying agent an exemption or reduced treaty rate certificate or letter in
accordance with the terms of such treaty. Under United States Treasury
regulations currently in effect, for purposes of determining whether tax is to
be withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume that dividends paid to the address
in a foreign country
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are paid to a resident of such country absent knowledge that such presumption is
not warranted (the "address rule"). However, on October 6, 1997, the U.S.
Treasury Department issued final regulations on withholding of income tax
payments to foreign persons, effective January 1, 2000, which will abolish the
address rule. Effective January 1, 2000, a Non-United States Holder seeking a
reduced rate of withholding under an income tax treaty would generally be
required to provide to the Company a valid Internal Revenue Service Form W-8
certifying that such Non-United States Holder is entitled to benefits under an
income tax treaty. The final regulations also provide special rules for
determining whether, for purposes of assessing the applicability of an income
tax treaty, dividends paid to a Non-United States Holder that is an entity
should be treated as being paid to the entity itself or to the persons holding
an interest in that entity. A Non-United States Holder who is eligible for a
reduced withholding rate may obtain a refund of any excess amounts withheld by
filing an appropriate claim for a refund with the Internal Revenue Service.
In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business with the United States or, if an
income tax treaty applies, attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% (or such lower rate as may be specified by an applicable
treaty) of the Non-United States corporation's "effectively connected earnings
and profits," subject to certain adjustments.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. Federal
income tax with respect to gain realized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of such Non-United States Holder in the U.S., (ii) in the case of
certain Non-United States Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
U.S. for 183 or more days in the taxable year of the disposition and either (a)
such individuals have a "tax home" (as defined for United States Federal income
tax purposes) in the U.S., or (b) the gain is attributable to an office or other
fixed place of business maintained by such individuals in the U.S. (iii) the
Non-United States Holder is subject to tax, pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates whose loss of U.S. citizenship
has as one of its principal purposes the avoidance of U.S. taxes, or (iv) under
certain circumstances if the Company is or has been during certain time periods
a "United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code and, assuming that the Common Stock is regularly
traded on an established securities market for tax purposes, the Non-United
States Holder held, directly or indirectly, at any time within the five-year
period preceding such disposition more than 5% of the outstanding Common Stock.
The Company is not, and does not anticipate becoming, a United States real
property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under the United States Treasury regulations, the Company must report
annually to the Internal Revenue Service and to each Non-United States Holder
the amount of dividends paid to such holder and any tax withheld with respect to
such dividends. These information reporting requirements apply regardless of
whether withholding is required because the dividends were effectively connected
with a trade or business in the United States of the Non-United States Holder or
withholding was reduced or eliminated by an applicable income tax treaty. Copies
of the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the Non-United
States Holder is a resident under the provisions of an applicable income tax
treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States
133
<PAGE> 139
Holder at an address outside of the United States. However, under final United
States Treasury regulations, effective as of January 1, 2000, a Non-United
States Holder will generally be subject to United States withholding tax at a
31% rate, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are satisfied, directly or through a foreign
intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
The payment of the proceeds of the disposition of Common Stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a Non-United Sates broker. However, information reporting requirements
(but probably, prior to January 1, 2000, not backup withholding) will apply to a
payment of disposition proceeds outside the U.S. if (A) the payment is made
through an office outside the U.S. of a broker that is either (i) a U.S. person,
(ii) a foreign person which derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the U.S., (iii) a "controlled
foreign corporation" for U.S. Federal income tax purposes, or (iv) effective
January 1, 2000, but probably not prior to such date, a foreign broker that is
(1) a foreign partnership, one or more of whose partners are U.S. persons who,
in the aggregate hold more than 50% of the income or capital interest in the
partnership at any time during its tax year, or (2) a foreign partnership
engaged at any time during its tax year in the conduct of a trade or business in
the United States, and (B) the broker fails to maintain documentary evidence
that the holder is a Non-United States Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
FEDERAL ESTATE TAX
An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
JURISDICTION.
134
<PAGE> 140
UNDERWRITING
Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company, the Selling Stockholders and
each of the underwriters named below (the "U.S. Underwriters") and concurrently
with the sale of 4,183,200 shares of Common Stock to the International Managers
(as defined below), the Company and the Selling Stockholders severally have
agreed to sell to each of the U.S. Underwriters, and each of the U.S.
Underwriters for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc.,
Prudential Securities Incorporated and Arnhold and S. Bleichroeder, Inc. are
acting as representatives (the "U.S. Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders, the number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith.......................
Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc. ...................................
BT Alex. Brown Incorporated.................................
Lehman Brothers Inc. .......................................
Prudential Securities Incorporated .........................
Arnhold and S. Bleichroeder, Inc. ..........................
---------
Total......................................... 6,274,800
=========
</TABLE>
The Company and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement" and,
together with the U.S. Purchase Agreement, the "Purchase Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International and Donaldson, Lufkin & Jenrette International are
acting as representatives (the "International Representatives"). Subject to the
terms and conditions set forth in the International Purchase Agreement, and
concurrently with the sale of 6,274,800 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company and the
Selling Stockholders severally have agreed to sell to the International
Managers, and the International Managers severally have agreed to purchase, an
aggregate of 4,183,200 shares of Common Stock. The public offering price per
share and the underwriting discount per share of Common Stock are identical
under the U.S. Purchase Agreement and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the public offering price
set forth on the cover page of this Prospectus, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
U.S. Underwriters and any dealer to whom they sell shares of Common Stock will
not offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Managers
135
<PAGE> 141
and any dealer to whom they sell shares of Common Stock will not offer to sell
or sell shares of Common Stock to U.S. persons or Canadian persons or to persons
they believe intend to resell to U.S. persons or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $ per share of Common Stock. The U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the Stock Offerings,
the public offering price, concession and discount may be changed.
The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 90 days
after the date of this Prospectus. In addition, except to the extent otherwise
provided in this Prospectus with respect to the Affiliate Shares, certain
stockholders have agreed not to make any demand for or exercise any rights with
respect to the registration of Common Stock and have waived all rights
(including demand and "piggyback" registration rights) to register securities
owned by them for such 90 day period and rights to purchase additional shares of
Common Stock in connection with the Offerings. See "Shares Eligible for Future
Sale."
The Selling Stockholders have granted an option to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 941,220 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The U.S. Underwriters may exercise this option only to cover
over-allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the U.S. Underwriters exercise this option, each U.S.
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Selling
Stockholders have also granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
additional 627,480 shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to U.S. Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
several U.S. Underwriters and the International Managers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
In connection with the Offerings, certain Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers on
the Nasdaq National Market may engage in "passive market making" in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 under Regulation
M. Rule 103 permits, upon the satisfaction of certain conditions, underwriters
and selling group members participating in a distribution that are also Nasdaq
National Market market makers in the security
136
<PAGE> 142
being distributed to engage in limited market making transactions during the
period when Rule 103 under Regulation M would otherwise prohibit such activity.
Rule 103 prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities displayed on the Nasdaq
National Market by a market maker that is not participating in the distribution.
Under Rule 103, each underwriter or selling group member engaged in passive
market making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
If the Underwriters create a short position in the Common Stock in
connection with the Stock Offerings, (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus), the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
Neither the Company nor any of the Underwriters makes any representation or
prediction, however, as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transaction or
that such transactions, once commenced, will not be discontinued without notice.
The Common Stock is quoted on the Nasdaq National Market and the EASDAQ
under the symbol "GTSG".
Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
LEGAL MATTERS
The validity of the Offered Securities offered hereby will be passed upon
for the Company by Shearman & Sterling, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
137
<PAGE> 143
EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of EDN Sovintel as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young (CIS) Ltd., independent auditors, as set forth in their report appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
138
<PAGE> 144
INDEX TO FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS GROUP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996,
and 1997............................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996,
and 1997............................................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995,
1996, and 1997......................................... F-6
Notes to Consolidated Financial Statements................ F-7
FIRST QUARTER FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998......................................... F-27
Consolidated Statements of Operations for the Three Months
ended March 31, 1997 and 1998.......................... F-28
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998.......................... F-29
Notes to Consolidated Financial Statements................ F-30
EDN SOVINTEL
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-33
Balance Sheets as of December 31, 1997 and 1996........... F-34
Statements of Income and Retained Earnings for the years
ended December 31, 1997, 1996, and 1995................ F-35
Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995................................... F-36
Notes to Financial Statements............................. F-37
FIRST QUARTER FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 and March 31,
1998................................................... F-45
Statements of Operations for the Three Months ended March
31, 1997 and 1998...................................... F-46
Statements of Cash Flows for the Three Months ended March
31, 1997 and 1998...................................... F-47
Notes to Financial Statements............................. F-48
</TABLE>
F-1
<PAGE> 145
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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global
TeleSystems Group, Inc. at December 31, 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.
Ernst & Young LLP
Vienna, Virginia
February 26, 1998
F-2
<PAGE> 146
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
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.
F-3
<PAGE> 147
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.
F-4
<PAGE> 148
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.
F-5
<PAGE> 149
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.
F-6
<PAGE> 150
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.
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
F-7
<PAGE> 151
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-8
<PAGE> 152
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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").
F-9
<PAGE> 153
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-10
<PAGE> 154
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's investments in and advances to ventures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- -------
(IN THOUSANDS)
<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 dealing with one of its partners, the inability of the
F-11
<PAGE> 155
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-12
<PAGE> 156
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<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").
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").
F-13
<PAGE> 157
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
---------------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue.......................................... $36,202 $107,270 $143,472
Gross margin..................................... 17,109 45,937 63,046
Net income (loss)................................ 3,240 (8,460) (5,220)
Equity in net losses............................. (1,091) (6,482) (7,573)
Current assets................................... 27,293 50,689 77,982
Total assets..................................... 48,174 146,483 194,657
Current liabilities.............................. 19,416 68,474 87,890
Total liabilities................................ 24,987 102,332 127,319
Net assets....................................... 23,187 44,151 67,338
Ownership interest in equity in net assets....... 14,912 19,513 34,425
</TABLE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
---------------------- -------------- -------------- ---------------
(IN THOUSANDS)
<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>
F-14
<PAGE> 158
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<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,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<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>
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,
F-15
<PAGE> 159
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-16
<PAGE> 160
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: SHAREHOLDERS' EQUITY
COMMON STOCK
The following table summarizes the Company's equity private placements for
the periods ending:
<TABLE>
<CAPTION>
SHARES ISSUED SHARE PRICE NET PROCEEDS
------------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
December 31, 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.
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
F-17
<PAGE> 161
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-18
<PAGE> 162
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS)
<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.
F-19
<PAGE> 163
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes at U.S. statutory
rates...................... $(12,865) 34.0% $(22,655) 34.0% $(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,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<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.
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.
F-20
<PAGE> 164
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-----------------
1996 1997
----- --------
(IN THOUSANDS)
<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>
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.
F-21
<PAGE> 165
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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").
F-22
<PAGE> 166
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
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,
------------------
1996 1997
------ --------
(IN THOUSANDS)
<S> <C> <C>
Purchase of additional interest in Western Europe region
subsidiary with conversion of debt to equity.............. $ -- $ 9,139
Line of credit issued as payment on note payable and
reclassification of restricted cash....................... -- 7,887
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.
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
F-23
<PAGE> 167
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<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 &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<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 &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<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>
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.
F-24
<PAGE> 168
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
FOR THE
CONDENSED BALANCE SHEET (UNAUDITED) REPORTED ADJUSTMENTS 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>
<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,
F-25
<PAGE> 169
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-26
<PAGE> 170
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 318,766 $ 507,895
Accounts receivable, net.................................. 17,079 23,078
Restricted cash........................................... 30,486 41,344
Prepaid expenses.......................................... 14,101 15,492
Other assets.............................................. 6,707 8,113
--------- ----------
TOTAL CURRENT ASSETS.............................. 387,139 595,922
Property and equipment, net................................. 236,897 270,641
Investments in and advances to ventures..................... 76,730 88,083
Goodwill and intangible assets, net......................... 43,284 58,055
Restricted cash............................................. 36,411 35,849
--------- ----------
TOTAL ASSETS...................................... $ 780,461 $1,048,550
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 61,984 $ 62,750
Debt maturing within one year............................. 6,390 8,882
Current portion of capital lease obligations.............. 21,490 19,250
Related party debt maturing within one year............... 5,708 10,023
Other current liabilities................................. 6,301 20,510
--------- ----------
TOTAL CURRENT LIABILITIES......................... 101,873 121,415
Long-term debt, less current portion........................ 408,330 506,336
Long-term portion of capital lease obligations.............. 117,645 136,988
Related party long-term debt, less current portion.......... 79,796 3,530
Taxes and other non-current liabilities..................... 14,595 12,970
--------- ----------
TOTAL LIABILITIES................................. 722,239 781,239
COMMITMENTS AND CONTINGENCIES
Minority interest........................................... 18,766 12,470
Common stock, subject to repurchase (797,100 outstanding at
December 31, 1997)........................................ 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; 37,606,814 and 52,040,140 shares issued and
outstanding, net of 195,528 and 195,528 shares of
treasury stock at December 31, 1997 and March 31, 1998,
respectively).......................................... 3,761 5,204
Additional paid-in capital................................ 274,359 539,911
Accumulated other comprehensive loss...................... (8,269) (10,213)
Accumulated deficit....................................... (242,884) (280,061)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 26,967 254,841
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 780,461 $1,048,550
========= ==========
</TABLE>
F-27
<PAGE> 171
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1998
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
REVENUES, NET:
Telecommunication and other services...................... $ 7,957 $ 20,792
Equipment sales........................................... 430 2,025
-------- --------
8,387 22,817
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Telecommunication and other services................... 5,550 17,467
Equipment sales........................................ 874 1,556
Selling, general and administrative....................... 11,488 19,749
Depreciation and amortization............................. 1,246 2,195
Non-income taxes.......................................... 287 742
-------- --------
19,445 41,709
Equity in losses (earnings) of ventures................... 3,420 (3,412)
-------- --------
LOSS FROM OPERATIONS........................................ (14,478) (15,480)
OTHER INCOME (EXPENSE):
Interest income........................................... 1,296 7,066
Interest expense.......................................... (3,668) (16,466)
Foreign currency losses................................... (494) (1,394)
-------- --------
(2,866) (10,794)
-------- --------
Net loss before income taxes, minority interest and
extraordinary loss........................................ (17,344) (26,274)
Income taxes................................................ 365 552
-------- --------
Net loss before minority interest and extraordinary loss.... (17,709) (26,826)
Minority interest........................................... (24) 2,353
-------- --------
Net loss before extraordinary loss.......................... (17,733) (24,473)
Extraordinary loss -- extinguishment of debt................ -- (12,704)
-------- --------
NET LOSS.................................................... $(17,733) $(37,177)
======== ========
Loss per share before extraordinary loss.................... $ (0.51) $ (0.54)
Extraordinary loss per share................................ -- (0.28)
-------- --------
Net loss per share.......................................... $ (0.51) $ (0.82)
======== ========
Weighted average common shares outstanding.................. 34,758 45,549
======== ========
</TABLE>
F-28
<PAGE> 172
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(17,733) $(37,177)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Extraordinary loss........................................ -- 12,704
Depreciation and amortization............................. 2,124 7,150
Amortization of discount on note payable.................. 1,157 477
Equity in losses (earnings) of ventures, net of dividends
received............................................... 3,420 (3,412)
Deferred interest......................................... 1,806 1,636
Minority interest......................................... 24 (6,561)
Other..................................................... 255 (237)
Changes in assets and liabilities, excluding effects of
acquisitions and ventures:
Accounts receivable.................................... (2,259) (2,162)
Prepaid expenses....................................... (803) (1,161)
Accounts payable and accrued expenses.................. (1,848) (774)
Other changes in assets and liabilities................ 500 2,130
-------- --------
NET CASH USED IN OPERATING ACTIVITIES............. (13,357) (27,387)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of
repayments............................................. (10,420) 2,370
Purchases of property and equipment....................... (1,589) (14,389)
Restricted cash........................................... 238 (10,357)
Goodwill and other intangibles............................ 208 (14,634)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (11,563) (37,010)
FINANCING ACTIVITIES
Proceeds from debt........................................ -- 105,300
Repayments of debt........................................ (175) (91,355)
Payment of debt issue costs............................... -- (3,957)
Net proceeds from issuance of common stock................ -- 235,620
Other financing activities................................ (394) 7,199
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES...................................... (569) 252,807
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,692) 719
-------- --------
Net (decrease) increase in cash and cash equivalents........ (27,181) 189,129
Cash and cash equivalents at beginning of period............ 57,874 318,766
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 30,693 $507,895
======== ========
</TABLE>
F-29
<PAGE> 173
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
The financial statements of Global TeleSystems Group, Inc. (the "Company")
included herein are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Material intercompany affiliate account
transactions have been eliminated; however, other adjustments may have been
required had an audit been performed. In the opinion of management, the
financial statements reflect all adjustments of a normal and recurring nature
necessary to present fairly the Company's financial position, results of
operations and cash flows for the interim periods. These financial statements
should be read in conjunction with the Company's 1997 audited consolidated
financial statements and the notes related thereto. The results of operations
for the three months ended March 31, 1998 may not be indicative of the operating
results for the full year.
The Company's operations are carried out through alliances with strategic
local partners in the form of venture arrangements. Wholly-owned subsidiaries
and majority-owned ventures where the Company has unilateral operating and
financial control are consolidated within the Company's financial results and
operations. 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 investments
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 the ventures, those ventures are accounted for by the
cost method. All significant intercompany accounts and transactions are
eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recorded have been recovered.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
nonowner sources. Comprehensive loss was $19.4 million and $39.1 million for the
three months ended March 31, 1997 and 1998, respectively, and was comprised of
net loss of $17.7 million and $37.2 million and foreign currency translation
adjustments of $1.7 million and $1.9 million for the three months ended March
31, 1997 and 1998, respectively.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
periods presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options, warrants, and convertible debt
instruments have been excluded from the net loss per share calculation because
their effect would be anti-dilutive.
F-30
<PAGE> 174
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain reclassifications have been made to the March 1997 condensed,
consolidated financial statements in order to conform to the 1998 presentation.
3. SHAREHOLDERS' EQUITY
In February 1998, the Company completed an initial public offering of 12.8
million shares of common stock at $20.00 per common share (the "Stock
Offering"). 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. Net proceeds from the Stock
Offering were approximately $235.6 million.
As a result of the Stock Offering, the Company no longer has a significant
obligation to repurchase or assist the seller in locating a purchaser for the
797,100 shares of common stock subject to repurchase that were outstanding at
December 31, 1997. Therefore, all amounts outstanding have been reclassified as
additional paid-in capital as of March 31, 1998.
4. DEBT OBLIGATIONS
In February 1998, the Company issued aggregate principal amount $105.0
million of 9.875% senior notes due in 2005 (the "Notes Offering" and together
with the Stock Offering, the "Offerings"). Net proceeds from the Notes Offering
were approximately $100.5 million. Approximately $19.6 million of the net
proceeds was placed in escrow for the first four semiannual interest payments,
commencing August 15, 1998.
As a result of the completion of the Stock Offering, the interest rate on
the $144.8 million aggregate principal amount of senior subordinated convertible
bonds issued in July 1997 (the "Bonds") will remain at 8.75% until maturity and
the approximately $5.1 million of the 6.25% additional interest that was
previously accrued through the date of the Stock Offering has been reflected as
an increase to additional paid-in capital. Upon completion of the Stock
Offering, the Bonds became convertible into 7.2 million common shares at a
conversion price of $20.00 per share. In March 1998, $6.4 million of the
outstanding Bonds was converted into 0.3 million shares of the Company's common
stock.
In 1996, the Company entered into long-term obligations ("Debt Obligations"
) totaling $70.0 million with lenders that are affiliated with and are
considered related parties to the Company as a result of their ownership of the
Company's common stock. In February 1998, approximately $85.2 million of the net
proceeds of the Offerings was used to repay the Debt Obligations of $70.0
million plus accrued interest that were due March 31, 2001. In addition, the
unamortized discount costs and debt issuance costs on the Debt Obligations were
written off at the time of repayment, resulting in the Company recording an
extraordinary loss of $12.7 million.
5. OTHER TRANSACTIONS
In March 1998, the Company purchased an additional 10.3% interest in Hermes
Europe Railtel B.V. ("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 89.4% of HER. The purchase price has been allocated to the
net assets based on the fair value at the date of acquisition. The excess
purchase price over the fair value of the net assets acquired was $10.2 million,
which has been recorded as goodwill and is being amortized on a straight-line
basis over five years.
Pursuant to a purchase agreement that the Company has with a venture's
partner, the Company was obligated to issue 336,630 shares of common stock to
the partner, based on the venture's 1997 earnings performance. These shares were
issued to the partner in April 1998 and the obligation of $13.5 million, based
on the share price of the common stock on the date of issuance, has been
reflected in "Other current liabilities" on the balance sheet as of March 31,
1998.
F-31
<PAGE> 175
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company acquired the remaining 33% interest in Sovam
Teleport from its minority partner and as a result in 1998 Sovam is accounted
for by the consolidation as opposed to the equity method of accounting. The
Company paid a nominal amount for the additional interest.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------
(IN THOUSANDS)
<S> <C>
Capitalization of leases.................................... $26,864
Accrual for additional consideration in relation to purchase
of a venture.............................................. 13,549
Reclassification of common stock subject to repurchase...... 12,489
Conversion of the Bonds into common stock................... 6,350
Reclassification of accrued interest on the Bonds........... 5,052
</TABLE>
No significant non-cash activities were incurred for the three months ended
March 31, 1997.
7. SUBSEQUENT EVENTS
In April 1998, $16.3 million of the Bonds were converted into 0.8 million
common shares of the Company's common stock.
Subsequent to March 31, 1998, HER entered into contractual commitments to
lease fiber pairs, including facilities and maintenance and utilize the partial
routes for laying fiber optic cable. Based on the contract provisions, these
commitments are currently estimated to aggregate approximately $22.5 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.
F-32
<PAGE> 176
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
F-33
<PAGE> 177
EDN SOVINTEL
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
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.
F-34
<PAGE> 178
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.
F-35
<PAGE> 179
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.
F-36
<PAGE> 180
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.
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
F-37
<PAGE> 181
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 redenominated 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.
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:
<TABLE>
<S> <C>
Network equipment........................................... 10 years
Other property and equipment................................ 3-5 years
</TABLE>
There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
DEFERRED EXPENSES
Deferred expenses represent the Company's interest in the historical cost
of network equipment owned by MTU Inform, a partner in a commercial venture
(Note 8). These expenses are amortized over the equipment's useful life of 10
years.
REVENUE RECOGNITION AND TAXES ON REVENUE
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.
F-38
<PAGE> 182
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-39
<PAGE> 183
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>
F-40
<PAGE> 184
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (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 (2,455)
expenses incurred in the ordinary course of
business which are not assessable or deductible
for Russian tax purposes......................... (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 (2,101)
revaluations..................................... (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>
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>
F-41
<PAGE> 185
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
<TABLE>
<CAPTION>
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>
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>
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.
F-42
<PAGE> 186
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-43
<PAGE> 187
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-44
<PAGE> 188
EDN SOVINTEL
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 5,620 $ 6,956
Accounts receivable, less allowance for doubtful accounts
of $643 and $800 at December 31, 1997 and March 31,
1998................................................... 16,223 19,766
Restricted cash........................................... 485 474
Due from affiliated companies............................. 1,586 2,267
Inventory................................................. 1,697 1,697
Deferred tax asset........................................ 186 186
Prepaid expenses and other assets......................... 5,318 7,303
------- -------
Total current assets.............................. 31,115 38,649
Property and equipment, net of accumulated depreciation of
$14,557 and $16,026 at December 31, 1997 and March 31,
1998...................................................... 38,709 40,741
Deferred expenses........................................... 945 912
======= =======
TOTAL ASSETS...................................... $70,769 $80,302
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 5,725 $ 6,543
Accrued expenses.......................................... 3,194 2,969
Due to affiliated companies............................... 10,104 12,478
Note payable to shareholder............................... 39 --
Taxes and other liabilities............................... 2,438 4,698
------- -------
TOTAL LIABILITIES................................. 21,500 26,688
Commitments and contingencies
SHAREHOLDERS' EQUITY
Contributed capital......................................... 2,000 2,000
Retained earnings........................................... 47,269 51,614
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 49,269 53,614
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $70,769 $80,302
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 189
EDN SOVINTEL
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
REVENUES, NET:.............................................. $25,162 $32,404
COST OF REVENUES:........................................... 14,763 21,957
------- -------
Gross margin................................................ 10,399 10,447
OPERATING EXPENSES:
Selling, general and administrative....................... 2,696 3,027
Depreciation and amortization............................. 160 177
Non-income taxes.......................................... 999 1,442
------- -------
Total operating expenses.......................... 3,855 4,646
Income from operations...................................... 6,544 5,801
OTHER (EXPENSE) INCOME:
Interest income........................................... 55 37
Interest expense.......................................... (159) --
Foreign currency losses................................... (38) (220)
------- -------
(142) (183)
Net income before taxes..................................... 6,402 5,618
Income taxes................................................ 1,708 1,273
------- -------
Net income.................................................. $ 4,694 $ 4,345
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 190
EDN SOVINTEL
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,694 $ 4,345
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,113 1,501
Provision for doubtful accounts........................... 152 157
Changes in assets and liabilities:
Accounts receivable.................................... (4,616) (3,700)
Inventory.............................................. 293 --
Prepaid expenses and other assets...................... (600) (1,985)
Accounts payable and accrued expenses.................. 1,686 2,853
------- -------
Net cash provided by operating activities................... 2,722 3,171
INVESTING ACTIVITIES
Purchases of property and equipment....................... (3,541) (3,500)
Restricted cash........................................... (31) 11
------- -------
Net cash used in investing activities....................... (3,572) (3,489)
FINANCING ACTIVITIES
Borrowing on (repayment of) shareholder note, net......... 204 (39)
Due to affiliated companies, net.......................... (961) 1,693
------- -------
Net cash (used in) provided by financing activities......... (757) 1,654
------- -------
Net (decrease) increase in cash and cash equivalents........ (1,607) 1,336
Cash and cash equivalents at beginning of period............ 3,606 5,620
------- -------
Cash and cash equivalents at end of period.................. $ 1,999 $ 6,956
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
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EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel (the "Company") contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's financial position as of December 31, 1997 and March 31, 1998, and the
results of operations and cash flows for the periods indicated.
The Company was established as a competitive local exchange carrier (CLEC)
in August 1990. Through the design, construction, and operation of a
telecommunications network in Moscow, the Company provides its customers,
principally major hotels, business offices and mobile communications companies,
with an alternative to the local telephone company for worldwide communications
services. 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded; however,
other adjustments may have been required had an audit been performed. It is
suggested that these financial statements be read in conjunction with the
Company's 1997 audited financial statements and the notes related thereto. The
results of operations for the three months ended March 31, 1998 may not be
indicative of the operating results for the full year.
The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's statutory 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. 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.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
nonowner sources. For the three months ended March 31, 1997 and 1998,
comprehensive income for the Company is equal to net income.
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EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. 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 and March
31, 1998.
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.
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EXHIBIT A
GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS
Accounting Rate Mechanism (ARM) -- The current system of bilateral
settlement agreements between PTOs under which tariffs for cross-border
pan-European-switched voice traffic are determined.
Add-drop multiplexer (ADM) -- A multiplexer which controls cross connect
between individual circuits by software, permitting dynamic cross connect of
individual 64 kbps circuits within an E-1 line.
AMPS -- Advanced Mobile Phone System; the cellular mobile telephone system
based on analog technology that is now used in U.S. systems. Each AMPS cell can
handle 832 simultaneous conversations.
Asynchronous Transfer Mode (ATM) -- A switching and transmission technology
that is one of general class of packet technologies that relay traffic by way of
an address contained within the first five bits of a switching and transmission
of mixed voice, data, and video at varying rates. The ATM format can be used by
many different information systems, including LANs.
Bps -- Bits per second; the basic measuring unit of speed in a digital
transmission system; the number of bits that a transmission facility can convey
between a sending location and a receiving location in one second.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The information-carrying capability of a transmission medium
is measured by its bandwidth, which is the relative range of frequencies that
can be passed without distortion by such medium. Bandwidth is measured in Hertz,
but may also be expressed as the number of bits that can be transmitted per
second.
Capacity -- Refers to transmission.
Carrier -- A provider of communications transmission services by fiber,
wire, or radio.
CCIT -- International Telegraph and Telephone Consultative Committee.
Closed User Group -- A group of customers with some affiliation with one
another and which are treated for regulatory purposes as not being the public.
Competitive Local Telecommunications Provider -- A company that provides
its customers with an alternative to the local telephone company for local
transport of private line, special access and transport of switched access
telecommunications services. Competitive Local Telecommunications Providers are
also referred to in the industry as alternative local telecommunications service
providers (ALTS), Competitive Access Providers (CAPs) and Competitive Local
Exchange Carriers (CLECs).
Dark Fiber -- Fiber that lacks the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Dedicated -- Refers to telecommunications lines dedicated to or reserved
for use by particular customers along predetermined routes (in contrast to
telecommunications lines within the local telephone company's public switched
network).
Digital -- Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission/switching technologies
employ a sequence of discrete, distinct pulses to represent information, as
opposed to the continuously variable analog signal.
E1 -- Data transmission rate of approximately 2 Mbps.
E3 -- Data transmission rate of approximately 34 Mbps.
Electrosviaz -- regional telephone company.
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Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or digital
interexchange private line facilities. Enhanced network services also include
applications on such networks, including Internet access and other Internet
services.
ERMES -- A standard for a pan-European radio message system sponsored by
the EC.
Eutelsat -- European Telecommunications Satellite Organization; an
international satellite organization in which members of the European Union hold
an 88% combined investment.
Frame Relay -- A wide area transport technology that organizes data into
units called frames instead of providing fixed bandwidth as with private lines.
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well-suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
Gbps -- Gigabits per second, which is a measurement of speed for digital
signal transmission expressed in billions of bits per second.
Gateway -- A network element interconnecting two otherwise incompatible
networks, network nodes, subnetworks or devices; performs a protocol conversion
operation across a wide spectrum of communications functions.
GSM -- Global System for Mobile Communications, formerly known as Groupe
Speciale Mobile. GSM began as a pan-European standard for digital cellular
systems. The name was changed to reflect the fact that the standard has been
adopted by several countries in Asia.
Hertz -- The unit for measuring the frequency with which an electromagnetic
signal cycles through the zero-value state between lowest and highest states.
One Hz (Hertz) equals one cycle per second. kHz (kilohertz) stands for thousands
of Hertz; MHz (megahertz) stands for millions of Hertz.
Inmarsat -- The International Maritime Satellite service, which provides
mobile communications to ships at sea, aircraft in flight and vehicles on the
road.
Intelsat -- International Telecommunications Satellite Organization; a
worldwide consortium of national satellite communications organizations.
Interconnect -- Connection of a telecommunications device of service to the
PSTN.
Interconnection -- Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
International Simple Resale -- Refers to the wholesale purchase of IPLCs
from facilities-based carriers and the reselling of such capacity to customers
for switched telephone service.
IPLC -- International Private Leased Circuits.
ISDN (Integrated Services Digital Network) -- ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications. ISDN's
combined voice and data networking capabilities reduce costs for end users and
result in more efficient use of available facilities. ISDN combines standards
for highly flexible customer to network signaling with both voice and data
within a common facility.
ITU -- International Telecommunications Union; a United Nations treaty
organization whose purpose is to accredit international telecommunications
standards. ITU signatories can turn ITU-approved standards into law through
international treaties such as the treaties governing use of the radio spectrum
for international satellite telecommunications and broadcasting.
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Kbps -- Kilobits per second, which is a measurement of speed for digital
signal transmission expressed in thousands of bits per second.
Local Area Network (LAN) -- The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
Local Loop -- The local loop is that portion of the local telephone network
that connects the customer's premises to the local exchange provider's central
office or switching center. This includes all the facilities starting from the
customer premise interface which connects to the inside wiring and equipment at
the customer premise to a terminating point within the switching wire center.
Mbps -- Megabits per second, which is a measurement of speed for digital
signal transmission expressed in millions of bits per second.
MGTS -- Moscow city telephone network.
Multiplexing -- The use of some means to inter-leave narrow-band or
slow-speed data from multiple sources in order to make use of a wide-band or
high-speed channel.
NMT -- Acronym for Nordic Mobile Telephone System, a cellular standard
widely used in Northern Europe.
Nodes -- Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
PBX/PABX (private branch exchange/private automatic branch exchange) -- A
customer operated switch on customer premises, typically used by large
businesses with multiple telephone lines.
Plesiochronous Digital Hierarchy (PDH) -- A method of controlling the
timing between transmission and switching systems that is not synchronized but
rather relies on highly accurate clocks to minimize the slip rates between
switching nodes.
POCSAG (Postal Office Code Standard Advisory Group) -- A lower-cost paging
technology which can be transmitted on ERMES frequency.
Points of Presence (POPs) -- Locations where a carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that carrier.
PSTN -- Public switched telecommunications network.
PTT/PTO -- Postal, Telegraph and Telephone agency/Public Telephony
Operators; a government authority or agency that operates the public
telecommunications network, and sets standards and policies. PTTs/PTOs are
agencies in charge of telecommunications services in many countries, under
direct supervision of the national government.
Redundant Electronics -- Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.
Regeneration/amplifier -- Devices which automatically re-transmit or boost
signals on an out-bound circuit.
Route Kilometers -- The number of kilometers along which fiber optic cables
are installed.
Route Mile -- The number of miles along which fiber optic cables are
installed.
SDH -- Synchronous Digital Hierarchy; the international standard for
ultra-high-speed broadband fiber-optic, digital transmission networks that use
equipment from many different manufacturers and carry a variety
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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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EXHIBIT B
SUPPLEMENTAL EASDAQ INFORMATION
APPROVAL BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE
This Prospectus will be submitted for approval by the Belgian Banking and
Finance Commission ("Commissie voor bet Banken Financiewezen/Commission Bancaire
et Financiere") ("BFC") in accordance with Article 29ter. sec. 1. par.1 of Royal
Decree No. 185 of July 9, 1935 and Article 11 of the Royal Decree of 31 October,
1991 on the publication of prospectuses in connection with public issues of
securities. The approval of this Prospectus by the BFC does not imply any
judgement as to the appropriateness of the quality of this Offering or the Offer
Shares nor of the situation of the Company.
On December 22, 1997, an application was made for the admission of the
Common Stock to trading on EASDAQ under the symbol "GTSG." Admission to EASDAQ
is subject to certain adequacy and liquidity requirements determined by the
EASDAQ Market Authority. Companies applying for admission to trading on EASDAQ
are required to publish relevant financial and other information regularly and
to keep the public informed of all events likely to affect the market price of
their securities. Price sensitive information is made available to investors in
Europe through the EASDAQ Reuters Regulatory Company Reporting System and
international information vendors.
The documents referred to above will also be made available to Belgian
investors upon prior written request addressed to the principal executive office
of the Company.
PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION
The Company, represented by Mr. William H. Seippel, Chief Financial
Officer, takes responsibility for the contents of this Prospectus.
The Company, having made all reasonable inquiries, accepts responsibility
for, and confirms that this Prospectus contains all information with regard to
the Company and the Common Stock that is material in the context of the offering
and sale of the Common Stock, that the information contained in this Prospectus
is true and correct in all material respects and is not misleading, that the
opinions and intentions of the Company expressed herein are honestly held and
that there are no other facts the omission of which makes this Prospectus as a
whole or any of such information or the expression of any such opinions or
intentions materially misleading.
Global TeleSystems Group, Inc.
by William H. Seippel
Chief Financial Officer
THE CLEARING SYSTEMS
INTERSETTLE
Transactions executed on EASDAQ will be settled by delivery through
INTERSETTLE. INTERSETTLE holds securities for its direct participants, which
include banks, securities brokers and dealers, other professional intermediaries
and foreign depositories, and facilitates the clearance and settlement of
securities transactions between INTERSETTLE participants through electronic
book-entry changes in the accounts of INTERSETTLE participants. Book-entry
settlement is mandatory for all financial instruments traded on EASDAQ. Physical
certificates cannot be used to settle a market transaction. Investors must hold
a securities account with a financial institution which directly or indirectly
has access to INTERSETTLE's clearing and settlement system. INTERSETTLE conducts
a real-time gross payment system in connection with its clearance operation,
payments being made simultaneously with the book-entry transfers between
securities accounts.
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DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organization, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. DTC
agrees with and represents to its participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law.
TRANSFERS BETWEEN INTERSETTLE AND DTC PARTICIPANTS
Common Stock will be held through DTC. Common Stock held directly or
indirectly by INTERSETTLE participants will be registered on the books of DTC in
the name of the nominee company of Brown Brothers Harriman, acting as custodian
for INTERSETTLE.
Transfers of Common Stock will be effected in the following manner:
(i) transfers of Common Stock between INTERSETTLE participants will be
effected in accordance with procedures established for this purpose by
INTERSETTLE;
(ii) transfer of Common Stock between DTC participants will be effected in
accordance with procedures established for the purpose by DTC; and
(iii) transfers of Common Stock between INTERSETTLE participants and DTC
participants will be effected by an increase or a reduction of the
quantity of Common Stock held in INTERSETTLE's account at Brown
Brothers Harriman and a corresponding reduction or increase of the
quantity of Common Stock held by the other relevant DTC participant
or participants.
Investors should inquire with the financial intermediary with whom the
investor has opened a securities account for the purpose of holding and trading
Common Stock, as to the cost of such trading as well as the terms and conditions
on which the financial service of the Common Stock will be delivered by such
financial intermediary.
The Common Stock has the following identification number:
CUSIP 379 36 U104, ISIN US379 36 U1043
The clearing costs, if any, will be at the cost of the investors. Investors
are requested to inform themselves about such costs.
POSSIBILITY OF SHARE REPURCHASES
The Company is not prohibited by its Certificate of Incorporation, By-laws
or Delaware General Corporation Law from repurchasing or otherwise acquiring
outstanding shares of Common Stock and, accordingly, the Company may exercise
its right to repurchase Common Stock.
AUTHORIZATION OF INCREASE IN AUTHORIZED CAPITAL OF THE COMPANY; AUTHORIZATION OF
THE ISSUANCE OF COMMON STOCK IN THE STOCK OFFERINGS
Effective December 1, 1997, the Board of Directors and stockholders of the
Company approved amendments to the Certificate of Incorporation which (i)
increased the authorized number of shares of capital stock to 145,000,000 (of
which 135,000,000 shares are Common Stock and 10,000,000 shares are preferred
stock) and (ii) effected a 3-for-2 stock split of all then-outstanding shares of
the Company's Common Stock.
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In addition, the Board of Directors of the Company has adopted a resolution
approving the offering and issuance of 11,100,000 shares of Common Stock in the
Stock Offerings.
TAXATION OF BELGIAN INVESTORS
The following generally summarizes the material Belgian tax consequences of
the sequisition, ownership and disposition of Common Stock. It is based on the
tax laws applicable in Belgium and France as in effect at the date of this
Prospectus, and is subject to changes in Belgium and French law, including
changes that could have retroactive effect. The following summary does not take
into account or discuss the tax laws of any country other than Belgium and
France nor does it take into account the individual circumstances of each
investor. The summary uses the term "Eligible Belgian Holders" to refer to
beneficial owners of Common Stock who hold directly less than 10% of the share
capital of the Company and whose ownership of such Common Stock is not
attributable to a permanent establishment or a fixed base in France, are
considered residents of Belgium for purposes of the income tax convention
between Belgium and France dated March 10, 1964 (the "Belgian-French Treaty")
and are fully entitled to benefits under the Belgian-French Treaty.
There are currently no procedures available for Holders of Common Stock
that are not U.S. residents to claim or receive from the French tax authorities
any tax treaty benefits in respect of dividends (including payment of avoir
fiscal and availability of a reduced withholding tax rate) that a Holder may be
entitled to receive pursuant to the Belgian-French Treaty.
Prospective Belgian Investors in Common Stock are advised to consult their
own tax advisers as to the Belgian and other tax consequences of the
acquisition, ownership and disposition of Common Stock.
TAXATION OF DIVIDENDS ON COMMON STOCK
French tax considerations
Dividends paid to non-residents of France generally are subject to French
withholding tax at a 25% rate and are not eligible for the benefit of the avoir
fiscal (a tax credit available to French residents equal to 50% of the amount of
dividends received from French companies such as the Company). However, under
the Belgian-French Treaty, Eligible Belgian Holders can claim the benefit of a
reduced withholding tax rate on dividends of 15%.
An individual Eligible Belgian Holder generally will also be entitled to
receive a payment of the avoir fiscal, after deduction of withholding tax of
15%. This payment will not be made available to such individual Eligible Belgian
Holder until after the close of the calendar year in which the dividend was paid
and only upon receipt by the French tax authorities of a claim made by the
individual Eligible Belgian Holder for such payment in accordance with the
procedure set forth below.
A Belgian company that is an Eligible Belgian Holder under the
Belgian-French Treaty (a "Belgian Resident Company") will not benefit from the
refund of the avoir fiscal but will be entitled to obtain from the French tax
authorities a refund of any precompte paid in cash in respect of such dividends
less the 15% French withholding tax. Amounts distributed as dividends by French
companies out of profits which have been taxed at the ordinary corporate income
tax rate or which have been earned and taxed more than five years before the
distribution and which give rise to the avoir fiscal are subject to a
"precompte" or prepayment by such companies. The precompte is paid by the
distributing company to the French tax authorities and is equal to one-half of
the nominal dividend distributed.
Dividends paid to an individual Eligible Belgian Holder will be subject to
the reduced withholding tax rate of 15% at the time the dividend is paid if (i)
such holder duly completes and provides the French tax authorities with French
Treasury Form 5200 RFI Belgique (the "Form") duly certified by the Belgian tax
authorities before the date of payment of the relevant dividend, or (ii) if
completion of the Form is not possible prior to the payment of dividends, such
holder duly completes and provides the French tax authorities with a simplified
certificate (the "Certificate") duly certified by the Belgian tax authorities
stating that (a) such holder is a Belgian resident as defined pursuant to the
provisions of the Belgian-French Treaty,
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(b) such holder's ownership of the Common Stock is not effectively connected
with a permanent establishment or fixed base in France, and (c) such holder
meets all the requirements of the Belgian-French Treaty for obtaining the
benefit of the reduced rate of withholding tax and the right to payment of the
French avoir fiscal. For example, the Company pays a dividend of 100, an
individual Eligible Belgian Holder will initially receive 85, but will be
entitled to an additional payment of 42.50, consisting of the avoir fiscal of
50, less a 15% withholding tax on that amount (equal to 7.5). Dividends paid to
an individual Eligible Belgian Holder that has not filed a completed Form or
Certificate before the dividend payment date will be subject to French
withholding tax at the rate of 25%. Such a holder may claim a refund of the
excess withholding tax and the avoir fiscal by completing and providing the
French tax authorities with the Form before December 31st of the calendar year
following the year during which the dividend is paid.
Dividends paid to a Belgian Resident Company will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if such holder duly
completes and provides the French tax authorities with French Treasury 5207 RF2
Belgique form before the date of payment of the relevant dividend duly certified
by the Belgian tax authorities. Dividends paid to such Belgian Resident Company
that has not filed a completed form before the dividend payment date will be
subject to French withholding tax at the rate of 25%. Such a holder may claim a
refund of the excess withholding tax by completing and providing the French tax
authorities with such 5207 RF2 Belgique form before December 31st of the
calendar year following the year during which the dividend is paid. The claim
for refund of the precompte is made on the form RF 5207 RF2 Belgique referred to
above.
Belgian withholding tax
Dividends distributed on Common Stock are subject in Belgium to a
withholding tax at the rate of 25%, when paid or attributed through a
professional intermediary in Belgium. However, no dividend withholding tax is
due if the Eligible Belgian Holder is a company subject to Belgian corporate
income tax.
In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle, due.
However, where the Eligible Belgian Holder is a Belgian resident entity subject
to the legal entities tax (e.g. a pension fund), the Holder itself has to pay
the dividend withholding tax at the rate of 25%.
In certain cases the above-mentioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies in particular to (i) dividends
distributed on shares publicly issued after January 1, 1994 and (ii) dividends
distributed on shares that have been privately issued after January 1, 1994 in
exchange for cash contributions, provided the shares are registered or bearer
shares placed in open custody to a financial institution in Belgium as of the
date of their issuance. This reduced rate should in principle also apply to
dividends on shares issued by the Company. The Company may however irrevocably
reject the application of the reduced withholding tax rate.
Income tax for Belgian resident individuals
In the hands of an Eligible Belgian Holder who is an individual holding
Common Stock as a private investment, the Belgian dividend withholding tax is a
final tax and the dividends need not be reported in the individual's annual
income tax return. If no withholding tax has been levied (i.e. in case of
payment or attribution outside Belgium), the individual has to report the
dividends in his tax return. Such Holder will be taxed at the separate rate of
25%, to be increased with a municipal surcharge (varying, as a rule, from 6% to
9%).
In the hands of an individual Eligible Belgian Holder whose holding of
Common Stock is effectively connected with a business, the dividends are taxable
at the ordinary rates for business income (i.e. varying from 25% to 55% to be
increased with the municipal surcharge and a crisis contribution of 3% of the
tax due). Any Belgium withholding tax is creditable against the final income tax
due, provided that the Holder has the full ownership of the Common Stock at the
time of payment of the dividends.
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Income tax for Belgian Resident Companies
Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40.17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due).
However, provided that the dividends benefit from the so-called
"dividend-received deduction", only 5% of the dividends received will be
taxable. In order to benefit from the deduction, the Company must not fall
within one of the categories which are expressly excluded from the "dividend
received deduction" (e.g. tax haven companies) and the beneficiary should hold,
at the time of payment of the dividends, a participation of at least 5% in the
Company or a participation which has a acquisition value of at least BEF 50
million.
Any Belgian dividend withholding tax can, in principle, be credited against
the company's final income tax, provided that the company has the full ownership
of the shares at the time of payment or attribution of the dividends and
provided that the dividend distribution does not entail a reduction in value or
capital loss on the Shares.
Income tax for Belgian resident entities subject to the Belgian legal entities
tax (pension funds, etc.)
The Belgian dividend withholding tax is a final tax.
CAPITAL GAINS TAXATION
French tax considerations
In general, a Belgian holder who is a resident of Belgium under the
Belgian-French Treaty will not be subject to French tax on any capital gain
derived from the sale or exchange of Common Stock, unless the gain is
attributable to a permanent establishment or fixed place of business maintained
by the holder in France.
Belgian tax considerations
Individual Eligible Belgian Holders holding the Common Stock as a private
investment and entities subject to legal entities tax are not subject to the
Belgian capital gains taxation on the disposal of the Common Stock.
Individual Eligible Belgian Holders may, however, be subject to a 33% tax
(to be increased with the municipal surcharge and the crisis contribution) if
the capital gain is deemed to be "speculative."
Individual Eligible Belgian Holders whose holding of Common Stock is
effectively connected with a business are taxable at the ordinary rates on any
capital gains realized on the disposal of Common Stock.
Belgian resident companies are not subject to capital gains taxation
provided that the dividends received on the shares qualify for the "dividend
received deduction" (except for the minimum holding requirement).
FRENCH ESTATE AND GIFT TAX
Under the estate tax convention between Belgium and France, a transfer of
Common Stock by reason of the death of an individual Eligible Belgian Holder
entitled to benefits under that convention will not be subject to French
inheritance tax, unless the decedent was domiciled in France at the time of his
or her death.
FRENCH WEALTH TAX
The French wealth tax (impot de solidare sur la fortune) does not apply to
an Eligible Belgian Holder.
BELGIAN INDIRECT TAXES
Stamp tax on securities transactions
In principle, a stamp tax is levied upon the subscription of shares of
Common Stock and the purchase and sale in Belgium of Common Stock through a
professional intermediary. The rate applicable to subscriptions of
B-5
<PAGE> 202
new shares of Common Stock is 0.35% but there is a limit of BEF 10,000 per
transaction. The rate applicable for secondary sales and purchases in Belgium of
Common Stock through a professional intermediary is 0.17% but there is a limit
of BEF 10,000 per transaction.
An exemption is available to professional intermediaries (e.g. credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident holder of Common
Stock who is acting for his own account will also be entitled to an exemption
from this stamp tax, provided that he delivers to the issuer or the professional
intermediary in Belgium, as the case may be, an affidavit confirming his
non-resident status in Belgium.
Tax on delivery of bearer securities
A tax is levied upon the physical delivery of Common Stock pursuant to
their subscription or their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of Common Stock pursuant to
a withdrawal of these Common Stock from "open custody."
The tax is due, at the rate of 0.2%, on the sums payable by the subscriber
or the acquiror in case of subscription or acquisition or the sales value of the
Common Stock, as estimated by the custodian in case of withdrawal from "open
custody."
However, an exemption is available for deliveries to recognized
professional intermediaries (such as credit institutions) acting for their own
account. An exemption is also available for delivery of Common Stock, which are
held in "open custody", to a non-resident.
B-6
<PAGE> 203
[MAP OF CIS]
<PAGE> 204
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 11
Use of Proceeds........................ 30
Price Range of Common Stock............ 30
Dividend Policy........................ 30
Dilution............................... 31
Capitalization......................... 32
Selected Historical Consolidated
Financial Data....................... 33
Supplemental Information -- Selected
Historical Financial Data -- Combined
Equity Investments................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 35
Business............................... 49
Management............................. 102
Executive Compensation and Other
Information.......................... 105
Beneficial Stock Ownership of Directors
and Officers......................... 107
Certain Related Party Transactions..... 116
Principal and Selling Stockholders..... 119
Description of Certain Indebtedness.... 122
Description of Capital Stock........... 124
Shares Eligible for Future Sale........ 130
Certain U.S. Federal Tax Consequences
to Non-U.S. Stockholders............. 132
Underwriting........................... 135
Legal Matters.......................... 137
Experts................................ 138
Index to Financial Statements.......... F-1
Exhibit A -- Glossary of
Telecommunications Industry Terms.... A-1
Exhibit B -- Supplemental EASDAQ
Information.......................... B-1
</TABLE>
======================================================
======================================================
10,458,000 SHARES
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
ARNHOLD AND S. BLEICHROEDER, INC.
, 1998
======================================================
<PAGE> 205
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 12, 1998
PROSPECTUS
10,458,000 SHARES
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
---------------------
Of the 10,458,000 shares of Common Stock, par value $.10 per share (the
"Common Stock"), offered hereby (the "Offered Securities"), 2,614,500 shares are
being offered by Global TeleSystems Group, Inc. (the "Company") and 7,843,500
shares are being offered by certain of the Company's stockholders (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares of the Selling Stockholders. See "Principal and Selling Stockholders"
and "Underwriting."
Of the 10,458,000 shares of Common Stock offered hereby, 4,183,200 shares
are being offered outside the United States and Canada (the "International
Offering") and 6,274,800 shares are being offered in the United States and
Canada (the "U.S. Offering" and, together with the International Offering, the
"Stock Offerings"). The initial offering price per share and the underwriting
discount per share are identical for both Stock Offerings. See "Underwriting."
The Company has also filed a registration statement with respect to the
offering of $350,000,000 of its % Convertible Senior Subordinated Debentures
due 2010 (the "New Convertible Bonds"), and such offering (the "New Convertible
Bond Offering" and, together with the Stock Offerings, the "Offerings") is being
made by a separate prospectus. The consummation of the Stock Offerings is not
conditioned upon the consummation of the New Convertible Bond Offering, and
there can be no assurance that the New Convertible Bond Offering will be
consummated.
The Common Stock is quoted on the Nasdaq National Market and the European
Association of Securities Dealers Automated Quotation ("EASDAQ") under the
symbol "GTSG." On June 25, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $47.88 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDERS
- - - - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share.............. $ $ $ $
- - - - -------------------------------------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
=========================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters (as defined herein) against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,494,780.
(3) The Selling Stockholders have granted to the International Managers (as
defined herein) and the U.S. Underwriters (as defined herein) options,
exercisable within 30 days of the date hereof, to purchase up to an
additional 627,480 and 941,220 shares of Common Stock, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
---------------------
GLOBAL COORDINATOR
MERRILL LYNCH & CO.
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
---------------------
MERRILL LYNCH INTERNATIONAL
---------------------
DONALDSON, LUFKIN & JENRETTE GOLDMAN SACHS INTERNATIONAL
INTERNATIONAL
---------------------
CIBC WOOD GUNDY OPPENHEIMER
ING BARINGS
MFK RENAISSANCE
---------------------
The date of this Prospectus is , 1998.
<PAGE> 206
UNDERWRITING
Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement") among the Company, the
Selling Stockholders and each of the underwriters named below (the
"International Managers") and concurrently with the sale of 6,274,800 shares of
Common Stock to the U.S. Underwriters (as defined below), the Company and the
Selling Stockholders severally have agreed to sell to each of the International
Managers, and each of the International Managers for whom Merrill Lynch
International ("Merrill Lynch"), Donaldson, Lufkin & Jenrette International,
Goldman Sachs International, CIBC Oppenheimer International Limited, Baring
Brothers Limited (as agent for ING Bank N.V.) and Renaissance Advisory Limited
are acting as representatives (the "International Representatives"), has
severally agreed to purchase from the Company and the Selling Stockholders, the
number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Merrill Lynch International.................................
Donaldson, Lufkin & Jenrette International .................
Goldman Sachs International.................................
CIBC Oppenheimer International Limited......................
Baring Brothers Limited (as agent for ING Bank N.V.)........
Renaissance Advisory Limited................................
---------
Total.......................................... 4,183,200
=========
</TABLE>
The Company and the Selling Stockholders have also entered into a U.S.
purchase agreement (the "U.S. purchase agreement" and, together with the
International Purchase Agreement, the "Purchase Agreements") with certain
underwriters in the United States and Canada (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters") for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation, are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 4,183,200 shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company and the Selling Stockholders severally have agreed to
sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed
to purchase, an aggregate of 6,274,800 shares of Common Stock. The public
offering price per share and the underwriting discount per share of Common Stock
are identical under the International Purchase Agreement and the U.S. Purchase
Agreement.
In each Purchase Agreement, the several International Managers and the
several U.S. Underwriters, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the public offering price
set forth on the cover page of this Prospectus, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
U.S. Underwriters and any dealer to whom they sell shares of Common Stock will
not offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Managers and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. persons or Canadian persons, except, in each
case, for transactions pursuant to the Intersyndicate Agreement.
133
<PAGE> 207
The International Representatives have advised the Company that the
International Managers propose initially to offer the shares of Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The International Managers may allow,
and such dealers may allow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. After the Stock Offerings, the
public offering price, concession and discount may be changed.
The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock, or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 90 days
after the date of this Prospectus. In addition, except to the extent otherwise
provided in this Prospectus with respect to the Affiliate Shares, certain
stockholders have agreed not to make any demand for or exercise any rights with
respect to the registration of Common Stock and have waived all rights
(including demand and "piggyback" registration rights) to register securities
owned by them for such 90 day period and rights to purchase additional shares of
Common Stock in connection with the Offerings. See "Shares Eligible for Future
Sale."
The Selling Stockholders have granted an option to the International
Managers, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 627,480 additional shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. The
Selling Stockholders have also granted an option to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
additional 941,220 shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to International Managers.
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
In connection with the Offerings, certain Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers on
the Nasdaq National Market may engage in "passive market making" in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 under Regulation
M. Rule 103 permits, upon the satisfaction of certain conditions, underwriters
and selling group members participating in a distribution that are also Nasdaq
National Market market makers in the security being distributed to engage in
limited market making transactions during the period when Rule 103 under
Regulation M would otherwise prohibit such activity. Rule 103 prohibits
underwriters and selling group members engaged in passive market making
generally from entering a bid or effecting a purchase at a price that exceeds
the highest bid for those securities displayed on the Nasdaq National Market by
a market maker that is not participating in the distribution. Under Rule 103,
each underwriter or selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's
134
<PAGE> 208
average daily trading volume during the two full consecutive calendar months
immediately preceding the date of the filing of the registration statement under
the Securities Act pertaining to the security to be distributed.
If the Underwriters create a short position in the Common Stock in
connection with the Stock Offerings, (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus), the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
Neither the Company nor any of the U.S. Underwriters makes any
representation or prediction, however, as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transaction or that
such transactions, once commenced, will not be discontinued without notice.
Each International Manager agrees that (a) it has not offered or sold and,
for a period of six months following consummation of the Stock Offerings, will
not offer or sell any shares of Common Stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute an offer
to the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (b) it has complied with and will comply with all
applicable provisions of the Public Offers of Securities Regulations 1995 and
the Financial Services Act 1986 with respect to anything done by it in relation
to the Common Stock in, from, or otherwise involving the United Kingdom and (c)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue or sale of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or to a person to whom the document may otherwise lawfully be issued or passed
on.
The Common Stock is quoted on the Nasdaq National Market and the EASDAQ
under the symbol "GTSG."
Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
135
<PAGE> 209
EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young, LLP, independent auditors, as set
forth in their report appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
136
<PAGE> 210
EXECUTIVE OFFICE OF THE COMPANY
GLOBAL TELESYSTEMS GROUP, INC.
1751 Pinnacle Drive
McLean, Virginia 22102
INDEPENDENT AUDITORS
ERNST & YOUNG, LLP
1225 Connecticut Ave., NW
Washington, D.C. 20036
LEGAL ADVISERS
to the Company
SHEARMAN & STERLING
599 Lexington Avenue
New York, New York 10022-6069
as to CIS law
COUDERT BROTHERS
1627 I Street, N.W.
Washington, D.C. 20006
to the Underwriters
CAHILL GORDON & REINDEL
80 Pine Street
New York, New York 10005
REGISTRAR AND PRINCIPAL PAYING AND TRANSFER AGENT
THE BANK OF NEW YORK
One Wall Street
New York, New York 10286
<PAGE> 211
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 11
Use of Proceeds........................ 30
Price Range of Common Stock............ 30
Dividend Policy........................ 30
Dilution............................... 31
Capitalization......................... 32
Selected Historical Consolidated
Financial Data....................... 33
Supplemental Information -- Selected
Historical Financial Data -- Combined
Equity Investments................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 35
Business............................... 49
Management............................. 102
Executive Compensation and Other
Information.......................... 105
Beneficial Stock Ownership of Directors
and Officers......................... 107
Certain Related Party Transactions..... 116
Principal and Selling Stockholders..... 119
Description of Certain Indebtedness.... 122
Description of Capital Stock........... 124
Shares Eligible for Future Sale........ 130
Certain United States Federal Tax
Consequences to Non-U.S.
Stockholders......................... 132
Underwriting........................... 135
Legal Matters.......................... 137
Experts................................ 138
Index to Financial Statements.......... F-1
Exhibit A -- Glossary of
Telecommunications Industry Terms.... A-1
Exhibit B -- Supplemental EASDAQ
Information.......................... B-1
</TABLE>
======================================================
======================================================
10,458,000 SHARES
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
GLOBAL TELESYSTEMS GROUP, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
CIBC WOOD GUNDY OPPENHEIMER
ING BARINGS
MFK RENAISSANCE
, 1998
======================================================
<PAGE> 212
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, to be borne by the Company in connection
with the offering of the securities being hereby registered.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
SEC Registration Fee........................................ $ 172,959
NASD Filing Fee............................................. 30,500
Nasdaq National Market Listing Fee.......................... 17,500
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 10,000
Accounting Fees and Expenses................................ 50,000
Legal Fees and Expenses..................................... 250,000
Printing Expenses........................................... 500,000
Miscellaneous............................................... 458,821
----------
TOTAL............................................. $1,494,780
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company's Directors shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided, however, that such exculpation from liabilities is not permitted with
respect to liability
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<PAGE> 213
arising from items described in clauses (i) through (iv) in the preceding
paragraph. The Certificate and the Company's By-Laws further provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the DGCL.
The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The foregoing reflects a 3-for-2 common stock split and an increase in the
par value per share of common stock to $0.10 effective December 1997.
Within the past three years the Company issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:
On March 13, 1995, the Company issued 400,000 shares of common stock, par
value $0.10 per share, pursuant to a stock purchase agreement. The shares were
issued to CIBV Liquidating B.V., a closed company with limited liability
organized under the laws of the Netherlands in exchange for the Company's
interest in PrimTelefone. No underwriter or underwriting discount was involved
in the offering. Exemption from registration was claimed under Section 4(2) of
the Securities Act regarding transactions by an issuer not involving any public
offering.
On June 21, 1995, the Company issued 5,090,876 shares of common stock, par
value $0.10 per share, at a purchase price of $9.00 per share, for an aggregate
offering price of $45.8 million, pursuant to a stock purchase agreement. In
addition to (i) certain investment funds and (ii) certain individual private
investors, these shares were issued to certain members of management and various
entities affiliated with certain members of management. No underwriter or
underwriting discount was involved in the offering. Exemption from registration
was claimed under Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering.
On January 19, 1996, and June 6, 1996, the Company granted affiliates of
George Soros an aggregate of 4,444,443 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $10.27
per share. The exercise price of the warrants was automatically reduced to $9.33
per share as of December 31, 1996 because the debt obligations remained
outstanding. The warrants were issued in connection with the Company's issuance
for cash of $40 million of notes to affiliates of George Soros, which notes bear
interest at a rate of 10% per annum and mature on March 3, 2001. No underwriter
or underwriting discount was involved in the offering. Exemption from
registration was claimed under Section 4(2) of the Securities Act regarding
transactions by an issuer not involving any public offering.
On February 2, 1996, the Company granted affiliates of Capital Research
International an aggregate of 3,333,333 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $10.27
per share. The exercise price of the warrants was automatically reduced to $9.33
per share as of December 31, 1996 because the debt obligations remained
outstanding. The warrants were issued in connection with the Company's issuance
for cash of $30 million of notes to affiliates of Capital Research
International, which notes bear interest at a rate of 10% per annum and mature
on March 31, 2001. No underwriter or underwriting discount was involved in the
offering. Exemption from registration was claimed under Section 4(2) of the
Securities Act regarding transactions by an issuer not involving any public
offering.
On July 23, 1996, July 31, 1996, August 8, 1996, August 22, 1996 and
September 12, 1996 the Company issued an aggregate of 8,348,532 shares of common
stock, par value $0.10 per share, at a purchase price of $13.33 per share, for
an aggregate offering price of $111 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.
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<PAGE> 214
On July 14, 1997 and July 31, 1997, the Company issued an aggregate
$141,295,000 of its Senior Subordinated Convertible Bonds due 2000, convertible
into the common stock, par value $0.10 per share, at a purchase price of 100%,
pursuant to a subscription agreement. UBS Securities LLC, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch & Co. acted as managers in the
offering and the aggregate discount was $5,651,800. The securities were sold to
a limited number of qualified institutional buyers as defined in Rule 144A under
the Securities Act and to non-U.S. persons outside the United States. Exemption
from registration was claimed under Rule 144A and Regulation S of the Securities
Act.
On August 15, 1997, August 29, 1997 and September 5, 1997, the Company
issued an aggregate 2,502,686 shares of common stock, par value $0.10 per share,
at a purchase price of $15.67 per share, for an aggregate offering price of
$39.2 million, pursuant to a stock purchase agreement. In addition to (i)
certain investment funds and (ii) certain individual private investors, these
shares were issued to certain members of management and various entities
affiliated with certain members of management. Exemption from registration was
claimed under Section 4(2) of the Securities Act regarding transactions by an
issuer not involving any public offering.
On August 29, 1997, the Company issued $3.5 million of its Senior
Subordinated Convertible Bonds due 2000, convertible into the common stock, par
value $0.10 per share, at a purchase price of 100%. In addition to (i) certain
investment funds and (ii) certain individual private investors, these shares
were issued to certain members of management and various entities affiliated
with certain members of management. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.
ITEM 16. EXHIBITS
(a) Exhibits:
The following is a list of exhibits filed as a part of this registration
statement.
<TABLE>
<C> <C> <S>
1.1* -- Form of U.S. Purchase Agreement with respect to Stock
Offerings
1.2* -- Form of International Purchase Agreement with respect to
Stock Offerings
1.3* -- Form of New Convertible Bond Purchase Agreement with respect
to Convertible Senior Debentures
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
</TABLE>
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<PAGE> 215
<TABLE>
<C> <C> <S>
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)
4.8* -- Indenture dated as of , 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating to
the Company's Convertible Senior Debentures due 2010
5.1* -- Opinion of Shearman & Sterling respecting the Securities
registered hereby
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society Institute
and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
</TABLE>
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<PAGE> 216
<TABLE>
<C> <C> <S>
10.7** -- Warrant Agreement, dated as of June 6, 1996, between Global
TeleSystems Group, Inc., The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996 (see
Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 25, 1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated December 30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated May 13, 1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 20, 1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 11, 1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 21, 1997
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+ -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1, 1995
</TABLE>
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<PAGE> 217
<TABLE>
<C> <C> <S>
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 as of 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
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
incorporated by reference 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
</TABLE>
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<PAGE> 218
<TABLE>
<C> <C> <S>
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe Railtel B.V., dated June 20, 1997
10.43* -- Master Agreement, dated June , 1998 between Ebone Holding Association, Ebone A/S, Hermes
Europe Railtel Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
21.1+ -- List of Subsidiaries of the Registrant
23.1* -- Consent of Shearman & Sterling (included in its opinion delivered under Exhibit No. 5.1)
23.2* -- Consent of Ernst & Young (CIS) Ltd.
23.3* -- Consent of Ernst & Young LLP
24.1++ -- Powers of Attorney
27.1+ -- Financial Data Schedule extracted from 12/31/97 audited financial statements
27.2++ -- Financial Data Schedule extracted from 3/31/98 unaudited financial statements
</TABLE>
- - - - ---------------
* Filed herewith.
** Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-36555) filed on September
26, 1997.
*** To be filed by amendment.
+ Incorporated by reference to the corresponding exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
++ Previously filed.
(b) Financial Statements and Schedules:
(1) Financial Statements
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
(2) Schedules
The Company has furnished Schedule II -- Valuation and Qualifying Accounts
on page S-1 of the Registration Statement. The other financial statement
schedules of the Company have been omitted because the information required to
be set forth therein is not applicable or is shown in the Financial Statements
or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the forms of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
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<PAGE> 219
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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<PAGE> 220
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, Commonwealth of Virginia, on this 1st day of
July, 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ GRIER C. RACLIN
----------------------------------
Name: Grier C. Raclin
Title: Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated on the 1st day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD W. THAMES* President, Chief Executive Officer July 1, 1998
- - - - ----------------------------------------------------- and Director (principal
Gerald W. Thames executive officer)
/s/ WILLIAM H. SEIPPEL* Executive Vice President of July 1, 1998
- - - - ----------------------------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)
/s/ ALAN B. SLIFKA* Chairman of the Board of Directors July 1, 1998
- - - - -----------------------------------------------------
Alan B. Slifka
/s/ MICHAEL GREELEY* Director July 1, 1998
- - - - -----------------------------------------------------
Michael Greeley
/s/ BERNARD MCFADDEN* Director July 1, 1998
- - - - -----------------------------------------------------
Bernard McFadden
/s/ STEWART J. PAPERIN* Director July 1, 1998
- - - - -----------------------------------------------------
Stewart J. Paperin
/s/ W. JAMES PEET* Director July 1, 1998
- - - - -----------------------------------------------------
W. James Peet
/s/ JEAN SALMONA* Director July 1, 1998
- - - - -----------------------------------------------------
Jean Salmona
/s/ JOEL SCHATZ* Director July 1, 1998
- - - - -----------------------------------------------------
Joel Schatz
/s/ ADAM SOLOMON* Director July 1, 1998
- - - - -----------------------------------------------------
Adam Solomon
</TABLE>
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<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID DEY* Director July 1, 1998
- - - - -----------------------------------------------------
David Dey
/s/ ROGER W. HALE* Director July 1, 1998
- - - - -----------------------------------------------------
Roger W. Hale
/s/ ROBERT J. AMMAN* Director July 1, 1998
- - - - -----------------------------------------------------
Robert J. Amman
*By: /s/ GRIER C. RACLIN
-------------------------------------------------
Grier C. Raclin
Attorney-in-fact
</TABLE>
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<PAGE> 222
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Global TeleSystems Group, Inc.
We have audited the consolidated financial statements of Global TeleSystems
Group, Inc. as of December 31, 1996 and 1997, and for each of the three years in
the period ended December 31, 1997, and have issued our report thereon dated
February 26, 1998 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedules listed in Item 16(b) of
this Registration Statement. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedules referred to above, 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
S-1
<PAGE> 223
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
Allowance for doubtful accounts at
3/31/98............................... 4,085 515 1,458 3,142
</TABLE>
S-2
<PAGE> 224
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
1.1* -- Form of U.S. Purchase Agreement with respect to Stock
Offerings...................................................
1.2* -- Form of International Purchase Agreement with respect to
Stock Offerings.............................................
1.3* -- Form of New Convertible Bond Purchase Agreement with respect
to Convertible Senior Debentures............................
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)....................................................
4.8* -- Indenture dated as of , 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating to
the Company's Convertible Senior Debentures due 2010........
5.1* -- Opinion of Shearman & Sterling respecting the Securities
registered hereby...........................................
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P. .............
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996..........................................
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996..........................................
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996.........................................
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996 ...................................
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997.........................................
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997.........................................
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997....................................
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P. .....
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society Institute
and Chatterjee Fund Management, L.P. .......................
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P. .............
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC.................
10.7** -- Warrant Agreement, dated as of June 6, 1996, between Global
TeleSystems Group, Inc., The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC.................
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc. ..................................
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996 (see
Exhibit No. 10.1(b))........................................
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 6, 1996......
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 25, 1996.....
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........................................................
</TABLE>
<PAGE> 226
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated December 30,
1996........................................................
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated May 13, 1997......
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated June 20, 1997.....
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 11, 1997.....
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated July 21, 1997.....
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated August 14, 1997...
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc., dated September 29,
1997........................................................
10.9** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc. ..................................
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets Growth
Fund, Inc. .................................................
10.11 -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February 2,
1996, between Global TeleSystems Group, Inc. and Capital
International Emerging Markets Funds........................
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds......................................
10.14+ -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan...................
10.15+ -- Restated and Amended 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 as of 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>
<PAGE> 227
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <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 Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997................
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB Swed
Carrier (incorporated by reference to Exhibit 10.1 to the
Hermes Europe Railtel B.V.'s Registration Statement on Form
S-4 (File No. 333-37719) filed on December 11, 1997)
(supersedes the Amended and Restated Shareholders' Agreement
incorporated by reference 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* -- Master Agreement, dated June , 1998 between Ebone Holding
Association, Ebone A/S, Hermes Europe Railtel Holdings B.V.
and Hermes Europe Railtel (Ireland) Limited.................
21.1+ -- List of Subsidiaries of the Registrant .....................
23.1* -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1) ...........................
23.2* -- Consent of Ernst & Young (CIS) Ltd. ........................
23.3* -- Consent of Ernst & Young LLP................................
24.1++ -- Powers of Attorney..........................................
</TABLE>
<PAGE> 228
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
27.1+ -- Financial Data Schedule extracted from 12/31/97 audited
financial statements........................................
27.2++ -- Financial Data Schedule extracted from 3/31/98 unaudited
financial statements........................................
</TABLE>
- - - - ---------------
* Filed herewith.
** Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-36555) filed on September
26, 1997.
*** To be filed by amendment.
+ Incorporated by reference to the corresponding exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
++ Previously filed.
<PAGE> 1
EXHIBIT 1.1
================================================================================
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
6,274,800 Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: [ ], 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
U.S. PURCHASE AGREEMENT.......................................................................................1
SECTION 1. Representations and Warranties.....................................................................4
(a) Representations and Warranties by the Company......................................4
(i) Compliance with Registration Requirements...............................................4
(ii) Independent Accountants................................................................5
(iii) Financial Statements..................................................................6
(iv) No Material Adverse Change in Business.................................................6
(v) Good Standing of the Company............................................................6
(vi) Good Standing of Subsidiaries..........................................................7
(vii) Capitalization 8
(viii) Authorization of Agreement...........................................................8
(ix) Authorization and Description of Securities............................................8
(x) Absence of Defaults and Conflicts.......................................................8
(xi) Absence of Labor Dispute...............................................................9
(xii) Absence of Proceedings...............................................................10
(xiii) Accuracy of Exhibits................................................................10
(xiv) Possession of Intellectual Property..................................................10
(xv) Absence of Further Requirements.......................................................11
(xvi) Possession of Licenses and Permits...................................................11
(xvii) Title to Property...................................................................11
(xviii) Compliance with Cuba Act...........................................................12
(xix) Investment Company Act...............................................................12
(xx) Environmental Laws....................................................................12
(xxi) Registration Rights..................................................................13
(b) Representations and Warranties by the Selling Shareholders........................13
(i) Accurate Disclosure....................................................................13
(ii) Authorization of Agreements...........................................................14
(iii) Valid and Marketable Title...........................................................15
(iv) Due Execution of Power of Attorney and Custody Agreement..............................15
(v) Absence of Manipulation................................................................16
(vi) Absence of Further Requirements.......................................................16
(vii) Restriction on Sale of Securities....................................................16
(viii) Certificates Suitable for Transfer..................................................16
(c) Officer's Certificates............................................................17
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing...................................................17
(a) Initial Securities................................................................17
(b) Option Securities.................................................................17
(c) Payment...........................................................................18
(d) Denominations; Registration.......................................................19
</TABLE>
<PAGE> 3
<TABLE>
Page
----
<S> <C>
SECTION 3. Covenants of the Company..........................................................................19
(a) Compliance with Securities Regulations and Commission Requests....................19
(b) Filing of Amendments..............................................................20
(c) Delivery of Registration Statements...............................................20
(d) Delivery of Prospectuses..........................................................21
(e) Continued Compliance with Securities Laws.........................................21
(f) Rule 158..........................................................................21
(g) Use of Proceeds...................................................................22
(h) Listing...........................................................................22
(i) Restriction on Sale of Securities.................................................22
(j) Reporting Requirements............................................................22
SECTION 4. Payment of Expenses...............................................................................23
(a) Expenses..........................................................................23
(b) Expenses of the Selling Shareholders..............................................23
(c) Termination of Agreement..........................................................24
(d) Allocation of Expenses............................................................24
SECTION 5. Conditions of U.S. Underwriters' Obligations......................................................24
(a) Effectiveness of Registration Statement...........................................24
(b) Opinion of Counsel for Company....................................................25
(c) Opinion of Counsel for the Selling Shareholders...................................25
(d) Opinion of Counsel for U.S. Underwriters..........................................25
(e) Officers' Certificate.............................................................25
(f) Certificates of Selling Shareholders..............................................26
(g) Accountant's Comfort Letter.......................................................26
(h) Bring-down Comfort Letter.........................................................26
(i) Approval of Listing...............................................................26
(j) No Objection......................................................................27
(k) Lock-up Agreements................................................................27
(l) Purchase of Initial International Securities......................................27
(m) Conditions to Purchase of U.S. Option Securities..................................27
(n) Additional Documents..............................................................29
(o) Termination of Agreement..........................................................29
SECTION 6. Indemnification...................................................................................29
(a) Indemnification of U.S. Underwriters..............................................29
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders..................................................................31
(c) Actions Against Parties; Notification.............................................32
(d) Settlement Without Consent if Failure to Reimburse................................32
(e) Other Agreements with Respect to Indemnification..................................33
</TABLE>
-ii-
<PAGE> 4
<TABLE>
Page
----
<S> <C>
SECTION 7. Contribution......................................................................................33
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....................................35
SECTION 9. Termination of Agreement..........................................................................35
(a) Termination; General..............................................................35
(b) Liabilities.......................................................................36
SECTION 10. Default by One or More of the U.S. Underwriters..................................................36
SECTION 11. Default by One or More of the Selling Shareholders or the Company................................37
SECTION 12. Notices .........................................................................................38
SECTION 13. Parties .........................................................................................38
SECTION 14. GOVERNING LAW AND TIME...........................................................................38
SECTION 15. Effect of Headings...............................................................................39
SCHEDULES
Schedule A - List of Underwriters..............................................................Sch A-1
Schedule B - List of Company and Selling Shareholders..........................................Sch B-1
Schedule C - Pricing Information...............................................................Sch C-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Shearman & Sterling.................................A-1-1
Exhibit A-2 - Form of Opinion of Grier Raclin........................................A-2-1
Exhibit A-3 - Form of Opinion of Coudert Brothers....................................A-3-1
Exhibit A-4 - Form of Opinion of Shevchenko Didkovskiy & Partners....................A-4-1
Exhibit A-5 - Form of Opinion of Somodeco............................................A-5-1
Exhibit A-6 - Form of Opinion of Loeff Claeys Verbeke................................A-6-1
Exhibit A-7 - Form of Opinion of Counsel for the Selling Shareholders................A-7-1
Exhibit B - Form of Lock-up Letter...................................................B-1
</TABLE>
-iii-
<PAGE> 5
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
6,274,800 Shares of Common Stock
(Par Value $.10 Per Share)
U.S. PURCHASE AGREEMENT
[ ], 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
Lehman Brothers Inc.
Prudential Securities Incorporated
Arnhold and S. Bleichroeder, Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the "Company"),
and the other persons listed in Schedule B hereto (the "Selling Shareholders")
confirm their agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters
named in Schedule A hereto (collectively, the "U.S. Underwriters", which term
shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated,
Lehman Brothers Inc., Prudential Securities Incorporated and Arnhold and S.
Bleichroeder, Inc. are acting as representatives (in such capacity, the "U.S.
Representatives"), with respect to the issue and sale by the Company and the
sale by the Selling Shareholders, acting severally and not jointly, and the
purchase by the U.S. Underwriters, acting severally and not
<PAGE> 6
-2-
jointly, of the respective numbers of shares of Common Stock, par value $.10 per
share, of the Company ("Common Stock") set forth in said Schedule A, and with
respect to the grant by the Company to the U.S. Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 941,220 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 6,274,800 shares of Common Stock (the
"Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or
any part of the 941,220 shares of Common Stock subject to the option described
in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities."
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Company
and the Selling Shareholders of an aggregate of 4,183,200 shares of Common Stock
(the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, Donaldson, Lufkin & Jenrette
International, Goldman Sachs International, CIBC Oppenheimer International
Limited, Baring Brothers Limited (as agent for ING Bank N.V.) and Renaissance
Advisory Limited are acting as the international representatives (collectively,
the "International Representatives") and the grant by the Company to the
International Managers, acting severally and not jointly, of an option to
purchase all or any part of the International Managers' pro rata portion of up
to 627,480 additional shares of Common Stock solely to cover over-allotments, if
any (the "International Option Securities" and, together with the U.S. Option
Securities, the "Option Securities"). The Initial International Securities and
the International Option Securities are hereinafter called the "International
Securities." It is understood that the Company and the Selling Shareholders are
not obligated to sell, and the U.S. Underwriters are not obligated to purchase,
any Initial U.S. Securities unless all of the Initial International Securities
are contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," the U.S. Securities and the International Securities are
hereinafter collectively called the "Securities," and this Agreement and the
International Purchase Agreement are hereinafter collectively called the
"Purchase Agreements."
<PAGE> 7
-3-
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co. (in such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-52733) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting." The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, at the time it
<PAGE> 8
-4-
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final Form of U.S. Prospectus and the final Form of
International Prospectus in the forms first furnished to the Underwriters for
use in connection with the offering of the Securities are herein called the
"U.S. Prospectus" and the "International Prospectus," respectively, and
collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S.
Prospectus" and "International Prospectus" shall refer to the preliminary U.S.
Prospectus dated June 12, 1998 and preliminary International Prospectus dated
June 12, 1998, respectively, each together with the applicable Term Sheet and
all references in this Agreement to the date of such Prospectuses shall mean the
date of the applicable Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the U.S.
Prospectus, the International Prospectus or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The
Company represents and warrants to each U.S. Underwriter as of the date hereof,
as of the Closing Time referred to in Section 2(c) hereof, and as of each Date
of Delivery (if any) referred to in Section 2(b), hereof and agrees with each
U.S. Underwriter, as follows:
(i) Compliance with Registration Requirements. The
Registration Statement has become effective under the 1933 Act and no
stop order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the
part of the Commission for additional information has been complied
with.
At the respective times the Registration Statement and any
post-effective amendments thereto became effective and at the Closing
Time (and, if any U.S. Option Securi-
<PAGE> 9
-5-
ties are purchased, at the Date of Delivery), the Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any
U.S. Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectuses
shall not be "materially different," as such term is used in Rule 434,
from the prospectuses included in the Registration Statement at the
time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or the U.S. Prospectus made in reliance upon and
in conformity with information furnished to the Company in writing by
or on behalf of any U.S. Underwriter through the U.S. Representatives
expressly for use in the Registration Statement or the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and each preliminary
prospectus and the Prospectuses delivered to the Underwriters for use
in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
<PAGE> 10
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(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of
the entities to which they relate as of the dates indicated and their
respective results of operations, stockholders' equity and cash flows
for the periods specified; said financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein. The selected financial data and the summary financial
information included in the Prospectuses present fairly the information
shown therein and, in the case of the consolidated financial data
therein, have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement,
and in the case of the combined financial data therein, have been
compiled from financial statements prepared on a basis consistent with
that of the audited financial statements included in the Registration
Statement.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement (at the time it became effective), except as otherwise stated
therein (at the time it became effective), (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its Subsidiaries (as defined below) considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by
the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C)
there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the state of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and perform
<PAGE> 11
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its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not, singly or in the aggregate, result in a
Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) and all entities in which the Company has a direct or
indirect majority equity interest or voting power (each a "Subsidiary"
and, collectively, the "Subsidiaries") has been duly organized (to the
extent applicable) and is validly existing as a corporation, general
partnership, limited partnership, limited liability company, closed
joint stock company, or similar entity in good standing (to the extent
applicable) under the laws of the jurisdiction of its organization, has
organizational power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectuses
and is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to
be in good standing would not, singly or in the aggregate, result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
or other ownership interests of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable (to the
extent applicable) and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity, except that the Company's
Capital Stock in Commstock International B.V. and in GTS Hungary has
been pledged to Ericsson Finans A.B. and Creditanstalt Bank as
collateral for certain borrowings; none of the outstanding shares of
capital stock or other ownership interests of any Subsidiary was issued
in violation of the preemptive or similar rights of any securityholder
of such Subsidiary. The only subsidiaries of the Company are (a) the
subsidiaries listed on Exhibit 21 to the Registration Statement and (b)
certain other subsidiaries which, considered in the aggregate as a
single Subsidiary,
<PAGE> 12
-8-
do not constitute a "significant subsidiary" as defined in Rule 1-02
of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities or
options referred to in the Prospectuses). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company.
(ix) Authorization and Description of Securities. The
Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters pursuant to this Agreement
and the International Managers pursuant to the International Purchase
Agreement, respectively, and, when issued and delivered by the Company
pursuant to this Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth herein and
the International Purchase Agreement, respectively, will be validly
issued, fully paid and non-assessable; the Common Stock conforms in all
material respects to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company
nor any of its Ventures (as defined below) is in violation of its
charter or by-laws (or equivalent constitutive documents) or in default
in the performance or observance of any obligation, agreement, covenant
or condition
<PAGE> 13
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contained in any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or other agreement or instrument to which
the Company or any of its Ventures is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any Venture is subject (collectively, "Agreements and
Instruments") except for such defaults that would not, singly or in the
aggregate, result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the International
Purchase Agreement and the consummation of the transactions
contemplated in this Agreement, the International Purchase Agreement
and in the Registration Statement (including the issuance and sale of
the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use of
Proceeds") and compliance by the Company with its obligations under
this Agreement and the International Purchase Agreement have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any Venture pursuant to, the Agreements and Instruments
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor
will such action result in any violation of the provisions of the
charter or by-laws (or equivalent constitutive documents) of the
Company or any Venture or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Venture or any of their assets,
properties or operations. As used herein, (a) "Ventures" means all
entities in which the Company has a direct or indirect greater than 25%
equity interest or voting power and (b) a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any Venture.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Venture exists or, to the knowledge of
the Company, is threatened, and the Company
<PAGE> 14
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is not aware of any existing or threatened labor disturbance by the
employees of any of its or any Venture's principal suppliers,
manufacturers, customers or contractors, which, in either case, may
reasonably be expected to, singly or in the aggregate, result in a
Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Venture, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which,
singly or in the aggregate, might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets of the Company
or any Venture or the consummation of the transactions contemplated in
this Agreement and the International Purchase Agreement or the
performance by the Company of its obligations hereunder or thereunder;
the aggregate of all pending legal or governmental proceedings to which
the Company or any Venture is a party or of which any of their
respective property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation
incidental to the business, singly or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and the
Ventures own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the
business now operated by them, except to the extent the failure to so
own, possess or be able to acquire would not result in a Material
Adverse Effect, and neither the Company nor any Venture has received
<PAGE> 15
-11-
any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of
the Company or any Venture therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities under this Agreement and the International
Purchase Agreement or the consummation of the transactions contemplated
by this Agreement and the International Purchase Agreement, except such
as have been already obtained or as may be required under the 1933 Act
or the 1933 Act Regulations and foreign or state securities or blue sky
laws.
(xvi) Possession of Licenses and Permits. Except as otherwise
disclosed in the Registration Statement, the Company and the Ventures
possess such material permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and the Ventures are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, result in a
Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a Material Adverse Effect;
and neither the Company nor any Venture has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xvii) Title to Property. The Company and the Ventures have good
and marketable title to all real property owned
<PAGE> 16
-12-
by the Company and the Ventures and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any Venture; and all of the leases
and subleases material to the business of the Company and the Ventures,
considered as one enterprise, and under which the Company or any
Venture holds properties described in the Prospectuses, are in full
force and effect, and neither the Company nor any Venture has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any Venture under any of
the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such Venture to the continued possession
of the leased or subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xix) Investment Company Act. Neither the Company nor any of
its Subsidiaries is, nor upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectuses will be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act").
(xx) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any Venture is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation,
<PAGE> 17
-13-
ambient air, surface water, groundwater, land surface or subsurface
strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and the
Ventures have all permits, authorizations and approvals required under
any applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or
any Ventures and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any
Ventures relating to Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the
Prospectuses, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(b) Representations and Warranties by the Selling
Shareholders. Each Selling Shareholder severally represents and warrants to each
U.S. Underwriter as of the date hereof and as of the Closing Time, and agrees
with each U.S. Underwriter, as follows:
(i) Accurate Disclosure. Such Selling Shareholder has
reviewed and is familiar with the Registration Statement and the
Prospectuses and neither the Prospectuses nor any amendment or
supplement thereto includes any untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements therein in the light of the circumstances under which they
were made, not misleading; provided, that the representations and
warranties set forth in this paragraph 1(b)(i) apply only to statements
or omissions in the Registration Statement or the Prospectuses based
upon information relating to such Selling Shareholder furnished to the
Company in writing
<PAGE> 18
-14-
by such Selling Shareholder expressly for use therein. It is understood
and agreed that the only written information furnished to the Company
by each respective Selling Shareholder specifically for use in the
Registration Statement is the information relating to such Selling
Shareholder set forth in the table under the caption "Principal and
Selling Stockholders" in the Prospectuses.
(ii) Authorization of Agreements. Such Selling Shareholder
has the full right, power and authority to enter into this Agreement
and, with the exception of Commingled Pension Trust Fund (Multi-Market
Special Investment Fund II) of Morgan Guaranty Trust Company of New
York, Alfred P. Sloan Foundation (Multi-Market Account), Multi-Market
Special Investment Trust Fund of Morgan Guaranty Trust Company of New
York, JPM Emerging Markets Special Opportunities Portfolio, L.P. and
JPM Emerging Markets Special Opportunities Portfolio Offshore, L.P.
(collectively, the "J.P. Morgan Entities") and Emerging Markets Growth
Fund, Inc., Capital International Emerging Markets Fund and New Europe
East Investment Fund (collectively, the "Capital Group Entities"), a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement"), and such Selling Shareholder has the full right,
power and authority to sell, transfer and deliver the Securities to be
sold by such Selling Shareholder hereunder. The execution and delivery
of this Agreement and, with the exception of the J.P. Morgan Entities
and the Capital Group Entities, the Power of Attorney and Custody
Agreement, and the sale and delivery of the Securities to be sold by
such Selling Shareholder and the consummation of the transactions
contemplated herein and compliance by such Selling Shareholder with its
obligations hereunder have been duly authorized by such Selling
Shareholder and do not and will not, whether with or without the giving
of notice or passage of time or both, conflict with or constitute a
breach of, or default under, or result in the creation or imposition of
any tax, lien, charge or encumbrance upon the Securities to be sold by
such Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder may be bound, or to which any of the
property or assets of such Selling Shareholder is subject, nor will
such action result in any violation of the provisions of the charter or
by-laws or other organizational instrument
<PAGE> 19
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of such Selling Shareholder, if applicable, or any applicable treaty,
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over such Selling Shareholder or any of its
properties.
(iii) Valid and Marketable Title. Such Selling Shareholder
has and will at the Closing Time have valid and marketable title to the
Securities to be sold by such Selling Shareholder hereunder, free and
clear of any security interest, mortgage, pledge, lien, charge, claim,
equity or encumbrance of any kind, other than pursuant to this
Agreement; and upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, assuming each such U.S.
Underwriter has no notice of any adverse claim, each of the U.S.
Underwriters will receive valid and marketable title to the Securities
purchased by it from such Selling Shareholder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
(iv) Due Execution of Power of Attorney and Custody
Agreement. Such Selling Shareholder, with the exception of the J.P.
Morgan Entities and the Capital Group Entities, has duly executed and
delivered, in the form heretofore furnished to the U.S.
Representatives, the Power of Attorney and Custody Agreement with Grier
C. Raclin, William H. Seippel and Alan Krenek, or any of them, as
attorneys-in-fact (the "Attorneys-in-Fact") and the Company, as
custodian (the "Custodian"); the Custodian is authorized to deliver the
Securities to be sold by such Selling Shareholder hereunder and to
accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 5(f) or that may be required pursuant to Section 5(l) on behalf
of such Selling Shareholder, to sell, assign and transfer to the U.S.
Underwriters the Securities to be sold by such Selling Shareholder
hereunder, to determine the purchase price to be paid by the
Underwriters to such Selling Shareholder, as provided in Section 2(a)
hereof, but subject to the provisions of the Power of Attorney, to
authorize the delivery of the Securities to be sold by such Selling
Shareholder hereunder, to accept payment therefor, and otherwise to act
on behalf of such Selling Shareholder in connection with this
Agreement.
<PAGE> 20
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(v) Absence of Manipulation. Such Selling Shareholder has
not taken, and will not take, directly or indirectly, any action which
is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(vi) Absence of Further Requirements. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by each Selling
Shareholder of its obligations hereunder or, with the exception of the
J.P. Morgan Entities and the Capital Group Entities, in the Power of
Attorney and Custody Agreement, or in connection with the sale and
delivery of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as may have
previously been made or obtained or as may be required under the 1933
Act or the 1933 Act Regulations or state securities laws.
(vii) Restriction on Sale of Securities. During of a period
of 90 days from the date of the Prospectuses, such Selling Shareholder
will not, without the prior written consent of Merrill Lynch on behalf
of the Underwriters, (a) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any share of Common
Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file any registration statement under the 1933 Act
with respect to any of the foregoing or (b) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause
(a) or (b) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall
not apply to the sale of the Securities hereunder and under the
International Purchase Agreement.
(viii) Certificates Suitable for Transfer. Certificates for
all of the Securities to be sold by such Selling Shareholder, with the
exception of the J.P. Morgan Entities
<PAGE> 21
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and the Capital Group Entities, pursuant to this Agreement, in suitable
form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank with signatures
guaranteed, have been placed in custody with the Custodian with
irrevocable conditional instructions to deliver such Securities to the
U.S. Underwriters pursuant to this Agreement.
(c) Officer's Certificates. Any certificate signed by any
officer of the Company or any Ventures delivered to the Global Coordinator, the
U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company herein to each U.S. Underwriter as to
the matters covered thereby; and any certificate signed by or on behalf of the
Selling Shareholders as such and delivered to the U.S. Representatives or to
counsel for the U.S. Underwriters pursuant to the terms of this Agreement shall
be deemed a representation and warranty by such Selling Shareholder to the U.S.
Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial Securities. The Company and each Selling
Shareholder, severally and not jointly, agrees to sell to each U.S. Underwriter,
severally and not jointly, and on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each U.S. Underwriter, severally and not jointly, agrees to purchase from
the Company and each Selling Shareholder, at the price per share set forth in
Schedule C, that proportion of the number of Initial Securities set forth in
Schedule B opposite the name of the Company or such Selling Shareholder, as the
case may be, which the number of Initial U.S. Securities set forth in Schedule A
opposite the name of such U.S. Underwriter, plus any additional number of
Initial U.S. Securities which such U.S. Underwriter may become obligated to
purchase pursuant to the provisions of Section 10 hereof, bears to the total
number of Initial Securities, subject in each case, to such adjustments among
the U.S. Underwriters as the U.S. Representatives in their sole discretion shall
make to eliminate any sales or purchases of fractional shares.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company and each Selling Shareholder, severally
and not jointly, hereby grants an option to the U.S. Underwriters, severally and
not
<PAGE> 22
-18-
jointly, to purchase up to an additional 941,220 shares of Common Stock as set
forth in Schedule B, at the price per share set forth in Schedule C, less an
amount per share equal to any dividends or distributions declared by the Company
and payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised not more than two times in whole or in part only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial U.S. Securities upon notice by the
Global Coordinator to the Company and the Selling Shareholders setting forth the
number of U.S. Option Securities as to which the several U.S. Underwriters are
then exercising the option and the time and date of payment and delivery for
such U.S. Option Securities. Any such time and date of delivery for the U.S.
Option Securities (a "Date of Delivery") shall be determined by the Global
Coordinator, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
U.S. Option Securities, each of the U.S. Underwriters, acting severally and not
jointly, on the basis of the representations and warranties of the Company
contained herein and subject to the terms and conditions herein set forth, will
purchase that proportion of the total number of U.S. Option Securities then
being purchased which the number of Initial U.S. Securities set forth in
Schedule A opposite the name of such U.S. Underwriter bears to the total number
of Initial U.S. Securities, subject in each case to such adjustments as the
Global Coordinator in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial
Securities shall be made at the offices of Cahill Gordon & Reindel, 80 Pine
Street, New York, New York 10005 or at such other place as shall be agreed upon
by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the
third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on the date
hereof) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the U.S. Option
Securities are purchased by the U.S. Underwriters, payment of the purchase price
for such U.S. Option Securities
<PAGE> 23
-19-
shall be made at the above-mentioned offices, or at such other place as shall be
agreed upon by the Global Coordinator and the Company, on each Date of Delivery
as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company and the Selling
Shareholders by wire transfer of immediately available funds to bank accounts
designated by the Company and the Custodian pursuant to each Selling
Shareholder's Power of Attorney and Custody Agreement, as the case may be, with
the exception of the J.P. Morgan Entities and the Capital Group Entities. It is
understood that each U.S. Underwriter has authorized the U.S. Representatives,
for its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial U.S. Securities and the U.S. Option Securities,
if any, which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants
with each U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the Global
Coordinator immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectuses or any amended Prospectuses shall have
been filed, (ii) of the receipt of any comments
<PAGE> 24
-20-
from the Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the Prospectuses or
for additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the Global
Coordinator or counsel for the U.S. Underwriters shall reasonably object within
three Business Days after being furnished such documents.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each of
the U.S. Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
<PAGE> 25
-21-
(d) Delivery of Prospectuses. The Company has delivered to
each U.S. Underwriter, without charge, as many copies of each preliminary
prospectus as such U.S. Underwriter reasonably requested, and the Company hereby
consents to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each U.S. Underwriter, without charge, during the period
when the U.S. Prospectus is required to be delivered under the 1933 Act or the
Securities Exchange of 1934 (the "1934 Act"), such number of copies of the U.S.
Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably
request. The U.S. Prospectus and any amendments or supplements thereto furnished
to the U.S. Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the International Purchase Agreement and the Prospectuses. If at any
time when a prospectus is required by the 1933 Act to be delivered in connection
with sales of the Securities, any event shall occur or condition shall exist as
a result of which it is necessary, in the reasonable opinion of counsel for the
U.S. Underwriters or for the Company, to amend the Registration Statement or
amend or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the reasonable opinion of any such counsel, at
any such time to amend the Registration Statement or amend or supplement any
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to the
U.S. Underwriters such number of copies of such amendment or supplement as the
U.S. Underwriters may reasonably request.
(f) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally available
to its securityholders an earnings statement for the purposes of, and to provide
the benefits contemplated by, the last paragraph of Section 11(a) of the 1933
Act.
<PAGE> 26
-22-
(g) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(h) Listing. The Company will use its best efforts to effect
the admission of the Securities being issued and sold by the Company pursuant to
this Agreement on the European Association of Securities Dealers Automated
Quotation ("EASDAQ") system and comply with the requirements of such exchange to
maintain such listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities being issued and sold by the Company
pursuant to this Agreement on the Nasdaq National Market and will file with the
Nasdaq National Market all documents and notices required by the Nasdaq National
Market of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National Market.
(i) Restriction on Sale of Securities. During a period of 90
days from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of the Securities hereunder and under
the International Purchase Agreement, (B) the issuance of any shares of Common
Stock by the Company upon the exercise of options or warrants or the conversion
of securities outstanding on the date hereof and referred to in the Prospectuses
or (C) the purchase or acquisition of shares of Common Stock pursuant to
contracts entered into prior to the date hereof and referred to in the
Prospectuses.
(j) Reporting Requirements. The Company, during the period
when the Prospectuses are required to be delivered under
<PAGE> 27
-23-
the 1933 Act or the 1934 Act, will file all documents required to be filed with
the Commission pursuant to the 1934 Act and rules and regulations of the
Commission thereunder within the time periods referred to therein.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to
the performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vi) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(vii) the fees and expenses of any transfer agent or registrar for the
Securities, (viii) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (ix) the fees and expenses incurred in
connection with the listing of the Securities being issued and sold by the
Company and the Selling Shareholders, as applicable, pursuant to this Agreement
on EASDAQ and inclusion of the Securities being issued and sold by the Company
and the Selling Shareholders, as applicable, pursuant to this Agreement in the
Nasdaq National Market.
(b) Expenses of the Selling Shareholders. The Selling
Shareholders, jointly and severally, will pay all expenses incident to the
performance of their respective obligations under, and the consummation of the
transactions contemplated by, this Agreement, including (i) any stamp duties,
capital duties and stock transfer taxes, if any, payable upon the sale of the
Securities to the U.S. Underwriters, and their transfer
<PAGE> 28
-24-
between the U.S. Underwriters pursuant to an agreement between such U.S.
Underwriters, and (ii) the fees and disbursements of their respective counsel
and accountants.
(c) Termination of Agreement. If this Agreement is terminated
by the U.S. Representatives in accordance with the provisions of Section 5,
Section 9(a)(i) or Section 11 hereof, the Company and the Selling Shareholders
shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses
reasonably incurred by the U.S. Underwriters in connection with this Agreement
or the offering of the Securities contemplated hereunder, including the
reasonable fees and disbursements of counsel and special counsel for the U.S.
Underwriters.
(d) Allocation of Expenses. The provisions of this Section
shall not affect any agreement that the Company and the Selling Shareholders may
make for the sharing of such costs and expenses.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof and in certificates of any officer of
the Company or any subsidiary of the Company or on behalf of any Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
<PAGE> 29
-25-
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Underwriters shall have received the favorable opinion, dated as of
Closing Time, of each of Shearman & Sterling, counsel for the Company,
Grier Raclin, Senior Vice President and General Counsel of the Company,
Coudert Brothers, special counsel for the Company and special
regulatory counsel for Hermes Europe Railtel B.V., Shevchenko
Didkovskiy & Partners, special Ukrainian counsel to Bancomsvyaz,
Somodeco, counsel and regulatory counsel to GTS Monaco Access S.A.M.,
and Loeff Claeys Verbeke, special Dutch counsel, each in form and
substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other
U.S. Underwriters to the effect set forth in Exhibits A-1 through A-6
hereto.
(c) Opinion of Counsel for the Selling Shareholders. At
Closing Time, the U.S. Underwriters shall have received the favorable
opinion, dated as of the Closing Time, of the respective counsel for
each Selling Shareholder, in form and substance satisfactory to counsel
for the U.S. Underwriters, together with signed or reproduced copies of
such letter for each of the other U.S. Underwriters to the effect set
forth in Exhibit A-7 hereto and to such further effect as counsel to
the U.S. Underwriters may be reasonably request.
(d) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the U.S. Underwriters shall have received the favorable opinion, dated
as of Closing Time, of each of Cahill Gordon & Reindel, counsel for the
U.S. Underwriters, and Clifford Chance, special Russian counsel to the
U.S. Underwriters, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters as to such matters as
are reasonably requested by the Representatives.
(e) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the U.S. Representatives shall
have received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company,
<PAGE> 30
-26-
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect
as though expressly made at and as of Closing Time, (iii) the Company
has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of such officer, are
contemplated by the Commission.
(f) Certificates of Selling Shareholders. At Closing Time, the
U.S. Underwriters shall have received certificates signed by each
Selling Shareholder or an Attorney-in-Fact on behalf of each Selling
Shareholder, dated as of Closing Time, to the effect that (i) the
representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same
force and effect as though expressly made at and as of Closing Time and
(ii) each Selling Shareholder has complied in all material respects
with all agreements and all conditions on its part to be performed
under this Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the U.S. Underwriters shall have received from Ernst
& Young a letter dated such date, in form and substance satisfactory to
the U.S. Representatives, together with signed or reproduced copies of
such letter for each of the other U.S. Underwriters containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the U.S.
Underwriters shall have received from Ernst & Young a letter, dated as
of Closing Time, to the effect that they reaffirm the statements made
in the letter furnished pursuant to subsection (e) of this Section,
except that the specified date referred to shall be a date not more
than three business days prior to Closing Time.
(i) Listing. At Closing Time, the Securities being issued and
sold by the Company pursuant to this Agreement
<PAGE> 31
-27-
shall have been accepted for listing on EASDAQ, subject only to
official notice of issuance. At Closing Time, the Securities being
issued and sold by the Company pursuant to this Agreement shall have
been accepted for inclusion in the Nasdaq National Market, subject only
to official notice of issuance.
(j) No Objection. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
U.S. Representatives shall have received an agreement substantially in
the form of Exhibit B hereto signed by a sufficient number of holders
as is reasonably acceptable to the U.S. Representatives of shares of
Common Stock, warrants, options or other rights to purchase or acquire
shares of Common Stock or other securities convertible or exchangeable
into Common Stock (other than the Company's Convertible Bonds due 2000
(the "Convertible Bonds")).
(l) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the
Initial U.S. Securities under this Agreement, the International
Managers shall have purchased the Initial International Securities
under the International Purchase Agreement.
(m) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the U.S. Option
Securities, the representations and warranties of the Company and the
Selling Shareholders contained herein and the statements in any
certificates furnished by the Company, any subsidiary of the Company
and the Selling Shareholders hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the U.S.
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time
<PAGE> 32
-28-
pursuant to Section 5(d) hereof remains true and correct as of
such Date of Delivery.
(ii) Certificate of the Selling Shareholders. A
certificate, dated such Date of Delivery, of an
Attorney-in-Fact on behalf of each Selling Shareholder
confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) hereof remains true and correct as of
such Date of Delivery.
(iii) Opinion of Counsel for Company. The favorable opinion,
dated as of such Date of Delivery, of each of the counsels
listed in Section 5(b), each in form and substance
satisfactory to counsel for the U.S. Underwriters, relating to
the U.S. Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The
favorable opinion, dated as of such Date of Delivery, of the
respective counsel for each Selling Shareholder, in form and
substance satisfactory to counsel for the U.S. Underwriters,
relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(v) Opinion of Counsel for U.S. Underwriters. The
favorable opinion of Cahill Gordon & Reindel, counsel for the
U.S. Underwriters and Clifford Chance, special counsel to the
U.S. Underwriters, dated such Date of Delivery, relating to
the U.S. Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst &
Young, in form and substance satisfactory to the U.S.
Representatives and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the
U.S. Representatives pursuant to Section 5(f) hereof, except
that the "specified date" in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior
to such Date of Delivery.
<PAGE> 33
-29-
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished
with such documents and opinions as they may reasonably request for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities by
the Company and with the sale of the Securities by the Selling
Shareholders as herein contemplated shall be reasonably satisfactory in
form and substance to the U.S. Representatives and counsel for the U.S.
Underwriters.
(o) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of U.S. Option Securities on a Date of Delivery which is after
the Closing Time, the obligations of the several U.S. Underwriters to
purchase the relevant Option Securities, may be terminated by the U.S.
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of U.S. Underwriters. The Company and the
Selling Shareholders, jointly and severally, agree to indemnify and hold
harmless each U.S. Underwriter and each person, if any, who controls any U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any
<PAGE> 34
-30-
untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(c) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of any U.S. Underwriter through the U.S. Representatives expressly for
use in the Registration Statement (or any amendment or supplement thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the U.S. Prospectus (or any amendment or
supplement thereto); provided, further that the Company will not be liable to a
U.S. Underwriter with respect to any preliminary prospectus to the extent that
the Company shall sustain the burden of proving that any such loss, liability,
claim, damage or expense resulted from the fact that such U.S. Underwriter, in
contravention of a requirement of this Agreement or applicable law, sold
Securities to a person to whom such U.S. Underwriter failed to send or give, at
or prior to the Closing Date, a copy of the U.S. Prospectus, as then
<PAGE> 35
-31-
amended or supplemented if: (i) the Company has previously furnished copies
thereof (sufficiently in advance of the Closing Date to allow for distribution
by the Closing Date) to the U.S. Underwriters and the loss, liability, claim,
damage or expense of such U.S. Underwriter resulted from an untrue statement or
omission of a material fact contained in or omitted from the preliminary
prospectus which was corrected in the U.S. Prospectus as, if applicable, amended
or supplemented prior to the Closing Date and such U.S. Prospectus was required
by law to be delivered at or prior to the written confirmation of sale to such
person and (ii) such failure to give or send such U.S. Prospectus by the Closing
Date to the party or parties asserting such loss, liability, claim, damage or
expense would have constituted the sole defense to the claim asserted by such
person; provided, further, that each Selling Shareholder shall be liable only
with reference to information relating to such Selling Shareholder furnished to
the Company in writing by or on behalf of such Selling Shareholder expressly for
use in the Registration Statement, any preliminary prospectus, the U.S.
Prospectus or any amendment or supplement thereto; provided, further, that each
Selling Shareholder's aggregate liability under this Section 6(a) shall be
limited to an amount equal to the gross proceeds (after deducting the
underwriting discount, but before deducting expenses) received by such Selling
Shareholder from the sale of the U.S. Securities and the International
Securities pursuant to the Purchase Agreements.
(b) Indemnification of Company, Directors and Officers and
Selling Shareholders. Each U.S. Underwriter severally agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, each
Selling Shareholder and each person, if any, who controls any Selling
Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment or supplement thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or any preliminary U.S. prospectus or the
U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment or supplement thereto) or such
preliminary prospectus or the U.S. Prospectus (or any amendment or supplement
thereto).
<PAGE> 36
-32-
(c) Actions Against Parties; Notification. Each indemnified
party shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified pursuant
to Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement Without Consent if Failure to Reimburse. If at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written
<PAGE> 37
-33-
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) Other Agreements with Respect to Indemnification. The
provisions of this Section shall not affect any agreement among the Company and
the Selling Shareholders with respect to indemnification.
SECTION 7. Contribution. If the indemnification provided for
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the U.S. Underwriters
on the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Shareholders on the one hand and of the U.S.
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the U.S. Underwriters on the other hand in
connection with the offering of the U.S. Securities pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the U.S. Securities pursuant to this Agreement
(before deducting expenses) received by the Company and the Selling Shareholders
and the total underwriting discount received by the U.S. Underwriters, in each
case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the U.S. Securities as set forth on such cover.
<PAGE> 38
-34-
The relative fault of the Company and the Selling Shareholders
on the one hand and the U.S. Underwriters on the other hand shall be determined
by reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Selling Shareholders
or by the U.S. Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the U.S.
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 7 were determined by pro rata allocation (even if the
U.S. Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this Section 7. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 7 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, (i) no
Selling Shareholder shall be required to contribute any amount in excess of the
amount of the total net proceeds received by such Selling Shareholder from the
U.S. Securities purchased from such Selling Shareholder and (ii) no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the U.S. Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such U.S. Underwriter has otherwise been required to pay by reason
of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who
controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the
<PAGE> 39
-35-
same rights to contribution as such U.S. Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company or any the Selling Shareholder
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
shall have the same rights to contribution as the Company or such Selling
Shareholder, as the case may be. The U.S. Underwriters' respective obligations
to contribute pursuant to this Section 7 are several in proportion to the number
of Initial U.S. Securities set forth opposite their respective names in Schedule
A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement or in certificates of officers of the Company or any Venture or
the Selling Shareholders submitted pursuant hereto, shall remain operative and
in full force and effect, regardless of any investigation made by or on behalf
of any U.S. Underwriter or controlling person, or by or on behalf of the Company
or the Selling Shareholders, and shall survive delivery of the Securities to the
U.S. Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The U.S. Representatives may
terminate this Agreement, by notice to the Company and the Selling Shareholders,
at any time at or prior to Closing Time (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the U.S. Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the U.S. Representatives, impracticable
to market the Securities or to enforce contracts for the sale of the Securities,
or (iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission, or EASDAQ, Luxembourg Stock Exchange or
the Nasdaq National Market, or if trading generally on the American Stock
Exchange or the New York Stock Exchange
<PAGE> 40
-36-
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to
this Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the U.S. Underwriters.
If one or more of the U.S. Underwriters shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the U.S. Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting U.S. Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of U.S. Securities to be purchased on such date, each of
the non-defaulting U.S. Underwriters shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the U.S. Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting U.S. Underwriter.
<PAGE> 41
-37-
No action taken pursuant to this Section shall relieve any
defaulting U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the U.S. Underwriters to purchase and the Company to sell the relevant U.S.
Option Securities, as the case may be, either (i) the U.S. Representatives or
(ii) the Company and any Selling Shareholder shall have the right to postpone
Closing Time or the relevant Date of Delivery, as the case may be, for a period
not exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
As used herein, the term "U.S. Underwriter" includes any person substituted for
a U.S. Underwriter under this Section 10.
SECTION 11. Default by One or More of the Selling Shareholders
or the Company. (a) If one or more of the Selling Shareholders selling an
aggregate of at least $15,000,000 of Securities shall fail at Closing Time or at
a Date of Delivery to sell and deliver the number of Securities which such
Selling Shareholder or Selling Shareholders are obligated to sell hereunder, and
the remaining Selling Shareholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number to be sold by all Selling Shareholders as set
forth in Schedule B hereto, then the U.S. Underwriters may, at option of the
U.S. Representatives, by notice from the U.S. Representatives to the Company and
the non-defaulting Selling Shareholders, either (a) terminate this Agreement
without any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as
referred to in this Section 11, each of the U.S. Representatives, the Company
and the non-defaulting Selling Shareholders shall have the right to postpone
Closing Time or the Date of Delivery for a period not exceeding seven days in
order to effect any required change in the Registration Statement or
Prospectuses or in any other documents or arrangements.
<PAGE> 42
-38-
(b) If the Company shall fail at Closing Time or at the Date
of Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party; provided, however, that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant
to this Section 11 shall relieve the Company from liability, if any, in respect
of such default.
SECTION 12. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
U.S. Underwriters shall be directed to the U.S. Representatives c/o Merrill
Lynch & Co., Merrill Lynch Pierce, Fenner & Smith Incorporated at North Tower,
World Financial Center, New York, New York 10281-1201, attention of Robert
Kramer; notices to the Company shall be directed to it at 1751 Pinnacle Drive,
North Tower - 12th Floor, McLean, VA 22102, attention of William H. Seippel; and
notices to the Selling Shareholders shall be directed to the Company at 1751
Pinnacle Drive, North Tower - 12th Floor, McLean, VA 22102, attention of William
H. Seippel.
SECTION 13. Parties. This Agreement shall each inure to the
benefit of and be binding upon the U.S. Underwriters, the Company and the
Selling Shareholders and their respective successors. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the U.S. Underwriters, the Company and
the Selling Shareholders and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the U.S. Underwriters, the Company and the Selling
Shareholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any U.S. Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
<PAGE> 43
-39-
SECTION 15. Effect of Headings. The Article and Section
headings herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
<PAGE> 44
-40-
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the U.S. Underwriters, the Company and the Selling
Shareholders in accordance with its terms.
Very truly yours,
GLOBAL TELESYSTEMS GROUP, INC.
By:
Title:
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE B HERETO, EXCLUDING
THE J.P. MORGAN ENTITIES AND
THE CAPITAL GROUP ENTITIES
By:
As Attorney-in-Fact acting on behalf of the
Selling Shareholders named in Schedule B
hereto, excluding the J.P. Morgan Entities
and the Capital Group Entities
<PAGE> 45
-41-
MORGAN GUARANTY TRUST COMPANY OF J.P. MORGAN INVESTMENT MANAGEMENT INC.
NEW YORK, AS TRUSTEE OF THE AS INVESTMENT MANAGER AND AGENT JPM
COMMINGLED PENSION TRUST FUND EMERGING MARKETS SPECIAL OPPORTUNITIES
(MULTI-MARKET SPECIAL INVESTMENT PORTFOLIO, L.P.
FUND II) OF MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
J.P. MORGAN INVESTMENT MANAGEMENT INC.
AS INVESTMENT MANAGER AND AGENT JPM
MORGAN GUARANTY TRUST COMPANY OF EMERGING MARKETS SPECIAL OPPORTUNITIES
NEW YORK, AS INVESTMENT MANAGER PORTFOLIO OFFSHORE, L.P.
AND AGENT FOR THE ALFRED P.
SLOAN FOUNDATION (MULTI-MARKET
ACCOUNT)
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, AS TRUSTEE OF THE
MULTI-MARKET SPECIAL INVESTMENT
TRUST FUND OF MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: By:
---------------------------- -------------------------------------
Name: Name:
Title: Title:
<PAGE> 46
-42-
EMERGING MARKETS GROWTH FUND, INC.
By:
-------------------------------------
Name:
Title:
CAPITAL INTERNATIONAL EMERGING MARKETS FUND
By:
-------------------------------------
Name:
Title:
NEW EUROPE EAST INVESTMENT FUND
By:
-------------------------------------
Name:
Title:
<PAGE> 47
-43-
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
<PAGE> 48
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
- - - - ------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner &
Smith Incorporated..........................................................
Donaldson, Lufkin & Jenrette
Securities Corporation......................................................
Bear, Stearns & Co. Inc.........................................................
BT Alex. Brown Incorporated.....................................................
Lehman Brothers Inc.............................................................
Prudential Securities Incorporated..............................................
Arnhold and S. Bleichroeder, Inc................................................ -------------
Total........................................................................... $
</TABLE>
SCHEDULE A-1
<PAGE> 49
SCHEDULE B
<TABLE>
<CAPTION>
Number of Maximum Number
Initial U.S. of Option
Securities Securities
to be Sold to be Sold
----------- --------------
<S> <C> <C>
Global TeleSystems Group, Inc...............................
[SELLING SHAREHOLDERS]......................................
Total....................................................... $ $
------------ ------------
</TABLE>
SCHEDULE B-1
<PAGE> 50
SCHEDULE C
GLOBAL TELESYSTEMS GROUP, INC.
Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $[ ].
2. The purchase price per share for the U.S. Securities to be paid
by the several U.S. Underwriters shall be $[ ], being an amount equal to the
initial public offering price set forth above less $[ ] per share; provided that
the purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
SCHEDULE C-1
<PAGE> 51
Exhibit B
, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
c/o Merrill Lynch & Co.
Merrill, Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
United States of America
Re: Agreement not to sell or otherwise
dispose of securities of Global
TeleSystems Group, Inc.
Ladies and Gentlemen:
The undersigned, a stockholder of Global TeleSystems Group, Inc. (the
"Company"), understands that the Company proposes to file two registration
statements on Form S-1 with the Securities and Exchange Commission in connection
with public offerings (the "Offerings") of shares of Common Stock (the "Shares")
and convertible bonds (the "Bonds," together with the Shares, the "Securities")
of the Company. The undersigned further understands that the Company proposes to
enter into one or more purchase agreements (the "Purchase Agreements") with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as
representative of the underwriters of the Offerings (the "Underwriters").
In recognition of the benefit that such Offerings will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in order to induce the Company and the Underwriters to enter into the respective
Purchase Agreements and to proceed with the Offerings, the undersigned hereby
agrees, that until the date that is 90 days after the date of the Purchase
Agreements, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
B-1
<PAGE> 52
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any Shares or any securities convertible into
or exchangeable or exercisable for any Shares (other than any Shares sold
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or any securities convertible into or
exchangeable or exercisable for any such Shares, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of disposition (except for publicly-traded Shares
that have been acquired on Nasdaq or Easdaq) or request the filing of any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of Shares (other than any Shares sold pursuant to an
effective registration statement under the Securities Act), whether any such
swap transaction is to be settled by delivery of Shares or other securities, in
cash or otherwise.
Sincerely,
Name of Stockholder:
--------------------------------------
(Print)
Signature:
--------------------------------------
By:
(if not natural person)
B-2
<PAGE> 1
EXHIBIT 1.2
===============================================================================
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
4,183,200 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: [ ], 1998
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTERNATIONAL PURCHASE AGREEMENT........................................................................1
SECTION 1. Representations and Warranties..........................................................4
(a) Representations and Warranties by the Company..................................4
(i) Compliance with Registration Requirements...........................4
(ii) Independent Accountants.............................................5
(iii) Financial Statements................................................5
(iv) No Material Adverse Change in Business..............................6
(v) Good Standing of the Company........................................6
(vi) Good Standing of Subsidiaries.......................................7
(vii) Capitalization......................................................7
(viii) Authorization of Agreement..........................................8
(ix) Authorization and Description of Securities.........................8
(x) Absence of Defaults and Conflicts...................................8
(xi) Absence of Labor Dispute............................................9
(xii) Absence of Proceedings..............................................9
(xiii) Accuracy of Exhibits...............................................10
(xiv) Possession of Intellectual Property................................10
(xv) Absence of Further Requirements....................................11
(xvi) Possession of Licenses and Permits.................................11
(xvii) Title to Property..................................................11
(xviii) Compliance with Cuba Act...........................................12
(xix) Investment Company Act.............................................12
(xx) Environmental Laws.................................................12
(xxi) Registration Rights................................................13
(b) Representations and Warranties by the Selling Shareholders....................13
(i) Accurate Disclosure................................................13
(ii) Authorization of Agreements........................................13
(iii) Valid and Marketable Title.........................................14
(iv) Due Execution of Power of Attorney and Custody
Agreement..........................................................15
(v) Absence of Manipulation............................................15
(vi) Absence of Further Requirements....................................15
(vii) Restriction on Sale of Securities..................................16
(viii) Certificates Suitable for Transfer.................................16
(c) Officer's Certificates........................................................16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 2. Sale and Delivery to International Managers; Closing...................................17
(a) Initial International Securities..............................................17
(b) International Option Securities...............................................17
(c) Payment.......................................................................18
(d) Denominations; Registration...................................................19
SECTION 3. Covenants of the Company...............................................................19
(a) Compliance with Securities Regulations and Commission Requests................19
(b) Filing of Amendments..........................................................20
(c) Delivery of Registration Statements...........................................20
(d) Delivery of Prospectuses......................................................20
(e) Continued Compliance with Securities Laws.....................................21
(f) Rule 158......................................................................21
(g) Use of Proceeds...............................................................21
(h) Listing.......................................................................22
(i) Restriction on Sale of Securities.............................................22
(j) Reporting Requirements........................................................22
SECTION 4. Payment of Expenses....................................................................22
(a) Expenses......................................................................23
(b) Expenses of the Selling Shareholders..........................................23
(c) Termination of Agreement......................................................23
(d) Allocation of Expenses........................................................24
SECTION 5. Conditions of International Managers' Obligations......................................24
(a) Effectiveness of Registration Statement.......................................24
(b) Opinion of Counsel for Company................................................24
(c) Opinion of Counsel for the Selling Shareholders...............................25
(d) Opinion of Counsel for International Managers.................................25
(e) Officers' Certificate.........................................................25
(f) Certificate of Selling Shareholders...........................................26
(g) Accountant's Comfort Letter...................................................26
(h) Bring-down Comfort Letter.....................................................26
(i) Listing.......................................................................26
(j) No Objection..................................................................27
(k) Lock-up Agreements............................................................27
(l) Purchase of Initial U.S. Securities...........................................27
(m) Conditions to Purchase of International Option Securities.....................27
(i) Officers' Certificate..............................................27
(ii) Certificate of the Selling Shareholders............................27
(iii) Opinion of Counsel for Company.....................................28
(iv) Opinion of Counsel for the Selling Shareholders....................28
</TABLE>
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(v) Opinion of Counsel for International Managers......................28
(vi) Bring-down Comfort Letter..........................................28
(n) Additional Documents..........................................................28
(o) Termination of Agreement......................................................29
SECTION 6. Indemnification........................................................................29
(a) Indemnification of International Managers.....................................29
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders..................................................................31
(c) Actions Against Parties; Notification.........................................31
(d) Settlement Without Consent if Failure to Reimburse............................32
(e) Other Agreements with Respect to Indemnification..............................33
SECTION 7. Contribution...........................................................................33
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.........................35
SECTION 9. Termination of Agreement...............................................................35
(a) Termination; General..........................................................35
(b) Liabilities...................................................................36
SECTION 10. Default by One or More of the International Managers...................................36
SECTION 11. Default by One or More of the Selling Shareholders or the Company......................37
SECTION 12. Notices................................................................................38
SECTION 13. Parties................................................................................38
SECTION 14. GOVERNING LAW AND TIME.................................................................38
SECTION 15. Effect of Headings.....................................................................38
SCHEDULES
Schedule A - List of International Managers..............................................Sch A-1
Schedule B - List of Company and Selling Shareholders....................................Sch B-1
Schedule C - Pricing Information.........................................................Sch C-1
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EXHIBITS
Exhibit A-1 - Form of Opinion of Shearman & Sterling.................................A-1-1
Exhibit A-2 - Form of Opinion of Grier Raclin........................................A-2-1
Exhibit A-3 - Form of Opinion of Coudert Brothers....................................A-3-1
Exhibit A-4 - Form of Opinion of Shevchenko Didkovskiy & Partners....................A-4-1
Exhibit A-5 - Form of Opinion of Somodeco............................................A-5-1
Exhibit A-6 - Form of Opinion of Loeff Claeys Verbeke................................A-6-1
Exhibit A-7 - Form of Opinion of Counsel for the Selling Shareholders................A-7-1
Exhibit B - Form of Lock-up Letter...................................................B-1
</TABLE>
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<PAGE> 6
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
4,183,200 Shares of Common Stock
(Par Value $.10 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
[ ], 1998
MERRILL LYNCH INTERNATIONAL
Donaldson, Lufkin & Jenrette International
Goldman Sachs International
CIBC Wood Gundy Oppenheimer
Baring Brothers Limited (as agent for ING Bank N.V.)
Renaissance Advisory Limited
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Place
London EC2Y 9LY
England
Ladies and Gentlemen:
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company"), and the other persons listed in Schedule B hereto (the "Selling
Shareholders") confirm their agreement with Merrill Lynch International
("Merrill Lynch") and each of the other International Managers named in Schedule
A hereto (collectively, the "International Managers", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Donaldson, Lufkin & Jenrette International,
Goldman Sachs International, CIBC Wood Gundy Oppenheimer, Baring Brothers
Limited (as agent for ING Bank N.V.) and Renaissance Advisory Limited are acting
as representatives (in such capacity, the "Lead Managers"), with respect to the
issue and sale by the Company and the sale by the Selling Shareholders, acting
severally and not jointly, and the purchase by the International Managers,
acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $.10 per share, of the Company ("Common Stock") set forth in
said Schedule A, and with respect to the grant by the Company to the
International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 627,480
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 4,183,200 shares of Common Stock (the "Initial International
Securities") to be purchased by the International
<PAGE> 7
-2-
Managers and all or any part of the 627,480 shares of Common Stock subject to
the option described in Section 2(b) hereof (the "International Option
Securities") are hereinafter called, collectively, the "International
Securities."
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the "U.S.
Purchase Agreement") providing for the offering by the Company and the Selling
Shareholders of an aggregate of 4,183,200 shares of Common Stock (the "Initial
U.S. Securities") through arrangements with certain underwriters in the United
States and Canada (the "U.S. Underwriters") for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated, Lehman
Brothers Inc., Prudential Securities Incorporated and Arnhold and S.
Bleichroeder, Inc. are acting as the U.S. representatives (collectively, the
"U.S. Representatives") and the grant by the Company to the U.S. Underwriters,
acting severally and not jointly, of an option to purchase all or any part of
the U.S. Underwriters' pro rata portion of up to 941,220 additional shares of
Common Stock solely to cover over-allotments, if any (the "U.S. Option
Securities" and, together with the International Option Securities, the "Option
Securities"). The Initial U.S. Securities and the U.S. Option Securities are
hereinafter called the "U.S. Securities." It is understood that the Company and
the Selling Shareholders are not obligated to sell, and the International
Managers are not obligated to purchase, any Initial International Securities
unless all of the Initial U.S. Securities are contemporaneously purchased by the
U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters," the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities," the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities," and this Agreement and the
U.S. Purchase Agreement are hereinafter collectively called the "Purchase
Agreements."
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such
capacity, the "Global Coordinator").
<PAGE> 8
-3-
The Company and the Selling Shareholders understand that the
International Managers propose to make a public offering of the International
Securities as soon as the Lead Managers deem advisable after this Agreement has
been executed and delivered.
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-52733) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting." The information included in any
such prospectus or in any such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became effective
(a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
<PAGE> 9
-4-
shall include the Rule 462(b) Registration Statement. The final Form of
International Prospectus and the final Form of U.S. Prospectus in the forms
first furnished to the Underwriters for use in connection with the offering of
the Securities are herein called the "International Prospectus" and the "U.S.
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "International Prospectus" and "U.S. Prospectus" shall
refer to the preliminary International Prospectus dated June 12, 1998 and
preliminary U.S. Prospectus dated June 12, 1998, respectively, each together
with the applicable Term Sheet and all references in this Agreement to the date
of such Prospectuses shall mean the date of the applicable Term Sheet. For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the International Prospectus, the U.S. Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each International Manager as of the date hereof, as
of the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each
International Manager, as follows:
(i) Compliance with Registration Requirements. The Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act and no proceedings for that purpose have been instituted
or are pending or, to the knowledge of the Company, are contemplated by the
Commission, and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement and any
post-effective amendments thereto became effective and at the Closing Time
(and, if any International Option Securities are purchased, at the Date of
Delivery), the Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not and
will not contain an untrue statement of a material fact or omit to state a
material
<PAGE> 10
-5-
fact required to be stated therein or necessary to make the statements
therein not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any
International Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or omitted
or will omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectuses shall not be "materially
different," as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
International Manager through the Lead Managers expressly for use in the
Registration Statement or the International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and each preliminary prospectus and the
Prospectuses delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the entities
to which they relate as of the dates indicated and their respective results
of operations, stockholders' equity and
<PAGE> 11
-6-
cash flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present fairly
in accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in
the Prospectuses present fairly the information shown therein and, in the
case of the consolidated financial data therein, have been compiled on a
basis consistent with that of the audited financial statements included in
the Registration Statement, and in the case of the combined financial data
therein, have been compiled from financial statements prepared on a basis
consistent with that of the audited financial statements included in the
Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement (at
the time it became effective), except as otherwise stated therein (at the
time it became effective), (A) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its Subsidiaries (as defined
below) considered as one enterprise, whether or not arising in the ordinary
course of business (a "Material Adverse Effect"), (B) there have been no
transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one enterprise,
and (C) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the state of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify
<PAGE> 12
-7-
or to be in good standing would not, singly or in the aggregate, result in
a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
the Company (as such term is defined in Rule 1-02 of Regulation S-X) and
all entities in which the Company has a direct or indirect majority equity
interest or voting power (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized (to the extent applicable) and is
validly existing as a corporation, general partnership, limited
partnership, limited liability company, closed joint stock company, or
similar entity in good standing (to the extent applicable) under the laws
of the jurisdiction of its organization, has organizational power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not, singly
or in the aggregate, result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock or other ownership interests of each such
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable (to the extent applicable) and is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity, except that the
Company's Capital Stock in Commstock International B.V. and in GTS Hungary
has been pledged to Ericsson Finans A.B. and Creditanstalt Bank as
collateral for certain borrowings; none of the outstanding shares of
capital stock or other ownership interests of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of such
Subsidiary. The only subsidiaries of the Company are (a) the subsidiaries
listed on Exhibit 21 to the Registration Statement and (b) certain other
subsidiaries which, considered in the aggregate as a single Subsidiary, do
not constitute a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances,
<PAGE> 13
-8-
if any, pursuant to this Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities or options referred to in the
Prospectuses). The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights
of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, against payment of the consideration set forth
herein and the U.S. Purchase Agreement, respectively, will be validly
issued, fully paid and non-assessable; the Common Stock conforms in all
material respects to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the issuance of
the Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its Ventures (as defined below) is in violation of its charter or
by-laws (or equivalent constitutive documents) or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its Ventures is a party or by which it or any
of them may be bound, or to which any of the property or assets of the
Company or any Venture is subject (collectively, "Agreements and
Instruments") except for such defaults that would not, singly or in the
aggregate, result in a
<PAGE> 14
-9-
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in this Agreement, the U.S. Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use of Proceeds") and
compliance by the Company with its obligations under this Agreement and the
U.S. Purchase Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Venture pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that would not result in a Material
Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws (or equivalent constitutive documents)
of the Company or any Venture or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Venture or any of their assets, properties or operations. As
used herein, (a) "Ventures" means all entities in which the Company has a
direct or indirect greater than 25% equity interest or voting power and (b)
a "Repayment Event" means any event or condition which gives the holder of
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
Venture.
(xi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any Venture exists or, to the knowledge of the Company,
is threatened, and the Company is not aware of any existing or threatened
labor disturbance by the employees of any of its or any Venture's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to, singly or in the aggregate, result in a
Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or
<PAGE> 15
-10-
brought by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or any Venture, which is required to be disclosed in
the Registration Statement (other than as disclosed therein), or which,
singly or in the aggregate, might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets of the Company or
any Venture or the consummation of the transactions contemplated in this
Agreement and the U.S. Purchase Agreement or the performance by the Company
of its obligations hereunder or thereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any Venture is a
party or of which any of their respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, singly or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and the
Ventures own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, except to the extent the failure to so own, possess
or be able to acquire would not result in a Material Adverse Effect, and
neither the Company nor any Venture has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company or any Venture therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
<PAGE> 16
-11-
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement, except such as have been already obtained or as
may be required under the 1933 Act or the 1933 Act Regulations and foreign
or state securities or blue sky laws.
(xvi) Possession of Licenses and Permits. Except as otherwise
disclosed in the Registration Statement, the Company and the Ventures
possess such material permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and the
Ventures are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, result in a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any Venture has
received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and the Ventures have good
and marketable title to all real property owned by the Company and the
Ventures and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectuses or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any
Venture; and all of the leases and subleases material to the business of
the Company and the Ventures, considered as one enterprise, and under which
the Company
<PAGE> 17
-12-
or any Venture holds properties described in the Prospectuses, are in full
force and effect, and neither the Company nor any Venture has any notice of
any material claim of any sort that has been asserted by anyone adverse to
the rights of the Company or any Venture under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company or such Venture to the continued possession of the leased or
subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. Neither the Company nor any of its
Subsidiaries is, nor upon the issuance and sale of the Securities as herein
contemplated and the application of the net proceeds therefrom as described
in the Prospectuses will be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any Venture is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata)
or wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and the Ventures have all permits, authorizations
and approvals required under any applicable
<PAGE> 18
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Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any Ventures and (D) there are no
events or circumstances that might reasonably be expected to form the basis
of an order for clean-up or remediation, or an action, suit or proceeding
by any private party or governmental body or agency, against or affecting
the Company or any Ventures relating to Hazardous Materials or any
Environmental Laws.
(xxi) Registration Rights. Except as disclosed in the Prospectuses,
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(b) Representations and Warranties by the Selling Shareholders.
Each Selling Shareholder severally represents and warrants to each International
Manager as of the date hereof and as of the Closing Time, and agrees with each
International Manager, as follows:
(i) Accurate Disclosure. Such Selling Shareholder has reviewed
and is familiar with the Registration Statement and the Prospectuses and
neither the Prospectuses nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein in the light of the
circumstances under which they were made, not misleading; provided, that
the representations and warranties set forth in this paragraph 1(b)(i)
apply only to statements or omissions in the Registration Statement or the
Prospectuses based upon information relating to such Selling Shareholder
furnished to the Company in writing by such Selling Shareholder expressly
for use therein. It is understood and agreed that the only written
information furnished to the Company by each respective Selling Shareholder
specifically for use in the Registration Statement is the information
relating to such Selling Shareholder set forth in the table under the
caption "Principal and Selling Stockholders" in the Prospectuses.
(ii) Authorization of Agreements. Such Selling Shareholder has the
full right, power and authority to enter into this Agreement and, with the
exception of Commingled
<PAGE> 19
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Pension Trust Fund (Multi-Market Special Investment Fund II) of Morgan
Guaranty Trust Company of New York, Alfred P. Sloan Foundation
(Multi-Market Account), Multi-Market Special Investment Trust Fund of
Morgan Guaranty Trust Company of New York, JPM Emerging Markets Special
Opportunities Portfolio, L.P. and JPM Emerging Markets Special
Opportunities Portfolio Offshore, L.P. (collectively, the "J.P. Morgan
Entities") and Emerging Markets Growth Fund, Inc., Capital International
Emerging Markets Fund and New Europe East Investment Fund (collectively,
the "Capital Group Entities"), a Power of Attorney and Custody Agreement
(the "Power of Attorney and Custody Agreement"), and such Selling
Shareholder has the full right, power and authority to sell, transfer and
deliver the Securities to be sold by such Selling Shareholder hereunder.
The execution and delivery of this Agreement and, with the exception of the
J.P. Morgan Entities and the Capital Group Entities, the Power of Attorney
and Custody Agreement and the sale and delivery of the Securities to be
sold by such Selling Shareholder and the consummation of the transactions
contemplated herein and compliance by such Selling Shareholder with its
obligations hereunder have been duly authorized by such Selling Shareholder
and do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax, lien,
charge or encumbrance upon the Securities to be sold by such Selling
Shareholder or any property or assets of such Selling Shareholder pursuant
to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other agreement or instrument to which
such Selling Shareholder is a party or by which such Selling Shareholder
may be bound, or to which any of the property or assets of such Selling
Shareholder is subject, nor will such action result in any violation of the
provisions of the charter or by-laws or other organizational instrument of
such Selling Shareholder, if applicable, or any applicable treaty, law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over such Selling Shareholder or any of its properties.
(iii) Valid and Marketable Title. Such Selling Shareholder has and
will at the Closing Time have valid and marketable title to the Securities
to be sold by such Selling Shareholder hereunder, free and clear of any
<PAGE> 20
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security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind, other than pursuant to this Agreement; and upon
delivery of such Securities and payment of the purchase price therefor as
herein contemplated, assuming each International Manager has no notice of
any adverse claim, each of the International Managers will receive valid
and marketable title to the Securities purchased by it from such Selling
Shareholder, free and clear of any security interest, mortgage, pledge,
lien, charge, claim, equity or encumbrance of any kind.
(iv) Due Execution of Power of Attorney and Custody Agreement. Such
Selling Shareholder, with the exception of the J.P. Morgan Entities and the
Capital Group Entities, has duly executed and delivered, in the form
heretofore furnished to the Lead Managers, the Power of Attorney and
Custody Agreement with Grier C. Raclin, William H. Seippel and Alan Krenek,
or any of them, as attorneys-in-fact (the "Attorneys-in-Fact") and the
Company, as custodian (the "Custodian"); the Custodian is authorized to
deliver the Securities to be sold by such Selling Shareholder hereunder and
to accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 5(f) or that may be required pursuant to Section 5(l) on behalf of
such Selling Shareholder, to sell, assign and transfer to the International
Managers the Securities to be sold by such Selling Shareholder hereunder,
to determine the purchase price to be paid by the Underwriters to such
Selling Shareholder, as provided in Section 2(a) hereof, but subject to the
provisions of the Power of Attorney, to authorize the delivery of the
Securities to be sold by such Selling Shareholder hereunder, to accept
payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement.
(v) Absence of Manipulation. Such Selling Shareholder has not taken,
and will not take, directly or indirectly, any action which is designed to
or which has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(vi) Absence of Further Requirements. No filing with, or consent,
approval, authorization, order, registration, qualification or decree of,
any court or governmental authority or agency, domestic or foreign, is
<PAGE> 21
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necessary or required for the performance by each Selling Shareholder of
its obligations hereunder or, with the exception of the J.P. Morgan
Entities and the Capital Group Entities, in the Power of Attorney and
Custody Agreement, or in connection with the sale and delivery of the
Securities hereunder or the consummation of the transactions contemplated
by this Agreement, except such as may have previously been made or obtained
or as may be required under the 1933 Act or the 1933 Act Regulations or
state securities laws.
(vii) Restriction on Sale of Securities. During of a period of 90
days from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of Merrill Lynch on behalf of the
Underwriters, (a) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file
any registration statement under the 1933 Act with respect to any of the
foregoing or (b) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (a) or (b) above is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to the sale of the Securities
hereunder and under the International Purchase Agreement.
(viii) Certificates Suitable for Transfer. Certificates for all of
the Securities to be sold by such Selling Shareholder, with the exception
of the J.P. Morgan Entities and the Capital Group Entities, pursuant to
this Agreement, in suitable form for transfer by delivery or accompanied by
duly executed instruments of transfer or assignment in blank with
signatures guaranteed, have been placed in custody with the Custodian with
irrevocable conditional instructions to deliver such Securities to the
International Managers pursuant to this Agreement.
(c) Officer's Certificates. Any certificate signed by any officer of
the Company or any Ventures delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company herein to each International Manager
as to
<PAGE> 22
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the matters covered thereby; and any certificate signed by or on behalf of
the Selling Shareholders as such and delivered to the Lead Managers or to
counsel for the International Managers pursuant to the terms of this Agreement
shall be deemed a representation and warranty by such Selling Shareholder to the
International Managers as to the matters covered thereby.
SECTION 2. Sale and Delivery to International Managers; Closing.
(a) Initial International Securities. The Company and each Selling
Shareholder, severally and not jointly, agrees to sell to each International
Manager, severally and not jointly, and on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each International Manager, severally and not jointly, agrees to purchase
from the Company and each Selling Shareholder, at the price per share set forth
in Schedule C, that proportion of the number of Initial International Securities
set forth in Schedule B opposite the name of the Company or such Selling
Shareholder, as the case may be, which the number of Initial International
Securities set forth in Schedule A opposite the name of such International
Manager, plus any additional number of Initial International Securities which
such International Manager may become obligated to purchase pursuant to the
provisions of Section 10 hereof, bears to the total number of Initial
International Securities, subject in each case, to such adjustments among the
International Managers as the Lead Managers in their sole discretion shall make
to eliminate any sales or purchases of fractional shares.
(b) International Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company and each Selling Shareholder, severally
and not jointly, hereby grants an option to the International Managers,
severally and not jointly, to purchase up to an additional 627,480 shares of
Common Stock as set forth in Schedule B, at the price per share set forth in
Schedule C, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial International Securities but
not payable on the International Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised not more than two
times in whole or in part only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
International Securities upon notice by the Global Coordinator to the Company
and the
<PAGE> 23
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Selling Shareholders setting forth the number of International Option Securities
as to which the several International Managers are then exercising the option
and the time and date of payment and delivery for such International Option
Securities. Any such time and date of delivery for the International Option
Securities (a "Date of Delivery") shall be determined by the Global Coordinator,
but shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the International Option
Securities, each of the International Managers, acting severally and not
jointly, on the basis of the representations and warranties of the Company
contained herein and subject to the terms and conditions herein set forth, will
purchase that proportion of the total number of International Option Securities
then being purchased which the number of Initial International Securities set
forth in Schedule A opposite the name of such International Manager bears to the
total number of Initial International Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial
Securities shall be made at the offices of Cahill Gordon & Reindel, 80 Pine
Street, New York, New York 10005 or at such other place as shall be agreed upon
by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the
third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on the date
hereof) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the International
Option Securities are purchased by the International Managers, payment of the
purchase price for such International Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant
<PAGE> 24
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to each Selling Shareholder's Power of Attorney and Custody Agreement, as the
case may be, with the exception of the J.P. Morgan Entities and the Capital
Group Entities. It is understood that each International Manager has authorized
the Lead Managers, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial International Securities and the
International Option Securities, if any, which it has agreed to purchase.
Merrill Lynch, individually and not as representative of the International
Managers, may (but shall not be obligated to) make payment of the purchase price
for the Initial International Securities or the International Option Securities,
if any, to be purchased by any International Manager whose funds have not been
received by the Closing Time or the relevant Date of Delivery, as the case may
be, but such payment shall not relieve such International Manager from its
obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with
each International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
<PAGE> 25
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qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the Global
Coordinator or counsel for the International Managers shall reasonably object
within three Business Days after being furnished such documents.
(c) Delivery of Registration Statements. The Company has furnished
or will deliver to the Lead Managers and counsel for the International Managers,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Lead Managers, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the International
Managers. The copies of the Registration Statement and each amendment thereto
furnished to the International Managers will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each International Manager,
<PAGE> 26
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without charge, during the period when the International Prospectus is required
to be delivered under the 1933 Act or the Securities Exchange of 1934 (the "1934
Act"), such number of copies of the International Prospectus (as amended or
supplemented) as such International Manager may reasonably request. The
International Prospectus and any amendments or supplements thereto furnished to
the International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the U.S. Purchase Agreement and the Prospectuses. If at any time when
a prospectus is required by the 1933 Act to be delivered in connection with
sales of the Securities, any event shall occur or condition shall exist as a
result of which it is necessary, in the reasonable opinion of counsel for the
International Managers or for the Company, to amend the Registration Statement
or amend or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the reasonable opinion of any such counsel, at
any such time to amend the Registration Statement or amend or supplement any
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to the
International Managers such number of copies of such amendment or supplement as
the International Managers may reasonably request.
(f) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(g) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
<PAGE> 27
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(h) Listing. The Company will use its best efforts to effect the
admission of the Securities being issued and sold by the Company pursuant to
this Agreement on the European Association of Securities Dealers Automated
Quotation ("EASDAQ") system and comply with the requirements of such exchange to
maintain such listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities being issued and sold by the Company
pursuant to this Agreement on the Nasdaq National Market and will file with the
Nasdaq National Market all documents and notices required by the Nasdaq National
Market of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National Market.
(i) Restriction on Sale of Securities. During a period of 90 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of the Securities hereunder and under
the U.S. Purchase Agreement, (B) the issuance of any shares of Common Stock by
the Company upon the exercise of options or warrants or the conversion of
securities outstanding on the date hereof and referred to in the Prospectuses or
(C) the purchase or acquisition of shares of Common Stock pursuant to contracts
entered into prior to the date hereof and referred to in the Prospectuses.
(j) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act and rules and regulations of the Commission thereunder within the time
periods referred to therein.
<PAGE> 28
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SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vi) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(vii) the fees and expenses of any transfer agent or registrar for the
Securities, (viii) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (ix) the fees and expenses incurred in
connection with the listing of the Securities being issued and sold by the
Company and the Selling Shareholders, as applicable, pursuant to this Agreement
on EASDAQ and inclusion of the Securities being issued and sold by the Company
and the Selling Shareholders, as applicable, pursuant to this Agreement in the
Nasdaq National Market.
(b) Expenses of the Selling Shareholders. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by, this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
U.S. Underwriters, and their transfer between the U.S. Underwriters pursuant to
an agreement between such U.S. Underwriters, and (ii) the fees and disbursements
of their respective counsel and accountants.
(c) Termination of Agreement. If this Agreement is terminated by
the Lead Managers in accordance with the provisions of Section 5, Section
9(a)(i) or Section 11 hereof, the
<PAGE> 29
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Company and the Selling Shareholders shall reimburse the International Managers
for all of their out-of-pocket expenses reasonably incurred by the International
Managers in connection with this Agreement or the offering of the Securities
contemplated hereunder, including the reasonable fees and disbursements of
counsel and special counsel for the International Managers.
(d) Allocation of Expenses. The provisions of this Section shall
not affect any agreement that the Company and the Selling Shareholders may make
for the sharing of such costs and expenses.
SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof and in certificates of any officer of
the Company or any subsidiary of the Company or on behalf of any Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement has become effective and at Closing Time no stop order suspending
the effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
counsel to the International Managers. A prospectus containing the Rule
430A Information shall have been filed with the Commission in accordance
with Rule 424(b) (or a post-effective amendment providing such information
shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule
434, a Term Sheet shall have been filed with the Commission in accordance
with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
International Managers shall have received the favorable opinion, dated as
of Closing Time, of each of Shearman & Sterling, counsel for the Company,
Grier Raclin, Senior Vice President and General Counsel of the Company,
Coudert Brothers, special counsel for the Company
<PAGE> 30
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and special regulatory counsel for Hermes Europe Railtel B.V., Shevchenko
Didkovskiy & Partners, special Ukrainian counsel to Bancomsvyaz, Somodeco,
counsel and regulatory counsel to GTS Monaco Access S.A.M., and Loeff
Claeys Verbeke, special Dutch counsel, each in form and substance
satisfactory to counsel for the International Managers, together with
signed or reproduced copies of such letter for each of the other
International Managers to the effect set forth in Exhibits A-1 through A-5
hereto.
(c) Opinion of Counsel for the Selling Shareholders. At Closing
Time, the International Managers shall have received the favorable opinion,
dated as of the Closing Time, of the respective counsel for each Selling
Shareholder, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of such
letter for each of the other International Managers to the effect set forth
in Exhibit A-6 hereto and to such further effect as counsel to the
International Managers may reasonably request.
(d) Opinion of Counsel for International Managers. At Closing Time,
the International Managers shall have received the favorable opinion, dated
as of Closing Time, of each of Cahill Gordon & Reindel, counsel for the
International Managers, and Clifford Chance, special Russian counsel to the
International Managers, together with signed or reproduced copies of such
letter for each of the other International Managers as to such matters as
are reasonably requested by the Lead Managers.
(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the Lead Managers shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on
<PAGE> 31
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its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or
are pending or, to the knowledge of such officer, are contemplated by the
Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the
International Managers shall have received certificates signed by each
Selling Shareholder or of an Attorney-in-Fact on behalf of each Selling
Shareholder, dated as of Closing Time, to the effect that (i) the
representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same
force and effect as though expressly made at and as of Closing Time and
(ii) each Selling Shareholder has complied in all material respects with
all agreements and all conditions on its part to be performed under this
Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the International Managers shall have received from Ernst &
Young a letter dated such date, in form and substance satisfactory to the
Lead Managers, together with signed or reproduced copies of such letter for
each of the other International Managers containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the International
Managers shall have received from Ernst & Young a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that
the specified date referred to shall be a date not more than three business
days prior to Closing Time.
(i) Listing. At Closing Time, the Securities being issued and sold
by the Company pursuant to this Agreement shall have been accepted for
listing on EASDAQ, subject only to official notice of issuance. At Closing
Time, the Securities being issued and sold by the Company pursuant to this
Agreement shall have been accepted for inclusion in the Nasdaq National
Market, subject only to official notice of issuance.
<PAGE> 32
-27-
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
International Managers shall have received an agreement substantially in
the form of Exhibit B hereto signed by a sufficient number of holders as is
reasonably acceptable to the Lead Managers of shares of Common Stock,
warrants, options or other rights to purchase or acquire shares of Common
Stock or other securities convertible or exchangeable into Common Stock
(other than the Company's Convertible Bonds due 2000 (the "Convertible
Bonds")).
(l) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.
(m) Conditions to Purchase of International Option Securities. In
the event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company and
the Selling Shareholders contained herein and the statements in any
certificates furnished by the Company, any subsidiary of the Company and
the Selling Shareholders hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the Lead Managers
shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Certificate of the Selling Shareholders. A certificate,
dated such Date of Delivery, of an Attorney-in-Fact on behalf of each
Selling Shareholder confirming that the certificate delivered at
Closing Time pursuant to Section 5(f) hereof remains true and correct
as of such Date of Delivery.
<PAGE> 33
-28-
(iii) Opinion of Counsel for Company. The favorable opinion,
dated as of such Date of Delivery, of each of the counsels listed in
Section 5(b), each in form and substance satisfactory to counsel for
the International Managers, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The
favorable opinion, dated as of such Date of Delivery, of the
respective counsel for each Selling Shareholder, in form and substance
satisfactory to the counsel for the International Managers, relating
to the Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(c)
hereof.
(v) Opinion of Counsel for International Managers. The
favorable opinion of Cahill Gordon & Reindel, counsel for the
International Managers and Clifford Chance, special counsel to the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst & Young, in
form and substance satisfactory to the Lead Managers and dated such
Date of Delivery, substantially in the same form and substance as the
letter furnished to the International Managers pursuant to Section
5(f) hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days
prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the International Managers shall have been furnished
with such documents and opinions as they may reasonably request for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities by the Company and
with the sale of the Securities by the
<PAGE> 34
-29-
Selling Shareholders as herein contemplated shall be reasonably
satisfactory in form and substance to the Lead Managers and counsel for the
International Managers.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities, may be terminated by the Lead
Managers by notice to the Company at any time at or prior to Closing Time
or such Date of Delivery, as the case may be, and such termination shall be
without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such
termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. The Company and the
Selling Shareholders, jointly and severally, agree to indemnify and hold
harmless each International Manager and each person, if any, who controls any
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation,
<PAGE> 35
-30-
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(c) below) any such settlement
is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of any International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment or supplement thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the International Prospectus (or any amendment
or supplement thereto); provided, further, that the Company will not be liable
to any International Manager with respect to any preliminary prospectus to the
extent that the Company shall sustain the burden of proving that any such loss,
liability, claim, damage or expense resulted from the fact that such
International Manager, in contravention of a requirement of this Agreement or
applicable law, sold Securities to a person to whom such International Manager
failed to send or give, at or prior to the Closing Date, a copy of the
International Prospectus as then amended or supplemented if (i) the Company has
previously furnished copies thereof (sufficiently in advance of the Closing Date
to allow for distribution by the Closing Date) to the International Managers,
and the loss, liability, claim, damage or expense of such International Manager
resulted from an untrue statement or omission of a material fact contained in or
omitted from the preliminary prospectus which was corrected in the International
Prospectus as, if applicable, amended or supplemented prior to the Closing Date
and such International Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such
<PAGE> 36
-31-
person and (ii) such failure to give or send such International Prospectus by
the Closing Date to the party or parties asserting such loss, liability, claim,
damage or expense would have constituted the sole defense to the claim asserted
by such person; provided, further, that each Selling Shareholder shall be liable
only with reference to information relating to such Selling Shareholder
furnished to the Company in writing by or on behalf of such Selling Shareholder
expressly for use in the Registration Statement, any preliminary prospectus, the
International Prospectus or any amendment or supplement thereto; provided,
further, that each Selling Shareholder's aggregate liability under this Section
6(a) shall be limited to an amount equal to the gross proceeds (after deducting
the underwriting discount, but before deducting expenses) received by such
Selling Shareholder from the sale of the International Securities and the U.S.
Securities pursuant to the Purchase Agreements.
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders. Each International Manager severally agrees to indemnify
and hold harmless the Company, its directors, each of its officers who signed
the Registration Statement, each Selling Shareholder and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, and each person, if any, who controls any Selling
Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment or supplement thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or any preliminary International prospectus
or the International Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment or supplement thereto) or
such preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
(c) Actions Against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof
<PAGE> 37
-32-
and in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. In the case of parties
indemnified pursuant to Section 6(a) above, counsel to the indemnified parties
shall be selected by Merrill Lynch, and, in the case of parties indemnified
pursuant to Section 6(b) above, counsel to the indemnified parties shall be
selected by the Company. An indemnifying party may participate at its own
expense in the defense of any such action; provided, however, that counsel to
the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement Without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
<PAGE> 38
-33-
(e) Other Agreements with Respect to Indemnification. The
provisions of this Section shall not affect any agreement among the Company and
the Selling Shareholders with respect to indemnification.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the International
Managers on the other hand from the offering of the Securities pursuant to this
Agreement or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Selling Shareholders on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the International Managers on the other hand in
connection with the offering of the International Securities pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the International Securities pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders and the total underwriting discount received by the International
Managers, in each case as set forth on the cover of the International
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the International
Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholderson the
one hand and the International Managers on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or
<PAGE> 39
-34-
the Selling Shareholders or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Selling Shareholders and the International Managers
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the International
Managers were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities, claims,
damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, (i) no Selling
Shareholder shall be required to contribute any amount in excess of the amount
of the total net proceeds received by such Selling Shareholder from the U.S.
Securities purchased from such Selling Shareholder and (ii) no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Manager has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company or any the Selling Shareholder within the meaning of
Section 15 of the 1933 Act or Section 20
<PAGE> 40
-35-
of the 1934 Act shall have the same rights to contribution as the Company or
such Selling Shareholder, as the case may be. The International Managers'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial International Securities set forth opposite
their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any Venture or the
Selling Shareholders submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any International Manager or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the International Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the International Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Lead Managers, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission, or EASDAQ, Luxembourg Stock Exchange or the Nasdaq National Market,
or if trading generally on the American Stock Exchange or the New York Stock
Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or
(iv) if
<PAGE> 41
-36-
a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the International Managers.
If one or more of the International Managers shall fail at Closing Time or a
Date of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Lead Managers
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting International Managers, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Lead Managers shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of International Securities to be purchased on such
date, each of the non-defaulting International Managers shall be
obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of International Securities to be purchased on such date, this
Agreement or, with respect to any Date of Delivery which occurs after
the Closing Time, the obligation of the International Managers to
purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without
liability on the part of any non-defaulting International Manager.
No action taken pursuant to this Section shall relieve any
defaulting International Manager from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a
<PAGE> 42
-37-
Date of Delivery which is after the Closing Time, which does not result in a
termination of the obligation of the International Managers to purchase and the
Company to sell the relevant International Option Securities, as the case may
be, either (i) the Lead Managers or (ii) the Company and any Selling Shareholder
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "International Manager"
includes any person substituted for a International Manager under this Section
10.
SECTION 11. Default by One or More of the Selling Shareholders or
the Company. (a) If one or more of the Selling Shareholders selling an aggregate
of at least $15,000,000 of Securities shall fail at Closing Time or at a Date of
Delivery to sell and deliver the number of Securities which such Selling
Shareholder or Selling Shareholders are obligated to sell hereunder, and the
remaining Selling Shareholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number to be sold by all Selling Shareholders as set
forth in Schedule B hereto, then the International Managers may, at option of
the Lead Managers, by notice from the Lead Managers to the Company and the
non-defaulting Selling Shareholders, either (a) terminate this Agreement without
any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to
in this Section 11, each of the Lead Managers, the Company and the
non-defaulting Selling Shareholders shall have the right to postpone Closing
Time or the Date of Delivery for a period not exceeding seven days in order to
effect any required change in the Registration Statement or Prospectuses or in
any other documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party; provided, however, that the provisions of Sections
1, 4,
<PAGE> 43
-38-
6, 7 and 8 shall remain in full force and effect. No action taken pursuant to
this Section 11 shall relieve the Company from liability, if any, in respect of
such default.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers c/o Merrill Lynch
International at 20 Farringdon Road, London EC1M 3NH, attention of [ ]; notices
to the Company shall be directed to it at 1751 Pinnacle Drive, North Tower -
12th Floor, McLean, VA 22102, attention of William H. Seippel; and notices to
the Selling Shareholders shall be directed to [ ], attention of [ ].
SECTION 13. Parties. This Agreement shall each inure to the benefit
of and be binding upon the International Managers, the Company and the Selling
Shareholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the International Managers, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the International Managers, the Company and the Selling
Shareholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any International Manager shall be deemed to be a successor by reason merely of
such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE> 44
-39-
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers, the Company and the Selling Shareholders in
accordance with its terms.
Very truly yours,
GLOBAL TELESYSTEMS GROUP, INC.
By
------------------------------
Title:
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE B HERETO, EXCLUDING THE
J.P. MORGAN ENTITIES
By:
------------------------------
As Attorney-in-Fact acting on
behalf of the Selling
Shareholders named in
Schedule B hereto, excluding
the J.P. Morgan Entities
<PAGE> 45
-40-
MORGAN GUARANTY TRUST COMPANY J.P. MORGAN INVESTMENT MANAGEMENT
OF NEW YORK, AS TRUSTEE OF THE INC. AS INVESTMENT MANAGER AND
COMMINGLED PENSION TRUST FUND AGENT
(MULTI-MARKET SPECIAL INVESTMENT JPM EMERGING MARKETS SPECIAL
FUND II) OF MORGAN GUARANTY TRUST OPPORTUNITIES PORTFOLIO, L.P.
COMPANY OF NEW YORK
MORGAN GUARANTY TRUST COMPANY J.P. MORGAN INVESTMENT MANAGEMENT
OF NEW YORK, AS INVESTMENT INC. AS INVESTMENT MANAGER AND AGENT
MANAGER AND AGENT FOR THE JPM EMERGING MARKETS SPECIAL
ALFRED P. SLOAN FOUNDATION OPPORTUNITIES PORTFOLIO OFFSHORE, L.P.
(MULTI-MARKET ACCOUNT)
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, AS TRUSTEE OF THE
MULTI-MARKET SPECIAL INVESTMENT
TRUST FUND OF MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: By:
------------------------------- -------------------------------
Name: Name:
Title: Title:
<PAGE> 46
-41-
EMERGING MARKETS GROWTH FUND, INC.
By:
-------------------------------
Name:
Title:
CAPITAL INTERNATIONAL EMERGING MARKETS FUND
By:
-------------------------------
Name:
Title:
NEW EUROPE EAST INVESTMENT FUND
By:
-------------------------------
Name:
Title:
<PAGE> 47
-42-
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
CIBC WOOD GUNDY OPPENHEIMER
BARING BROTHERS LIMITED (as agent for ING Bank N.V.)
RENAISSANCE ADVISORY LIMITED
By: MERRILL LYNCH INTERNATIONAL
By:
-------------------------------
Authorized Signatory
For themselves and as Lead Managers of the other International Managers named in
Schedule A hereto.
<PAGE> 48
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
International
Name of International Manager Securities
- - - - ----------------------------- -------------
<S> <C>
Merrill Lynch International............................... $
Donaldson, Lufkin & Jenrette $
International
Goldman Sachs International $
CIBC Wood Gundy Oppenheimer $
Baring Brothers Limited (as agent for $
ING Bank N.V.)
Renaissance Advisory Limited $
-------------
Total..................................................... $
=============
</TABLE>
Schedule A-1
<PAGE> 49
SCHEDULE B
<TABLE>
<CAPTION>
Number of Maximum Number of
Initial International International Option
Securities Securities
to be Sold to be Sold
--------------------- --------------------
<S> <C> <C>
Global TeleSystems Group, Inc...........
[SELLING SHAREHOLDERS]..................
--------------------- --------------------
Total................................... $ $
</TABLE>
Schedule B-1
<PAGE> 50
SCHEDULE C
GLOBAL TELESYSTEMS GROUP, INC.
Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $[ ].
2. The purchase price per share for the International Securities
to be paid by the several International Managers shall be $[ ], being an
amount equal to the initial public offering price set forth above less $[ ]
per share; provided that the purchase price per share for any International
Option Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial International Securities but not payable on the International
Option Securities.
Schedule C-1
<PAGE> 51
Exhibit B
, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
c/o Merrill Lynch & Co.
Merrill, Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
United States of America
Re: Agreement not to sell or otherwise
dispose of securities of Global
TeleSystems Group, Inc.
Ladies and Gentlemen:
The undersigned, a stockholder of Global TeleSystems Group, Inc. (the
"Company"), understands that the Company proposes to file two registration
statements on Form S-1 with the Securities and Exchange Commission in connection
with public offerings (the "Offerings") of shares of Common Stock (the "Shares")
and convertible bonds (the "Bonds," together with the Shares, the "Securities")
of the Company. The undersigned further understands that the Company proposes to
enter into one or more purchase agreements (the "Purchase Agreements") with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as
representative of the underwriters of the Offerings (the "Underwriters").
In recognition of the benefit that such Offerings will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in order to induce the Company and the Underwriters to enter into the respective
Purchase Agreements and to proceed with the Offerings, the undersigned hereby
agrees, that until the date that is 90 days after the date of the Purchase
Agreements, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
B-1
<PAGE> 52
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any Shares or any securities convertible into
or exchangeable or exercisable for any Shares (other than any Shares sold
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or any securities convertible into or
exchangeable or exercisable for any such Shares, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of disposition (except for publicly-traded Shares
that have been acquired on Nasdaq or Easdaq) or request the filing of any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of Shares (other than any Shares sold pursuant to an
effective registration statement under the Securities Act), whether any such
swap transaction is to be settled by delivery of Shares or other securities, in
cash or otherwise.
Sincerely,
Name of Stockholder:
---------------------------
(Print)
Signature:
---------------------------
By:
(if not natural person)
B-2
<PAGE> 1
EXHIBIT 1.3
===============================================================================
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
$350,000,000
[ ]% Convertible Senior Subordinated Debentures due 2010
PURCHASE AGREEMENT
Dated: [ ], 1998
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PURCHASE AGREEMENT.....................................................................................1
SECTION 1. Representations and Warranties..........................................................3
(a) Representations and Warranties by the Company......................................3
(i) Compliance with Registration Requirements.................................3
(ii) Independent Accountants...................................................4
(iii) Financial Statements......................................................4
(iv) No Material Adverse Change in Business....................................5
(v) Good Standing of the Company..............................................5
(vi) Good Standing of Subsidiaries.............................................6
(vii) Capitalization............................................................6
(viii) Authorization of Agreement................................................7
(ix) Authorization of the Indenture............................................7
(x) Authorization of the Securities...........................................7
(xi) Description of the Securities and the Indenture...........................8
(xii) Authorization and Description of Common Stock.............................8
(xiii) Absence of Defaults and Conflicts.........................................8
(xiv) Absence of Labor Dispute..................................................9
(xv) Absence of Proceedings...................................................10
(xvi) Accuracy of Exhibits.....................................................10
(xvii) Possession of Intellectual Property......................................10
(xviii) Absence of Further Requirements..........................................11
(xix) Possession of Licenses and Permits.......................................11
(xx) Title to Property........................................................12
(xxi) Compliance with Cuba Act.................................................12
(xxii) Investment Company Act...................................................12
(xxiii) Environmental Laws.......................................................12
(xxiv) Registration Rights......................................................13
(b) Officer's Certificates............................................................13
SECTION 2. Sale and Delivery to Underwriters; Closing.............................................13
(a) Initial Securities................................................................14
(b) Option Securities.................................................................14
(c) Payment...........................................................................14
(d) Denominations; Registration.......................................................15
SECTION 3. Covenants of the Company...............................................................15
(a) Compliance with Securities Regulations and Commission Requests....................15
(b) Filing of Amendments..............................................................16
(c) Delivery of Registration Statements...............................................16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
(d) Delivery of Prospectuses..........................................................17
(e) Continued Compliance with Securities Laws.........................................17
(f) Rule 158..........................................................................18
(g) Use of Proceeds...................................................................18
(h) Listing...........................................................................18
(i) Restriction on Sale of Securities.................................................18
(j) Restriction on Sale of Debt Securities............................................19
(k) Reporting Requirements............................................................19
SECTION 4. Payment of Expenses....................................................................19
(a) Expenses..........................................................................19
(b) Termination of Agreement..........................................................20
SECTION 5. Conditions of Underwriters' Obligations................................................20
(a) Effectiveness of Registration Statement...........................................20
(b) Opinion of Counsel for Company....................................................20
(c) Opinion of Counsel for Underwriters...............................................21
(d) Officers' Certificate.............................................................21
(e) Accountant's Comfort Letter.......................................................21
(f) Bring-down Comfort Letter.........................................................22
(g) No Objection......................................................................22
(h) Approval of Listing...............................................................22
(i) Conditions to Purchase of Option Securities.......................................22
(j) Additional Documents..............................................................23
(k) Termination of Agreement..........................................................23
SECTION 6. Indemnification........................................................................24
(a) Indemnification of Underwriters...................................................24
(b) Indemnification of Company, Directors and Officers................................25
(c) Actions Against Parties; Notification.............................................26
(d) Settlement Without Consent if Failure to Reimburse................................27
SECTION 7. Contribution...........................................................................27
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.........................29
SECTION 9. Termination of Agreement...............................................................29
(a) Termination; General..............................................................29
(b) Liabilities.......................................................................30
SECTION 10. Default by One or More of the Underwriters.............................................30
SECTION 11. Notices................................................................................31
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 12. Parties................................................................................31
SECTION 13. GOVERNING LAW AND TIME.................................................................32
SECTION 14. Effect of Headings.....................................................................32
SCHEDULES
Schedule A - List of Underwriters........................................................Sch A-1
Schedule B - Pricing Information.........................................................Sch B-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Shearman & Sterling.................................A-1-1
Exhibit A-2 - Form of Opinion of Grier Raclin........................................A-2-1
Exhibit A-3 - Form of Opinion of Coudert Brothers....................................A-3-1
Exhibit A-4 - Form of Opinion of Shevchenko Didkovskiy & Partners....................A-4-1
Exhibit A-5 - Form of Opinion of Somodeco............................................A-5-1
</TABLE>
-iii-
<PAGE> 5
GLOBAL TELESYSTEMS GROUP, INC.
(a Delaware corporation)
$350,000,000
[ ]% Convertible Senior Subordinated Debentures due 2010
PURCHASE AGREEMENT
[ ], 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin &
Jenrette Securities Corporation, Bear, Stearns & Co. Inc. and Goldman, Sachs &
Co. (collectively, the "Underwriters"), which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), with
respect to the issue and sale by the Company and the purchase by the
Underwriters, acting severally and not jointly, of the respective principal
amounts set forth in Schedule A hereto of the $350,000,000 aggregate principal
amount of the Company's [ ]% Convertible Senior Subordinated Debentures due 2010
(the "Debentures"), and with respect to the grant by the Company to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of an additional $52,500,000
principal amount of Debentures to cover over-allotments, if any. The aforesaid
$350,000,000 principal amount of Debentures (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the $52,500,000 principal
amount of Debentures subject to the option described in Section 2(b) hereof (the
"Option Securities") are hereinafter called, collectively, the "Securities." The
Securities are to be issued pursuant to an Indenture dated as of [ ], 1998 (the
"Indenture") between
<PAGE> 6
-2-
the Company and The Bank of New York, as trustee (the "Trustee").
The Securities are convertible into shares of common stock, par value
$.10 per share, of the Company (the "Common Stock"), in accordance with the
terms of the Securities and the Indenture, at the initial conversion price
specified in Schedule B hereto.
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as they deem advisable after this Agreement
has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-52733) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." Any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto, at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished
<PAGE> 7
-3-
to the Underwriters for use in connection with the offering of the Securities is
herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus"
shall refer to the preliminary Prospectus dated June 12, 1998, together with the
applicable Term Sheet and all references in this Agreement to the date of such
Prospectus shall mean the date of the applicable Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b), hereof and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. The
Registration Statement has become effective under the 1933 Act and no
stop order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the
part of the Commission for additional information has been complied
with.
At the respective times the Registration Statement and any
post-effective amendments thereto became effective and at the Closing
Time (and, if any Option Securities are purchased, at the Date of
Delivery), the Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any amendments or supplements thereto were issued and at
the Closing Time (and, if any Option Securities are purchased, at the
Date of Delivery), included or will include an untrue statement of a
material fact or
<PAGE> 8
-4-
omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectus shall
not be "materially different," as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or the Prospectus made in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of
any Underwriter through Merrill Lynch expressly for use in the
Registration Statement or the Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and each preliminary
prospectus and the Prospectus delivered to the Underwriters for use in
connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the entities to which they relate as of the dates indicated and their
respective results of operations, stockholders' equity and cash flows
for the periods specified; said financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein. The selected financial data and the summary financial
information included in the Prospectus present
<PAGE> 9
-5-
fairly the information shown therein and, in the case of the
consolidated financial data therein, have been compiled on a basis
consistent with that of the audited financial statements included in
the Registration Statement, and in the case of the combined financial
data therein, have been compiled from financial statements prepared on
a basis consistent with that of the audited financial statements
included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement (at the time it became effective), except as otherwise stated
therein (at the time it became effective), (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its Subsidiaries (as defined below) considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by
the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C)
there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the state of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not, singly or in the aggregate, result in a
Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) and all entities in which the Company has a direct or
indirect majority equity interest or voting power (each a "Subsidiary"
and, collectively, the "Subsidiaries") has been duly organized
<PAGE> 10
-6-
(to the extent applicable) and is validly existing as a corporation,
general partnership, limited partnership, limited liability company,
closed joint stock company, or similar entity in good standing (to the
extent applicable) under the laws of the jurisdiction of its
organization, has organizational power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not, singly or in
the aggregate, result in a Material Adverse Effect; except as otherwise
disclosed in the Registration Statement, all of the issued and
outstanding capital stock or other ownership interests of each such
Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable (to the extent applicable) and is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity, except that the Company's Capital Stock in Commstock
International B.V. and in GTS Hungary has been pledged to Ericsson
Finans A.B. and Creditanstalt Bank as collateral for certain
borrowings; none of the outstanding shares of capital stock or other
ownership interests of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
The only subsidiaries of the Company are (a) the subsidiaries listed on
Exhibit 21 to the Registration Statement and (b) certain other
subsidiaries which, considered in the aggregate as a single Subsidiary,
do not constitute a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
<PAGE> 11
-7-
violation of the preemptive or other similar rights of any
securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company.
(ix) Authorization of the Indenture. The Indenture has been
duly authorized by the Company and when duly executed and delivered by
the Company and the Trustee, will constitute a valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or other
similar laws relating to or affecting enforcement of creditors' rights
generally, and except as enforcement thereof is subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law).
(x) Authorization of the Securities. The Securities have been
duly authorized and, at the Closing Time, will have been duly executed
by the Company and, when authenticated, issued and delivered in the
manner provided for in the Indenture and delivered against payment of
the purchase price therefor as provided in this Agreement, will
constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or other similar laws affecting
enforcement of creditors' rights generally, and except as enforcement
thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law),
and will be in the form contemplated by, and entitled to the benefits
of, the Indenture.
(xi) Description of the Securities and the Indenture. The
Securities and the Indenture will conform in all material respects to
the respective statements relating thereto contained in the Prospectus.
The Indenture has been qualified under the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act") and complies in all material
respects with the requirements of the Trust Indenture Act.
<PAGE> 12
-8-
(xii) Authorization and Description of Common Stock The Common
Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same. Upon issuance and delivery of the
Securities in accordance with this Agreement and the Indenture, the
Securities will be convertible at the option of the holder thereof for
shares of Common Stock in accordance with the terms of the Securities
and the Indenture; the shares of Common Stock initially issuable upon
conversion of the Securities have been duly authorized and reserved for
issuance upon such conversion by all necessary corporate action and
such shares, when issued upon such conversion, will be validly issued
and will be fully paid and non-assessable; no holder of such shares
will be subject to personal liability by reason of being such a holder;
and the issuance of such shares upon such conversion will not be
subject to the preemptive or other similar rights of any securityholder
of the Company.
(xiii) Absence of Defaults and Conflicts. Neither the Company
nor any of its Ventures (as defined below) is in violation of its
charter or by-laws (or equivalent constitutive documents) or in default
in the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its Ventures is a party or by
which it or any of them may be bound, or to which any of the property
or assets of the Company or any Venture is subject (collectively,
"Agreements and Instruments") except for such defaults that would not,
singly or in the aggregate, result in a Material Adverse Effect; and
the execution, delivery and performance of this Agreement and the
Indenture and the consummation of the transactions contemplated in this
Agreement, the Indenture and in the Registration Statement (including
the issuance and sale of the Securities and the use of the proceeds
from the sale of the Securities as described in the Prospectus under
the caption "Use of Proceeds" and the issuance of the shares of Common
Stock issuable upon conversion of the Securities) and compliance by the
Company with its obligations under this Agreement and the Indenture and
the transactions contemplated herein and therein have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or
<PAGE> 13
-9-
Repayment Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Venture pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions
of the charter or by-laws (or equivalent constitutive documents) of the
Company or any Venture or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Venture or any of their assets,
properties or operations. As used herein, (a) "Ventures" means all
entities in which the Company has a direct or indirect greater than 25%
equity interest or voting power and (b) a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any Venture.
(xiv) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Venture exists or, to the knowledge of
the Company, is threatened, and the Company is not aware of any
existing or threatened labor disturbance by the employees of any of its
or any Venture's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to,
singly or in the aggregate, result in a Material Adverse Effect.
(xv) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Venture, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which,
singly or in the aggregate, might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets of the Company
or any Venture or the consummation of the transactions contemplated in
this Agreement and the Indenture or the performance by the Company of
its obligations hereunder or thereunder; the aggregate of all pending
legal or governmental
<PAGE> 14
-10-
proceedings to which the Company or any Venture is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, singly or in the aggregate,
could not reasonably be expected to result in a Material Adverse
Effect.
(xvi) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xvii) Possession of Intellectual Property. The Company and the
Ventures own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the
business now operated by them, except to the extent the failure to so
own, possess or be able to acquire would not result in a Material
Adverse Effect, and neither the Company nor any Venture has received
any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of
the Company or any Venture therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xviii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities under this Agreement or the issuance of shares
of Common Stock upon conversion of the Securities or the consummation
of the transactions contemplated by this Agreement and the Indenture,
except such as have been already obtained or as may be required under
the
<PAGE> 15
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1933 Act or the 1933 Act Regulations and foreign or state securities
or blue sky laws.
(xix) Possession of Licenses and Permits. Except as otherwise
disclosed in the Registration Statement, the Company and the Ventures
possess such material permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and the Ventures are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, result in a
Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a Material Adverse Effect;
and neither the Company nor any Venture has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xx) Title to Property. The Company and the Ventures have good
and marketable title to all real property owned by the Company and the
Ventures and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security
interests, claims, restrictions or encumbrances of any kind except such
as (a) are described in the Prospectus or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company or any Venture; and all of the leases and subleases
material to the business of the Company and the Ventures, considered as
one enterprise, and under which the Company or any Venture holds
properties described in the Prospectus, are in full force and effect,
and neither the Company nor any Venture has any notice of any material
claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Venture under any of the leases or
subleases mentioned above, or affecting or questioning the rights of
the Company or such Venture to the continued possession of the leased
or subleased premises under any such lease or sublease.
<PAGE> 16
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(xxi) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xxii) Investment Company Act. Neither the Company nor any of
its Subsidiaries is, nor upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus will be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act").
(xxiii) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any Venture is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and the Ventures have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any Ventures
and (D) there are no events or circumstances that might reasonably be
expected to form the basis of an order for clean-up or remediation, or
an action, suit or proceeding by any private party or governmental body
or
<PAGE> 17
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agency, against or affecting the Company or any Ventures relating to
Hazardous Materials or any Environmental Laws.
(xxiv) Registration Rights. Except as disclosed in the
Prospectus, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any Ventures delivered to the Underwriters or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company herein to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. The Company agrees to sell to each
Underwriter, severally and not jointly, and on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, each Underwriter, severally and not jointly, agrees to purchase from
the Company, at the price set forth in Schedule B, the aggregate principal
amount of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, the Company hereby grants
an option to the Underwriters, severally and not jointly, to purchase up to an
additional $52,500,000 aggregate principal amount of Securities at the same
price set forth in Schedule B for the Initial Securities, plus accrued interest,
if any, from the Closing Date to the Date of Delivery (as defined below). The
option hereby granted will expire 30 days after the date hereof and may be
exercised not more than two times in whole or in part only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Underwriters to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery for the
Option Securities (a "Date of Delivery") shall be determined by the
Underwriters, but shall not be later than seven full business days after the
exercise of said option, nor
<PAGE> 18
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in any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, on the basis of the
representations and warranties of the Company contained herein and subject to
the terms and conditions herein set forth, will purchase that proportion of the
total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities.
(c) Payment. Payment of the purchase price for the Initial
Securities shall be made at the offices of Cahill Gordon & Reindel, 80 Pine
Street, New York, New York 10005 or at such other place as shall be agreed upon
by the Underwriters and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on the date
hereof) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Underwriters and the Company
(such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price for
such Option Securities shall be made at the above-mentioned offices, or at such
other place as shall be agreed upon by the Underwriters and the Company, on each
Date of Delivery as specified in the notice from the Underwriters to the
Company.
Payment shall be made to the Company by wire transfer of
immediately available funds to bank accounts designated by the Company. Merrill
Lynch, individually and not as representative of the Underwriters, may (but
shall not be obligated to) make payment of the purchase price for the Initial
Securities or the Option Securities, if any, to be purchased by any Underwriter
whose funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Underwriters may request in writing at least one
full business day before the Closing Time or the relevant Date of Delivery,
<PAGE> 19
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as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Underwriters in The City of New York not later than 10:00 A.M. (Eastern time) on
the business day prior to the Closing Time or the relevant Date of Delivery, as
the case may be.
SECTION 3. Covenants of the Company. The Company
covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Underwriters immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectus or any amended Prospectus shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the
Underwriters notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the Prospectus,
will furnish the Underwriters with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Underwriters or counsel for
the
<PAGE> 20
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Underwriters shall reasonably object within three Business Days after being
furnished such documents.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Underwriters and counsel for the Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Underwriters, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the Underwriters. The
copies of the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary prospectus
as such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange of 1934 (the "1934 Act"), such number of copies of the Prospectus (as
amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is necessary,
in the reasonable opinion of counsel for the Underwriters or for the Company, to
amend the Registration Statement or amend or supplement the Prospectus in order
that the Prospectus will not include any untrue statements of a material fact or
omit to state a material fact necessary in order to make the statements therein
not misleading in the light of the circumstances existing at the time it is
delivered to a
<PAGE> 21
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purchaser, or if it shall be necessary, in the reasonable opinion of any such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Company will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(f) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally available
to its securityholders an earnings statement for the purposes of, and to provide
the benefits contemplated by, the last paragraph of Section 11(a) of the 1933
Act.
(g) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(h) Listing. The Company will use its best efforts to effect
the listing of the Securities on the Luxembourg Stock Exchange. The Company will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(i) Restriction on Sale of Equity Securities. During a period
of 90 days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of the
<PAGE> 22
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Securities hereunder and shares of Common Stock issuable upon conversion
thereof, (B) the issuance of any shares of Common Stock by the Company upon the
exercise of options or warrants or the conversion of securities outstanding on
the date hereof and referred to in the Prospectus, (C) the purchase or
acquisition of shares of Common Stock pursuant to contracts entered into prior
to the date hereof and referred to in the Prospectus or (D) the sale of Common
Stock by the Company pursuant to a U.S. purchase agreement and an international
purchase agreement, both entered into as of the date hereof.
(j) Restriction on Sale of Debt Securities. The Company will
not, without the prior written consent of Merrill Lynch, contract to sell or
announce or make any offering, sale or other disposition of any debt securities
of the Company having a maturity greater than one year during the period
beginning from the date of this Agreement and continuing through the earlier of
the termination of trading restrictions with respect to the Securities and the
Closing Time.
(k) Reporting Requirements. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission pursuant
to the 1934 Act and rules and regulations of the Commission thereunder within
the time periods referred to therein.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to
the performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, the Indenture and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriters, including any stock or other transfer taxes
and any stamp or other duties payable upon the sale, issuance or delivery of the
Securities to the Underwriters, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vi) the preparation,
printing and delivery to the Underwriters of copies of the Blue Sky Survey and
<PAGE> 23
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any supplement thereto, (vii) the fees and expenses of the Trustee, including
the fees and disbursements of counsel for the Trustee in connection with the
Indenture, (viii) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (ix) any fees payable in connection with the
rating of the Securities.
(b) Termination of Agreement. If this Agreement is terminated
by the Underwriters in accordance with the provisions of Section 5, Section
9(a)(i) or Section 11 hereof, the Company shall reimburse the Underwriters for
all of their out-of-pocket expenses reasonably incurred by the Underwriters in
connection with this Agreement or the offering of the Securities contemplated
hereunder, including the reasonable fees and disbursements of counsel and
special counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The
obligations of the several Underwriters hereunder are subject to the accuracy of
the representations and warranties of the Company contained in Section 1 hereof
and in certificates of any officer of the Company or any subsidiary of the
Company delivered pursuant to the provisions hereof, to the performance by the
Company of its covenants and other obligations hereunder, and to the following
further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement has become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission, and
any request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Company
has elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Underwriters shall have received the favorable opinion, dated as of Closing
Time, of each of Shearman & Sterling, counsel for the Company, Grier Raclin,
Senior Vice President
<PAGE> 24
-20-
and General Counsel of the Company, Coudert Brothers, special counsel for the
Company and special regulatory counsel for Hermes Europe Railtel B.V.,
Shevchenko Didkovskiy & Partners, special Ukrainian counsel to Bancomsvyaz,
Somodeco, counsel and regulatory counsel to GTS Monaco Access S.A.M., Loeff
Claeys Verbeke, Netherlands counsel for the Company, each in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibits A-1 through A-5 hereto.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Underwriters shall have received the favorable opinion, dated as of Closing
Time, of each of Cahill Gordon & Reindel, counsel for the Underwriters, and
Clifford Chance, special Russian counsel to the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters as
to such matters as are reasonably requested by the Underwriters.
(d) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Underwriters shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or, to the knowledge of
such officer, are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the Underwriters shall have received from Ernst & Young a
letter dated such date, in form and substance satisfactory to the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters containing statements and information of the
<PAGE> 25
-21-
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the
Underwriters shall have received from Ernst & Young a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(g) No Objection. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(h) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on the Luxembourg Stock Exchange, subject to
notice of issuance.
(i) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Underwriters shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion, dated as of such Date of Delivery, of each of
counsels listed in Section 5(b), each in form and substance
satisfactory to counsel for the Underwriters, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(b) hereof.
<PAGE> 26
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(iii) Opinion of Counsel for Underwriters. The
favorable opinion of Cahill Gordon & Reindel, counsel for the
Underwriters and Clifford Chance, special counsel to the
Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst &
Young, in form and substance satisfactory to the Underwriters
and dated such Date of Delivery, substantially in the same
form and substance as the letter furnished to the Underwriters
pursuant to Section 5(f) hereof, except that the "specified
date" in the letter furnished pursuant to this paragraph shall
be a date not more than five days prior to such Date of
Delivery.
(j) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may reasonably request for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated and with respect to the shares of Common Stock issuable upon
conversion of the Securities, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities by the Company shall be reasonably
satisfactory in form and substance to the Underwriters and counsel for the
Underwriters.
(k) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Underwriters by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
<PAGE> 27
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SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the
<PAGE> 28
-24-
extent arising out of any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
expressly for use in the Registration Statement (or any amendment or supplement
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); provided, further that the Company will not be liable to
any Underwriter with respect to any preliminary prospectus to the extent that
the Company shall sustain the burden of proving that any such loss, liability,
claim, damage or expense resulted from the fact that such Underwriter, in
contravention of a requirement of this Agreement or applicable law, sold
Securities to a person to whom such Underwriter failed to send or give, at or
prior to the Closing Date, a copy of the Prospectus, as then amended or
supplemented if: (i) the Company has previously furnished copies thereof
(sufficiently in advance of the Closing Date to allow for distribution by the
Closing Date) to the Underwriters and the loss, liability, claim, damage or
expense of such Underwriter resulted from an untrue statement or omission of a
material fact contained in or omitted from the preliminary prospectus which was
corrected in the Prospectus as, if applicable, amended or supplemented prior to
the Closing Date and such Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person and (ii) such failure
to give or send such Prospectus by the Closing Date to the party or parties
asserting such loss, liability, claim, damage or expense would have constituted
the sole defense to the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment or supplement thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter expressly for use in the Registration Statement (or
any amendment or supplement
<PAGE> 29
-25-
thereto) or such preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) Actions Against Parties; Notification. Each indemnified
party shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified pursuant
to Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement Without Consent if Failure to Reimburse. If at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written
<PAGE> 30
-26-
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties'
<PAGE> 31
-27-
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who
controls a Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial Securities set forth opposite
their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and
<PAGE> 32
-28-
agreements contained in this Agreement or in certificates of officers of the
Company or any Venture submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or controlling person, or by or on behalf of the Company, and
shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Underwriters may terminate this
Agreement, by notice to the Company at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Underwriters, impracticable to market the Securities or to enforce contracts for
the sale of the Securities, or (iii) if trading in any securities of the Company
has been suspended or materially limited by the Commission, or the European
Association of Securities Dealers Automated Quotation Market authority,
Luxembourg Stock Exchange or the Nasdaq National Market, or if trading generally
on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to
this Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
<PAGE> 33
-29-
SECTION 10. Default by One or More of the Underwriters. If one
or more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the non-defaulting Underwriters shall
have the right, within 24 hours thereafter, to make arrangements for one or more
of the non-defaulting Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the Underwriters
shall not have completed such arrangements within such 24-hour period, then:
(a) if the principal amount of Defaulted Securities does not
exceed 10% of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the principal amount of Defaulted Securities exceeds
10% of the principal amount of Securities to be purchased on such date, this
Agreement or, with respect to any Date of Delivery which occurs after the
Closing Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the Underwriters to purchase and the Company to sell the relevant Option
Securities, as the case may be, either (i) the Underwriters or (ii) the Company
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
<PAGE> 34
-30-
SECTION 11. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Underwriters c/o Merrill Lynch & Co.,
Merrill Lynch Pierce, Fenner & Smith Incorporated at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Robert Kramer;
notices to the Company shall be directed to it at 1751 Pinnacle Drive, North
Tower - 12th Floor, McLean, VA 22102, attention of William H. Seippel.
SECTION 12. Parties. This Agreement shall inure to the benefit
of and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section
headings herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
<PAGE> 35
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If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its terms.
Very truly yours,
GLOBAL TELESYSTEMS GROUP, INC.
By
---------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
------------------------------------------
Authorized Signatory
<PAGE> 36
SCHEDULE A
<TABLE>
<CAPTION>
Principal
Amount of
Initial
Name of Underwriter Securities
- - - - ------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner &
Smith Incorporated..........................................
Donaldson, Lufkin & Jenrette
Securities Corporation......................................
Bear, Stearns & Co. Inc.........................................
Goldman, Sachs & Co.............................................
Total........................................................... $350,000,000
============
</TABLE>
Schedule A-1
<PAGE> 37
SCHEDULE B
GLOBAL TELESYSTEMS GROUP, INC.
$350,000,000
[ ]% Convertible Subordinated Debentures due 2010
1. The initial public offering price of the Securities shall
be [ ]% of the principal amount thereof, plus accrued interest, if any,
from the date issuance.
2. The purchase price to be paid by the several Underwriters
shall be [ ]% of the principal amount thereof.
3. The interest rate on the Securities shall be [ ]% per
annum.
4. The Securities shall be convertible into shares of Common
Stock, par value $.10 per share, of the Company at an initial
conversion price of $[ ] per share.
Schedule B-1
<PAGE> 1
EXHIBIT 4.8
================================================================================
GLOBAL TELESYSTEMS GROUP, INC.
[ ]% Convertible Senior Subordinated Debentures
due 2010
---------------------
INDENTURE
Dated as of , 1998
---------------------
The Bank of New York
Trustee
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- - - - ------- -------
<S> <C> <C>
310(a)(1)............................................................... 8.10
(a)(2)............................................................... 8.10
(a)(3)............................................................... N.A.*
(a)(4)............................................................... N.A.
(a)(5)............................................................... 8.10
(b).................................................................. 8.8; 8.10
(c).................................................................. N.A.
311(a).................................................................. 8.11
(b).................................................................. 8.11
(c).................................................................. N.A.
312(a).................................................................. 2.5
(b).................................................................. 11.3
(c).................................................................. 11.3
313(a).................................................................. 8.6
(b)(1)............................................................... N.A.
(b)(2)............................................................... 8.6
(c).................................................................. 8.6; 11.2
(d).................................................................. 8.6
314(a).................................................................. 5.2; 5.4;11.2
(b).................................................................. N.A.
(c)(1)............................................................... 11.4(a)
(c)(2)............................................................... 11.4(a)
(c)(3)............................................................... N.A.
(d).................................................................. N.A.
(e).................................................................. 11.4(b)
(f).................................................................. N.A.
315(a).................................................................. 8.1(b)
(b).................................................................. 8.5; 11.2
(c).................................................................. 8.1(a)
(d).................................................................. 8.1(c)
(e).................................................................. 7.11
316(a)(last sentence)................................................... 2.9
(a)(1)(A)............................................................ 7.5
(a)(1)(B)............................................................ 7.4
(a)(2)............................................................... N.A.
(b).................................................................. 7.7
(c).................................................................. 11.5
317(a)(1)............................................................... 7.8
(a)(2)............................................................... 7.9
(b).................................................................. 2.4
318 (a).................................................................. 11.1
</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>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions.....................................................................1
SECTION 1.2. Other Definitions...............................................................8
SECTION 1.3. Trust Indenture Act Provisions..................................................8
SECTION 1.4. Rules of Construction...........................................................9
ARTICLE 2
THE SECURITIES
SECTION 2.1. Form and Dating................................................................10
SECTION 2.2. Execution and Authentication...................................................10
SECTION 2.3. Registrar, Paying Agent and Conversion Agent...................................11
SECTION 2.4. Paying Agent to Hold Money In Trust............................................12
SECTION 2.5. Securityholder Lists...........................................................12
SECTION 2.6. Transfer and Exchange..........................................................12
SECTION 2.7. Replacement Securities.........................................................13
SECTION 2.8. Outstanding Securities.........................................................14
SECTION 2.9. Treasury Securities............................................................14
SECTION 2.10. Temporary Securities...........................................................15
SECTION 2.11. Cancellation...................................................................15
ARTICLE 3
REDEMPTION AND PURCHASES
SECTION 3.1. Right to Redeem; Notice to Trustee.............................................15
SECTION 3.2. Selection of Securities to Be Redeemed.........................................16
SECTION 3.3. Notice of Redemption...........................................................16
SECTION 3.4. Effect of Notice of Redemption.................................................17
SECTION 3.5. Deposit of Redemption Price....................................................17
SECTION 3.6. Securities Redeemed in Part....................................................18
SECTION 3.7. Conversion Arrangement on Call for Redemption..................................18
SECTION 3.8. Purchase of Securities at Option of the Holder Upon Change in Control..........19
SECTION 3.9. Effect of Change in Control Purchase Notice....................................23
SECTION 3.10. Deposit of Change in Control Purchase Price....................................24
SECTION 3.11. Securities Purchased In Part...................................................24
</TABLE>
-i-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 3.12. Compliance With Securities Laws Upon Purchase of Securities....................25
SECTION 3.13. Repayment to the Company.......................................................25
ARTICLE 4
CONVERSION
SECTION 4.1. Conversion Privilege...........................................................25
SECTION 4.2. Conversion Procedure...........................................................26
SECTION 4.3. Fractional Shares..............................................................28
SECTION 4.4. Taxes on Conversion............................................................28
SECTION 4.5. Company to Provide Stock.......................................................28
SECTION 4.6. Adjustment of Conversion Price.................................................28
SECTION 4.7. No Adjustment..................................................................33
SECTION 4.8. Adjustment for Tax Purposes....................................................33
SECTION 4.9. Notice of Adjustment...........................................................33
SECTION 4.10. Notice of Certain Transactions.................................................34
SECTION 4.11. Effect of Reclassification, Consolidation, Merger or Sale on
Conversion Privilege........................................................34
SECTION 4.12. Trustee's Disclaimer...........................................................35
SECTION 4.13. Voluntary Reduction............................................................36
ARTICLE 5
COVENANTS
SECTION 5.1. Payment of Securities..........................................................36
SECTION 5.2. SEC Reports....................................................................36
SECTION 5.3. Compliance Certificates........................................................37
SECTION 5.4. Notice of Defaults.............................................................37
SECTION 5.5. Further Instruments and Acts...................................................37
SECTION 5.6. Liquidation....................................................................37
ARTICLE 6
SUCCESSOR CORPORATION
SECTION 6.1. When Company May Merge, Etc....................................................38
SECTION 6.2. Successor Corporation Substituted..............................................39
ARTICLE 7
DEFAULT AND REMEDIES
SECTION 7.1. Events of Default..............................................................39
SECTION 7.2. Acceleration...................................................................40
SECTION 7.3. Other Remedies.................................................................41
</TABLE>
-ii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 7.4. Waiver of Defaults and Events of Default.......................................42
SECTION 7.5. Control by Majority............................................................42
SECTION 7.6. Limitations on Suits...........................................................42
SECTION 7.7. Rights of Holders to Receive Payment and to Convert............................43
SECTION 7.8. Collection Suit by Trustee.....................................................43
SECTION 7.9. Trustee May File Proofs of Claim...............................................43
SECTION 7.10. Priorities.....................................................................44
SECTION 7.11. Undertaking for Costs..........................................................44
SECTION 7.12. Waiver of Usury, Stay or Extension Laws........................................45
ARTICLE 8
TRUSTEE
SECTION 8.1. Duties of Trustee..............................................................45
SECTION 8.2. Rights of Trustee..............................................................46
SECTION 8.3. Individual Rights of Trustee...................................................47
SECTION 8.4. Trustee's Disclaimer...........................................................47
SECTION 8.5. Notice of Default or Events of Default.........................................47
SECTION 8.6. Reports by Trustee to Holders..................................................47
SECTION 8.7. Compensation and Indemnity.....................................................48
SECTION 8.8. Replacement of Trustee.........................................................49
SECTION 8.9. Successor Trustee by Merger, Etc...............................................50
SECTION 8.10. Eligibility; Disqualification..................................................50
SECTION 8.11. Preferential Collection of Claims Against Company..............................50
ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 9.1. Satisfaction and Discharge of Indenture........................................51
SECTION 9.2. Application of Trust Money.....................................................52
SECTION 9.3. Repayment to Company...........................................................52
SECTION 9.4. Reinstatement..................................................................53
ARTICLE 10
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.1. Without Consent of Holders.....................................................53
SECTION 10.2. With Consent of Holders........................................................53
SECTION 10.3. Compliance With Trust Indenture Act............................................55
SECTION 10.4. Revocation and Effect of Consents..............................................55
SECTION 10.5. Notation on or Exchange of Securities..........................................55
SECTION 10.6. Trustee to Sign Amendments, etc................................................55
</TABLE>
-iii-
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 11
MISCELLANEOUS
SECTION 11.1. Trust Indenture Act Controls...................................................56
SECTION 11.2. Notices........................................................................56
SECTION 11.3. Communications by Holders With Other Holders...................................57
SECTION 11.4. Certificate and Opinion as to Conditions Precedent.............................57
SECTION 11.5. Record Date for Vote or Consent of Securityholders.............................58
SECTION 11.6. Rules by Trustee, Paying Agent, Registrar and Conversion Agent.................58
SECTION 11.7. Legal Holidays.................................................................58
SECTION 11.8. Governing Law..................................................................58
SECTION 11.9. No Adverse Interpretation of Other Agreements..................................59
SECTION 11.10. No Recourse Against Others.....................................................59
SECTION 11.11. Successors.....................................................................59
SECTION 11.12. Multiple Counterparts..........................................................59
SECTION 11.13. Separability...................................................................59
SECTION 11.14. Table of Contents, Headings, etc...............................................59
ARTICLE 12
SUBORDINATION
SECTION 12.1. Securities Subordinated to Senior Indebtedness.................................59
SECTION 12.2. Securities Subordinated to Prior Payment of All Senior Indebtedness
on Dissolution, Liquidation, Reorganization, Etc., of the Company...........60
SECTION 12.3. Securityholders to Be Subrogated to Right of Holders of Senior
Indebtedness................................................................62
SECTION 12.4. Obligations of the Company Unconditional.......................................62
SECTION 12.5. Company Not to Make Payment With Respect to Securities in Certain
Circumstances...............................................................63
SECTION 12.6. Notice to Trustee..............................................................64
SECTION 12.7. Application by Trustee of Money Deposited With It..............................65
SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of Company or
Holders of Senior Indebtedness..............................................66
SECTION 12.9. Trustee to Effectuate Subordination............................................66
</TABLE>
-iv-
<PAGE> 7
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 12.10. Right of Trustee to Hold Senior Indebtedness...................................66
SECTION 12.11. Article 5 Not to Prevent Events of Default.....................................66
SECTION 12.12. No Fiduciary Duty Created to Holders of Senior Indebtedness....................67
SECTION 12.13. Article Applicable to Paying Agents............................................67
EXHIBIT A.......................................................................................A-1
</TABLE>
-v-
<PAGE> 8
THIS INDENTURE dated as of [ ], 1998, is between Global
TeleSystems Group, Inc., a Delaware corporation (the "Company"), and The Bank of
New York, a New York banking corporation, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of the other and
for the equal and ratable benefit of the registered holders of the Company's [
]% Convertible Senior Subordinated Debentures due 2010:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions
"Affiliate" means, with respect to any specified person, any
other person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified person.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Board of Directors" means the Board of Directors of the
Company or any authorized committee of the Board of Directors.
"Business Day" means a day that is not a Legal Holiday.
"Capitalized Lease Obligation" means any obligation under a
lease of (or other agreement conveying the right to use) any property (whether
real, personal or mixed) that is required to be classified and accounted for as
a capital amount thereof at such date, determined in accordance with GAAP.
"Cash" or "cash" means such coin or currency of the United
States as at any time of payment is legal tender for the payment of public and
private debts.
"Common Stock" means the common stock of the Company, $.10 par
value, as it exists on the date of this Indenture and any shares of any class or
classes of capital stock of the Company resulting from any reclassification or
reclassifications thereof.
"Company" means the party named as such in this Indenture
until a successor replaces it pursuant to this Indenture, and thereafter means
the successor.
<PAGE> 9
"Corporate Trust Office" means the principal office of the
Trustee at which at any particular time its corporate trust business shall be
administered which office at the date of the execution of this Indenture is
located at 101 Barclay Street, New York, New York 10286, Attention: Corporate
Trust Trustee Administration or at any other time at such other address as the
Trustee may designate from time to time by notice to the Company.
"Currency Agreement" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Issuer or any Subsidiary or any Significant Joint Venture against
fluctuations in currency values.
"Default" or "default" means any event which is, or after
notice or passage of time, or both, would be an Event of Default.
"Eligible Joint Venture" means a Joint Venture (other than a
Subsidiary) (a) that is formed with respect to the construction, development,
acquisition, servicing, ownership, improvement, operation or management of a
telecommunications business, (b) in which the Company, directly or indirectly,
owns at least 25% of the outstanding capital stock or other ownership interest
therein and (c) in respect of which the Company, directly or indirectly, either
(i) controls, by voting power, membership on the board of directors or
management committee or other similar governing body, or through the provisions
of any applicable partnership, joint venture, shareholder or other similar
agreement or under an operating, maintenance or management agreement or
otherwise, the management and operation of the Joint Venture and any
telecommunications project of such Joint venture or (ii) otherwise has the right
to control or veto material acts and decisions with respect to the management or
operation of the Joint Venture that, taken as a whole, are substantially similar
to the rights of the Company with respect to the Existing Joint Ventures as of
the date of original issuance of the Debentures.
"Existing Joint Ventures" means each of PrymTelefon,
Bancomsvyaz, TeleCommunications of Moscow, GTS Monaco Access S.A.M., Sovam
Teleport Kiev Divison 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.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial
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Accounting Standards Board or in such other statements by such other entity as
may be approved by a significant segment of the accounting profession of the
United States of America, which are applicable from time to time and are
consistently applied.
"Holder" or "Securityholder" means the person in whose name a
Security is registered on the Registrar's books.
"Indebtedness" means, with respect to any person, without
duplication, (a) all liabilities of such person for borrowed money or for the
deferred purchase price of property or services, excluding any (i) trade account
payables arising in the ordinary course of business and (ii) other accrued
current liabilities incurred in the ordinary course of business, including,
without limitation, all obligations, contingent or otherwise, of such person in
connection with any letters of credit, banker's acceptance or other similar
credit transactions; (b) all obligations of such person evidenced by bonds,
debentures or other similar instruments; (c) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person (even if the rights and remedies of the seller
or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business; (d) all Capitalized Lease
Obligations of such person; (e) all Indebtedness referred to in the preceding
clauses of other persons and all dividends of other persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such person, even though such person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured); (f) all guarantees of Indebtedness referred to in this
definition by such person; (g) all Redeemable Capital Stock of such person,
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued dividends; (h) all obligations under or in respect of
Currency Agreements and Interest Rate Protection Obligations of such person; (i)
any Preferred Stock of such person that provides for payments of liquidation
value by way of a sinking fund, or by way of a mandatory redemption, defeasance,
retirement, repurchase or otherwise, or allows the holder the option to redeem,
in each case prior to the 91st day prior to the Maturity of the Debentures
(valued at the sum of (without duplication) (A) the liquidation preference
thereof, (B) any mandatory redemption payment obligations in respect thereof and
(C) accrued dividends thereon); and (j) any amendment, supplement, modification,
deferral, renewal, extension or refunding
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of any liability of the types referred to in clauses (a) through (i) above. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Capital Stock, such fair
market value shall be determined in good faith by the board of directors of the
issuer of such Redeemable Capital Stock.
"Indenture" means this Indenture as amended or supplemented
from time to time pursuant to the terms of this Indenture.
"Interest Rate Protection Agreement" means any arrangement
with any other person whereby, directly or indirectly, such person is entitled
to receive from time to time periodic payments calculated by applying either a
floating or a fixed rate of interest on a stated notional amount in exchange for
periodic payments made by such person calculated by applying a fixed or a
floating rate of interest on the same notional amount and shall include without
limitation, interest rate swaps, caps, floors, collars and similar agreements.
"Interest Rate Protection Obligations" means the obligations
of any person pursuant to an Interest Rate Protection Agreement.
"Joint Venture" means a joint venture, partnership or other
similar arrangement, whether corporation, partnership or other legal form where
the Company or one or more Subsidiaries has, directly or indirectly, less than a
majority of the Voting Stock or other ownership interest.
"Lien" means any mortgage, charge, pledge, lien (statutory or
other), security interest, hypothecation, assignment for security, claim or
preference or priority or other encumbrance upon or with respect to any property
of any kind; provided, that in no event shall an operating lease be deemed to
constitute a Lien. A person shall be deemed to own subject to Lien any property
which such person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"Material Joint Venture" means a Joint Venture that, as of the
end of the most recent four-quarter period, had (i) total assets which exceeded
10 percent of the total combined assets of the Company at the end of such period
or
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(ii) total revenues which exceeded 15 percent of the total combined revenues of
the Company for such period.
"Maturity" means, (i) when used with respect to the
Debentures, , 2010 and (ii) when used with respect to any Indebtedness other
than the Debentures, the date specified in the instrument governing such
Indebtedness as the fixed date on which the principal of such Indebtedness, or
any installment of interest thereon, is due and payable.
"Officer" means the Chairman or any Co-Chairman of the Board,
any Vice Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or any Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers; provided, however, that for purposes of Section 5.4, "Officers'
Certificate" means a certificate signed by the principal executive officer,
principal financial officer or principal accounting officer of the Company.
"Opinion of Counsel" means a written opinion from legal
counsel. The counsel may be an employee of or counsel to the Company or the
Trustee.
"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 and (c) charitable organizations
controlled by or affiliated with any of the Persons named in the foregoing
clauses (a) and (b).
"Person" or "person" means any individual, corporation,
limited liability company, partnership, joint venture, association, joint-stock
company, trust, or any other entity or organization, including a government or
political subdivision or instrumentality thereof.
"Preferred Stock" of any person means capital stock of such
person of any class or classes (however designated) that ranks prior, as to the
payment of dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such person, to shares of
capital stock of any other class of such person.
"Principal" or "principal" of a debt security, including the
Securities, means the principal of the security plus, when appropriate, the
premium, if any, on the security.
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<PAGE> 13
"Redeemable Capital Stock" means any shares of any class or
series of Capital Stock, that, either by the terms thereof, by the terms of any
security into which it is convertible or exchangeable or by contract or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to the Maturity with respect to the principal of
the Debentures or is redeemable at the option of the holder thereof at any time
prior to any such Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Maturity.
"Redemption Date" or "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" or "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 as Exhibit A hereto.
"SEC" or "Commission" means the Securities and Exchange
Commission.
"Securities" means the [ ]% Convertible Senior Subordinated
Debentures due 2010 or any of them (each, a "Security"), as amended or
supplemented from time to time, that are issued under this Indenture.
"Senior Indebtedness" means the principal of, premium, if any,
interest, and other amounts payable on or in respect of any Indebtedness of the
Company, whether outstanding on the date of original issuance or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Debentures. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include (a) Indebtedness evidenced by
the Debentures, (b) Indebtedness that is pursuant to the instrument creating
such Indebtedness expressly subordinate or junior in right of payment to any
Indebtedness of the Company, (c) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) or Title 11, United States Code,
is without recourse to the Company, (d) Indebtedness that is presented by
Redeemable Capital Stock, (e) Indebtedness for goods, materials or services
purchased in the ordinary course of business or Indebtedness consisting of trade
account payables or other current liabilities incurred in the ordinary course of
business, (f) Indebtedness of or amounts owed by the Company for compensation to
employees or for services rendered to the Company, (g) any liability for
federal, state, local or
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other taxes owed or owing by the Company, (h) Indebtedness of the Company to a
Wholly Owned Subsidiary or any other Affiliate of the Company or any of such
Affiliate's Wholly Owned Subsidiaries and (i) amounts owing under leases (other
than Capitalized Lease Obligations).
"Subsidiary" means, with respect to the Company, (i) a
corporation a majority of whose Voting Stock is at the time, directly or
indirectly, owned by the Company, by one or more Subsidiaries of the Company or
by the Company and one or more Subsidiaries and (ii) any other person (other
than a corporation), including, without limitation, a joint venture, in which
the Company, one or more Subsidiaries of the Company or the Company and one or
more Subsidiaries, directly or indirectly, at the date of determination thereof,
has at least majority ownership interest entitled to vote in the election of
directors, managers or trustees thereof (or other person performing similar
functions). For purposes of this definition, any directors' qualifying shares or
investments by foreign nationals mandated by applicable law shall be disregarded
in determining the ownership of a Subsidiary.
"TIA" means the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990 and as in effect on the date of this
Indenture, except as provided in Section 10.3, and except to the extent an
amendment to the Trust Indenture Act expressly provides for application of the
Trust Indenture Act as in effect on another date.
"Trading Day" means, with respect to an security, each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are not generally traded on the exchange or market in which such security is
traded.
"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 the successor.
"Trust Officer" means, with respect to the Trustee, any
officer assigned to the Corporate Trust Office, including any managing director,
vice president, assistant vice president, assistant treasurer, assistant
secretary or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above-designated officers and having
direct responsibility for the administration of this Indenture, and also, with
respect to a particular matter, any other officer, to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject.
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<PAGE> 15
"Voting Stock" means any class or classes of Capital Stock
pursuant to which the holders thereof under ordinary circumstances have the
power to vote in the election of the board of directors, managers or trustees of
any person (irrespective of whether or not, at the time, Capital Stock of any
other class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"Wholly-Owned Subsidiary" means any Subsidiary of the Company
of which 100 percent of the outstanding Capital Stock is owned by the Company or
by one or more Wholly-Owned Subsidiaries of the Company or by the Company and
one or more Wholly-Owned Subsidiaries of the Company. For purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Subsidiary.
SECTION 1.2. Other Definitions
<TABLE>
<CAPTION>
Term Defined In Section
---- ------------------
<S> <C>
"Bankruptcy Law"................................................................ 7.1
"Change in Control.............................................................. 3.8
"Change in Control Purchase Date"............................................... 3.8
"Change in Control Purchase Notice"............................................. 3.8
"Change in Control Purchase Price".............................................. 3.8
"Company Order"................................................................. 2.2
"Conversion Agent".............................................................. 2.3
"Conversion Date"............................................................... 4.2
"Conversion Price".............................................................. 4.6
"Conversion Shares"............................................................. 4.6
"Custodian"..................................................................... 7.1
"Determination Date"............................................................ 4.6
"Distribution Date"............................................................. 4.6
"Event of Default".............................................................. 7.1
"Exchange Act".................................................................. 3.8
"Legal Holiday"................................................................. 11.7
"NYSE".......................................................................... 4.6
"Paying Agent".................................................................. 2.3
"Purchase Agreement"............................................................ 2.1
"Registrar"..................................................................... 2.3
"Rights"........................................................................ 4.6
"Triggering Distribution"....................................................... 4.6
"Unissued Shares"............................................................... 3.8
</TABLE>
SECTION 1.3. Trust Indenture Act Provisions
Whenever this Indenture refers to a provision of the TIA, that
provision is incorporated by reference in and made a part of this Indenture. The
Indenture shall also include those provisions of the TIA required to be included
herein by the
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<PAGE> 16
provisions of the Trust Indenture Reform Act of 1990. The following TIA terms
used in this Indenture have the following meanings:
"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; and
"obligor" on the indenture securities means the Company or any
other obligor on the Securities.
All other terms used in this Indenture that are defined in 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 1.4. 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 the United States of America and in effect on the
date hereof, and any other reference in this Indenture to
"generally accepted accounting principles" refers to generally
accepted accounting principles in the United States of America
and in effect on the date hereof;
(3) words in the singular include the plural, and words in
the plural include the singular;
(4) provisions apply to successive events and transactions;
(5) the term "merger" includes a statutory share exchange
and the term "merged" has a correlating meaning;
(6) the masculine gender includes the feminine and the
neuter;
(7) references to agreements and other instruments include
subsequent amendments thereto; and
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(8) "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 2
THE SECURITIES
SECTION 2.1. Form and Dating
The Securities and the Trustee's certificate of authentication
shall be substantially in the form set forth in Exhibit A which is incorporated
in and made part of this Indenture. The Securities may have notations, legends
or endorsements required by law, stock exchange rule or usage. Each Security
shall be dated the date of its authentication. The Securities are being offered
and sold by the Company pursuant to a Purchase Agreement, dated [ ], 1998 (the
"Purchase Agreement"), among the Company and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
SECTION 2.2. Execution and Authentication
An Officer shall sign the Securities for the Company by manual
or facsimile signature. The Company's seal shall be affixed to or reproduced on
the Securities and attested by the Secretary or an Assistant Secretary of the
Company. Typographic and other minor errors or defects in any such reproduction
of the seal or any such facsimile signature shall not affect the validity or
enforceability of any Security which has been authenticated and delivered by the
Trustee.
If an Officer whose signature is on a Security 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 and make available for delivery
Securities for original issue in the aggregate principal amount of up to
$400,000,000 (plus up to an additional $60,000,000 issued pursuant to the
exercise of the over-allotment option described in the Purchase Agreement upon
receipt of a written order or orders of the Company signed by two Officers of
the Company (a "Company Order"). The Company Order shall specify the amount of
Securities to be authenticated and
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<PAGE> 18
the date on which each original issue of Securities is to be authenticated. The
aggregate principal amount of Securities outstanding at any time may not exceed
$400,000,000, except as provided above and in Section 2.7.
The Trustee shall act as the initial authenticating agent.
Thereafter, the Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. 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 shall have the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
The Securities shall be issuable only in registered form
without coupons and only in denominations of $1,000 and any integral multiple
thereof.
SECTION 2.3. Registrar, Paying Agent and Conversion Agent
The Company shall maintain an office or agency where
Securities may be presented for registration of transfer or for exchange (the
"Registrar"), an office or agency where Securities may be presented for payment
(the "Paying Agent"), an office or a agency where Securities may be presented
for conversion (the "Conversion Agent") and an office or agency where notices
and demands to or upon the Company in respect of the securities and this
Indenture may be served. The Registrar shall keep a register of the Securities
and of their transfer and exchange.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture. 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 Agent not a party to this Indenture.
If the Company fails to maintain a Registrar, Paying Agent, Conversion Agent or
agent for service of notices and demands, or fails to give the foregoing notice,
the Trustee shall act as such. The Company or any Affiliate of the Company may
act as Paying Agent (except for the purposes of Section 5.1 and Article 9),
Registrar or Conversion Agent.
The Company initially appoints the Trustee as Registrar,
Paying Agent, Conversion Agent and agent for service of notices and demands in
connection with the Securities.
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<PAGE> 19
SECTION 2.4. Paying Agent to Hold Money In Trust
Prior to 11:00 a.m., New York City time, on each due date of
the principal of or interest on any Securities, the Company shall deposit with
the Paying Agent a sum sufficient to pay such principal or interest so becoming
due. Subject to Section 12.7, the Paying Agent shall hold in trust for the
benefit of Securityholders or the Trustee all money 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 (or any other obligor on the Securities)
in making any such payment. If the Company or an Affiliate of the Company acts
as Paying Agent, it shall, before 11:00 a.m., New York City time, on each due
date of the principal of or interest on any Securities, segregate the money and
hold it as a separate trust fund. The Company at any time may require a Paying
Agent to pay all money held by it to the Trustee, and the Trustee may at any
time during the continuance of any default, upon written request to a Paying
Agent, require such Paying Agent to forthwith pay to the Trustee all sums so
held in trust by such Paying Agent. Upon doing so, the Paying Agent (other than
the Company) shall have no further liability for the money.
SECTION 2.5. 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 Securityholders. If the Trustee is not the Registrar, the Company
shall furnish to the Trustee on or before each semiannual interest payment date
and at such other times as the Trustee may request in writing a list in such
form and as of such date as the Trustee may reasonably require of the names and
addresses of Securityholders.
SECTION 2.6. Transfer and Exchange
When a Security is presented to the Registrar with a request
to register a transfer thereof or to exchange such Security for an equal
principal amount of Securities of other authorized denominations, the Registrar
shall register the transfer or make the exchange as requested; provided,
however, that every Security 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 duly executed by
the Holder thereof or its attorney duly authorized in writing. To permit
registration of transfers and exchanges, upon surrender of any Security for
registration of transfer or exchange at the office or agency maintained pursuant
to Section 2.3, the Company shall execute and the Trustee shall authenticate
Securities of a like aggregate principal amount at the Registrar's request. An
exchange or
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<PAGE> 20
transfer shall be without charge, except that the Company or the Registrar may
require payment of a sum sufficient to cover any tax, assessment or other
governmental charge that may be imposed in relation thereto, and provided
further that this sentence shall not apply to any exchange pursuant to Section
2.10, 3.6, 3.11, 4.2 (last paragraph) or 10.5.
Neither the Company, the Registrar nor the Trustee shall be
required to exchange or register a transfer of (a) any Securities for a period
of 15 days next preceding any selection of Securities to be redeemed, (b) any
Securities or portions thereof selected or called for redemption (except, in the
case of redemption of a Security in part, the portion not to be redeemed) or (c)
any Securities or portions there in respect of which a Change in Control
Purchase Notice has been delivered and not withdrawn by the Holder thereof
(except, in the case of the purchase of a Security in part, the portion not to
be purchased).
All Securities issued upon any transfer or exchange of
Securities shall be valid obligations of the Company, evidencing the same debt
and entitled to the same benefits under this Indenture as the Securities
surrendered upon such transfer or exchange.
SECTION 2.7. Replacement Securities
If any mutilated Security is surrendered to the Company, the
Registrar or the Trustee, or the Company, the Registrar and the Trustee receive
evidence to their satisfaction of the destruction, loss or theft of any
Security, and there is delivered to the Company, the Registrar and the Trustee
such Security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Company, the Registrar or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute, and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, or is about to be redeemed or
purchased by the Company pursuant to Article 3, the Company in its discretion
may, instead of issuing a new Security, pay, redeem or purchase such Security,
as the case may be.
Upon the issuance of any new Securities under this Section
2.7, the Company may require the payment of a sum sufficient
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<PAGE> 21
to cover any tax, assessment or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee or the Registrar) in connection therewith.
Every new Security issued pursuant to this Section 2.7 in lieu
of any destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.8. Outstanding Securities
Securities outstanding at any time are all Securities
authenticated by the Trustee, except for those canceled by it, those delivered
to it for cancellation and those described in this Section 2.8 as not
outstanding.
If a Security is replaced pursuant to Section 2.7, it ceases
to be outstanding unless the Company receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company) holds on a
redemption date or maturity date money sufficient to pay the principal of
(including premium, if any) and accrued interest on Securities payable on that
date, then on and after that date such Securities cease to be outstanding and
interest on them ceases to accrue.
Subject to the restrictions contained in Section 2.9, a
Security does not cease to be outstanding because the Company or an Affiliate of
the Company holds the Security.
SECTION 2.9. Treasury Securities
In determining whether the Holders of the required principal
amount of Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that, for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee knows are
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<PAGE> 22
so owned shall be so disregarded. Securities so owned which have been pledged in
good faith shall not be disregarded if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to the
Securities and that the pledgee is not the Company or any other obligor on 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 execute, and, upon receipt of a Company Order, the
Trustee shall authenticate and deliver, temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company with the consent of the Trustee considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate and deliver 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, the Paying Agent and the Conversion Agent shall
forward to the Trustee or its agent any Securities surrendered to them for
transfer, exchange, payment or conversion. The Trustee and no one else shall
cancel, in accordance with its standard procedures, all Securities surrendered
for transfer, exchange, redemption, payment, conversion or cancellation and
shall deliver the canceled Securities to the Company. The Company may not issue
new Securities to replace Securities it has paid or delivered to the Trustee for
cancellation or that any Holder has converted pursuant to Article 4.
ARTICLE 3
REDEMPTION AND PURCHASES
SECTION 3.1. Right to Redeem; Notice to Trustee
The Securities may be redeemed at the election of the Company,
as a whole or from time to time in part, at any time on or after [ ], 2001, at
the redemption prices specified in paragraph 5 of the form of Security attached
hereto as Exhibit A, together with accrued interest up to but not including the
Redemption Date.
If the Company elects to redeem Securities pursuant to this
Section 3.1 and paragraph 5 of the Securities, it shall
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notify the Trustee at least 35 days prior to the redemption date as fixed by the
Company (unless a shorter notice shall be satisfactory to the Trustee) of the
redemption date and the principal amount of Securities to be redeemed. If fewer
than all of the Securities are to be redeemed, the record date relating to such
redemption shall be selected by the Company and given to the Trustee, which
record date shall not be less than ten days after the date of notice to the
Trustee.
SECTION 3.2. Selection of Securities to Be Redeemed
If less than all of the Securities are to be redeemed, the
Trustee shall, not more than 60 days prior to the redemption date, select the
Securities to be redeemed by lot. The Trustee shall make the selection from the
Securities outstanding and not previously called for redemption, pro rata or by
another method the Trustee considers fair and appropriate. Securities in
denominations of $1,000 may only be redeemed in whole. The Trustee may select
for redemption portions (equal to $1,000 or any multiple thereof) of the
principal of Securities that have denominations larger than $1,000. Provisions
of this Indenture that apply to Securities called for redemption also apply to
portions of Securities called for redemption.
If any Security selected for partial redemption is converted
in part before termination of the conversion right with respect to the portion
of the Security so selected, the converted portion of such Security shall be
deemed (so far as may be) to be the portion selected for redemption. Securities
which have been converted during a selection of Securities to be redeemed shall
be treated by the Trustee as outstanding for the purpose of such selection.
SECTION 3.3. Notice of Redemption
At least 30 days but not more than 60 days before a redemption
date, the Company shall mail or cause to be mailed a notice of redemption to
each Holder of Securities to be redeemed at such Holder's address as it appears
on the Registrar's books.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the then current Conversion Price;
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(4) the name and address of the Paying Agent and the
Conversion Agent;
(5) that Securities called for redemption must be presented
and surrendered to the Paying Agent to collect the redemption price;
(6) that the Securities called for redemption may be
converted at any time before the close of business on the redemption
date;
(7) that Holders who wish to convert Securities must satisfy
the requirements in paragraph 8 of the Securities;
(8) that, unless the Company defaults in making the
redemption payment, interest on Securities called for redemption shall
cease accruing on and after the redemption date and the only remaining
right of the Holder shall be to receive payment of the redemption price
upon presentation and surrender to the Paying Agent of the Securities;
and
(9) 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 presentation and surrender of such Security,
a new Security or Securities in aggregate principal amount equal to the
unredeemed portion thereof will be issued.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.4. Effect of Notice of Redemption
Once notice of redemption is mailed, Securities called for
redemption become due and payable on the redemption date and at the redemption
price stated in the notice, except for Securities that are converted in
accordance with the provisions of Section 4.1. Upon presentation and surrender
to the Paying Agent, Securities called for redemption shall be paid at the
redemption price, plus accrued interest up to but not including the redemption
date.
SECTION 3.5. Deposit of Redemption Price
Prior to 11:00 a.m. New York City time, on the redemption
date, the Company shall deposit with the Paying Agent (or, if the Company acts
as Paying Agent, shall segregate and hold in trust) money sufficient to pay the
redemption price of and accrued interest on all Securities to be redeemed on
that
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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 or
have been converted. The Paying Agent shall return to the Company any money not
required for that purpose because of the conversion of Securities pursuant to
Article 4 or otherwise. If such money is then held by the Company in trust and
is not required for such purpose, it shall be discharged from the trust.
SECTION 3.6. Securities Redeemed in Part
Upon presentation and surrender of a Security that is redeemed
in part, the Company shall execute and the Trustee shall authenticate for and
deliver to the Holder a new Security equal in principal amount to the unredeemed
portion of the Security surrendered.
SECTION 3.7. Conversion Arrangement on Call for Redemption
In connection with any redemption of Securities, the Company
may arrange for the purchase and conversion of any Securities called for
redemption by an agreement with one or more investment bankers or other
purchasers to purchase such Securities by paying to the Paying Agent in trust
for the Securityholders, on or before the close of business on the Redemption
Date, an amount that, together with any amounts deposited with the Paying Agent
by the Company for the redemption of such Securities, is not less than the
Redemption Price, together with interest, if any, accrued to, but not including,
the Redemption Date, of such Securities. Notwithstanding anything to the
contrary contained in this Article 3, the obligation of the Company to pay the
Redemption Price of such Securities, including all accrued interest, if any,
shall be deemed to be satisfied and discharged to the extent such amount is so
paid by such purchasers. If such an agreement is entered into, any Securities
not duly surrendered for conversion by the Holders thereof may, at the option of
the Company, be deemed, to the fullest extent permitted by law, acquired by such
purchasers from such Holders and (notwithstanding anything to the contrary
contained in Article 4) surrendered by such purchasers for conversion, all as of
immediately prior to the close of business on the Redemption Date, subject to
payment of the above amount as aforesaid. The Paying Agent shall hold and pay to
the Holders whose Securities are selected for redemption any such amount paid to
it for purchase and conversion in the same manner as it would money deposited
with it by the Company for the redemption of Securities. Without the Paying
Agent's prior written consent, no arrangement between the Company and such
purchasers for the purchase and conversion of any Securities shall increase or
otherwise affect any of the powers, duties, responsibilities or
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obligations of the Paying Agent as set forth in this Indenture, and the Company
agrees to indemnify the Paying Agent from, and hold it harmless against, any
loss, liability or expense arising out of or in connection with any such
arrangement for the purchase and conversion of any Securities between the
Company and such purchasers, including the costs and expenses incurred by the
Paying Agent in the defense of any claim or liability arising out of or in
connection with the exercise or performance of any of its powers, duties,
responsibilities or obligations under this Indenture.
SECTION 3.8. Purchase of Securities at Option of the Holder Upon Change in
Control
(a) If at any time that Securities remain outstanding
there shall have occurred a Change in Control, Securities shall be purchased by
the Company at the option of the Holder thereof, as of the date that is 30
Business Days after the occurrence of the Change in Control (the "Change in
Control Purchase Date") at a purchase price equal to 100% of the principal
amount thereof (the "Change in Control Purchase Price") plus accrued interest up
to but not including the Change in Control Purchase Date, subject to
satisfaction by or on behalf of any Holder of the requirements set forth in
subsection (c) of this Section 3.8.
A "Change in Control" shall be deemed to have occurred at such
time after the initial issuance of the Securities if there shall occur:
(1) any Person or group, other than the Permitted Holders,
is or becomes owner, directly or indirectly, of shares of capital stock
of the Company representing 50% of the total voting power of all shares
of capital stock 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;
(2) the Company consolidates with, or merges with or into,
another Person or the Company sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of the assets
of the Company, 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, shares of capital stock of the Company
representing a majority of the total voting power of all classes of
capital stock of the Company immediately prior to such transaction,
"beneficially own," directly or indirectly, shares of capital stock of
the Company representing a majority of the total voting power
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of all classes of capital stock of the surviving or transferee Person;
(3) 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 previously 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
(4) there shall occur the liquidation or dissolution of the
Company.
For purposes of a Change in Control, "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.
Notwithstanding the foregoing, a Change of Control will be
deemed not to have occurred (i) if the last sale price of the Common Stock for
any five trading days during the ten trading days immediately preceding the
Change of Control is at least equal to 105% of the Conversion Price in effect
immediately preceding the Change of Control or (ii) if at least 90% of the
consideration (excluding cash payments for fractional shares or cash payments
for appraisal rights) in the transaction or transactions constituting the Change
in Control consists of shares of common Stock or securities convertible into
shares of common stock that are, or upon issuance will be, traded on a national
securities exchange or through the Nasdaq National Market.
A "beneficial owner" shall be determined in accordance with
Rule 13d-3 promulgated by the Commission under the Exchange Act, as in effect on
the date of execution of this Indenture, except that, for purposes of this
subsection (a), the number of shares of capital stock of the Company entitling
the holders thereof to vote generally in elections of directors shall be deemed
to include, in addition to all outstanding shares of capital stock of the
Company entitling the holders thereof to vote generally in the election of
directors and Unissued Shares deemed to be held by the Person with respect to
which the Change in Control determination is being made, all
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Unissued Shares deemed to be held by all other Persons. As used herein,
"Unissued Shares" shall mean shares of capital stock of the Company not
outstanding that are subject to options, warrants, rights to purchase or
conversion privileges exercisable within 60 days following the date of
determination of a Change in Control and that, upon issuance, shall entitle the
holders thereof to vote generally in the election of directors.
(b) Within 10 Business Days after the occurrence of a
Change in Control, the Company shall mail a written notice of Change in Control
to the Trustee and to each Holder (and to beneficial owners as required by
applicable law) and shall cause a copy of such notice to be published in a daily
newspaper of national circulation. The notice shall include the form of a Change
in Control Purchase Notice to be completed by the Holder and shall state:
(1) the date of such Change in Control and, briefly, the
events causing such Change in Control;
(2) the date by which the Change in Control Purchase Notice
pursuant to this Section 3.8 must be given;
(3) the Change in Control Purchase Date;
(4) the Change in Control Purchase Price;
(5) briefly, the conversion rights of the Securities;
(6) the name and address of the Paying Agent and the
Conversion Agent;
(7) the then current Conversion Price;
(8) that Securities as to which a Change in Control Purchase
Notice has been given may be converted into Common Stock only to
the extent that the Change in Control Purchase Notice has been
withdrawn in accordance with the terms of this Indenture;
(9) the procedures that the Holder must follow to exercise
rights under this Section 3.8;
(10) the procedures for withdrawing a Change in Control
Purchase Notice, including a form of notice of withdrawal; and
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(11) that the Holder must satisfy the requirements set forth
in the Securities in order to convert the Securities.
(c) A Holder may exercise its rights specified in
subsection (a) of this Section 3.8 upon delivery of a written notice of the
exercise of such rights (a "Change in Control Purchase Notice") to the Paying
Agent at any time prior to the close of business on the Business Day next
preceding the Change in Control Purchase Date, stating:
(1) the certificate number of each Security that the Holder
will deliver to be purchased;
(2) the portion of the principal amount of each Security
that the Holder will deliver to be purchased, which portion must
be $1,000 or an integral multiple thereof; and
(3) that such Security shall be purchased pursuant to the
terms and conditions specified in this Indenture.
The delivery of such Security to the Paying Agent (together
with all necessary endorsements) at the office of the Paying Agent shall be a
condition to the receipt by the Holder of the Change in Control Purchase Price
therefor; provided, however, that such Change in Control Purchase Price shall be
so paid pursuant to this Section 3.8 only if the Security so delivered to the
Paying Agent shall conform in all respects to the description thereof set forth
in the related Change in Control Purchase Notice.
The Company shall purchase from the Holder thereof, pursuant
to this Section 3.8, a portion of a Security if the principal amount of such
portion is $1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to the purchase of all of a Security pursuant to Sections
3.8 through 3.13 also apply to the purchase of such portion of such Security.
Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Change in Control Purchase Notice
contemplated by this subsection (c) shall have the right to withdraw such Change
in Control Purchase Notice in whole or in a portion thereof that is $1,000 or in
an integral multiple thereof at any time prior to the close of business on the
Business Day next preceding the Change in Control Purchase Date by delivery of a
written notice of withdrawal to the Paying Agent in accordance with Section 3.9.
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The Paying Agent shall promptly notify the Company of the
receipt by it of any Change in Control Purchase Notice or written withdrawal
thereof.
SECTION 3.9. Effect of Change in Control Purchase Notice
Upon receipt by the Paying Agent of the Change in Control
Purchase Notice specified in Section 3.8(c), the Holder of the Security in
respect of which such Change in Control Purchase Notice was given shall (unless
such Change in Control Purchase Notice is withdrawn as specified below)
thereafter be entitled to receive solely the Change in Control Purchase Price
with respect to such Security plus accrued interest thereon up to but not
including the Change in Control Purchase Date. Such Change in Control Purchase
Price and accrued interest shall be paid to such Holder promptly following the
later of (a) the Change in Control Purchase Date with respect to such Security
(provided the conditions in Section 3.8(c) have been satisfied) and (b) the time
of delivery of such Security to the Paying Agent by the Holder thereof in the
manner required by Section 3.8(c). Securities in respect of which a Change in
Control Purchase Notice has been given by the Holder thereof may not be
converted into shares of Common Stock on or after the date of the delivery of
such Change in Control Purchase Notice unless such Change in Control Purchase
Notice has first been validly withdrawn.
A Change in Control Purchase Notice may be withdrawn by means
of a written notice of withdrawal delivered by the Holder to the office of the
Paying Agent at any time prior to the close of business on the Business Day
immediately preceding the Change in Control Purchase Date, specifying:
(1) the certificate number of each Security in respect of
which such notice of withdrawal is being submitted;
(2) the principal amount of the Security or portion thereof
with respect to which such notice of withdrawal is being
submitted; and
(3) the principal amount, if any, of such Security that
remains subject to the original Change in Control Purchase Notice
and that has been or will be delivered for purchase by the
Company.
There shall be no purchase of any Securities pursuant to
Section 3.8 if there has occurred (prior to, on or after, as the case may be,
the giving, by the Holders of such Securities, of the required Change in Control
Purchase Notice) and is continuing an Event of Default (other than a default in
the payment
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of the Change in Control Purchase Price with respect to such Securities).
SECTION 3.10. Deposit of Change in Control Purchase Price
At or before 11:00 a.m., New York City time, on the second
Business Day immediately following a Change in Control Purchase Date, the
Company shall deposit with the Trustee or with the Paying Agent (or, if the
Company is acting as the Paying Agent, shall segregate and hold in trust as
provided in Section 2.4) an amount of money sufficient to pay the aggregate
Change in Control Purchase Price of all the Securities or portions thereof that
are to be purchased as of such Change in Control Purchase Date plus accrued
interest thereon up to but not including the Change in Control Purchase Date.
The manner in which the deposit required by this Section 3.10 is made by the
Company shall be at the option of the Company, provided that such deposit shall
be made in a manner such that the Trustee or the Paying Agent shall have
immediately available funds on the second Business Day immediately following the
Change in Control Purchase Date.
If the Paying Agent holds, in accordance with the terms
hereof, money sufficient to pay the Change in Control Purchase Price of any
Security tendered for purchase, then, on the second Business Day immediately
following to the Change in Control Purchase Date, such Security will cease to be
outstanding and will be deemed paid, whether or not such Security is delivered
to the Paying Agent, and all other rights of the Holder in respect thereof shall
terminate (other than the right to receive the Change in Control Purchase Price
upon delivery of such Security).
SECTION 3.11. Securities Purchased In Part
Any Security that is to be purchased only in part shall be
surrendered at the office of the Paying Agent (with, if the Company or the
Trustee so requires, due endorsement by, or a written instrument of transfer in
form satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or such Holder's attorney-in-fact duly authorized in writing), and
promptly after the Change in Control Purchase Date 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 such authorized
denomination or denominations as may be requested by such Holder, in aggregate
principal amount equal to, and in exchange for, the portion of the principal
amount of the Security so surrendered that is not purchased.
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SECTION 3.12. Compliance With Securities Laws Upon Purchase of Securities
In connection with any offer to purchase or purchase of
Securities under Section 3.8 (provided that such offer or purchase constitutes
an "issuer tender offer" for purposes of Rule 13e-4 under the Exchange Act
(which term, as used herein, includes any successor provision thereto) at the
time of such offer or purchase), the Company shall (a) comply with Rule 13e-4
and Rule 14e-1 under the Exchange Act, (b) file the related Schedule 13E-4 (or
any successor or similar schedule, form or report) under the Exchange Act, and
(c) otherwise comply with all federal and state securities laws so as to permit
the rights of the Holders and obligations of the Company under Sections 3.8
through 3.11 to be exercised in the time and in the manner specified therein.
SECTION 3.13. Repayment to the Company
Subject to the provisions of Section 5.7, to the extent that
the aggregate amount of cash deposited by the Company pursuant to Section 3.10
exceeds the aggregate Change in Control Purchase Price of the Securities or
portions thereof that the Company is obligated to purchase, plus accrued
interest thereon up to but not including the Change in Control Purchase Date,
then promptly after the second Business Day immediately following the Change in
Control Purchase Date, the Trustee or the Paying Agent, as the case may be,
shall return any such excess to the Company.
ARTICLE 4
CONVERSION
SECTION 4.1. Conversion Privilege
Subject to the further provisions of this Section 4.1, a
Holder of a Security may convert such Security into Common Stock at any time
prior to maturity, at the Conversion Price then in effect; provided, however,
that, if such Security is called for redemption pursuant to Article 3, such
conversion right shall terminate at the close of business on the Business Day
immediately preceding the redemption date for such Security (unless the Company
shall default in making the redemption payment when due, in which case the
conversion right shall terminate at the close of business on the date such
default is cured and such Security is redeemed); provided, further, that, if the
Holder of a Security presents such Security for redemption prior to the close of
business on the Business Day immediately preceding the redemption date for such
Security, the right of conversion shall terminate upon presentation of the
Security to
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the Trustee (unless the Company shall default in making the redemption payment
when due, in which case the conversion right shall terminate at the close of
business on the date such default is cured and such Security is redeemed). The
number of shares of Common Stock issuable upon conversion of a Security shall be
determined by dividing the principal amount of the Security or portion thereof
surrendered for conversion by the Conversion Price in effect on the Conversion
Date. The initial Conversion Price is set forth in paragraph 8 of the Securities
and is subject to adjustment as provided in this Article 4.
A Holder may convert a portion of a Security equal to $1,000
or any integral multiple thereof. Provisions of this Indenture that apply to
conversion of all of a Security also apply to conversion of a portion of a
Security.
A Security in respect of which a Holder has delivered a Change
in Control Purchase Notice pursuant to Section 3.8(c) exercising the option of
such Holder to require the Company to purchase such Security may be converted
only if such Change in Control Purchase Notice is withdrawn by a written notice
of withdrawal delivered to the Paying Agent prior to the close of business on
the Business Day immediately preceding the Change in Control Purchase Date in
accordance with Section 3.9.
A Holder of Securities is not entitled to any rights of a
holder of Common Stock until such Holder has converted its Securities to Common
Stock, and only to the extent such Securities are deemed to have been converted
into Common Stock pursuant to this Article 4.
SECTION 4.2. Conversion Procedure
To convert a Security, a Holder must (a) complete and manually
sign the conversion notice on the back of the Security and deliver such notice
to the Conversion Agent, (b) surrender the Security to the Conversion Agent, (c)
furnish appropriate endorsements and transfer documents if required by the
Registrar or the Conversion Agent, and (d) pay any transfer or similar tax, if
required. The date on which the Holder satisfies all of those requirements is
the "Conversion Date." As soon as practicable after the Conversion Date, the
Company shall deliver to the Holder through the Conversion Agent a certificate
for the number of whole shares of Common Stock issuable upon the conversion,
payment for accrued interest on such Security to the extent required by this
Section 4.2 and cash in lieu of any fractional shares pursuant to Section 4.3.
The person in whose name the certificate is registered shall
be deemed to be a shareholder of record on the Conversion Date; provided,
however, that no surrender of a Security
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on any date when the stock transfer books of the Company shall be closed shall
be effective to constitute the person or persons entitled to receive the shares
of Common Stock upon such conversion as the record holder or holders of such
shares of Common Stock on such date, but such surrender shall be effective to
constitute the person or persons entitled to receive such shares of Common Stock
as the record holder or holders thereof for all purposes at the close of
business on the next succeeding day on which such stock transfer books are open;
provided, further, that such conversion shall be at the Conversion Price in
effect on the Conversion Date as if the stock transfer books of the Company had
not been closed. Upon conversion of a Security, such person shall no longer be a
Holder of such Security. No payment or adjustment will be made for dividends or
distributions on shares of Common Stock issued upon conversion of a Security.
Except as otherwise provided in this Section 4.2, no payment
or adjustment will be made for accrued interest on a converted Security.
Interest accrued through and including [ ], 2001 shall be paid on any Security
called for redemption pursuant to Article 3 and surrendered for conversion
pursuant to this Article 4 before the close of business on [ ], 2001. If any
Holder surrenders a Security for conversion after the close of business on the
record date for the payment of an installment of interest and before the close
of business on the related interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date shall be paid to
the Holder of such Security on such record date. In such event, unless such
Security has been called for redemption, such Security, when surrendered for
conversion, must be accompanied by delivery of a check or draft payable to the
Conversion Agent in an amount equal to the interest payable on such interest
payment date on the portion so converted. If such payment does not accompany
such Security, the Security shall not be converted. If the Company defaults in
the payment of interest payable on the interest payment date, the Conversion
Agent shall repay such funds to the Holder.
If a Holder converts more than one Security at the same time,
the number of shares of Common Stock issuable upon the conversion shall be based
on the aggregate principal amount of Securities converted.
Upon surrender of a Security that is converted in part, the
Company shall execute, and the Trustee shall authenticate and deliver to the
Holder, a new Security equal in principal amount to the unconverted portion of
the Security surrendered.
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SECTION 4.3. Fractional Shares
The Company will not issue fractional shares of Common Stock
upon conversion of Securities. In lieu thereof, the Company will pay an amount
in cash based upon the closing sale price of the Common Stock on the Trading Day
immediately prior to the date of conversion.
SECTION 4.4. Taxes on Conversion
If a Holder converts a Security, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon such conversion. However, the Holder shall pay any such tax
which is due because the Holder requests the shares to be issued in a name other
than the Holder's name. The Conversion Agent may refuse to deliver the
certificate representing the Common Stock being issued in a name other than the
Holder's name until the Conversion Agent receives a sum sufficient to pay any
tax which will be due because the shares are to be issued in a name other than
the Holder's name. Nothing herein shall preclude any tax withholding required by
law or regulation.
SECTION 4.5. Company to Provide Stock
The Company shall, prior to issuance of any Securities
hereunder, and from time to time as it may be necessary, reserve, out of its
authorized but unissued Common Stock, a sufficient number of shares of Common
Stock to permit the conversion of all outstanding Securities into shares of
Common Stock.
All shares of Common Stock delivered upon conversion of the
Securities shall be newly issued shares or treasury shares, shall be duly
authorized, validly issued, fully paid and nonassessable and shall be free from
preemptive rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all federal
and state securities laws regulating the offer and delivery of shares of Common
Stock upon conversion of Securities, if any, and will list or cause to have
quoted such shares of Common Stock on each national securities exchange or in
the over-the-counter market or such other market on which the Common Stock is
then listed or quoted.
SECTION 4.6. Adjustment of Conversion Price
The conversion price as stated in paragraph 8 of the
Securities (the "Conversion Price") shall be adjusted from time to time by the
Company as follows:
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(a) In case the Company shall (i) pay a dividend in shares of
Common Stock to all holders of Common Stock, (ii) make a distribution
in shares of Common Stock to all holders of Common Stock, (iii)
subdivide its outstanding Common Stock into a greater number of shares,
or (iv) combine its outstanding Common Stock into a smaller number of
shares, the Conversion Price in effect immediately prior thereto shall
be adjusted so that the Holder of any Security thereafter surrendered
for conversion shall be entitled to receive that number of shares of
Common Stock which it would have owned had such Security been converted
immediately prior to the happening of such event. An adjustment made
pursuant to this subsection (a) shall become effective immediately
after the record date in the case of a dividend in shares or
distribution and shall become effective immediately after the effective
date in the case of subdivision or combination.
(b) In case the Company shall issue rights or warrants to all
or substantially all holders of its Common Stock entitling them (for a
period commencing no earlier than the record date described below and
expiring not more than 60 days after such record date) to subscribe for
or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price per share less than the current market price
per share of Common Stock (as determined in accordance with subsection
(e) of this Section 4.6) at the record date for the determination of
shareholders entitled to receive such rights or warrants, the
Conversion Price in effect immediately prior thereto shall be adjusted
so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such record date by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding on such record date, plus the number of shares which
the aggregate offering price of the total number of shares of Common
Stock so offered (or the aggregate Conversion Price of the convertible
securities so offered) would purchase at such current market price, and
of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock offered (or into which the convertible securities so
offered are convertible). Such adjustment shall be made successively
whenever any such rights or warrants are issued, and shall become
effective immediately after such record date. If at the end of the
period during which such rights or warrants are exercisable not all
rights or warrants shall have been exercised, the adjusted Conversion
Price shall be immediately readjusted to what it would have been based
upon the number of additional shares of Common Stock actually issued
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(or the number of shares of Common Stock issuable upon conversion of
convertible securities actually issued).
(c) In case the Company shall distribute to all or
substantially all holders of its Common Stock any shares of capital
stock of the Company (other than Common Stock), evidences of
indebtedness or other non-cash assets (including securities of any
company other than the Company), or shall distribute to all or
substantially all holders of its Common Stock rights or warrants to
subscribe for or purchase any of its securities (excluding those
referred to in subsection (b) of this Section 4.6), then in each such
case the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the current market price per share (as
defined in subsection (e) of this Section 4.6) of the Common Stock on
the record date mentioned below less the fair market value on such
record date (as determined by the Board of Directors, whose
determination shall be conclusive evidence of such fair market value)
of the portion of the capital stock, evidences of indebtedness or other
non-cash assets so distributed or of such rights or warrants applicable
to one share of Common Stock (determined on the basis of the number of
shares of Common Stock outstanding on the record date), and of which
the denominator shall be the current market price per share (as defined
in subsection (e) of this Section 4.6) of the Common Stock on such
record date. Such adjustment shall become effective immediately after
the record date for the determination of shareholders entitled to
receive such distribution. Notwithstanding the foregoing, in the event
that the Company shall distribute rights or warrants (other than those
referred to in subsection (b) of this Section 4.6) ("Rights") pro rata
to holders of Common Stock, the Company may, in lieu of making any
adjustment pursuant to this Section 4.6, make proper provision so that
each holder of a Security who converts such Security (or any portion
thereof) after the record date for such distribution and prior to the
expiration or redemption of the Rights shall be entitled to receive
upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion (the "Conversion Shares"), a number of
Rights to be determined as follows: (i) if such conversion occurs on or
prior to the date for the distribution to the holders of Rights of
separate certificates evidencing such Rights (the "Distribution Date"),
the same number of Rights to which a holder of a number of shares of
Common Stock equal to the number of Conversion Shares is entitled at
the time of such conversion in accordance
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with the terms and provisions of and applicable to the Rights and (ii)
if such conversion occurs after the Distribution Date, the same number
of Rights to which a holder of the number of shares of Common Stock
into which the principal amount of the Security so converted was
convertible immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
(d) In case the Company shall, by dividend or otherwise, at
any time distribute (a "Triggering Distribution") to all or
substantially all holders of its Common Stock cash in an aggregate
amount that, together with the aggregate amount of all cash
distributions to all or substantially all holders of its Common stock
made within the 12 months preceding the date of payment of the
Triggering Distribution and in respect of which no Conversion Price
adjustment pursuant to this Section 4.6 has been made, exceeds 12.5% of
the product of the current market price per share of Common Stock (as
determined in accordance with subsection (e) of this Section 4.6) on
the Business Day (the "Determination Date") immediately preceding the
day on which such Triggering Distribution is declared by the Company
multiplied by the number of shares of Common Stock outstanding on such
date (excluding shares held in the Treasury of the Company), the
Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying such Conversion Price in effect
immediately prior to the Determination Date by a fraction of which the
numerator shall be the current market price per share of the Common
Stock (as determined in accordance with subsection (e) of this Section
4.6) on the Determination Date less the amount of cash (plus the fair
market value of such other consideration) so distributed within such 12
months (including, without limitation, the Triggering Distribution)
applicable to one share of Common Stock (determined on the basis of the
number of shares of Common Stock outstanding on the Determination Date)
and the denominator shall be such current market price per share of the
Common Stock (as determined in accordance with subsection (e) of this
Section 4.6) on the Determination Date, such reduction to become
effective immediately prior to the opening of business on the day
following the date on which the Triggering Distribution IS paid.
(e) For the purpose of any computation under subsections (b),
(c) and (d) of this Section 4.6, the current market price per share of
Common Stock on any date shall be deemed to be the average of the daily
closing prices for the 30 consecutive Trading Days commencing 45
Trading
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Days before (1) the Determination Date with respect to distributions
under subsection (d) of this Section 4.6 or (ii) the record date with
respect to distributions, issuances or other events requiring such
computation under subsection (b) or (c) of this Section 4.6. The
closing price for each day shall be the last reported sales price or,
in case no such reported sale takes place on such date, the average of
the reported closing bid and asked prices in either case on the New
York Stock Exchange (the "NYSE") or, if the Common Stock is not listed
or admitted to trading on the NYSE, on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national
securities exchange, the closing sales price of the Common Stock as
quoted by NASDAQ or, in case no reported sale takes place, the average
of the closing bid and asked prices as quoted by NASDAQ or any
comparable system or, if the Common Stock is not quoted on NASDAQ or
any comparable system, the closing sales price or, in case no reported
sale takes place, the average of the closing bid and asked prices, as
furnished by any two members of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that
purpose. If no such prices are available, the current market price per
share shall be the fair value of a share of Common Stock as determined
by the Board of Directors.
(f) In any case in which this Section 4.6 shall require that
an adjustment be made following a record date or a Determination Date,
as the case may be, established for purposes of this Section 4.6, the
Company may elect to defer (but only until five Business Days following
the filing by the Company with the Trustee of the certificate described
in Section 4.9) issuing to the Holder of any Security converted after
such record date or Determination Date the shares of Common Stock and
other capital stock of the Company issuable upon such conversion over
and above the shares of Common Stock and other capital stock of the
Company issuable upon such conversion only on the basis of the
Conversion Price prior to adjustment; and, in lieu of the shares the
issuance of which is so deferred, the Company shall issue or cause its
transfer agents to issue due bills or other appropriate evidence
prepared by the Company of the right to receive such shares. If any
distribution in respect of which an adjustment to the Conversion Price
is required to be made as of the record date, effective date or
Determination Date therefor is not thereafter made or paid by the
Company for any reason, the Conversion Price shall be readjusted to the
Conversion Price which would then be in effect if such record date had
not been
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fixed or such effective date or Determination Date had not occurred.
SECTION 4.7. No Adjustment
No adjustment in the Conversion Price shall be required unless
the adjustment would require an increase or decrease of at least 1% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 4.7 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article 4 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
No adjustment need be made for a transaction referred to in
Section 4.6 if all Securityholders are entitled to participate in the
transaction on a basis and with notice that the Board of Directors determines to
be fair and appropriate in light of the basis and notice on which holders of
Common Stock participate in the transaction. The Company shall give notice to
the Trustee of any such determination.
No adjustment need be made for rights to purchase Common Stock
or issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends or interest.
No adjustment need be made for a change in the par value or a
change to no par value of the Common Stock.
To the extent that the Securities become convertible into the
right to receive cash, no adjustment need be made thereafter as to the cash.
Interest will not accrue on the cash.
SECTION 4.8. Adjustment for Tax Purposes
The Company shall be entitled to make such reductions in the
Conversion Price, in addition to those required by Section 4.6, as it in its
discretion shall determine to be advisable in order that any stock dividends,
subdivisions of shares, distributions of rights to purchase stock or securities
or distributions of securities convertible into or exchangeable for stock
hereafter made by the Company to its shareholders shall not be taxable.
SECTION 4.9. Notice of Adjustment
Whenever the Conversion Price is adjusted, the Company shall
promptly mail to Securityholders a notice of the adjustment and file with the
Trustee an Officers' Certificate
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briefly stating the facts requiring the adjustment and the manner of computing
it.
SECTION 4.10. Notice of Certain Transactions
In the event that:
(1) the Company takes any action which would require an
adjustment in the Conversion Price;
(2) the Company consolidates or merges with, or transfers
all or substantially all of its property and assets to, another
corporation and shareholders of the Company must approve the
transaction; or
(3) there is a dissolution or liquidation of the Company,
the Company shall mail to Securityholders and file with the Trustee a notice
stating the proposed record or effective date, as the case may be. The Company
shall mail the notice at least ten days before such date. Failure to mail such
notice or any defect therein shall not affect the validity of any transaction
referred to in clause (1), (2) or (3) of this Section 4.10.
SECTION 4.11. Effect of Reclassification, Consolidation, Merger or Sale on
Conversion Privilege
If any of the following shall occur, namely: (a) any
reclassification or change of shares of Common Stock issuable upon conversion of
the Securities (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination, or any other change for which an adjustment is provided in Section
4.6); (b) any consolidation or merger to which the Company is a party other than
a merger in which the Company is the continuing corporation and which does not
result in any reclassification of, or change (other than a change in name, or in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination) in, outstanding shares of Common
Stock; or (c) any sale or conveyance of all or substantially all of the property
and assets of the Company to any person, then the Company, or such successor or
purchasing corporation, as the case may be, shall, as a condition precedent to
such reclassification, change, consolidation, merger, sale or conveyance,
execute and deliver to the Trustee a supplemental indenture providing that the
Holder of each Security then outstanding shall have the right to convert such
Security into the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon conversion of such Security immediately prior to
such reclassification, change, consolidation, merger, sale or conveyance. Such
supplemental indenture shall provide for adjustments of the Conversion Price
which shall be as nearly equivalent as may be practicable to the adjustments of
the Conversion Price provided for in this Article 4. If, in the case of any such
consolidation, merger, sale or conveyance, the stock or other securities and
property (including cash) receivable thereupon by a holder of Common Stock
include shares of stock or other securities and property of a corporation other
than the successor or purchasing corporation, as the case may be, in such
consolidation, merger, sale or
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conveyance, then such supplemental indenture shall also be executed by such
other corporation and shall contain such additional provisions to protect the
interests of the Holders of the Securities as the Board of Directors shall
reasonably consider necessary by reason of the foregoing. The provisions of this
Section 4.11 shall similarly apply to successive consolidations, mergers, sales
or conveyances.
In the event the Company shall execute a supplemental
indenture pursuant to this Section 4.11, the Company shall promptly file with
the Trustee (x) an Officers' Certificate briefly stating the reasons therefor,
the kind or amount of shares of stock or other securities or property (including
cash) receivable by Holders of the Securities upon the conversion of their
Securities after any such reclassification, change, consolidation, merger, sale
or conveyance, any adjustment to be made with respect thereto and that all
conditions precedent have been complied with and (y) an Opinion of Counsel that
all conditions precedent have been complied with.
SECTION 4.12. Trustee's Disclaimer
The Trustee shall have no duty to determine when an adjustment
under this Article 4 should be made, how it should be made or what such
adjustment should be, but may accept as conclusive evidence of that fact or the
correctness of any such adjustment, and shall be protected in relying upon, an
Officers' Certificate including the Officers' Certificate with respect thereto
which the Company is obligated to file with the Trustee pursuant to Section 4.9.
The Trustee makes no representation as to the validity or value of any
securities or assets issued upon conversion of Securities, and the Trustee shall
not be responsible for the Company's failure to comply with any provisions of
this Article 4.
The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any supplemental indenture
executed pursuant to Section 4.11, but
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may accept as conclusive evidence of the correctness thereof, and shall be fully
protected in relying upon, the Officers' Certificate with respect thereto which
the Company is obligated to file with the Trustee pursuant to Section 4.11.
SECTION 4.13. Voluntary Reduction
The Company from time to time may reduce the Conversion Price
by any amount for any period of time if the period is at least 20 days or such
longer period as may be required by law and if the reduction is irrevocable
during the period; provided, however, that in no event may the Conversion Price
be less than the par value of a share of Common Stock.
ARTICLE 5
COVENANTS
SECTION 5.1. Payment of Securities
The Company shall promptly make all payments in respect of the
Securities on the dates and in the manner provided in the Securities and this
Indenture. An installment of principal or interest shall be considered paid on
the date it is due if the Paying Agent (other than the Company) holds by 11:00
a.m., New York City time, on that date money, deposited by the Company or an
Affiliate thereof, sufficient to pay the installment. The Company shall pay
interest on overdue principal at the rate borne by the Securities per annum; it
shall pay interest on overdue installments of interest at the same rate to the
extent lawful.
SECTION 5.2. SEC Reports
The Company shall file all reports and other information and
documents which it is required to file with the SEC pursuant to Section 13 or
15(d) of the Exchange Act, and within 15 days after it files them with the SEC,
the Company shall file copies of all such reports, information and other
documents with the Trustee.
In the event the Company is at any time no longer subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will prepare, for the first three quarters of each fiscal year,
quarterly financial statements substantially equivalent to the financial
statements required to be included in a report on Form 10-Q under the Exchange
Act. The Company will also prepare, on an annual basis, complete audited
consolidated financial statements, including, but not limited to, a balance
sheet, a statement of operations, a statement of cash flows and all appropriate
notes. All such
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financial statements will be prepared in accordance with generally accepted
accounting principles. The Company will cause a copy of such financial
statements to be filed with the Trustee and mailed to the Holders of the
Securities within 50 days after the end of each of the first three quarters of
each fiscal year and within 95 days after the close of each fiscal year. The
Company will also comply with the other provisions of TIA Section 314(a).
SECTION 5.3. Compliance Certificates
The Company shall deliver to the Trustee, within 90 days after
the end of each fiscal year of the Company, an Officers' Certificate as to the
signer's knowledge of the Company's compliance with all conditions and covenants
on its part contained in this Indenture and stating whether or not the signer
knows of any default or Event of Default. If such signer knows of such a default
or Event of Default, the Officers' Certificate shall describe the default or
Event of Default and the efforts to remedy the same. For the purposes of this
Section 5.3, compliance shall be determined without regard to any grace period
or requirement of notice provided pursuant to the terms of this Indenture.
SECTION 5.4. Notice of Defaults
In the event (a) that indebtedness of the Company in an
aggregate principal amount in excess of $25,000,000 is declared due and payable
before its maturity because of the occurrence of any default under such
indebtedness, or (b) of the occurrence of any event which entitles the holder or
holders of such indebtedness to declare such indebtedness due and payable before
its maturity and with respect to which any applicable grace period has lapsed or
expired, the Company will promptly give written notice to the Trustee of such
declaration or event.
SECTION 5.5. Further Instruments and Acts
Upon request of the Trustee, the Company will execute and
deliver such further instruments and do such further acts as may be reasonably
necessary or proper to carry out more effectively the purposes of this
Indenture.
SECTION 5.6. Liquidation
The Company shall not adopt any plan of liquidation which
provides for, contemplates or the effectuation of which is preceded by (A) the
sale, lease, conveyance or other disposition of all or substantially all the
assets of the Company otherwise than substantially as an entirety in accordance
with
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Article 6 and (B) the distribution of all or substantially all the proceeds of
such sale, lease, conveyance or other disposition and the remaining assets of
the Company to holders of Common Stock of the Company, unless the Company shall
in connection with the adoption of such plan make provision for, or agree that
prior to making any liquidating distributions it will make provision for, the
satisfaction of the Company's obligations under this Indenture and under the
Securities as to the payment of principal and interest thereof.
ARTICLE 6
SUCCESSOR CORPORATION
SECTION 6.1. When Company May Merge, Etc.
The Company shall not consolidate with or merge with or into,
or transfer all or substantially all of its property and assets to, any person
unless:
(a) either the Company shall be the resulting or surviving
corporation or such person is a corporation organized and 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, a State thereof or the District of Columbia, and
such person expressly assumes by supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Securities and this Indenture (in
which case all such obligations of the Company shall terminate); and
(b) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company as
a result of such transaction as having been incurred by the Company at
the time of such transaction, no default or Event of Default shall have
occurred and be continuing.
The Company shall deliver to the Trustee prior to the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each of which
shall comply with Section 11.4 and shall state that such consolidation, merger
or transfer and any such supplemental indenture comply with this Article 6 and
that all conditions precedent herein provided for relating to such transaction
have been complied with; provided, however, that such Opinion of Counsel shall
address only the matters referred to in clause (a) of this Section 6.1.
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SECTION 6.2. Successor Corporation Substituted
Upon any consolidation or merger, or any transfer of all or
substantially all of the property and assets of the Company in accordance with
Section 6.1, the successor corporation formed by such consolidation or into
which the Company is merged or to which such transfer is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor corporation had
been named as the Company herein.
ARTICLE 7
DEFAULT AND REMEDIES
SECTION 7.1. Events of Default
An "Event of Default" shall occur if:
(1) the Company defaults in the payment of interest on any
Security when the same becomes due and payable and the default
continues for a period of 30 days;
(2) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at maturity, upon
redemption or otherwise;
(3) the Company fails to comply with any of its other
agreements contained in the Securities or this Indenture and the
default continues for the period and after the notice specified below;
(4) a default shall occur under any bond, debenture, note or
other evidence of indebtedness for money borrowed by the Company having
an aggregate outstanding principal amount in excess of $25,000,000,
which default shall have resulted in such indebtedness becoming or
being declared due and payable prior to the date on which it would
otherwise have been due and payable, without such indebtedness having
been discharged, such acceleration having been rescinded or annulled or
there having been deposited in trust a sum of money sufficient to
discharge in full such indebtedness, in each case within a period of 10
days following the occurrence of such acceleration;
(5) the Company pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case or proceeding;
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(B) consents to the entry of an order for relief against it
in an involuntary case or proceeding;
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property; or
(D) makes a general assignment for the benefit of its
creditors; or
(6) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case
or proceeding;
(B) appoints a Custodian of the Company or for all or
substantially all of its property; or
(C) orders the liquidation of the Company;
and in each case the order or decree remains unstayed and in effect
for 60 days.
The term "Bankruptcy Law" means Title 11 of the United States
Code or any similar federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law.
A default under clause (3) above is not an Event of Default
until the Trustee notifies the Company, or the Holders of at least 25% in
principal amount of the Securities then outstanding notify the Company and the
Trustee, of the default, and the Company does not cure the default within 60
days after receipt of such notice. The notice given pursuant to this Section 7.1
must specify the default, demand that it be remedied and state that the notice
is a "Notice of Default." When any default under this Section 7.1 is cured, it
ceases.
Subject to the provisions of Sections 8.1 and 8.2, the Trustee
shall not be charged with knowledge of any Event of Default unless written
notice thereof shall have been given to a Trust Officer at the Corporate Trust
Office of the Trustee by the Company, the Paying Agent, any Holder or any agent
of any Holder.
SECTION 7.2. Acceleration
If an Event of Default (other than an Event of Default
specified in clause (5) or (6) of Section 7.1) occurs and
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is continuing, the Trustee may, by notice to the Company, or the Holders of at
least 25% in principal amount of the Securities then outstanding may, by notice
to the Company and the Trustee, and the Trustee shall, upon the request of such
Holders, declare all unpaid principal of and accrued interest to the date of
acceleration on the Securities then outstanding (if not then due and payable) to
be due and payable upon any such declaration, and the same shall become and be
immediately due and payable. If an Event of Default specified in clause (5) or
(6) of Section 7.1 occurs, all unpaid principal of and accrued interest on the
Securities then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Securityholder. The Holders of a majority in principal amount of the Securities
then outstanding by notice to the Trustee may rescind an acceleration and its
consequences if (a) all existing Events of Default, other than the nonpayment of
the principal of and accrued interest on the Securities which has become due
solely by such declaration of acceleration, have been cured or waived; (b) to
the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due otherwise
than by such declaration of acceleration, has been paid; (c) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction; and (d) all payments due to the Trustee and any predecessor
Trustee under Section 8.7 have been made. Anything herein contained to the
contrary notwithstanding, in the event of any acceleration pursuant to this
Section 7.2, the Company shall not be obligated to pay any premium which it
would have had to pay if it had then elected to redeem the Securities pursuant
to paragraph 5 of the Securities, except in the case of any Event of Default
occurring by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding payment of the
premium which it would have had to pay if it had then elected to redeem the
Securities pursuant to paragraph 5 of the Securities, in which case an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law.
SECTION 7.3. 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 the principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
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
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any Securityholder in exercising any right or remedy accruing 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.
SECTION 7.4. Waiver of Defaults and Events of Default
Subject to Sections 7.7 and 10.2, the Holders of a majority in
principal amount of the Securities then outstanding by notice to the Trustee may
waive an existing default or Event of Default and its consequence, except a
default in the payment of the principal of or interest on any Security as
specified in clauses (1) and (2) of Section 7.1. When a default or Event of
Default is waived, it is cured and ceases.
SECTION 7.5. Control by Majority
The Holders of a majority in principal amount of the
Securities then outstanding 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 or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of another Securityholder or the
Trustee, 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.
SECTION 7.6. Limitations on Suits
A Securityholder may not pursue any remedy with respect to
this Indenture or the Securities (except actions for payment of overdue
principal or interest or for the conversion of the Securities pursuant to
Article 4) unless:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in principal amount of the
then outstanding Securities make a written request to the Trustee to
pursue the remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
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(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Securities then outstanding.
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.
SECTION 7.7. Rights of Holders to Receive Payment and to Convert
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Security to receive payment of the principal of and
interest on the Security, on or after the respective due dates expressed in the
Security, to convert such Security in accordance with Article 4 and to bring
suit for the enforcement of any such payment on or after such respective dates
or the right to convert, is absolute and unconditional and shall not be impaired
or affected without the consent of the Holder.
SECTION 7.8. Collection Suit by Trustee
If an Event of Default in the payment of principal or interest
specified in clause (1) or (2) of Section 7.1 occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company or another obligor on the Securities for the whole amount of
principal and accrued interest remaining unpaid, together with, to the extent
that payment of such interest is lawful, interest on overdue principal and 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 7.9. 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 on the Securities), its creditors or its property and shall be
entitled and empowered to collect and receive any money or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceeding is hereby authorized by each
Securityholder
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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 agents and counsel, and any other
amounts due the Trustee under Section 8.7, and to the extent that such payment
of the reasonable compensation, expenses, disbursements and advances in any such
proceedings shall be denied for any reason, payment of the same shall be secured
by a lien on, and shall be paid out of, any and all distributions, dividends,
money, securities and other property which the Securityholders may be entitled
to receive in such proceedings, whether in liquidation or under any plan of
reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to, or, on behalf of any
Securityholder, to authorize, accept or adopt 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 7.10. Priorities
If the Trustee collects any money pursuant to this Article 7,
it shall pay out the money in the following order:
First, to the Trustee for amounts due under Section 8.7;
Second, to the holders of Senior Indebtedness to the extent
required by Article 12;
Third, to Securityholders 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
Fourth, to the Company.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section 7.10.
SECTION 7.11. 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
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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,
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 7.11
does not apply to a suit made by the Trustee, a suit by a Holder pursuant to
Section 7.7, or a suit by Holders of more than 10% in principal amount of the
Securities then outstanding.
SECTION 7.12. Waiver of Usury, Stay or Extension Laws
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 8
TRUSTEE
SECTION 8.1. Duties of Trustee
(a) If an Event of 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 its exercise as a prudent
person would exercise or use under the circumstances in the conduct of his or
her own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties as are
specifically set forth in this Indenture and no others; 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 furnished to the Trustee and conforming to the requirements of
this Indenture. The Trustee, however, shall examine any certificates
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and opinions which by any provision hereof are specifically required to
be delivered to the Trustee to determine whether or not they conform to
the requirements of this Indenture.
(c) The Trustee may 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 subsection (b)
of this Section 8.1;
(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 7.5.
(d)The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee.
(e) Every provision of this Indenture that in any way
relates to the Trustee is subject to subsections (a), (b), (c) and (d) of this
Section 8.1.
(f) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company. Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
SECTION 8.2. Rights of Trustee
Subject to Section 8.1:
(a) The Trustee may rely conclusively 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 or an Opinion of Counsel, which shall
conform to Section 11.4(b). 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.
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(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent 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 believes to be authorized or
within its rights or powers.
(e) The Trustee may consult with counsel, and the advice or
opinion of such counsel as to matters of law shall be full and complete
authorization and protection in respect of any such action taken,
omitted or suffered by it hereunder in good faith and in accordance
with the advice or opinion of such counsel.
SECTION 8.3. 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 an
affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 8.10 and 8.11.
SECTION 8.4. Trustee's Disclaimer
The Trustee makes no representation as to the validity or
adequacy of this Indenture 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 in the Securities other than its certificate of
authentication.
SECTION 8.5. Notice of Default or Events of Default
If a default or an Event of Default occurs and is continuing
and if it is known to the Trustee, the Trustee shall mail to each Securityholder
notice of the default or Event of Default within 90 days after it occurs. Except
in the case of a default or an Event of Default in payment of the principal of
or interest on any Security, the Trustee may withhold the notice if and so long
as a committee of its Trust Officers in good faith determines that withholding
notice is in the interests of Securityholders.
SECTION 8.6. Reports by Trustee to Holders
If such report is required by TIA Section 313, within 60 days
after each January 15, beginning with the January 15 following the date of this
Indenture, the Trustee shall mail to each Securityholder a brief report dated as
of such January 15
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that complies with TIA Section 313(a). The Trustee also shall comply with TIA
Section 313(b)(2) and (c).
A copy of each report at the time of its mailing to
Securityholders shall be mailed to the Company and filed with the SEC and each
stock exchange, if any, on which the Securities are listed. The Company shall
notify the Trustee whenever the Securities become listed on any stock exchange
and any changes in the stock exchanges on which the Securities are listed.
SECTION 8.7. Compensation and Indemnity
The Company shall pay to the Trustee from time to time
reasonable compensation for its services (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust). The Company shall reimburse the Trustee upon request for all
reasonable disbursements, expenses and advances incurred or made by it. Such
expenses may include the reasonable compensation, disbursements and expenses of
the Trustee's agents and counsel.
The Company shall indemnify the Trustee (which for purposes of
this Section 8.7 shall include its officers, directors, employees and agents)
for, and hold it harmless against, any loss, liability or expense (including
reasonable legal fees and expenses) incurred by it in connection with its duties
under this Indenture or any action or failure to act as authorized or within the
discretion or rights or powers conferred upon the Trustee hereunder including
the reasonable costs and expenses of the Trustee and its counsel in defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Trustee shall notify
the Company promptly of any claim asserted against the Trustee for which it may
seek indemnity. The Company need not pay for any settlement without its written
consent, which shall not be unreasonably withheld.
The Company need not reimburse the Trustee for any expense or
indemnify it against any loss or liability incurred by it resulting from its
negligence or bad faith.
To secure the Company's payment obligations in this Section
8.7, the Trustee shall have a senior claim to which the Securities are hereby
made subordinate on all money or property held or collected by the Trustee,
except such money or property held in trust to pay the principal of and interest
on particular Securities. The obligations of the Company under this Section 8.7
to compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that of
the Securities upon
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all property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the Holders of particular Securities. The
obligations of the Company under this Section 8.7 shall survive the satisfaction
and discharge of this Indenture or the resignation or removal of the Trustee.
When the Trustee incurs expenses or renders services after an
Event of Default specified in clause (5) or (6) of Section 7.1 occurs, the
expenses and the compensation for the services are intended to constitute
expenses of administration under any Bankruptcy Law.
SECTION 8.8. Replacement of Trustee
The Trustee may resign by so notifying the Company. The
Holders of a majority in principal amount of the Securities then outstanding may
remove the Trustee by so notifying the Trustee and may, with the Company's
written consent, appoint a successor Trustee. The Company may remove the Trustee
if:
(1) the Trustee fails to comply with Section 8.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee.
If a successor Trustee does not take office within 45 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of l0% in principal amount of the Securities then
outstanding may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee fails to comply with Section 8.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee and be released from its obligations (exclusive of any
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liabilities that the retiring Trustee may have incurred while acting as Trustee)
hereunder, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Securityholder.
A retiring Trustee shall not be liable for the acts or
omissions of any successor Trustee after its succession.
Notwithstanding replacement of the Trustee pursuant to this
Section 8.8, the Company's obligations under Section 8.7 shall continue for the
benefit of the retiring Trustee.
SECTION 8.9. Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to, another
corporation, the resulting, surviving or transferee corporation, without any
further act, shall be the successor Trustee, provided such transferee
corporation shall qualify and be eligible under Section 8.10. Such successor
Trustee shall promptly mail notice of its succession to the Company and each
Securityholder.
SECTION 8.10. Eligibility; Disqualification
The Trustee shall always satisfy the requirements of
paragraphs (1), (2) and (5) of TIA Section 310(a). If at any time the Trustee
shall cease to satisfy any such requirements, it shall resign immediately in the
manner and with the effect specified in this Article 8. The Trustee shall be
subject to the provisions of TIA Section 310(b). Nothing herein shall prevent
the Trustee from filing with the SEC the application referred to in the
penultimate paragraph of TIA Section 310(b).
SECTION 8.11. 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.
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ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 9.1. Satisfaction and Discharge of Indenture
This Indenture shall cease to be of further effect (except as
to any surviving rights of conversion, registration of transfer or exchange of
Securities herein expressly provided for), and the Trustee, on demand of and at
the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in Section 2.7 and (ii) Securities for whose
payment money has theretofore been deposited in trust and
thereafter repaid to the Company as provided in Section 9.3)
have been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to
the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their
stated maturity within one year, or
(iii) are to be called for redemption within
one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of clause (i), (ii) or (iii)
above, has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as trust funds in trust for the
purpose an amount sufficient to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to
the Trustee for cancellation, for principal (and premium, if
any) and interest to the date of such deposit (in the case of
Securities which have become due and payable) or to the stated
maturity or Redemption Date, as the case may be;
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(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 8.7 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of clause (1) of
this Section, the obligations of the Trustee under Section 9.2 and the last
paragraph of Section 9.3 shall survive.
SECTION 9.2. Application of Trust Money
Subject to the provisions of Section 9.3, the Trustee or the
Paying Agent shall hold in trust, for the benefit of the Holders, all money
deposited with it pursuant to Section 9.1, and shall apply the deposited money
in accordance with this Indenture to the payment of the principal of and
interest on the Securities. Money so held in trust shall not be subject to the
Subordination provisions of Article 12.
SECTION 9.3. Repayment to Company
The Trustee and the Paying Agent shall promptly pay to the
Company upon request any excess money (i) deposited with them pursuant to
Section 9.1 and (ii) held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon
request any money held by them for the payment of principal or interest that
remains unclaimed for two years after a right to such money has matured;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such 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 will 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 otherwise prohibited by law.
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SECTION 9.4. Reinstatement
If the Trustee or the Paying Agent is unable to apply any
money in accordance with Section 9.2 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, then the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 9.1 until
such time as the Trustee or the Paying Agent is permitted to apply all such
money in accordance with Section 9.2; provided, however, that if the Company has
made any payment of the principal of or interest on 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 any such payment from the
money held by the Trustee or the Paying Agent.
ARTICLE 10
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.1. Without Consent of Holders
The Company and the Trustee may amend or supplement this
Indenture or the Securities without notice to or consent of any Securityholder:
(a) to comply with Sections 4.11 and 6.1;
(b) to provide for uncertificated Securities in addition to
or in place of certificated Securities;
(c) to cure any ambiguity, defect or inconsistency, or to make
any other change that does not adversely affect the rights of any
Securityholder;
(d) to comply with the provisions of the TIA; or
(e) to appoint a successor Trustee.
SECTION 10.2. With Consent of Holders
The Company and the Trustee may amend or supplement this
Indenture or the Securities with the written consent of the Holders of at least
a majority in principal amount of the Securities then outstanding. The Holders
of at least a majority in principal amount of the Securities then outstanding
may waive compliance in a particular instance by the Company with any provision
of this Indenture or the Securities without notice to any Securityholder.
Subject to Section 10.4, without
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the written consent of each Securityholder affected, however, an amendment,
supplement or waiver, including a waiver pursuant to Section 7.4, may not:
(1) reduce the principal amount of Securities whose Holders
must consent to an amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of
interest on any Security;
(3) reduce the principal of or premium on or change the fixed
maturity of any Security or alter the redemption provisions with
respect thereto in a manner adverse to the Holder thereof;
(4) alter the conversion provisions with respect to any
Security in a manner adverse to the Holder thereof;
(5) waive a default in the payment of the principal of
(including any premium) or interest on any Security;
(6) make any changes in Section 7.4 or in this Section 10.2,
except to increase any percentage in principal amount of outstanding
Securities required for any amendment, supplement or waiver;
(7) modify the provisions of Article 12 in a manner adverse to
the Holders; or
(8) make any Security payable in money other than that in the
Security.
It shall not be necessary for the consent of the Holders under
this Section 10.2 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
10.2 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 amendment, supplement or
waiver.
An amendment under this Section 10.2 may not make any change
that adversely affects the rights under Article 12 of any holder of an issue of
Senior Indebtedness unless the holders of that issue, pursuant to its terms,
consent to the change.
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SECTION 10.3. Compliance With Trust Indenture Act
Every amendment to or supplement of this Indenture or the
Securities shall comply with the TIA as in effect at the date of such amendment
or supplement.
SECTION 10.4. Revocation and Effect of Consents
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder is a continuing consent by the Holder and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security, even if notation of the consent is not
made on any Security. However, any such Holder or subsequent Holder may revoke
the consent as to its Security or portion of a Security if the Trustee receives
the notice of revocation before the date the amendment, supplement or waiver
becomes effective.
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 (7) of Section 10.2. 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 10.5. 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.
SECTION 10.6. Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment or supplement authorized
pursuant to this Article 10 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee, but need
not sign any amendment or supplement that adversely affects the Trustee's
rights, duties, liabilities or immunities. In signing or refusing to sign such
amendment or supplement, the Trustee shall be entitled to receive and, subject
to Section 8.1, shall be fully protected in relying upon, an Opinion of Counsel
stating that such amendment or supplement is authorized or permitted by this
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Indenture. The Company may not sign an amendment or supplement until the Board
of Directors approves it.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1. Trust Indenture Act Controls
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by any of Sections 310 to 317, inclusive, of
the TIA through operation of Section 318(c) thereof, such imposed duties shall
control.
SECTION 11.2. Notices
Any notice, request or communication shall be given in writing
and delivered in person or mailed by first-class mail, postage prepaid,
addressed as follows:
If to the Company:
Global TeleSystems Group, Inc.
1751 Pinnacle Drive
North Tower - 12th Floor
McLean, Virginia 22102
Attention: Chief Financial Officer
If to the Trustee:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Corporate Trust Trustee
Administration
Such notices or communications shall be effective when received.
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 to a Securityholder shall
be mailed by first-class mail to it at its address shown on the register kept by
the Registrar.
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. If a notice or communication to a Securityholder is mailed in
the manner provided
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above, it is duly given, whether or not the addressee receives it.
SECTION 11.3. 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 11.4. Certificate and Opinion as to Conditions Precedent
(a) Upon any request or application by the Company to the
Trustee to take any action under this Indenture, the Company shall furnish to
the Trustee at the request of the Trustee:
(1) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent (including any covenants,
compliance with which constitutes a condition precedent), if any,
provided for in this Indenture relating to the proposed action have
been complied with; and (2) an Opinion of Counsel stating that, in the
opinion of such counsel, all such conditions precedent (including any
covenants, compliance with which constitutes a condition precedent)
have been complied with.
(b) Each Officers' Certificate and Opinion of Counsel
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 or she
has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
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(4) a statement as to whether or not, 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 11.5. Record Date for Vote or Consent of Securityholders
The Company (or, in the event deposits have been made pursuant
to Section 5.6 or 9.1, the Trustee) may set a record date for purposes of
determining the identity of Securityholders entitled to vote or consent to any
action by vote or consent authorized or permitted under this Indenture, which
record date shall be the later of ten days prior to the first solicitation of
such vote or consent or the date of the most recent list of Securityholders
furnished to the Trustee pursuant to Section 2.5 prior to such solicitation.
Notwithstanding the provisions of Section 10.4, if a record date is fixed, those
persons who were Holders of Securities at such record date (or their duly
designated proxies), and only those persons, shall be entitled to take such
action by vote or consent or to revoke any vote or consent previously given,
whether or not such persons continue to be Holders after such record date.
SECTION 11.6. Rules by Trustee, Paying Agent, Registrar and Conversion Agent
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar, Paying Agent or Conversion Agent may make
reasonable rules for its functions.
SECTION 11.7. Legal Holidays
A "Legal Holiday" is a Saturday, Sunday or a day on which
state or federally chartered banking institutions in New York, New York (or such
other city and state where the Trustee's corporate trust operations are then
located) are not required to be open. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.
SECTION 11.8. Governing Law
This Indenture and the Securities shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York.
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SECTION 11.9. 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 11.10. No Recourse Against Others
All liability described in paragraph 17 of the Securities of
any director, officer, employee or shareholder, as such, of the Company is
waived and released.
SECTION 11.11. 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 11.12. Multiple Counterparts
The parties may sign multiple counterparts of this Indenture.
Each signed counterpart shall be deemed an original, but all of them together
represent the same agreement.
SECTION 11.13. Separability
In case any provisions 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.
SECTION 11.14. Table of Contents, Headings, etc.
The table of contents, cross-reference sheet and headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
ARTICLE 12
SUBORDINATION
SECTION 12.1. Securities Subordinated to Senior Indebtedness
The Company covenants and agrees, and each Holder of
Securities issued hereunder by its acceptance thereof likewise covenants and
agrees, that all Securities shall be issued subject
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to the provisions of this Article 12; and each person holding any Security,
whether upon original issue or upon transfer or assignment thereof, accepts and
agrees to be bound by such provisions.
The payment of all amounts on account of all Securities issued
hereunder shall, to the extent and in the manner hereinafter set forth, be
subordinated and subject in right of payment to the prior payment in full of all
Senior Indebtedness, whether outstanding at the date of this Indenture or
thereafter created, assumed or guaranteed.
SECTION 12.2. Securities Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation, Reorganization, Etc.,
of the Company
Upon the payment or distribution of the assets of the Company
of any kind or character, whether in cash, property or securities (including any
collateral at any time securing the Securities), to creditors upon any
dissolution, winding-up, liquidation or reorganization of the Company (whether
voluntary or involuntary, or in bankruptcy, insolvency, reorganization,
liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshaling of the assets and liabilities of the Company,
or otherwise), then in such event:
(a) all Senior Indebtedness and the reasonable fees and
expenses of the Trustee shall first be paid in full, in cash, before
any payment is made on account of the Securities, whether by way of the
payment of principal of or interest on the indebtedness evidenced by
the Securities, a deposit pursuant to Section 9.1, a repurchase,
redemption or other acquisition of the Securities or otherwise
(collectively, "pay the Securities");
(b) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other
than securities of the Company as reorganized or readjusted, or
securities of the Company or any other Person provided for by a plan of
reorganization or readjustment, junior, or the payment of which is
otherwise subordinate, at least to the extent provided in this Article
12, with respect to the Securities, to the payment of all Senior
Indebtedness), to which the Holders or the Trustee on behalf of the
Holders would be entitled except for the provisions of this Article 12,
including any such payment or distribution which may be payable or
deliverable by reason of the payment of another debt of the Company
being subordinated to the payment of the Securities,
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shall be paid or delivered by any debtor, Custodian or other person
making such payment or distribution, directly to the holders of the
Senior Indebtedness or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness have been
issued, ratably according to the aggregate amounts remaining unpaid on
account of the Senior Indebtedness held or represented by each, for
application to payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full after
giving effect to any concurrent payment or distribution to or for the
benefit of the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing
provisions of this Section 12.2, any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities (other than securities of the Company as reorganized or
readjusted, or securities of the Company or any other Person provided
for by a plan of reorganization or readjustment, junior, or the payment
of which is otherwise subordinate, at least to the extent provided for
in this Article 12, with respect to the Securities, to the payment of
all Senior Indebtedness), shall be received by the Trustee or the
Holders before all Senior Indebtedness is paid in full, such payment or
distribution (subject to the provisions of Sections 12.6 and 12.7)
shall be held in trust for the benefit of, and shall be immediately
paid or delivered by the Trustee or such Holders, as the case may be,
to, the Holders of Senior Indebtedness remaining unpaid or unprovided
for, or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments
evidencing any of such Senior Indebtedness have been issued, ratably
according to the aggregate amounts remaining unpaid on account of the
Senior Indebtedness held or represented by each, for application to the
payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full after giving effect to
any concurrent payment or distribution to or for the benefit of the
holders of such Senior Indebtedness.
The Company shall give prompt written notice to the Trustee of
any dissolution, winding-up, liquidation or reorganization of the Company.
Upon any distribution of assets of the Company referred to in
this Article 12, the Trustee, subject to the provisions of Sections 8.1 and 8.2,
and the Holders shall be entitled
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to rely conclusively upon any order or decree by any court of competent
jurisdiction in which such dissolution, winding-up, liquidation or
reorganization proceeding is pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to the Trustee or to
the Holders, for the purpose of ascertaining the persons entitled to participate
in such distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 12.
SECTION 12.3. Securityholders to Be Subrogated to Right of Holders of Senior
Indebtedness
Subject to the prior payment in full of all Senior
Indebtedness then due, the Holders shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness until the principal of and
interest on the Securities shall be paid in full, and, for purposes of such
subrogation, no payments or distributions to the holders of Senior Indebtedness
of assets, whether in cash, property or securities, distributable to the holders
of Senior Indebtedness under the provisions hereof to which the Holders would be
entitled except for the provisions of this Article 12, and no payment pursuant
to the provisions of this Article 12 to the holders of Senior Indebtedness by
the Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Article 12 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 12.4. Obligations of the Company Unconditional
Nothing contained in this Article 12 or elsewhere in this
Indenture or in any Security is intended to or shall impair, as among the
Company, its creditors other than the holders of Senior Indebtedness, and the
Holders, the obligation of the Company, which is absolute and unconditional, to
pay to the Holders the principal of and interest on the Securities, as and when
the same shall become due and payable in accordance with the terms of the
Securities, or to affect the relative rights of the Holders and other creditors
of the Company other than the holders of Senior Indebtedness, nor shall anything
herein or therein prevent the Trustee or any Holder from exercising all remedies
otherwise permitted by applicable law upon the happening of an Event of Default
under this Indenture, subject
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to the provisions of Article 7, and the rights, if any, under this Article 12 of
the holders of Senior Indebtedness to receive assets, whether in cash, property
or securities, of the Company otherwise payable or deliverable to the Trustee or
such Holder upon the exercise of any such remedy.
SECTION 12.5. Company Not to Make Payment With Respect to Securities in Certain
Circumstances
(a) Upon the happening of a default in payment (whether
at maturity or at a date fixed for prepayment or by acceleration or otherwise)
of the principal of, interest on or other amount due in respect of any Senior
Indebtedness, as such default is defined under or in respect of such Senior
Indebtedness or in any agreement pursuant to which such Senior Indebtedness has
been incurred, then, unless and until the amount of such Senior Indebtedness
then due shall have been paid in full or provision made therefor in a manner
satisfactory to the holders of such Senior Indebtedness, or such default shall
have been cured or waived or shall have ceased to exist, the Company shall not
pay the Securities.
(b) Upon the happening of an event of default with
respect to any Senior Indebtedness (other than under circumstances when the
terms of subsection (a) of this Section 12.5 are applicable), as such event of
default is defined under or in respect of such Senior Indebtedness or in any
agreement pursuant to which such Senior Indebtedness has been incurred,
permitting the holders thereof to immediately accelerate the maturity thereof,
and upon written notice thereof given to the Company and the Trustee by any one
or more holders of such Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness have been
issued (a "Default Notice"), then, unless and until such event of default shall
have been cured or waived in writing by the holders of such Senior Indebtedness
or shall have ceased to exist, the Company shall not pay the Securities;
provided, however, that this subsection (b) shall not prevent the making of any
such payment (which is not otherwise prohibited by subsection (a) of this
Section 12.5) for more than 180 days after the Default Notice shall have been
given unless the Senior Indebtedness in respect of which such event of default
exists has been declared due and payable in its entirety, in which case no such
payment may be made until such acceleration has been waived, rescinded or
annulled, or such Senior Indebtedness shall have been paid in full, or payment
thereof shall be duly provided for in cash or in any other manner satisfactory
to the holders of such Senior Indebtedness. Notwithstanding the foregoing, not
more than one Default Notice shall be given with respect to the same issue of
Senior Indebtedness
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within a period of 360 consecutive days, and no event of default which existed
or was continuing on the date of any Default Notice and was known to the holders
of such issue of Senior Indebtedness shall be made the basis for the giving of a
subsequent Default Notice by the holders of such issue of Senior Indebtedness.
(c) In the event that, notwithstanding the foregoing
provisions of this Section 12.5, the Company shall pay the Securities and such
payment shall be received by the Trustee, any Holder or any Paying Agent (or, if
the Company is acting as its own Paying Agent, money for any such payment shall
be segregated and held in trust), after the happening of a default under any
Senior Indebtedness of the type specified in subsections (a) and (b) of this
Section 12.5, then, unless and until the amount of such Senior Indebtedness then
due shall have been paid in full, or provision made therefor or such default
shall have been cured or waived or shall have ceased to exist, such payment
(subject, in each case, to the provisions of Sections 12.6 and 12.7 and the
proviso contained in subsection (b) of this Section 12.5) shall be held in trust
for the benefit of, and shall be immediately paid over to, the holders of Senior
Indebtedness or their representative or representatives or the trustee or
trustees under any indenture under which any instruments evidencing any of the
Senior Indebtedness may have been issued ratably according to the aggregate
amounts remaining unpaid on account of the Senior Indebtedness held or
represented by each, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all Senior Indebtedness in
accordance with its terms, after giving effect to any concurrent payment or
distribution to or for the benefit of the holders of Senior Indebtedness.
SECTION 12.6. Notice to Trustee
The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Securities. Notwithstanding the provisions
of this Article 12 or any other provision of this Indenture, the Trustee shall
not at any time be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to or by the Trustee, unless and until
the Trustee shall have received written notice thereof from the Company or from
the holder or holders of Senior Indebtedness or from their representative or
representatives or from the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness have been
issued; and, prior to the receipt of any such written notice, the Trustee,
subject to the provisions of Sections 8.1 and 8.2, shall be entitled to assume
conclusively that such facts do not exist.
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The Trustee shall be entitled to rely conclusively on the
delivery to it of a written notice by a person representing himself or herself
to be a holder of Senior Indebtedness (or a representative of such holder or the
trustee under any indenture pursuant to which any instruments evidencing any of
such Senior Indebtedness have been issued) to establish that such notice has
been given by a holder of Senior Indebtedness or a representative of any such
holder. In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 12, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
each person under this Article 12, and, if such evidence is not furnished, the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
SECTION 12.7. Application by Trustee of Money Deposited With It
Money deposited in trust with the Trustee pursuant to Section
9.1 and not in violation of this Article 12 shall be for the sole benefit of
Securityholders and shall thereafter not be subject to the subordination
provisions of this Article 12, otherwise, any deposit of money by the Company
with the Trustee or any Paying Agent (whether or not in trust) for the payment
of the principal of or interest on any Securities shall be subject to the
provisions of Sections 12.1, 12.2, 12.3 and 12.5; except that, if two Business
Days prior to the date on which by the terms of this Indenture any such money
may become payable for any purpose (including, without limitation, the payment
of either the principal of or interest on any Security) the Trustee shall not
have received with respect to such money the notice provided for in Section
12.6, then the Trustee or any Paying Agent shall have full power and authority
to receive such money and to apply such money to the purpose for which it was
received, and shall not be affected by any notice to the contrary which may be
received by it on or after such date. This Section 12.7 shall be construed
solely for the benefit of the Trustee and the Paying Agent and shall not
otherwise affect the rights that holders of Senior Indebtedness may have to
recover any such payments from the Holders in accordance with the provisions of
this Article 12.
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SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of Company
or Holders of Senior Indebtedness
No right of any present or future holders of any Senior
Indebtedness to enforce subordination, as herein provided, shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and covenants
of this Indenture, regardless of any knowledge thereof which any such holder may
have or be otherwise charged with. The holders of any Senior Indebtedness may
extend, renew, modify or amend the terms of such Senior Indebtedness or any
security therefor and release, sell or exchange such security and otherwise deal
freely with the Company, all without affecting the liabilities and obligations
of the parties to this Indenture or the Holders. No provision in any
supplemental indenture which affects the superior position of the holders of the
Senior Indebtedness shall be effective against the holders of the Senior
Indebtedness unless the holders of such Senior Indebtedness (required pursuant
to the terms of such Senior Indebtedness to give such consent) have consented
thereto.
SECTION 12.9. Trustee to Effectuate Subordination
Each Holder of a Security by its acceptance thereof authorizes
and directs the Trustee on its behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article 12 and
appoints the Trustee its attorney-in-fact for any and all such purposes.
SECTION 12.10. Right of Trustee to Hold Senior Indebtedness
The Trustee, in its individual capacity, shall be entitled to
all of the rights set forth in this Article 12 in respect of any Senior
Indebtedness at any time held by it to the same extent as any other holder of
Senior Indebtedness, and nothing in this Indenture shall be construed to deprive
the Trustee of any of its rights as such holder.
Nothing in this Article shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 8.7.
SECTION 12.11. Article 5 Not to Prevent Events of Default
The failure to make a payment on account of the principal of
or interest on the Securities by reason of any provision
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in this Article 12 shall not be construed as preventing the occurrence of an
Event of Default under Section 7.1.
SECTION 12.12. No Fiduciary Duty Created to Holders of Senior Indebtedness
Notwithstanding any other provision in this Article 12, the
Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior
Indebtedness by virtue of the provisions of this Article 12.
SECTION 12.13. Article Applicable to Paying Agents
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article 12 shall in such case (unless the context
shall otherwise require) be construed as extending to and including such Paying
Agent within its meaning as fully for all intents and purposes as if such Paying
Agent were named in this Article 12 in addition to or in place of the Trustee;
provided, however, that Sections 12.6, 12.10 and 12.12 shall not apply to the
Company if it acts as Paying Agent.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the day of , 1998.
GLOBAL TELESYSTEMS GROUP, INC.
By:
-------------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By:
-------------------------------------
Name:
Title:
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[FORM OF FACE OF SECURITY]
GLOBAL TELESYSTEMS GROUP, INC.
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE
CUSIP: ______ R-_____
[ ]% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2010
Global TeleSystems Group, Inc. promises to pay to Cede & Co. or
registered assigns, the principal sum of ____________ Dollars on [ ], 2010.
Interest Payment Dates: and
Record Dates: and
This Debenture is convertible as specified on the other side of this
Debenture. Additional provisions of this Debenture are set forth on the other
side of this Debenture.
In Witness Whereof, Global TeleSystems Group, Inc. has caused this
instrument to be duly executed under its corporate seal.
GLOBAL TELESYSTEMS GROUP, INC.
By:
-------------------------------------
Name:
Title:
[SEAL]
Attest:
By:
------------------------------
Name:
Title: Secretary
Dated:
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Trustee's Certificate of Authentication: This is one of the Securities referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK,
as Trustee
By:
------------------------------
Authorized Signatory
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[FORM OF REVERSE SIDE OF SECURITY]
GLOBAL TELESYSTEMS GROUP, INC.
[ ]% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2010
1. Interest
Global TeleSystems Group, Inc., a Delaware corporation (the "Company"),
promises to pay interest on the principal amount of this Debenture at the rate
per annum shown above. The Company shall pay interest semiannually on and of
each year, commencing , 199[]. Interest on the Debentures shall accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of first issuance of the Debentures under the Indenture (as
defined below); provided, however, that if there is not an existing default in
the payment of interest, and if this Debenture is authenticated between a record
date referred to on the face hereof and the next succeeding interest payment
date, interest shall accrue from such interest payment date. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment
The Company shall pay interest on this Debenture (except defaulted
interest) to the person who is the Holder of this Debenture at the close of
business on the th or th next preceding the related interest payment date. The
Holder must surrender this Debenture to the Paying Agent to collect payment of
principal. The Company will 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. The Company may, however pay principal and interest by its check
or wire payable in such money. It may mail an interest check to the Holder's
registered address.
3. Paying Agent, Registrar and Conversion Agent
Initially, The Bank of New York (the "Trustee") will act as Paying
Agent, Registrar and Conversion Agent. The Company may change any Paying Agent,
Registrar or Conversion Agent without notice to the Holder. The Company or any
of its Subsidiaries may act as Paying Agent, Registrar or Conversion Agent.
4. Indenture, Limitations
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its [ ]% Convertible
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Senior Subordinated Debentures due 2010 (the "Debentures"), issued under an
Indenture dated as of [ ] 1998 (the "Indenture"), between the Company and the
Trustee. The terms of this Debenture include those stated in the Indenture and
those required by or made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended, and as in effect on the date of the
Indenture. This Debenture is subject to all such terms, and the Holder of this
Debenture is referred to the Indenture and said Act for a statement of them.
The Debentures are subordinated unsecured obligations of the Company
limited to up to $400,000,000 aggregate principal amount, subject to Section 2.2
of the Indenture. The Indenture does not limit other debt of the Company,
secured or unsecured, including Senior Indebtedness.
5. Optional Redemption
The Debentures are subject to redemption, at any time on or after [ ],
2001, as a whole or in part, at the election of the Company. The Redemption
Prices (expressed as percentages of the principal amount) beginning [ ] of the
years indicated are as follows:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2001 %
2002 %
2003 %
2004 %
2005 %
2006 %
2007 %
2008 and thereafter 100%
</TABLE>
in each case together with accrued interest up to but not including the
Redemption Date.
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
Debentures to be redeemed at its registered address. Debentures in denominations
larger than $1,000 may be redeemed in part, but only in whole multiples of
$1,000. On and after the Redemption Date, subject to the deposit with the Paying
Agent of funds sufficient to pay the Redemption Price, interest ceases to accrue
on Debentures or portions of them called for redemption.
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7. Purchase of Debentures at Option of Holder Upon a Change in Control
At the option of the Holder and subject to the terms and conditions of
the Indenture, the Company shall become obligated to purchase all or any part
specified by the Holder (so long as the principal amount of such part is $1,000
or an integral multiple thereof) of the Debentures held by such Holder on the
date that is 30 Business Days after a Change in Control, at a purchase price
equal to 100% of the principal amount thereof together with accrued interest up
to but not including the Change in Control Purchase Date. The Holder shall have
the right to withdraw any Change in Control Purchase Notice by delivering a
written notice of withdrawal to the Paying Agent in accordance with the terms of
the Indenture.
8. Conversion
A Holder of a Debenture may convert such Debenture into shares of
Common Stock of the Company at any time prior to maturity; provided, however,
that if the Debenture is called for redemption, the conversion right will
terminate at the close of business on the Business Day immediately preceding the
redemption date for such Debenture (unless the Company shall default in making
the redemption payment when due, in which case the conversion right shall
terminate at the close of business on the date such default is cured and such
Debenture is redeemed); provided, further, that if the Holder of a Debenture
presents such Debenture for redemption prior to the close of business on the
Business Day immediately preceding the redemption date for such Debenture, the
right of conversion shall terminate upon presentation of the Debenture to the
Trustee (unless the Company shall default in making the redemption payment when
due, in which case the conversion right shall terminate on the close of business
on the date such default is cured and such Debenture is redeemed). The initial
Conversion Price is $[ ] per share, subject to adjustment under certain
circumstances. The number of shares issuable upon conversion of a Debenture is
determined by dividing the principal amount converted by the Conversion Price in
effect on the Conversion Date. No payment or adjustment will be made for accrued
interest on a converted Debenture, except as described in the next succeeding
paragraph, or for dividends or distributions on shares of Common Stock issued
upon conversion of a Debenture. No fractional shares will be issued upon
conversion; in lieu thereof, an amount will be paid in cash based upon the
closing sale price of the Common Stock on the last Trading Day prior to the
Conversion Date.
To convert a Debenture, a Holder must (a) complete and
manually sign the conversion notice set forth below and deliver
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such notice to the Conversion Agent, (b) surrender the Debenture to the
Conversion Agent, (c) furnish appropriate endorsements or transfer documents if
required by the Registrar or Conversion Agent, and (d) pay any transfer or
similar tax, if required. Interest accrued through and including [ ], 2001 shall
be paid on any Debenture called for redemption and surrendered for conversion
before the close of business on [ ], 2001. If a Holder surrenders a Debenture
for conversion after the close of business on the record date for the payment of
an installment of interest and before the close of business on the related
interest payment date then, notwithstanding such conversion, the interest
payable on such interest payment date shall be paid to the Holder of such
Debenture on such record date. In such event, unless the Debenture has been
called for redemption, the Debenture must be accompanied by payment of an amount
equal to the interest payable on such interest payment date on the principal
amount of the Debenture or portion thereof then converted. A Holder may convert
a portion of a Debenture equal to $1,000 or any integral multiple thereof.
A Debenture in respect of which a Holder had delivered a Change in
Control Purchase Notice exercising the option of such Holder to require the
Company to purchase such Debenture may be converted only if the Change in
Control Purchase Notice is withdrawn as provided above and in accordance with
the terms of the Indenture.
9. Conversion Arrangement on Call for Redemption
Any Securities called for redemption, unless surrendered for conversion
before the close of business on the Business Day immediately preceding the
Redemption Date, may be deemed to be purchased from the Holders of such
Securities at an amount not less than the Redemption Price, together with
accrued interest, if any, to, but not including, the Redemption Date, by one or
more investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders, to convert them into Common Stock of
the Company and to make payment for such Securities to the Paying Agent in Trust
for such Holders.
10. Subordination
The indebtedness evidenced by the Debentures is, to the extent and in
the manner provided in the Indenture, subordinate and junior in right of payment
to the prior payment in full of all Senior Indebtedness of the Company. Any
Holder by accepting this Debenture agrees to and shall be bound by such
subordination provisions and authorizes the Trustee to give them effect.
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In addition to all other rights of Senior Indebtedness described in the
Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any terms of any instrument relating to the
Senior Indebtedness or any extension or renewal of the Senior Indebtedness.
11. Denominations, Transfer, Exchange
The Debentures are in registered form without coupons in denominations
of $1,000 and integral multiples of $1,000. A Holder may register the transfer
of or exchange Debentures in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or permitted by the Indenture.
12. Persons Deemed Owners
The Holder of a Debenture may be treated as the owner of it for all
purposes.
13. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent will pay the money back to the Company at
its written request. After that, Holders entitled to money must look to the
Company for payment.
14. Amendment, Supplement and Waiver
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Debentures then outstanding and any past default or
compliance with any provision may be waived in a particular instance with the
consent of the Holders of a majority in principal amount of the Debentures then
outstanding. Without the consent of or notice to any Holder, the Company and the
Trustee may amend or supplement the Indenture or the Debentures to, among other
things, provide for uncertificated Debentures in addition to or in place of
certificated Debentures, or to cure any ambiguity, defect or inconsistency or
make any other change that does not adversely affect the rights of any Holder.
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15. Successor Corporation
When a successor corporation assumes all the obligations of its
predecessor under the Debentures and the Indenture in accordance with the terms
and conditions of the Indenture, the predecessor corporation will be released
from those obligations.
16. Defaults and Remedies
An Event of Default is: default for 30 days in payment of interest on
the Debentures; default in payment of principal on the Debentures when due;
failure by the Company for 60 days after notice to it to comply with any of its
other agreements contained in the Indenture or the Debentures; certain events of
bankruptcy, insolvency or reorganization of the Company; and the acceleration of
certain other indebtedness. If an Event of Default (other than as a result of
certain events of bankruptcy, insolvency or reorganization) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Debentures then outstanding may declare all unpaid principal of and accrued
interest to the date of acceleration on the Debentures then outstanding to be
due and payable immediately, all as and to the extent provided in the Indenture.
If an Event of Default occurs as a result of certain events of bankruptcy,
insolvency or reorganization, unpaid principal of and accrued interest on the
Debentures then outstanding shall become due and payable immediately without any
declaration or other act on the part of the Trustee or any Holder, all as and to
the extent provided in the Indenture. Holders may not enforce the Indenture or
the Debentures except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Debentures.
Subject to certain limitations, Holders of a majority in principal amount of the
Debentures then outstanding may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders notice of any continuing default
(except a default in payment of principal or interest) if it determines that
withholding notice is in their interests. The Company is required to file
periodic reports with the Trustee as to the absence of default.
17. Trustee Dealings With the Company
The Bank of New York, the Trustee under the Indenture, in its
individual or any other capacity, may make loans to, accept deposits from and
perform services for the Company or an Affiliate of the Company, and may
otherwise deal with the Company or an Affiliate of the Company, as if it were
not the Trustee.
A-8
<PAGE> 84
18. No Recourse Against Others
A director, officer, employee or shareholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or the Indenture nor for any claim based on, in respect of or by
reason of such obligations or their creation. The Holder of this Debenture by
accepting this Debenture waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of this Debenture.
19. Discharge Prior to Maturity
If the Company deposits with the Trustee or the Paying Agent money or
U.S. Government Obligations sufficient to pay the principal of and interest on
the Debentures to maturity, the Company will be discharged from the Indenture
except for certain sections thereof.
20. Authentication
This Debenture shall not be valid until the Trustee or an
authenticating agent signs the certificate of authentication on the other side
of this Debenture.
21. Abbreviations and Definitions
Customary abbreviations may be used in the name of the Holder 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).
All capitalized terms used in this Debenture and not specifically
defined herein are defined in the Indenture and are used herein as so defined.
22. Indenture to Control
In the case of any conflict between the provisions of this Debenture
and the Indenture, the provisions of the Indenture shall control.
The Company will furnish to any Holder, upon written request and
without charge, a copy of the Indenture. Requests may be made to: Global
TeleSystems Group, Inc., 1751 Pinnacle Drive, North Tower, 12th Floor, McLean,
Virginia 22102, Attention: Chief Financial Officer.
A-9
<PAGE> 85
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
- - - - --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
- - - - --------------------------------------------------------------------------------
agent to transfer this Debenture on the books of the Company. The Agent may
substitute another to act for him or her.
Date:
-----------------
Your signature:
-------------------------------------------------------
(Sign exactly as your name appears on the other side of
this Debenture)
- - - - --------------------------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Debenture)
* Signature guaranteed by:
------------------------------------------------------
By:
-----------------------------------------------------------------------------
- - - - ---------------
* The signature must be guaranteed by a bank, a trust company or a member
firm of the New York Stock Exchange.
A-10
<PAGE> 86
CONVERSION NOTICE
To convert this Debenture into Common Stock of the Company, check the box: [ ]
To convert only part of this Debenture, state the amount to be converted:
$_____________
If you want the stock certificate made out in another person's name, fill in the
form below:
- - - - --------------------------------------------------------------------------------
(Insert other person's soc. sec. or tax I.D. no.)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
Date:
-----------------
Your signature:
-------------------------------------------------------
(Sign exactly as your name appears on the other side of
this Debenture)
- - - - --------------------------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Debenture)
* Signature guaranteed by:
------------------------------------------------------
By:
-----------------------------------------------------------------------------
- - - - --------
* The signature must be guaranteed by a bank, a trust company or a member
firm of the New York Stock Exchange.
A-11
<PAGE> 1
Exhibit 5.1
(S&S Letterhead)
July 1, 1998
Global TeleSystems Group, Inc.
1751 Pinnacle Drive
North Tower - 12th Floor
McLean, VA 22102
Global TeleSystems Group, Inc.
Ladies and Gentlemen:
We have acted as counsel to Global TeleSystems Group, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, of a Registration Statement on Form S-1 (Registration No.
333-52735), as it has been and may be amended (the "Registration Statement"),
including the prospectuses included therein at the time the Registration
Statement is declared effective relating to the proposed public offering of
10,458,000 shares (the "Initial Securities") of the Company's common stock, par
value $0.10 per share ("Common Stock") and additional 1,568,700 shares of Common
Stock (the "Option Securities") which are subject to an over-allotment option
granted to the several underwriters (the "Underwriters"), pursuant to a U.S.
Purchase Agreement and an International Purchase Agreement (collectively, the
"Purchase Agreements") between the Underwriters and the Company (the forms of
which shall be filed as exhibits to the Registration Statement). The Initial
Securities and the Option Securities are hereinafter referred to together as the
"Securities."
In this capacity, we have examined the Registration Statement, the forms
of the Purchase Agreements and originals, or copies identified to our
satisfaction, of such corporate records of the Company, certificates and
statements of public officials, officers of the Company and others and such
other documents, agreements and instruments as we have deemed necessary as a
basis for the opinions hereinafter expressed. In our examinations, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies.
<PAGE> 2
2
Our opinions expressed below are limited to the law of the State of New
York, the General Corporation Law of the State of Delaware and the Federal law
of the United States, and we do not express any opinion herein concerning any
other law.
Based on the foregoing, and having regard for such legal considerations as
we deem relevant, we are of the opinion that when the issuance of the Securities
has been duly authorized by the Company, when the Purchase Agreements have been
duly authorized, executed and delivered by the parties thereto and when the
Securities have been issued and sold to the Underwriters by the Company pursuant
to the Purchase Agreements, the Securities will be validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Shearman & Sterling
DJB/CCP/MJS/MLW
<PAGE> 1
EXHIBIT 10.43
MASTER AGREEMENT
DATED 24th JUNE, 1998
BETWEEN
1) EBONE HOLDING ASSOCIATION
2) EBONE A/S
3) HERMES EUROPE RAILTEL HOLDINGS B.V.
4) HERMES EUROPE RAILTEL (IRELAND) LIMITED
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1 INTERPRETATION 4
2 IMPLEMENTATION 5
3 ISSUANCE OF SHARES 5
4 TRANSMISSION CAPACITY 6
5 RESTRUCTURING OF EBONE 6
6 SHARE OFFER 6
7 AUTHORITY 7
8 CONFIDENTIALITY 7
9 PUBLICITY 8
10 ENTIRE CONTRACT 9
11 VARIATION 9
12 NO WAIVER 9
13 NOTICES 9
14 TERMINATION 10
15 ASSIGNMENT 10
16 FURTHER ASSURANCES 10
17 DISPUTE RESOLUTION AND GOVERNING LAW 11
</TABLE>
Page 2 of 11
<PAGE> 3
APPENDICES
A. EBONE Shareholders Agreement
B. EBONE INC. Articles of Association
C. HER-P Guarantee (re: SHA)
D. Transmission Capacity Agreement
E. HER-I's Standard Terms
F. HER-P Guarantee (re: TCA)
G. Draft EBONE Newco B.V. Articles of Association
H. EBONE B.V. Shareholders Agreement
I. Extract of Minutes of Meeting No. 10A of the Board of EBONE and EHA
dated 23 June 1998
J. Extract of Minutes of the Extraordinary General Assembly of EHA dated
23 June 1998
K. Extract of Minutes of Meeting No. 10B of the Board of EBONE and EHA dated
23 June 1998
L. Extract of Minutes of the General Assembly of EBONE dated 23 June 1998
M. Extract of Minutes of Extraordinary General Assembly of EBONE dated
24 June 1998
N. Documents provided by EBONE
O. Share Subscription Agreement
P. Opinion of McCann Fitzgerald (re: HER-I)
Q. Documents provided by HER-P
R. Documents provided by HER-H
Page 3 of 11
<PAGE> 4
THIS AGREEMENT IS MADE THIS 24TH DAY OF JUNE, 1998
BY AND BETWEEN:
1. EBONE HOLDING ASSOCIATION, an association registered in Copenhagen as
number LEV 244815 and having its place of business at Vermundsgade 5,
2100 Copenhagen, Denmark, hereinafter "EHA";
2. EBONE A/S, a private limited liability company, registered in
Copenhagen as number A/S 231925 and having its place of business at
Vermundsgade 6, 2100 Copenhagen, Denmark, hereinafter "EBONE" or "the
Company";
3. HERMES EUROPE RAILTEL HOLDINGS B.V., a private limited liability
company registered in The Netherlands under number 33299402
(Amsterdam) and having its place of business at Strawinskylaan 305,
1077 XX Amsterdam, Netherlands, hereinafter "HER-H"; and
4. HERMES EUROPE RAILTEL (IRELAND) LIMITED, a company incorporated with
limited liability under the laws of the Republic of Ireland as company
number 276431 and whose registered office is 2 Custom House Plaza,
Harbourmaster Place, Dublin 1, Ireland, hereinafter "HER-I";
Hereinafter collectively referred to as "the Parties" and individually as a
"Party".
WHEREAS:
A. EBONE was founded by EHA in 1996 to develop and operate Internet
access for the members of EHA and for other customers according to
market developments;
B. HER-I is a wholly-owned subsidiary of Hermes Europe Railtel B.V.
("HER-P") which leases telecommunication transmission capacity to
telecommunication operators and other service providers on a carriers'
carrier basis;
C. HER-H is a wholly-owned subsidiary of HER-P which operates as a
holding company;
D. In an agreement dated 18 September 1997, HER-P and EBONE entered into
a Transmission Capacity Agreement pursuant to which HER-P agreed to
lease transmission capacity to EBONE;
E. HER-P assigned its rights and obligations under the agreement dated 18
September 1997 to HER-I on March 27, 1998, with the consent of EBONE;
F. EBONE now wishes to obtain the supply of additional telecommunications
transmission capacity from HER-I;
G. The Parties have agreed that the funds required to finance the
purchase of such additional capacity shall be obtained through the
sale by EBONE to HER-H of shares in EBONE;
H. The Parties wish to make provision for the subsequent restructuring of
EBONE and to provide an opportunity for members of EHA to subscribe
for shares in EBONE or the restructured company;
I. The Parties now wish to define their basic rights and obligations
under the arrangements described above and to make provision for their
implementation.
NOW IT IS HEREBY AGREED AS FOLLOWS: Interpretation
1 INTERPRETATION
1.1 The following definitions shall apply in this Agreement and in the
Appendices hereto:
Page 4 of 11
<PAGE> 5
Affiliated Company: in relation to any Shareholder, a company
which (a) is controlled in fact by the
Shareholder, and (b) fifty-one (51)% of the
shares of which are owned by the Shareholder;
Agreement: this Agreement and all annexes, appendices,
attachments, and schedules hereto;
Appendix: an Appendix to this Agreement;
Members: the entities as listed in Annex 2 to the
Shareholders' Agreement appended hereto as
Appendix A;
1.2 Any inconsistencies between the documents forming part of this
Agreement shall be resolved by giving them the following order of
precedence, unless expressly stated to the contrary:
(a) The Appendices;
(b) The main body of this Agreement but excluding the Appendices.
1.3 References in this Agreement to any Party shall include that Parties'
employees, agents, successors (whether by operation of law or
otherwise) and permitted assigns.
1.4 Headings are included in this Agreement for ease of reference only and
shall not affect the interpretation or construction of this Agreement.
1.5 All documentation exchanged between the parties pursuant to this
Agreement shall be in English.
2 IMPLEMENTATION
2.1 The Parties will enter into a series of transactions as described in
Articles 3 to 6. Each of these transactions will take place in the
sequence in which they are described. It is a condition of each
transaction that all of the other transactions shall be entered into
on the same day.
3 ISSUANCE OF SHARES
3.1 For purposes of this Agreement, the Parties have agreed on a valuation
of EBONE of ECU 30 million.
3.2 HER-H will subscribe for 51,000 shares in EBONE with a nominal value of
DKK 1,000 each with the intent that HER-I will become owner of 75% of
the shares in EBONE. EHA and EBONE will cause the nominal share capital
of EBONE to be increased from DKK 17 million to DKK 68 million for
this purpose. HER-H will make a cash payment of ECU 90 million to
EBONE for the shares.
3.3 In order to give effect to the transaction contemplated by Article
3.2, EBONE and HER-H will enter into a Share Subscription Agreement in
the form appended hereto as Appendix O.
3.4 Thereupon, the Parties will
(a) enter into a Shareholders' Agreement in the form appended
hereto as Appendix A; and
(b) cause the Articles of Association of EBONE to be amended in
the manner provided in Appendix B.
3.5 The shares issued to HER-H will be free from all claims, liens,
charges and encumbrances and together with all rights attached or
accruing thereto.
3.6 HER-H will procure from HER-P a guarantee of its due performance of
its obligations under the Shareholders' Agreement. The Guarantee
shall be in the form attached as Appendix C.
Page 5 of 11
<PAGE> 6
4 TRANSMISSION CAPACITY
4.1 EBONE will enter into a Transmission Capacity Agreement with HER-I in
the form appended hereto as Appendix D (the "TCA") under which HER-I
will agree to supply transmission capacity to EBONE of a value
equivalent to ECU 90 million. The ECU 90 million will be paid in cash
at the date of signing of the TCA. HER-I's standard terms, including
the terms summarized in Appendix E will apply. Capacity on the HER
Network, including US connectivity will be available per the HER Ready
For Service Date in the TCA. Prices will be as per Schedule 3 of the
TCA. The term of the TCA will be 10 years. EBONE will be free to
relocate capacity for up to 10 years, both between routes as well as
in time (on a monthly basis), except where the Capacity provided is
Europe-US.
4.2 EBONE and HER-I hereby terminate the Telecommunications Capacity
Agreement between them dated 18 September 1997. No compensation shall
be payable by either party to the other in respect of the termination.
Services currently being provided by HER-I under the agreement of 18
September 1997 will be continued by HER-I, without interruption, under
the TCA.
4.3 HER-I will procure from HER-P a guarantee of HER-I's due performance
of its obligations under the TCA. The Guarantee shall be in the form
attached as Appendix E.
5 RESTRUCTURING OF EBONE
5.1 The Parties will co-operate in the implementation of a restructuring
plan for EBONE pursuant to which
(a) A new Dutch holding company will be formed ("Ebone Newco
B.V.");
(b) EHA and HER-H will swap their shares in EBONE for shares in
Ebone Newco B.V., which will then own 100% of the shares of
EBONE.
5.2 The Articles of Association of Ebone Newco B.V. will be substantially
in the form attached hereto as Appendix G. The parties will meet to
discuss differences between the Articles of EBONE (Appendix B) and the
Articles of Ebone Newco B.V. (Appendix G).
5.3 The Parties will enter into (and cause Ebone Newco B.V. to enter into)
a Shareholders' Agreement which will be substantially in the form
attached hereto as Appendix H.
5.4 The transactions contemplated by this Article will be undertaken as
soon as possible, but only after the parties have applied for and
obtained a tax ruling from the Danish and Dutch authorities confirming
that the swap as described in Clause 5.1(b) will not have any adverse
tax consequences for the Parties. If the Parties do not obtain a
favourable tax ruling by 1 December 1998, HER-H will have the option,
exercisable until 4 December 1998, of requiring that the Parties
proceed with the restructuring on condition that HER-H will indemnify
EHA in respect of any such adverse tax consequence for it.
5.5 Upon completion of the share swap referred to in Article 5.1, the
EBONE Shareholders' Agreement (Appendix A) shall, notwithstanding any
provision therein to the contrary, terminate.
5.6 The Boards of Directors and Management of EBONE and Ebone Newco B.V.
shall be identical.
5.7 HER-H and EHA bind themselves to vote their shares in EBONE and in
Ebone Newco B.V. in the manner necessary to give effect to the
arrangements described in this Article.
6 SHARE OFFER
6.1 Members of the EHA will be invited to subscribe to 32% of the shares of
EBONE or a nominal value of up to DKK 32 million, thus bringing the
share capital up to DKK 100 million for a total consideration of up to
ECU 56.47 million (to be reduced proportionately if the entire
percentage allocated
Page 6 of 11
<PAGE> 7
is not taken up). There will be restriction of any single Member
acquiring, directly or indirectly, more than ten (10)% of the total
shares in EBONE. If the offering is oversubscribed by Members, shares
will be allocated amongst them on a pro rata basis.
6.2 HER-H's holding of shares in EBONE will as a consequence be reduced
from 75% to no less than 51% (depending on the number of shares taken
by Members).
6.3 EHA will hold the balance of the shares (17% to 25%).
6.4 An offer to Members to subscribe for the shares referred to in Article
5.1 will be circulated as soon as practical after execution of this
Agreement. Members desiring to accept the offer will be required to
sign and return a binding commitment letter by 15 September 1998.
Shares will be issued no later than 31 December 1998.
6.5 It will be a condition to issuing of shares that any Member committed
to take up shares shall agree to become a party to the relevant
Shareholders Agreement (Appendix H, or if the restructuring
contemplated by Article 5 does not proceed, Appendix A).
7 AUTHORITY
7.1 Attached hereto as Appendices I, J, K and L are copies of extracts of
minutes of meetings of the Board of Directors and the General Assembly
of EHA and EBONE of 23 of June 1998.
7.2 Attached hereto as Appendix M is a copy of an extract of the Minutes of
a Meeting of the Extraordinary General Assembly of EBONE dated 24 June
1998.
7.3 Attached hereto as Appendix N are copies of the following documents
provided by EBONE:
1. Power of Attorney made by Ebone A/S dated 23 June 1998.
2. Declaration re material changes.
7.4 Attached hereto as Appendix P is a copy of an opinion of McCann
Fitzgerald, Solicitors, dated 23 June 1998 provided by HER-I.
7.5 Attached hereto as Appendix Q are copies of the following documents
provided by HER-P:
1. Unanimous Written Consent of the Board of Directors of GTS-Hermes
Inc. with attached Minute of Resolution of Mr. Jan Loeber;
2. Notarial Declaration;
3. Extract from Register of Commerce (translation);
4. Extract of Minutes of Meeting of Board of Supervisory Directors;
5. Opinion of Richards, Layton and Finger dated 23 June 1998.
7.6 Attached hereto as Appendix R are copies of the following documents
provided by HER-H:
1. Minute of Resolution of Sole Director Mr. Jan Loeber;
2. Notarial Declaration;
3. Extract from Register of Commerce (translation).
7.7 Nothing in this Agreement is intended to impose any liability on any
member of EHA, except in a case where such member becomes a
Shareholder of EBONE or Ebone Newco B.V. pursuant to a Shareholders'
Agreement (Appendices A and H).
8 CONFIDENTIALITY
8.1 Each Party shall promptly supply to the other such information and
assistance which the other may reasonably request to enable it to
perform its obligations under this Agreement. Each Party shall ensure
that information provided to other Parties in accordance or in
connection with this Agreement is correct to the best of its knowledge
at the time that it is provided.
Page 7 of 11
<PAGE> 8
8.2 Each Party shall keep in confidence all confidential information and
will not (and will use its reasonable endeavours to ensure that its
directors, employees, officers, servants, agents, Affiliated Companies
and professional advisers will not) disclose such information to any
third party other than in accordance with this Agreement. Each party
shall exercise no lesser degree of care in relation to confidential
information than it would apply to its own confidential information.
8.3 The following disclosures shall not constitute a breach of Clauses
8.2:
(a) a disclosure authorized in writing;
(b) publication of confidential information in accordance with a
statutory or other regulatory requirement or pursuant to an
order of a competent court or tribunal;
(c) a disclosure made to any regulator or any expert or arbitrator
appointed in accordance with the provisions of this Agreement
to the extent that such disclosure is a legal requirement;
(d) a disclosure made to financial institutions, a lender of funds
or a financial advisor where such disclosure is required as
part of an arrangement for the financing or refinancing of
such party; or
(e) a disclosure to Shareholders or majority owned Group Companies
of the party provided that any third party which receives
confidential information pursuant to this provision has agreed
to be bound by the restrictions contained in Clauses 8.2, 8.3
and 8.4 (a)-(e) in the same manner as it were a party to this
Agreement.
8.4 The provisions of Clause 8.2 do not apply to any confidential
information which:
(a) enters into the public domain other than by reason of a breach
of this Agreement;
(b) is known to the party to which it is disclosed at the time of
its disclosure;
(c) is independently generated, developed or discovered at any
time by or for the party to which it is disclosed;
(d) is disclosed by a third party without any restriction on
further disclosure; or
(e) is necessary for the purposes of permitting a party to perform
its obligations under this Agreement or a Capacity Order (as
defined in the TCA) provided that any third party which
receives confidential information pursuant to this provision
has agreed to be bound by the restrictions contained in
Clauses 8.2, 8.3 and 8.4 (a)-(e) in the same manner as if it
were a party to this Agreement.
8.5 Confidential information shall only be used for the purposes for which
it was disclosed and/or for the purposes of performing the obligations
of the parties under this Agreement or a Capacity Order.
8.6 The obligations of confidentiality in this Clause 8 shall continue for
five (5) years following the termination of this Agreement.
9 PUBLICITY
(a) For the duration of this Agreement, any formal press release,
public announcement, news release or other form of major
publicity relating to this Agreement shall be made only after
prior consultation between the Parties and mutual agreement as
to the substantive contents thereof. No party shall
unreasonably withhold or delay any consent required under this
provision.
(b) Where a formal press release, public announcement, news
release, filings or other form of major publicity relating to
the existence of this Agreement or its terms is required by
the laws of any jurisdiction governing any of the Parties or
in connection with the procurement of
Page 8 of 11
<PAGE> 9
capital, no consultation or agreement between the Parties shall
be required but the Company shall provide the Parties with
advance copies prior to making any formal press release, public
announcement, news release, filings or other form of major
publicity.
10 ENTIRE CONTRACT
This Agreement and its Appendices contains the entire agreement among
the Parties with respect to the subject matter hereof and supersedes
all prior agreements among the Parties in relation to the same subject
matter. Each Party confirms to each of the others that it is not
relying on any representation, warranty, or commitment of any kind
save as set out in or explicitly contemplated by this Agreement.
11 VARIATION
11.1 No variation, modification or addition to or cancellation of any
provision of this Agreement shall be effective unless agreed in
writing by a duly authorized representative of each of the Parties.
12 NO WAIVER
12.1 Failure by any party at any time to enforce any of the provisions of
this Agreement shall neither be construed as a waiver of any rights
or remedies hereunder nor in any way affect the validity of this
Agreement or any part of it, and no waiver of a breach of this
Agreement shall constitute a waiver of any subsequent breach.
12.2 Termination of this Agreement shall not operate as a waiver of any
breach by a Party of any of the provisions thereof and shall be
without prejudice to any rights or remedies of either Party which may
arise as a consequence of such breach or which may have accrued
hereunder up to the date of such termination.
12.3 No waiver of a breach of this Agreement shall be effective unless
given in writing.
13 NOTICES
13.1 Any notice given under this Agreement shall be in writing and sent or
delivered:
in the case of EBONE, to:
EBONE A/S
Vermundsgade 5
DK-2100 Copenhagen
Denmark
Attention: Frode Greisen
in the case of EHA, to:
EBONE HOLDING ASSOCIATION
Vermundsgade 5
DK-2100 Copenhagen
Denmark
Attention: Peter Rastl
in the case of HER-I, to:
Hermes Europe Railtel (Ireland) Limited
2 Custom House Plaza
Harbourmaster Place
Dublin 1
Page 9 of 11
<PAGE> 10
Ireland
Attention: Managing Director
in the case of HER-H, to:
Hermes Europe Raitel B.V.
Terhulpsesteenweg 6A
1560 Hoeilaart
Belgium
Attention: Managing Director
13.2 Any notice or communication shall be deemed to have been received:
o if sent by facsimile transmission, when sent;
o if delivered by hand (including courier), when
delivered;
o if sent by air mail (where appropriate), 5 working
days after posting; or
o if sent by ordinary first class mail (where the
recipient is within the same jurisdiction as the
sender), 2 working days after posting.
In proving posting it shall be sufficient to show that the envelope
containing such notice or communication was properly addressed,
stamped and posted.
13.3 Any Party may amend its address and facsimile number specified in
Clause 13.1 by written notice to the other Parties.
14 TERMINATION
14.1 EBONE may terminate this Agreement immediately upon giving notice in
writing to the other parties in the event that HER-H becomes bankrupt
or insolvent; has sought protection from its creditors under any
statute or legal process; has suffered or permitted a trustee,
liquidator, receiver, receiver-manager or similar custodian to be
appointed or to take possession of its property or assets; has
voluntarily or involuntarily commenced proceedings for dissolution,
liquidation or winding up; or has ceased to carry on business in the
ordinary course.
14.2 If EBONE terminates this Agreement pursuant to Article 13.1, EBONE may
by notice in writing to HER-H retract the shares issued to HER-H
pursuant hereto in EBONE (or in the event that the share swap referred
to in Article 5.1 is completed, in EBONE Newco B.V.), provided that
EBONE pays to HER-H a sum equivalent to the value of the services
rendered by HER-I under the TCA to the date of said notice calculated
in accordance with Schedule 3 of the TCA.
15 ASSIGNMENT
15.1 This Agreement is personal to the Parties and may not be assigned by
either of them without the consent of the other, except that HER-H may
assign this Agreement to an Affiliated Company, and such an Affiliated
Company may further assign to another Affiliated Company; provided
always that HER-P guarantees the performance of the relevant
Affiliated Company in the manner contemplated by Articles 3.6 and 4.3.
16 FURTHER ASSURANCES
The Parties shall do, execute and perform and shall procure to be
done, executed and performed all such further acts, deeds, documents
and things as may be required from time to time to give full effect to
this Agreement.
Page 10 of 11
<PAGE> 11
17 DISPUTE RESOLUTION AND GOVERNING LAW.
17.1 All disputes arising in connection with this Agreement shall be
finally settled under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed
in accordance with the said Rules. The place of arbitration shall be
Paris and the language of arbitration shall be English.
17.2 This Agreement shall be governed by and construed in accordance with
English Law.
Signed in four counterparts in Brussels
EBONE HOLDINGS HERMES EUROPE RAILTEL
HOLDINGS B.V.
/s/ [Illegible] /s/ Jan Loeber
- - - - ----------------------------------- ------------------------------------
By: By: Hermes Europe Railtel B.V.
Title: Jan Loeber
Date: Title: Managing Director
Date:
EBONE A/S HERMES EUROPE RAILTEL
(IRELAND) LIMITED
/s/ [Illegible] /s/ [Illegible]
- - - - ----------------------------------- ------------------------------------
By: By:
Title: Title:
Date: Date:
Page 11 of 11
<PAGE> 1
Exhibit 23.2
CONSENT OF ERNST & YOUNG (CIS) LTD., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 16, 1998 (EDN Sovintel), in Amendment No. 3 to
the Registration Statement (Form S-1 No. 333-52735) and related Prospectus of
Global TeleSystems Group, Inc., dated on or about June 30, 1998.
/s/ Ernst & Young (CIS) Ltd.
Moscow, Russia
June 29, 1998
<PAGE> 1
Equity
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 26, 1998 (Global TeleSystems Group, Inc.), in
Amendment No. 3 to the Registration Statement (Form S-1 No. 333-52735) and
related Prospectus of Global TeleSystems Group, Inc., dated on or about
June 30, 1998.
/s/ Ernst & Young LLP
Vienna, Virginia
June 29, 1998
