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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1999
REGISTRATION NO. 333-45915
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 5
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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>
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<TABLE>
<S> <C>
1751 PINNACLE DRIVE GRIER C. RACLIN, ESQ.
NORTH TOWER -- 12TH FLOOR 1751 PINNACLE DRIVE
MCLEAN, VA 22102 NORTH TOWER -- 12TH FLOOR
(703) 918-4500 MCLEAN, VA 22102
(703) 918-4573
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of agent
principal executive offices) for service)
</TABLE>
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Copies to:
LINDA C. QUINN, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 848-8747
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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. [X]
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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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.
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<PAGE> 2
PROSPECTUS
$144,787,000
8.75% SENIOR SUBORDINATED CONVERTIBLE BONDS DUE 2000
7,239,350 SHARES OF COMMON STOCK OF
GLOBAL TELESYSTEMS GROUP, INC.
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
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The selling bondholders listed under "Selling Holders" in this prospectus
intend to offer and sell from time to time, $144,787,000 aggregate principal
amount of our 8.75% senior subordinated convertible bonds due 2000 and up to
7,239,350 shares of our common stock. We will issue these shares upon the
conversion of the bonds. Our shares currently trade on the Nasdaq National
Market under the symbol "GTSG."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is June 8, 1999.
<PAGE> 3
SUMMARY
We are a leading independent provider of telecommunications services to
businesses, other high usage customers and telecommunications carriers in
Europe. We also provide telecommunications services in Russia and the
Commonwealth of Independent States (CIS). In October 1998 we realigned our
operations into five lines of business: GTS Carrier Services, GTS Business
Services, GTS Access Services, GTS Business Services - CIS and GTS Mobile
Services - CIS. In March 1999, we added a sixth line of business, GTS Wholesale
Services.
GTS CARRIER SERVICES
GTS Carrier Services has three components: Hermes Europe Railtel B.V.,
Transoceanic Services and IP Services. Through Hermes Railtel, we operate a
centrally managed fiber optic network that is designed to carry high volumes of
telecommunications traffic across national borders in Europe and to the United
States. We sell this capacity to other telecommunications carriers and, through
our subsidiary, Ebone A/S, we connect Internet service providers in Europe to
the Internet. Through Transoceanic Services, we intend to expand our ability to
provide these services between the United States and Europe by utilizing the
resources of FLAG Atlantic Limited, a joint venture in formation in which we
have a 50% equity interest. This joint venture will build and operate a new
transatlantic dual cable system, called FLAG Atlantic-1, designed to carry
voice, data and video traffic at much faster speeds than currently available on
existing transatlantic links. Through IP Services, we plan to offer Internet
services to businesses, other high usage customers and telecommunications
carriers. These services will range from providing access to and transporting
data on the Internet to other services, such as helping other companies to set
up and maintain their web sites. We intend to utilize the three components of
our Carrier Services line of business to become a leading provider of seamless
transatlantic city-to-city managed services to businesses and telecommunications
providers. For a comprehensive discussion on our Carrier Services line of
business, see "Business -- GTS Carrier Services."
GTS BUSINESS SERVICES
Through our Business Services line of business, we focus on providing high
quality, competitively priced telecommunications services to businesses and
other high usage customers. We currently conduct our Business Services line of
business through our three recently acquired subsidiaries, Esprit Telecom Group
plc, NetSource Europe ASA and Omnicom. We provide a range of telecommunications
services organized in the following two segments:
- long distance voice and fax services for corporate customers to
worldwide destinations; and
- network management services and services providing access to and
termination of traffic on our network for telecommunications service
providers who do not own their own telecommunications facilities, such
as calling card companies.
Excluding the operations of Omnicom, at December 31, 1998, we had over
35,000 business customers and approximately 44,000 small office and home office
and residential customers in 11 countries throughout Europe. We intend to
increase our Business Services product offering to include services such as toll
free services and calling cards. For a discussion of our Business Services line
of business, see "Business -- GTS Business Services."
GTS WHOLESALE SERVICES
In March 1999, we introduced Wholesale Services as our sixth line of
business. Wholesale Services provides international traffic termination services
to other telecommunications service providers, including public
telecommunications operators, global alliances and regional telephone companies.
Termination services involve the termination of traffic through our own network
or through other providers. Through our Wholesale Services line of business, we
expect to integrate the wholesale services activities of Esprit Telecom with the
international services and switching operations of our GTS-Monaco Access
operations.
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At a later date, Wholesale Services will also incorporate NetSource's wholesale
activities. For a discussion of our Wholesale Services line of business, see
"Business -- GTS Wholesale Services."
GTS ACCESS SERVICES
Through our Access Services line of business, we plan to offer local access
to telecommunications networks for voice and data traffic to businesses, other
high usage customers and telecommunications carriers in 12 major Western
European cities by 2001. Our existing operations in Hungary and the Czech
Republic currently provide alternative local access and other services to
businesses and governmental customers in those markets. We plan to develop our
infrastructure through one or more of the following:
- constructing, purchasing or leasing fiber optic cable networks;
- obtaining licenses for telecommunications networks utilizing microwave
transmissions; or
- forming partnerships with or acquiring existing network operators.
We intend to reduce local access costs that we now incur for our Carrier
Services and Business Services customers by providing such local access
ourselves instead of purchasing it from incumbent public telecommunications
operators or other local access providers.
GTS BUSINESS SERVICES - CIS
Through our Business Services - CIS line of business we offer
telecommunications services to business customers in Russia and other countries
in the Commonwealth of Independent States. These services include:
- international long distance, local telephone services and access to
domestic long distance carriers in Moscow and St. Petersburg;
- domestic long distance services in Moscow and several other cities in
Russia; and
- data services, including high-speed data transmission, electronic mail
and Internet access services.
We currently operate in 31 regions, including 14 cities and the city of
Moscow, in Russia and the CIS. For a discussion of our Business Services - CIS
line of business, see "Business -- GTS Business Services - CIS and Mobile
Services - CIS -- GTS Business Services - CIS."
GTS MOBILE SERVICES - CIS
Through our Mobile Services - CIS line of business, we offer cellular
telephone services to business customers in 14 regions in Russia and in Kiev,
Ukraine. For a discussion of our Mobile Services - CIS line of business, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS Mobile
Services - CIS."
BUSINESS STRATEGY
In order to achieve our objective of becoming Europe's premier independent
provider of telecommunications services to businesses, other high usage
customers and telecommunications carriers, we intend to implement the following
key strategies:
- Continue construction of the Hermes Railtel network to expand its
geographic reach;
- Develop local access infrastructure in 12 major metropolitan markets
throughout Europe by 2001;
- Expand our Internet capabilities and product offerings;
- Reinforce and extend market penetration of Hermes Railtel's network by
enhancing the scope, capacity, reliability and efficiency of our
infrastructure, and by providing our own local access;
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<PAGE> 5
- Increase high usage retail customer base and route traffic over our own
networks; and
- Integrate the marketing and service offerings of each of our six lines of
business.
RECENT DEVELOPMENTS
CONCURRENT SECONDARY STOCK AND PREFERRED STOCK OFFERINGS
On April 19, 1999, the SEC declared effective two shelf registration
statements with respect to the resale of an aggregate of approximately 24.1
million shares of our common stock owned by some of our affiliates and other
stockholders. Shortly thereafter, Apax Funds Nominees Limited and Warburg,
Pincus Ventures L.P., which together owned approximately 7.7% of our common
stock as of December 31, 1998, sold their shares under an underwritten public
offering pursuant to the shelf registration statements.
Concurrently with this offering, we offered, pursuant to exemptions from
registration under the Securities Act, US$500 million of depositary shares
(including US$65,000,000 of depositary shares exercised pursuant to the
underwriters over-allotment option), each representing 1/100 of a share of
7 1/4% cumulative convertible preferred stock. Each depositary share has a
liquidation preference of $50 per share. Holders of the depositary shares are
entitled to quarterly cash payments of $.90625 per share commencing on June 15,
1999. We have registered with the SEC the shares, the common stock issuable upon
conversion of the preferred stock and shares of common stock to be paid as
dividends on the preferred stock. We realized net proceeds, after underwriting
discounts and commissions, of $485 million and intend to use such proceeds for
general corporate purposes, including business development.
OMNICOM ACQUISITION
On April 26, 1999, we purchased 52% of the shares of Omnicom, a French
corporation, for euro 194.6 million (approximately $210 million) of which we
paid 50% in cash (approximately $103 million) and 50% in shares of our common
stock (consisting of 1,850,497 shares). These shares are unregistered and are
therefore subject to transfer restrictions. We have agreed to file a
registration statement with respect to these shares. Certain of the Omnicom
majority shareholders have agreed:
- to place a total of approximately 20% of the GTS shares acquired in
escrow until the later of June 30, 2000 and thirty days after the filing
of our Form 10-K for year end December 31, 1999; and
- not to transfer a total of approximately 30% of the GTS Shares acquired
until six months after the date of acquisition.
As required by French law, we have filed with the Conseil des Marches
Financiers and are currently offering to purchase the remaining outstanding
shares and the convertible bonds of Omnicom. We are not making this offer to
Omnicom securityholders in the United States, mailing or distributing the offer
to purchase in the United States or accepting any Omnicom securityholders'
acceptances mailed to us from the United States. As of the date of this
prospectus, we currently own approximately 98% of the shares of Omnicom.
Omnicom is one of France's first telecommunications providers to
successfully challenge France Telecom's network. Omnicom is the second operator
to connect with France Telecom and also holds a national network operator's
license for France. Excluding France Telecom, Omnicom is the leading provider of
telecommunications services for small and medium-sized businesses in France.
Omnicom markets its services through both a direct sales force and sales agents
throughout France. Omnicom's other service offerings include the sale and
distribution of pre-paid cards to outlets in France and the offering of
telecommunications services to residential customers.
We believe that Omnicom's business is complementary with ours and that both
companies will enjoy benefits from this combination.
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OUR NEW CHIEF EXECUTIVE OFFICER; MANAGEMENT
In March 1999, our board of directors elected H. Brian Thompson as chairman
and chief executive officer. Mr. Thompson served as chairman and chief executive
officer of LCI International, Inc. from 1991 until June 1998, when Qwest
Communications International, Inc. acquired LCI. During Mr. Thompson's tenure at
LCI, that company grew in annual revenues from $220 million to $1.6 billion in
1997. LCI provided long-distance voice and data services in the United States
and to more than 230 international locations. In addition, our board elected
Robert J. Amman, a board member, president of our company.
ESPRIT TELECOM ACQUISITION
On February 2, 1999, we commenced an offer to purchase all of the issued
share capital of Esprit Telecom. On March 4, 1999, after all of the conditions
to our offer were satisfied, we accepted ordinary shares and American depositary
shares representing approximately 97.9% of the issued share capital of Esprit
Telecom. In exchange, we issued approximately 15.7 million shares of our common
stock.
We are in the process of developing our business plan and strategy for
Esprit Telecom, including the manner in which Esprit Telecom will be integrated
into our existing lines of business and corporate structure. We have accounted
for this transaction as a pooling of interests. On April 16, 1999, we announced
30-day postmerger combined financial results. The combined company generated
revenues of $59 million, net loss of $26 million and earnings per share of
$(0.32) for the 30-day postmerger period beginning March 5, 1999. In addition,
we incurred charges in the first quarter of 1999 in connection with the Esprit
Telecom combination. We recognized a charge of approximately $46 million in
transaction costs, including investment banking, advising, debt restructuring,
legal, accounting, printing and employee-related expenses. We also incurred
additional charges of $18 million to eliminate or reduce redundancies of the GTS
and Esprit Telecom networks, including, fiber lease cancellation, write-off of
excess equipment and redeployment of switches. For a discussion of risks
associated with the integration of this acquisition, see "Risk
Factors -- Failure to successfully integrate our recent acquisitions could
disrupt the operations of our businesses and prevent us from realizing intended
benefits."
HERMES DEBT OFFERING
On January 4, 1999, Hermes Railtel, an 89.9% owned subsidiary, completed a
private placement of $200 million principal amount of 10 3/8% senior notes due
2009 and E85 million principal amount of 10 3/8% senior notes due 2006. Hermes
Railtel filed an S-4 registration statement with the SEC to exchange registered
senior notes with the same terms and conditions as its 10 3/8% senior notes, for
the 10 3/8% senior notes. This exchange was completed on March 29, 1999. Hermes
Railtel will use the proceeds of this offering to finance the cost of building
the remainder of the network and increasing transatlantic capacity and enhancing
the speed and capacity of the network.
OUR COMPANY INFORMATION
We maintain our principal offices at 1751 Pinnacle Drive, North
Tower -- 12th Floor, McLean, VA 22102 (telephone (703) 918-4500).
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RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in GTS. As a shareholder, you may be subject to risks inherent in our
business. The value of your investment may increase or decline and could result
in a loss. You should carefully consider the following factors relating to us as
well as other information contained in this prospectus before deciding to invest
in shares of our common stock.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO IMPLEMENT OUR
BUSINESS STRATEGY
We will require additional capital to fund future acquisitions, capital
expenditures and ongoing operations. If we fail to generate sufficient funds in
the future from a combination of operating cash flow and additional debt or
equity financings, we may have to delay or abandon executing significant
elements of our business plan including:
- our plans to offer local access services in twelve major Western
European cities by 2001;
- our plans to further extend our network in Europe;
- our participation in the FLAG Atlantic Limited joint venture, which
plans to operate and build a new transatlantic cable; and
- capital expenditures and other costs necessary to develop and offer
Internet services.
Failure to implement elements of our business plan could have a material adverse
effect on our operations and on the market price of our common stock.
OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE
We have incurred substantial debt (including the assumed debt of Esprit
Telecom) and may incur substantial additional debt to implement our business
plans.
As a result of our current high level of debt, we:
- will need significant cash to service our debt, which will reduce funds
available for operations, future business opportunities and investments
in new or developing technologies and make us more vulnerable to adverse
economic conditions;
- may not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;
- may be less flexible in planning for, or reacting to, changes in our
business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and
- will have more debt than some of our competitors, which may place us at
a competitive disadvantage with respect to such competitors.
If we fail to make the required payments or to comply with our debt
covenants we will default on our debt. A default would permit our debtholders to
accelerate the maturity of the debt, which in turn would cause defaults under
our other indebtedness.
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COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO BORROW AND INVEST,
WHICH COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR FUTURE OPERATIONS
The covenants in our currently outstanding debt may materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. Among other things, these covenants
limit our ability to:
- incur additional indebtedness;
- pay dividends, make distributions on our common stock or make certain
other restricted payments;
- limit our ability to use our assets as collateral for loans;
- dispose of our assets; or
- enter into transactions with affiliates.
WE MAY DEFAULT ON OUR OBLIGATIONS TO BONDHOLDERS BECAUSE THE BONDS ARE
SUBORDINATED OBLIGATIONS
The bonds are unsecured, senior subordinated obligations and, are
subordinated in right of payment to all of our existing and future senior debt.
In the event of our insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding-up or upon acceleration of the bonds due to an event of
default, holders of debt of our subsidiaries and holders of our senior debt will
be entitled to receive payment in full before you would receive any payment and
there may not be sufficient assets remaining to pay amounts due on any or all of
the bonds.
We and our subsidiaries are permitted to incur either senior debt or other
debt. As of March 31, 1999, we had approximately $105.0 million of debt
outstanding that was senior in right of payment to the bonds, and our
subsidiaries had approximately $1.1 billion of debt outstanding that was
effectively senior to the bonds. The bonds will rank equally in right of payment
with our 5 3/4% convertible bonds due 2010. See "Capitalization" and
"Description of the Bonds -- Subordination."
FAILURE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS COULD DISRUPT THE
OPERATIONS OF OUR BUSINESSES AND PREVENT US FROM REALIZING INTENDED BENEFITS
If we are unable to integrate our newly acquired companies, we may fail to
realize the expected cost savings, increases in revenue and other projected
benefits from such integration, and may suffer material adverse short and
long-term effects on our operating results and financial condition. The process
of integrating NetSource and Esprit Telecom may disrupt our respective
businesses and may cause an interruption of, or a loss of momentum in, our
respective businesses as a result of a number of obstacles such as:
- loss of key employees or customers;
- possible inconsistencies in standards, controls, procedures and policies
among the companies being combined and the need to implement common
company-wide financial, accounting, information, billing and other
systems;
- failure to maintain the quality of customer service that such companies
have historically provided;
- the need to coordinate geographically diverse organizations;
- incompatible equipment;
- changes in management may impair relationship with employees and
customers;
- limitations under existing Esprit Telecom debt covenants;
- the resulting diversion of management's attention from our day-to-day
business and the need to hire management personnel to address such
obstacles; and
- additional expenditures required to facilitate this integration.
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For a discussion of the integration of recent acquisitions, see
"Summary -- GTS Wholesale Services" and "Summary -- Recent
Developments -- Esprit Telecom Acquisition."
OUR INABILITY TO IDENTIFY FUTURE ACQUISITION OPPORTUNITIES OR ACQUIRE THE
FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE SUCH OPPORTUNITIES MAY HINDER THE
GROWTH OF OUR NETWORK
Our inability to successfully implement our acquisition strategy may hinder
the expansion of our network and make our services less attractive to customers
seeking a geographically broader network. We believe that additional attractive
acquisition opportunities currently exist in Western and Central Europe and the
United States. We continuously evaluate attractive acquisition opportunities
and, at any given time, may be engaged in discussions with respect to possible
material acquisitions or other business combinations. Some of these transactions
may involve our selling in one or more private or public transactions certain of
our Russian businesses or our interests in these businesses, or our contributing
some of our Russian businesses in exchange for an interest in the surviving
entity. Although we have discussions with other companies to assess
opportunities on an ongoing basis, we do not currently have a definitive
agreement with respect to any material acquisition or joint venture. We may be
unable to identify, finance and complete, on acceptable terms, suitable
acquisitions, transactions or business combinations. Furthermore, we may not be
able to raise the additional capital necessary to fund such acquisitions and may
have to divert management's attention and our financial and other resources from
other areas. For a comprehensive discussion of our acquisition strategy, see
"Business -- GTS Carrier Services -- Business and Marketing Strategy,"
"Business -- GTS Business Services -- Business and Marketing Strategy,"
"Business -- GTS Wholesale Services -- Business and Marketing Strategy," and
"Business -- GTS Access Services -- Business and Marketing Strategy."
OUR HISTORY OF SUBSTANTIAL NET LOSSES MAY CONTINUE INDEFINITELY AND MAKE IT
DIFFICULT TO FUND OUR OPERATIONS
We have historically sustained substantial operating and net losses. If we
do not become profitable in the future, the value of our common stock may fall
and we could have difficulty obtaining funds to continue our operations. For the
following periods, we reported net losses of:
<TABLE>
<CAPTION>
PERIOD NET LOSS
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<S> <C>
Year ended December 31, 1996................................ $ 76.2 million
Year ended December 31, 1997................................ $134.8 million
Year ended December 31, 1998................................ $255.8 million
Quarter ended March 31, 1999................................ $162.2 million
Inception through March 31, 1999............................ $705.9 million
</TABLE>
These net losses reflect the restatement of our historical financial statements
for 1998 and prior periods to account for the acquisition of Esprit Telecom as a
pooling of interests. Since December 31, 1998, we have incurred higher net
losses as compared to the corresponding period for the previous year. We expect
to continue incurring significant operating losses during the next several years
while we develop our operations, infrastructure and customer base in new
European markets.
ESTABLISHED COMPETITORS WITH GREATER RESOURCES MAY MAKE IT MORE DIFFICULT FOR US
TO EFFECTIVELY MARKET OUR SERVICES, OFFER OUR SERVICES AT A PROFIT AND ATTRACT
AND RETAIN CUSTOMERS
Competitors may force us to lower our prices or modify our service
offerings to remain competitive. We may not be able to effectively market our
expanded service offerings, keep prices at a profitable level or attract and
retain customers. Specifically, prices for international long distance calls
have decreased substantially over the last few years in most of our current and
potential markets. We expect our prices for services to continue to decrease for
the foreseeable future.
Our competitors include large established national carriers, alliances
among telecommunications companies, competitors that own equipment and networks,
companies that purchase and resell the services
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of other carriers, Internet service providers and other providers of bundled
services. We may also face competition from cable television companies, wireless
telephone companies, microwave carriers and satellite companies. Many of these
competitors have established customer bases and extensive brand name recognition
and have greater financial, management and other resources. Our medium- to
large-sized business and governmental agency customers and organizations may
also be reluctant to entrust their telecommunications needs to what they
perceive to be a relatively new and unproven operator.
In addition, various telecommunications companies, including MCI WorldCom,
Inc., Viatel, Inc., KPN N.V., Qwest Communications International, Inc., Deutsche
Telekom AG and France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc, have announced plans to construct, have begun to
construct or are operating fiber optic networks across various European
countries which do or will compete with Hermes Railtel.
For more information on our competitors in Business Services and Access
Services lines of business, see "Business -- Competition Faced by Our Lines of
Business."
OUR COMPETITIVE POSITION MAY BE COMPROMISED BY OUR DEPENDENCE ON OTHER
TELECOMMUNICATIONS SERVICE PROVIDERS
We need to enter into interconnection agreements with large established
national carriers and other local service providers operating in our target
markets. We may also need to enter into agreements which permit us to place our
equipment at the facilities of such third parties and/or lease
telecommunications transport capacity from such third parties. Failure to enter
into interconnection and other agreements which provide satisfactory pricing and
other terms could affect our ability to compete in a targeted market. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."
OUR ACCESS SERVICES AND BUSINESS SERVICES ACTIVITIES MAY CAUSE OUR CARRIER
SERVICES LINE OF BUSINESS TO LOSE CUSTOMERS
Our Carrier Services line of business, through Hermes Railtel, offers
services to customers that may compete with our Access Services and Business
Services lines of business. Our Business Services and Access Services lines of
business may contract with Hermes Railtel for capacity on an arms-length basis.
However, Hermes Railtel's customers and potential customers may not perceive
Hermes Railtel as an independent operator in such transactions. Such a
perception could negatively impact Hermes Railtel's ability to attract and
retain customers, which could, in turn, adversely affect our revenues.
WE MAY INCUR ADDITIONAL CHARGES UNDER OUR RESALE AGREEMENTS WITH LONG-DISTANCE
AND INTERNATIONAL CARRIERS
We enter into many telecommunications traffic resale agreements with long
distance and international carriers. These agreements often contain minimum
volume commitments. We may be obligated to pay underutilization charges if we
overestimate our need for transmission capacity. If we underestimate our need
for transmission capacity, we may need to pay more for the extra capacity
needed. Under these arrangements, we are subject to the risk of unanticipated
price fluctuations and service restrictions or cancellations. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."
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OUR INABILITY TO MANAGE OUR RAPID GROWTH COULD ADVERSELY AFFECT OUR FINANCIAL
REPORTING, CUSTOMER SERVICE AND REVENUES
Our rapid expansion has placed and will continue to place significant
demands on our operating and financial control systems and infrastructure. In
order to manage our growth effectively, we expect to purchase additional
telecommunications facilities and expand, train and manage the employee base.
Inaccuracies in our forecasts of market demand could result in insufficient or
excessive telecommunications facilities and excessively increase our fixed
expenses. Additionally our business development and expansion will create
additional demands on our customer support, sales and marketing and
administrative resources and network infrastructure.
OUR FAILURE TO INTEGRATE, MANAGE AND OPERATE NEW TECHNOLOGY COULD RESULT IN
SYSTEM FAILURES
Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for dense wavelength division multiplexing, which allows multiple
signals to be carried simultaneously and Internet-data transmission using dense
wavelength division multiplexing technology. Integrating these new technologies
could increase the risk of system failure and result in further strains on our
resources. Additionally, any damage to our Carrier Services network management
center or our major Business Services switching centers could harm our ability
to monitor and manage the network operations and generate accurate call detail
reports from which billing information is derived. See "Business -- GTS Carrier
Services" and "Business -- GTS Business Services."
SYSTEM FAILURES OR INTERRUPTIONS IN OUR NETWORK MAY CAUSE LOSS OF CUSTOMERS
Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Any prolonged failure of our communications network or other systems or
hardware that causes significant interruptions to our operations could seriously
damage our reputation and result in customer attrition and financial losses.
THE TECHNOLOGY OF OUR HERMES RAILTEL NETWORK COULD BECOME OBSOLETE AND HARM OUR
COMPETITIVENESS
If our network is not able to meet its design specifications or if it is
unable to keep pace with technological changes in the telecommunications
industry, our network could become obsolete. Our network has been designed to
utilize dense wavelength division multiplexing and synchronous digital hierarchy
technology, another digital transmission standard that facilitates the
compatibility of dissimilar equipment from different vendors. In addition, the
network will be extended to support IP Services in 1999. While the currently
operational portion of our network has performed at or above design
specifications since November 1996, our network may not achieve the technical
specifications which we designed it for. Additionally, we may be unable to
allocate the funds necessary to upgrade our network as technological
improvements in telecommunications equipment are introduced. This could harm our
competitive position relative to other more technologically advanced networks.
For a more comprehensive discussion of the Hermes Railtel network technology,
see "Business -- GTS Carrier Services -- Hermes Railtel Network."
WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY
WHICH COULD ADVERSELY AFFECT OUR PROJECTED REVENUE GROWTH
We may be unable to successfully, timely and cost-effectively realize
numerous elements of our business plan, including:
- our plan to provide local access services in twelve major Western
European cities by 2001;
- our plan to build and operate the FLAG Atlantic-1 transatlantic cable by
the end of 2000;
- our plan to develop and offer Internet services;
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<PAGE> 12
- the execution of agreements with various parties regarding, among other
things, rights-of-way and development and maintenance of infrastructure
and equipment; and
- the timely performance by third parties of their contractual obligations
to engineer, design and construct the infrastructure underlying our
local access strategy, transatlantic services and Internet services.
We believe that our cost estimates and the network expansion schedule are
reasonable with respect to these projects. However, the actual construction
costs or time required to complete the plans could substantially exceed current
estimates. Any significant delay or increase in the costs to develop such plans
could have a material adverse effect on our operations.
DELAYS IN REGULATORY LIBERALIZATION IN EU MEMBER STATES COULD ADVERSELY AFFECT
OUR SERVICE OFFERINGS IN THOSE COUNTRIES
A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. Although EU
member states had a legal obligation to liberalize their markets in accordance
with these directives by January 1, 1998, Greece and Portugal have been granted
extensions. In many countries where we implement our business plan and make
capital expenditures there is a risk that regulatory liberalization may not
occur. As a result, we may be unable to provide many of our services and to
proceed with the planned growth and expansion of our networks, infrastructure
and other systems.
Even if an EU member state promptly adopts liberalization measures in a
timely fashion, we may encounter difficulty in executing our business plan if
(1) established national or regional telecommunications operators, regulators,
trade unions and other sources resist implementation of such measures or (2) any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries. For a comprehensive discussion of our
business strategy, see "Business -- Business Strategy," "Business -- GTS Carrier
Services -- Business and Marketing Strategy," "Business -- GTS Business
Services -- Business and Marketing Strategy," "Business -- GTS Wholesale
Services -- Business and Marketing Strategy," and "Business -- GTS Access
Services -- Business and Marketing Strategy."
WE MAY ENCOUNTER DELAYS, OPERATIONAL PROBLEMS AND INCREASED COSTS IF WE ARE
UNABLE TO ACQUIRE KEY EQUIPMENT FROM OUR MAJOR SUPPLIERS
We are significantly dependent on the technology and equipment which we
acquire from telecommunications equipment manufacturers that may provide vendor
financing for, and maintenance of, this equipment. Without this equipment, we
would face delays, operational disruption and higher expenses. Our main
suppliers are Alcatel, Nortel, Ericsson and Siemens. While we could obtain
equipment of comparable quality from several alternative suppliers, we may be
unable to acquire compatible equipment from such alternative sources on a timely
and cost-efficient basis.
FAILURE TO OBTAIN NEW LEASES OF TRANSMISSION CAPACITY OR RENEW EXISTING LEASES
ON OUR LEASED LINES COULD CAUSE US TO INCUR LOSSES ON THE LEASED PORTIONS OF OUR
NETWORK
We currently lease a substantial portion of our network transmission
capacity under agreements which generally have twelve-month or longer fixed
terms. These lease arrangements result in high fixed costs. If our lease
arrangements deteriorate or terminate and we are unable to enter into new
arrangements, our cost structure, service quality, network coverage, results of
operations and financial condition could be adversely affected. For a more
comprehensive discussion of our network agreements, see "Business -- GTS Carrier
Services -- Hermes Railtel Network -- Network Agreements."
FAILURE TO CARRY SUFFICIENT TRAFFIC ON OUR LEASED LINES COULD CAUSE US TO INCUR
LOSSES ON THE LEASED PORTION OF OUR NETWORK
The revenues generated by transporting traffic in these leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are
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unable to charge an appropriate price for such traffic, we could fail to
generate revenue sufficient to cover our lease costs, and would therefore incur
operating losses on the particular route or routes. For a more comprehensive
discussion of our network agreements, see "Business -- GTS Carrier
Services -- Hermes Railtel Network -- Network Agreements."
OUR REVENUES FROM OUR WHOLESALE AND RESELLER CUSTOMERS ARE SUBJECT TO
FLUCTUATIONS AND MAY RESULT IN LOSSES OR INCONSISTENT PROFITABILITY
Customers of our Business Services line of business that purchase services
on a wholesale basis or for resale to retail customers typically change their
routing or providers to take advantage of the lowest cost alternative. This
often results in greater fluctuations in revenue generated by these customers
than by other categories of customers. Due to capacity and quality constraints
on our least-cost routes, we have occasionally been forced to carry traffic over
a higher-cost route, thereby decreasing our revenues. We may continue to
experience short term fluctuations in usage and revenue as customers change
routing and providers. For a discussion of our wholesale and resale customers,
see "Business -- GTS Wholesale Services -- Targeted Customers."
WE MAY BE AT A COMPETITIVE DISADVANTAGE DUE TO RESTRICTIONS IMPOSED BY THE
FOREIGN CORRUPT PRACTICES ACT ON CERTAIN OF OUR BUSINESS PRACTICES
Many of our current and potential competitors are not subject to, or
constrained by the prohibitions of, the Foreign Corrupt Practices Act, including
the prohibition against making payments to government officials in order to
obtain commercial benefits. We are subject to, and seek to comply with, the
limitations and prohibitions of such law, and accordingly may be subject to
competitive disadvantages to the extent that our competitors are able to secure
business, licenses or other preferential treatment through the making of such
payments. Accordingly, we cannot assure you that we will be able to compete
effectively against companies free from such limitations in the emerging markets
where such commercial practices are commonplace.
WE WILL LOSE TAX BENEFITS IF WE ARE UNABLE TO USE OUR NET OPERATING LOSS
CARRYFORWARDS
As of December 31, 1998, we had net operating loss carryforwards for U.S.
federal tax purposes of approximately $251.0 million expiring in 2003 through
2018. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
Because of the change in ownership provisions of the Tax Reform Act of 1986, our
ability to use the tax benefits from our net operating loss carryforwards is
subject to an annual limit as a result of the initial public offering and the
follow on stock offering, convertible senior subordinated debenture due 2010
offering carried out in July 1998 and our recent acquisitions of Esprit and
NetSource.
FLUCTUATIONS IN FOREIGN CURRENCIES MAY MAKE IT MORE COSTLY FOR US TO PAY OUR
U.S. DOLLAR-, DEUTSCHMARK-AND EURO-DENOMINATED DEBT
Changes in foreign currency exchange rates can reduce the value of our
assets and revenues and increase our liabilities and costs, as our revenue and
some of our costs, assets and liabilities are denominated in multiple local
currencies. We have substantial debt denominated in U.S. dollars, Deutschmarks
and Euros. However, most of our revenues are denominated in European currencies.
Therefore, our ability to pay interest and principal on such debt is dependent
on the then current exchange rates between U.S. dollars and the currencies in
which our revenues are denominated. We historically have not used hedging
transactions to limit our exposure to risks from doing business in foreign
currencies. In April 1998, Hermes Europe Railtel B.V. entered into a currency
swap contract to limit its exposure to some if its currency risks. For further
discussion of our exposure to currency fluctuations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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OUR RISK OF FRAUD AND BAD DEBT MAY GROW AS OUR SMALL TO MEDIUM SIZED CUSTOMERS
INCREASE
We have experienced problems relating to the fraudulent use of our access
codes and the failure of some customers to make full payment for services
rendered. However, we do not believe that such problems are substantially
different from what is generally experienced in the telecommunications industry.
We expect that the credit risk characteristic of our customer base may increase
as the share of our revenue deriving from small to medium sized enterprises and
service provider/reseller customers increases.
WE MAY NOT IMPLEMENT BILLING AND MANAGEMENT INFORMATION SYSTEMS EFFECTIVELY AND
ON SCHEDULE
We may encounter difficulties in implementing and enhancing our new billing
and management information systems and in integrating new technology into such
systems. While our existing billing system is sufficient for its current
operations, we have selected a new billing system which we believe will provide
the capability and flexibility to support our anticipated growth. If our billing
and management information systems are not effectively implemented, our call
details may not be accurately recorded and customer bills may not be generated
promptly and accurately. This would adversely impact on our business since we
would not be able to promptly collect on customer balances due to us. For a
comprehensive discussion of our Billing and Management Information Systems, see
"Business -- GTS Business Services -- Billing and Management Information
Systems" and "Business -- GTS Access Services -- Billing and Management
Information Systems."
FAILURE OF OUR COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD DISRUPT OUR
BUSINESS AND OPERATIONS
We rely greatly on computer systems and other technological devices.
However, these devices may not be capable of recognizing dates beginning on
January 1, 2000. This problem could cause any of our network, Internet or
programming operations to malfunction or fail. We are communicating with third
parties significant to our business to find out more about their Year 2000
compliance programs. We cannot assure you that our Year 2000 program or the
programs of third parties who do business with us will be effective or that our
estimates about the timing and cost of completing our program will be accurate.
We have spent approximately $4.9 million for our Year 2000 compliance
through December 31, 1998, and expect to spend approximately an additional $5.0
million to $6.0 million through the end of calendar year 1999. We currently
expect to incur $2.0 million to replace identified telecommunications equipment
and software. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance."
LOSS OF KEY PERSONNEL COULD AFFECT OUR GROWTH AND FUTURE SUCCESS
We believe that our growth and future success will depend in large part
upon a small number of key executive officers, as well as on our ability to
attract and retain highly skilled personnel to work in the emerging markets in
which we operate. Key personnel include our senior management and the heads of
our lines of business as well as senior management personnel formerly employed
by NetSource and Esprit Telecom, which we recently acquired. We cannot assure
you that we will be able to hire and retain qualified personnel. The competition
for qualified personnel in the telecommunications industry is intense,
particularly in the emerging markets where we operate.
SIGNIFICANT STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS
At December 31, 1998, the Open Society Institute, Soros Foundation Hungary,
Soros Charitable Foundation, Soros Humanitarian Foundation, Winston Partners II
LLC, Winston Partners II LDC and Chatterjee Fund Management, L.P., which we
collectively refer to as the Soros associates, beneficially owned approximately
11.91% of our common stock and Alan B. Slifka and affiliates beneficially owned
4.60% of our common stock. In addition, two persons who are affiliated with the
Soros associates and one person who is affiliated with the Slifka affiliates
serve on our board. As a result, either of these two stockholder groups may
significantly influence decisions which stockholders must approve, such as the
election of directors and other decisions relating to the management of
business.
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<PAGE> 15
TURMOIL IN RUSSIA AND THE CIS CREATES SIGNIFICANT UNCERTAINTY FOR OUR OPERATIONS
To date, we have earned a significant portion of our revenue from
operations in Russia and the other countries of the CIS. All foreign companies
operating in the former Soviet Union, including our company, face significant
political, economic, regulatory, legal and tax risks, as described below.
For a discussion of our consideration of a possible sale of our interest in
certain of our Russian businesses, including through a public offering, see
"Business -- GTS Business Services -- CIS and Mobile Services -- CIS."
THE EFFECT OF POLITICAL INSTABILITY ON OUR BUSINESS IS UNCERTAIN
Instability in the political systems of Russia and the other independent
countries of the CIS discourages investment and spending and could reduce our
revenues and profits from our operations in these countries. The political
instability results from political gridlock, dissatisfaction with reform, social
and ethnic unrest, economic difficulties, and changes in government policies,
and may grow worse in the future. Russia's current president continues to
institute political reforms, but the pace of reform is slowing. The dismissal of
a significant number of government leaders by the Russian president over the
past year has contributed to continuing political instability.
The Russian parliament has passed legislation to protect private property
from expropriation and nationalization. However, since the Russian government
lacks experience in enforcing these provisions and since the present political
system is unstable, we do not know if these protections will be enforced in the
future. Expropriation or nationalization of our business would have a material
adverse effect on our operations.
RUSSIA'S UNSTABLE ECONOMY MAY REDUCE DEMAND FOR OUR SERVICES
The Russian economy has experienced severe volatility in both financial and
currency markets. These developments have been accompanied by a substantial
decline in the Russian stock market and the failure of banks and other
businesses. Reforms enacted by the Russian government to create a more market-
oriented economy are at risk in this environment and it is uncertain whether
stability will return to the Russian financial markets. If the Russian economy
does not improve, this condition will most likely have an impact on the demand
for our services offered in Russia.
THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT
RUBLES AND RECOVER FUNDS
The instability of the ruble and the institution of further restrictions on
certain foreign exchange payments could negatively affect our ability to convert
rubles into foreign currency and transfer foreign exchange payments out of
Russia. Through our Business Services - CIS and Mobile Services - CIS lines of
business, we have earned and continue to earn significant revenue in Russia. The
value of the ruble against the U.S. Dollar, however, has steadily declined. As a
result of the August 17, 1998 decision by the Russian Government and the Central
Bank of Russia to devalue the ruble and its aftermath, the value of the ruble
against the U.S. Dollar has fallen even more significantly, negatively affecting
our financial performance. During the quarter ended September 30, 1998, we
recorded a $13.1 million pre-tax charge, the largest portion of which consisted
of foreign currency exchange losses on our net monetary assets that are
denominated in rubles. Since the August 17th decision, the Russian authorities
have been unable to maintain a stable exchange rate. Thus, an additional
significant and sudden decline in the value of the ruble might occur which could
negatively affect our financial performance and require us to record another
significant pre-tax charge.
Our ability to hedge against further declines in the values of the ruble by
converting to other currencies is significantly limited. The ruble is generally
non-convertible outside Russia. Within Russia, the market for converting rubles
into other currencies is limited and is subject to rules that restrict the
purposes for which conversion and payment are allowed. This market may become
even more restricted or may cease to exist as a result of policies the Russian
government may implement.
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<PAGE> 16
The 90-day moratorium that the August 17th decision imposed on certain
foreign exchange payments delayed transfers of funds. Although the 90-day
moratorium has expired, it could be renewed or established in another form if
the Russian government and Central Bank anticipate further liquidity crises. Any
delay in converting rubles into foreign currency to make a payment or delay in
the transfer of such foreign currency could have a material adverse effect on
our operations.
For a more comprehensive discussion of the economic crisis in Russia and
the other independent countries of the CIS, see "Business -- GTS Business
Services - CIS and Mobile Services - CIS -- Background on the Political,
Economic and Tax Environment in Russia."
MORE RESTRICTIVE RUSSIAN TELECOMMUNICATIONS POLICIES COULD CONSTRAIN OUR
OPERATIONS
Presently, Russian legislation does not restrict foreign investment in the
telecommunications industry, but there have been press reports of renewed
consideration of nationalization and foreign ownership restrictions of certain
strategic industries, such as the telecommunications industry. Any change to
current government regulations or policies that negatively affects the licenses
that we hold or our ability to obtain licenses in the future would restrict our
operations in Russia and the CIS. For a more comprehensive discussion of
regulatory issues in Russia and the other independent countries of the CIS, see
"Business -- Licenses and Regulatory Issues -- GTS Business Services - CIS and
Mobile Services - CIS."
WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO CONFUSION IN RUSSIA'S LAWS AND
LEGAL STRUCTURES
The current confusion with the Russian and CIS legal structure makes it
difficult to know if we would be able to enforce our rights in disputes with our
joint venture partners or other parties, or if we are in compliance with all
applicable laws, rules and regulations. The Russian and other CIS governments
have rapidly introduced laws and regulations and have changed their legal
structures in an effort to make their economies more market-oriented, resulting
in considerable legal confusion, especially in areas of the law that directly
affect our operations. There can be no assurance that local laws and regulations
will become stable in the future. Our ability to provide services in Russia and
the other independent countries of the CIS could be adversely affected by
difficulties in protecting and enforcing our rights and by future changes to
local laws and regulations.
OUR RUSSIAN TAX BURDEN MAY BE SIGNIFICANTLY GREATER THAN ANTICIPATED
It is possible that our Russian taxes may be greater than the estimated
amount that we have expensed to date and accrued on our balance sheets. The
Russian tax system has many uncertainties and Russian tax authorities have
become increasingly aggressive in their interpretation of the tax law, and in
their enforcement and collection activities. We believe that the resolution of
our Russian tax liability will not have a material adverse effect on our Russian
shareholdings and financial condition. However, the amount and timing of an
unfavorable resolution of our tax liability could have a material adverse effect
on future results of operations or cash flows in a particular period.
OUR MANAGEMENT, LEGAL AND FINANCIAL CONTROLS MAY BE INADEQUATE TO ENSURE THAT
WE COMPLY WITH APPLICABLE LAWS
As a result of deficient reporting and control standards, we have been
unable to ascertain whether certain practices by our ventures were in compliance
with applicable U.S. and foreign laws. If we or any of our ventures were found
to be involved in unlawful practices we or our ventures could be exposed, among
other things, to significant fines, the risk of prosecution and the loss of our
licenses. Russia and the other independent countries of the CIS in which we
operate lack corporate management and financial reporting legal requirements,
and have underdeveloped banking, computer and other internal control systems.
Additionally, we have had difficulty hiring and retaining qualified employees in
these markets. As a result, we have had difficulty:
- establishing internal management, legal and financial controls;
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<PAGE> 17
- collecting financial data;
- preparing financial statements, books of account and corporate records;
and
- instituting business practices that meet Western standards.
In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. In addition, in early 1997, we retained special outside counsel to
conduct a thorough review of our business practices in the emerging markets in
which we operate. The review did not identify any violations of law that we
believe would have a material adverse effect on our financial condition. We
believe that the special counsel review was properly conducted and was
sufficient in scope, but we cannot assure you that all potential deficiencies
have been identified or that the control procedures and compliance programs
initiated by us will be effective. In addition, if government authorities were
to disagree with our assessment, our future results of operations and cash flows
could be materially adversely affected.
THE REORGANIZATION OF THE RUSSIAN TELECOMMUNICATIONS INDUSTRY MAY CREATE
STRONGER COMPETITION FOR US AND HURT OUR RELATIONS WITH OUR RUSSIAN PARTNERS
The Russian government has reorganized the Russian telecommunications
industry so that one entity, Svyazinvest, now owns a majority interest in most
of our principal venture partners and other telecommunications service providers
in Russia. This reorganization could make it more difficult for us to attract
and retain customers, and thereby reduce our revenues, because:
- Svyazinvest is likely to become a stronger competitor; and
- Our business relationships with our principal venture partners, which
make up a major component of our business strategy in Russia, may be
hurt.
For a further discussion of Svyazinvest, see "Business -- Licenses and
Regulatory Issues -- GTS Business Services - CIS and Mobile Services - CIS."
WE MAY BE OVERLY DEPENDENT ON OUR JOINT VENTURE PARTNERS
INABILITY TO OBTAIN LOCAL ASSISTANCE ON MARKETING AND REGULATORY MATTERS MAY
DISRUPT OUR RUSSIAN AND CIS OPERATIONS
We are substantially dependent on our local partners to provide us with
marketing expertise and knowledge of the local regulatory environment. Because
their local knowledge helps facilitate the acquisition of necessary licenses and
permits, any significant disruption in our relationship with these parties could
make it more difficult for us to obtain and maintain licenses and permits for
our Russian and CIS operations.
TERMS OF OUR JOINT VENTURE AGREEMENTS LIMIT OUR ABILITY TO MANAGE JOINT
VENTURES
Under the terms of various joint venture agreements we have the right to
nominate key employees, direct the operations and determine the strategies of
such joint ventures' governance. However, our partners in some ventures have the
ability to frustrate the exercise of such rights. Significant actions by most
ventures, such as approving budgets and business plans, declaring and paying
dividends, and entering into significant corporate transactions effectively
require the approval of our local partners. Further, we would be unlikely as a
practical matter to want to take significant actions without the approval of our
joint venture partners. Accordingly, we are unable to unilaterally control the
operations of our joint ventures. For a discussion of these joint ventures, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS
Business Services - CIS -- Operations."
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<PAGE> 18
OUR COMPETITION WITH OUR JOINT VENTURE PARTNERS MAY RESULT IN CONFLICTS OF
INTEREST
We frequently compete with some joint venture partners in the same markets
which may lead to conflicts of interest. For example, Rostelecom, our partner in
Sovintel, is the dominant international and domestic long distance carrier in
Russia. Similarly, many of our regional telephone company partners in the
TeleRoss Ventures offer cellular services in direct competition with certain of
the operations of Mobile Services - CIS. We cannot assure you that any such
conflicts will be resolved in our favor.
WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN
CONTROL, EVEN IF IT WOULD BENEFIT SHAREHOLDERS
We have adopted anti-takeover provisions that could delay or prevent a
third party from gaining control of us in a transaction that our board of
directors had not negotiated and approved, even if such change in control would
be beneficial to you. These anti-takeover provisions could depress the market
price of your common stock. These anti-takeover provisions include:
- Section 203 of the Delaware General Corporation Law, which prohibits a
business combination between a corporation and an interested stockholder
within three years of the stockholder becoming an "interested
stockholder" except in limited circumstances.
- provisions of our charter and by-laws, including:
- 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;
- supermajority voting requirements with respect to certain amendments
to our charter;
- the authority to issue shares of preferred stock and to determine the
rights without stockholder approval; and
- a shareholders' rights plan.
For a more comprehensive discussion of the provisions of our charter and
by-laws affecting our capital stock, see "Description of Capital
Stock -- Certain Charter and By-law Provisions."
ANY U.S. JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE ENFORCEABLE IN OTHER
COUNTRIES
Substantially all of our assets are located outside the U.S. As a result,
it will be necessary for you to comply with non-U.S. laws in order to enforce
judgments obtained in a U.S. court (including those with respect to federal
securities law claims) against the non-U.S. assets of our operating ventures. We
cannot assure you that any U.S. judgments would be enforced under any such
non-U.S. laws.
OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED
We do not expect to pay any cash dividends in the foreseeable future. Also,
our ability to pay dividends is limited under the terms of indentures governing
our outstanding debt securities. If we raise any capital in the future, we may
be restricted from paying dividends under the terms of such financings. In
addition, the decision on August 17, 1998 by the Russian government and the
Central Bank of Russia to devalue the ruble and other actions that the Russian
government may take in the future may restrict the ability of the ventures in
Russia to declare and pay dividends. For more information on these debt
securities, see "Description of Certain Indebtedness."
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SUBSTANTIAL RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE AND DILUTE
STOCKHOLDERS' OWNERSHIP INTEREST
We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our common stock in the public
market pursuant to Rule 144 or pursuant to effective registration statements
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for our common stock. Presently, we filed and
the SEC declared effective four other registration statements. Two registration
statements on Form S-8 cover the resale of shares of common stock issued to
employees, officers and directors under our employee benefit plans. In addition,
we have filed with the SEC, and in April 1999 the SEC declared effective, two
registration statements covering 24.1 million shares of our common stock owned
by some of our affiliates and other stockholders. See "Description of Capital
Stock -- Prior Purchase Agreements -- Registration Rights." Finally, under
another shelf registration statement, the selling stockholders listed in the
prospectus contained in that shelf registration statement may sell shares of
common stock that we issue upon conversion of the shares of convertible
preferred stock and the depositary agent may sell shares of our common stock in
payment of dividends on the shares of convertible preferred stock. The resale of
shares under these registration statements may depress our common stock price.
OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE
The market price for your common stock could fluctuate due to various
factors. These factors include:
- failure to integrate or realize projected benefits from our recent
acquisitions;
- acquisition-related announcements;
- announcements by us or our competitors of new contracts, technological
innovations or new products;
- changes in government regulations;
- fluctuations in our quarterly and annual operating results;
- political and economic development in emerging markets (including Russia
and the other independent countries of the CIS); and
- general market conditions.
In addition, the stock markets have, in recent years, experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, have adversely affected,
and may continue to adversely affect, the market price of your common stock.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements as to how we may
perform in the future. We have based these forward-looking statements on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks, uncertainties and assumptions about us,
including, among other things:
- Risk of delay in implementing our business plan;
- Risks of completing acquisitions and integrating acquired businesses;
- Political, economic and legal changes in the markets where we operate;
- Heightened competition; and
- Our need for additional, substantial financing.
These forward-looking statements are principally contained in the following
sections of the prospectus:
- Risk Factors;
- Management's Discussion and Analysis of Financial Condition and Results
of Operations; and
- Business.
In addition, in those and other portions of this prospectus, the words and
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimated", "intends", "plans", "projection" and "outlook" are
intended to identify forward-looking statements. These statements should be
viewed with caution.
These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. In making these
forward-looking statements in this prospectus, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1998. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale of
their shares of our common stock and we will not receive any proceeds from the
sale of those shares.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Because of our historic losses, we have experienced a deficiency of
earnings available to cover fixed charges throughout our existence. The
deficiency of earnings available to cover fixed charges has been computed by
adding loss from continuing operations before income taxes minus fixed charges.
Fixed charges consist of interest on all indebtedness and amortization of
discount on all indebtedness.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------- ------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- --------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Deficiencies of earnings
available to cover fixed
charges..................... $(158,444) $(235,300) $(132,276) $(74,845) $(41,631) $(17,951)
</TABLE>
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PRICE RANGE OF COMMON STOCK
Our 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 our 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
Quarter ending September 30, 1998........................... $64.25 $24.50
Quarter ending December 31, 1998............................ $59.50 $21.13
Quarter ending March 31, 1999............................... $68.25 $47.81
------ ------
Quarter ending June 30, 1999 (through June 7, 1999)......... $80.00 $56.50
====== ======
</TABLE>
The closing bid price for the common stock as reported on the Nasdaq
National Market on June 7, 1999 was $80.00. As of December 31, 1998, there were
approximately 484 holders of record of our common stock.
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INDUSTRY OVERVIEW
EUROPEAN TELECOMMUNICATIONS MARKET
Liberalization in the European telecommunications markets has proceeded
rapidly since the late 1980's. Historically, the European public
telecommunications operators monopolized the provision of telecommunications
services in their home markets and designed their networks according to national
rather than continental and international considerations. Between 1990 and 1997,
however, the European Union implemented a series of directives designed to open
up the telecommunications markets to competition. These directives required
member states to implement legislation liberalizing their respective
telecommunications markets to permit alternative telecommunications companies
both to provide telecommunications services and to access the existing
telecommunications infrastructure controlled by these national and regional
providers. In response to these European regulatory changes, a number of new
interests, including our company, have emerged to compete with the European
public telecommunications operators.
INTERNET INDUSTRY
The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information and
conduct business electronically. The Internet originated with the ARPAnet, a
restricted network that was created in 1969 by the United States Department of
Defense Advanced Research Projects Agency to provide efficient and reliable long
distance data communications among the disparate computer systems used by
government-funded researchers and academic organizations. The networks that
comprise the Internet, or its backbone, are connected in a variety of ways,
including by public switched telephone networks and by high speed, dedicated
leased lines. Communications on the Internet are enabled by Internet Protocol or
IP, which is a market-based standard computer language broadly adopted on the
Internet and elsewhere that allows computers with different architectures and
operating systems software to communicate with each other on the Internet.
Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an Internet service provider became more prevalent.
Internet service providers offer access, e-mail, customized content and other
specialized services and products aimed at allowing both commercial and
residential customers to obtain information from, transmit information to, and
utilize resources available on the Internet.
Internet service providers generally operate networks composed of dedicated
lines leased from public telecommunications operators, local access providers
and internet service providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
Internet service provider switching equipment by facilities obtained by the
customer or the Internet service provider from either public telecommunications
operators or local access providers through a dedicated access line or the
placement of a circuit-switched local telephone to the Internet service
provider.
IP COMMUNICATIONS TECHNOLOGY
There are two widely used switching technologies in currently deployed
communications networks: circuit-switching systems and packet-switching systems.
Circuit-switch based communications systems establish a dedicated channel for
each communication (such as a telephone call for voice or fax), maintain the
channel for the duration of the call and disconnect the channel at the
conclusion of the call. Packet-switch based communications systems format the
information to be transmitted, such as e-mail, voice, fax and data, into a
series of shorter digital messages called "packets." Each packet consists of a
portion of the complete message plus the addressing information to identify the
destination and return address.
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Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, some
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by the Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communication transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.
Initiatives are under way to develop technology to address these
disadvantages of packet-switch based systems. We believe that the evolving IP
standard will remain a primary focus of these development efforts. We expect the
benefits of these efforts to be improved communications, reduced latency and
declining networking hardware costs.
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BUSINESS
OUR HISTORICAL OVERVIEW
We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated into Delaware in 1993 and changed our name to Global
TeleSystems Group, Inc. in February 1995. Our principal business office is
located at 1751 Pinnacle Drive, North Tower -- 12th Floor, McLean, Virginia
22102, United States, and our telephone number is (703) 918-4500.
From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and (2)
establishing and developing Hermes Europe Railtel B.V., a venture designed to
provide a high speed transmission network across national borders in Western
Europe. We intended to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from totalitarian rule and
state-controlled economies. In addition, in Western Europe growing
liberalization of regulations governing the provision of telecommunications
services has resulted in a proliferation of new competitors to incumbent public
telecommunications operators. At the same time, with the trend toward the
increasing globalization of business, there has been a substantial growth in
demand for high quality voice and data telecommunications. We perceived a need
for a fast, efficient and lower cost cross-border network that would carry the
traffic of established public telecommunications operators and other carriers.
Since we began operating our Hermes Railtel network in late 1996, the demand for
its services has validated our decision to build and develop such a network.
In 1998, we changed our strategy in response to the economic crisis in
emerging markets and the advent on January 1, 1998 of the deregulation of the
provision of telecommunications services in Western Europe. We also sought to
build on the success of our Hermes Railtel network by developing a plan to
provide telecommunications services, including local access services, directly
to businesses and other customers. Accordingly, during 1998, we acquired two
companies that provide such services to businesses and other high usage
customers in Western Europe and developed a plan to provide local access
services in 12 major Western European cities. In addition, we realigned our
operations into five lines of business to facilitate the coordination and
management of our activities.
BUSINESS STRATEGY
In order to achieve our objective of becoming Europe's premier independent
provider of telecommunications services to businesses, other high usage
customers and telecommunications carriers, we intend to implement the following
key strategies:
CONTINUE BUILDOUT OF HERMES RAILTEL NETWORK
We intend to make Hermes Railtel's service offerings more attractive to our
carrier customers by expanding the geographic reach and reliability of our core
network. We are continuing to build our Hermes Railtel network by extending its
coverage to include approximately 50 cities throughout Europe by the end of 2000
and by putting in place a high speed, cost-efficient transatlantic link through
our FLAG Atlantic Limited joint venture. We are also deploying dense wavelength
division multiplexing technology that will permit significant expansion of the
core network's transmission capacity and allow us to upgrade the reliability and
efficiency of the network.
DEVELOP LOCAL ACCESS INFRASTRUCTURE
In order to facilitate our customers' access to our network and to exploit
what we believe to be an expanding market, we intend to build, lease or acquire
local access infrastructure in 12 major metropolitan markets throughout Europe
by 2001. We believe that the increasing liberalization of telecommunications
regulation in Europe and the existing level of competition in Europe for local
access services offer an
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<PAGE> 25
attractive opportunity to build out local access infrastructure. We believe that
implementing this strategy will also benefit our Carrier Services and Business
Services lines of business.
CAPITALIZE ON GROWTH IN DATA/IP TRAFFIC
In anticipation of continued rapid growth in data and Internet traffic, we
plan to expand our IP-based capabilities and product offerings. We intend to
apply IP technology to Hermes Railtel's fiber optic network in order to enhance
its efficiency and capacity. In addition to offering IP transport services, we
intend to offer Internet access and IP-based services, such as web site
management.
REINFORCE AND EXTEND MARKET PENETRATION OF HERMES RAILTEL'S NETWORK
We intend to reinforce and extend the market penetration of Hermes
Railtel's network by enhancing the scope, capacity, reliability and efficiency
of our infrastructure, and by providing our own local access. As a result of
these enhancements, we believe that we are well-positioned to generate
additional revenues from existing carrier customers and attract new customers as
demand for seamless transatlantic city-to-city services increases. Targeted new
customers include the U.S. regional Bell operating companies, as well as U.S.
and European Internet service providers.
INCREASE HIGH USAGE RETAIL CUSTOMER BASE AND ROUTE TRAFFIC OVER OUR OWN
NETWORK
As a result of the Esprit Telecom and NetSource acquisitions, we have an
established retail customer base of leading international businesses,
organizations and governmental agencies. We intend to continue to focus our
retail marketing efforts on small, medium and large-sized businesses,
governmental agencies and other organizations that have extensive
telecommunications needs and which generate substantial volumes of
telecommunications traffic. By routing this traffic over our Hermes Railtel,
Business Services and Access Services networks, we seek to realize the benefits
of owning our own infrastructure. In order to build our customer base, we
anticipate significantly increasing the size of our direct sales force. We also
seek to offer a level of service superior to that provided by incumbent
telecommunications providers. We believe that providing a high level of customer
service is a key element in establishing customer loyalty and attracting new
customers. For a discussion of the risks associated with our business strategy,
see "Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenues."
GTS CARRIER SERVICES
OVERVIEW
Our Carrier Services line of business is made up of three components:
- Hermes Railtel;
- Transoceanic Services; and
- IP Services.
Cross-border transmission capacity has historically been used predominantly
for the transmission of voice traffic. We believe that cross-border transmission
capacity will increasingly be used to transport data traffic and in several
years the volume of capacity used for transporting data traffic will
significantly exceed that used for transporting voice traffic. This trend is
being driven by the rapid growth of the Internet and other data-intensive
applications such as videoconferencing, multimedia, and medical and business
imaging, among others.
We intend to participate in this developing market by providing
comprehensive telecommunications transport services to established and emerging
telecommunications carriers, Internet service providers and other significant
consumers of transmission services. We believe that our customers will
increasingly demand network connection to the world's major commercial and
financial centers. In addition, we believe
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<PAGE> 26
that our customers will demand Internet or IP-based services such as Internet
access, web hosting and management services in order to participate in the
expected growth of the Internet.
HERMES RAILTEL NETWORK
We are one of the leading providers of telecommunications services to other
telecommunications carriers. We operate a centrally managed fiber optic network
that is designed to carry high volumes of telecommunications traffic across
national borders in Europe and to the United States. At March 3, 1999, the
network operated over approximately 12,200 kilometers connecting 19 cities in 10
countries. We expect the network to extend approximately 25,000 kilometers with
points of presence, or equipment for switching or relaying traffic, in
approximately 50 cities in 20 European countries by the end of 2000.
Capacity on the Hermes Railtel network is sold to public telecommunications
operators, other carriers, Internet service providers, resellers of unused
telecommunications capacity and other telecommunication service providers. We
believe that we are able to provide our customers a service that is superior to
other services currently available through public telecommunications operators
or through other independent providers.
At March 3, 1999, we operated the Hermes Railtel network in Belgium, The
Netherlands, the United Kingdom, France, Germany, Switzerland, Italy, Denmark,
Sweden and Spain, linking the following 19 cities: Brussels, Antwerp, Rotterdam,
Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich, Geneva, Stuttgart,
Dusseldorf, Munich, Milan, Berlin, Copenhagen, Stockholm, Hamburg and Madrid. If
completed as expected by the end of 2000, our network will extend approximately
25,000 kilometers. During 1999, we plan to extend our network through France to
Barcelona and commence operating in Austria, the Czech Republic, Luxembourg and
Portugal.
We currently lease capacity on transatlantic cables linking the network
with North America and are exploring various interconnectivity options to
Russia. At March 3, 1999, 54 customers were under contract for service on the
Hermes Railtel network, and at December 31, 1998 our customers were
contractually obligated to pay us an aggregate of $418 million for future
services, provided Hermes Railtel performs in accordance with contractual
specifications.
We intend to continue to build Hermes Railtel's network using
cost-efficient access to an infrastructure of railways, motorways, pipeline
companies, waterways and power companies. We have a flexible approach to the
network plan and intend to fine-tune the scope, route and design of the network
based on our evaluation of customer demand. We have entered into agreements for
the construction and/or lease of fiber optic routes for the network in the
countries where we currently operate. We continue to negotiate rights-of-way and
other infrastructure arrangements in order to extend the network. We expect to
incur approximately $750 million in additional capital expenditures, including
capital lease obligations, through 2000 in connection with the build-out of the
network.
In June 1998, we acquired our 75% interest in Ebone, a Danish company which
connects European Internet service providers to the Internet over its own
network. In May 1999, we acquired the remaining 25% interest in Ebone. As of
December 31, 1998, Ebone served 83 customers in 25 countries. As part of the
transaction, Ebone purchased approximately $100 million of long-term capacity
rights on Hermes Railtel's network. It will provide Ebone with capacity of up to
622 megabits per second between the majority of European cities that Ebone
serves. Many of Ebone's existing customers own a portion of Ebone's shares
through an association.
MANAGED BANDWIDTH SERVICES
Hermes Railtel provides primarily large capacity cross-border European
circuits and transatlantic services to carriers and service providers over an
integrated, managed network. The Hermes Railtel network, based on dense
wavelength division multiplexing and synchronous digital hierarchy technology (a
form of packet switched transmission technology), provides digital transmission
capability upon which a broad range of advanced functionality may be built. The
Hermes Railtel network offers network
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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. Our network is designed to
provide customers with a wide variety of bandwidth speeds, ranging from a data
transmission rate of 2.048 Mbps (or millions of bits per second) to a data
transmission rate of 2.5 gigabits per second (or billions of bits per second).
For more information on technology in the telecommunications industry, see
"Industry Overview -- IP Communications Technology."
Point-to-Point Transmission Capacity. The current market for cross-border
transport is also served by international private leased circuits provided by
public telecommunications operators. Traditionally, such private leased circuits
are formed by combining half-circuits from two public telecommunications
operators between customer locations, often with additional public
telecommunications operators providing transit segments. Under such private
leased circuits, overall service quality guarantees generally are not provided
and only a limited range of bandwidth is available, usually only at a data
transmission rate of 2.048 Mbps, and in certain instances, at a data
transmission rate of 34 Mbps. We provide a Point-to-Point Transmission Capacity
service to our customers. We believe this service is a significant improvement
to private leased circuits because it provides a greater range of bandwidths
from 2,048 Mbps to multiples of 140 Mbps or 155 Mbps and allows customers to
choose a service level agreement which provides service guarantees appropriate
for their applications, including guarantees for on-time service delivery and
service availability.
Our point-to-point transmission capacity consists of "integrated" and
"node-to-node" services. Our network integrated service provides an end-to-end
service between customer-specified locations where we arrange for the connection
between the network node location and the customer's location. The node-to-node
service can be selected when the customer prefers to provide its own connection
to the local network node location. In node-to-node service, we guarantee
service only on our network and not from our network node to the customer's
location. Our network prices for both services are competitive relative to
current service offerings. Our customers can choose flexible contract terms from
one to ten years in duration, with discount schemes designed to ensure that we
remain a cost-effective solution.
Virtual Network Transmission Services. As the European marketplace
liberalizes and carriers and other telecommunications service providers plan to
expand their operations across Europe, a need arises for a flexible and
cost-effective means of telecommunications transport. Such service providers
have traditionally obtained international transport service by leasing
international private leased circuits. Leasing private leased circuits requires
a carrier to lease channels on a segment-by-segment basis from multiple public
telecommunications operators, linking the target cities under arrangements
having a fixed capacity and pricing structure for each segment of the carrier's
network. Private leased circuits have several disadvantages, including (1)
difficulty in obtaining discount/volume pricing schemes since there is no single
provider of pan-European coverage, (2) delays in implementation due to numerous
contractual negotiations and the need to interconnect numerous leased circuits,
(3) limited opportunities to lease high-bandwidth pan-European capacity and (4)
variability of quality due to the absence of a centrally managed single uniform
network. Telecommunications carriers could also construct their own network,
which is expensive, time-consuming and complex and which may not be justified by
traffic volume.
Our network transmission service provides a new solution and an attractive
alternative to leasing circuits or building infrastructure. This service enables
our 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
our network with a pricing structure based on the overall amount of leased
capacity for the customer's entire network.
Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements and prefer to have control over the
physical configuration of their networks. This service connects multiple
customer locations with multiple paths in a ring configuration. We provide the
customer with reliable and direct control over the paths dedicated to its
traffic within the ring and exclusive control over the routing. We can add
additional ring capacity with no service interruption and additional customer
locations with minimal service interruption. We can provide this ring service at
a very competitive rate compared to other point-to-point services. For a
discussion of the risks associated with the
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Hermes Railtel network technology, see "Risk Factors -- The technology of our
Hermes Railtel network could become obsolete and harm our competitiveness."
INTERNET ACCESS AND IP TRANSPORT
Ebone Internet Access Services. Internet service providers, which are
companies that provide Internet access to end-users, have purchased Internet
access from Ebone since 1991. Ebone has one of the largest installed bases of
Internet service provider customers in Europe. Building on the expertise
developed since the advent of the Internet in Europe, Ebone now offers Internet
service providers a high quality Internet access service with the following
significant features:
- Reliable access to Internet service throughout Ebone's network, which is
made possible by always dedicating excess bandwidth capacity on its
network;
- Access to other Internet networks through links with major Internet
backbone providers in Europe and in the United States; and
- Access speeds ranging up to 620 Mbps.
IP Transport Services. We are developing IP transport services for service
providers that focus on building their own Internet backbone, Intranet or voice
over IP services. This IP traffic has been traditionally supported by a
combination of managed bandwidth services (like the ring or the point-to-point
services of Hermes Railtel's network) and Internet network services (like
Ebone's Internet services).
Today, large service providers building their Internet networks demand the
speed offered by fiber infrastructure, the reliability of managed bandwidth
services and the flexibility of Internet network services.
We intend to carry the international Internet traffic of service providers
between their private points of presence and/or Internet exchange points. We
expect these services to combine high quality transmission services with the
ability to upgrade transmission capacity and speed and to control configurations
which are the strengths of large Internet network providers. For a discussion of
the risks associated with the Hermes Railtel network technology, see "Risk
Factors -- The technology of our Hermes Railtel network could become obsolete
and harm our competitiveness."
BUSINESS AND MARKETING STRATEGY
The overall strategy of Hermes Railtel is to offer public
telecommunications operators and other carriers pan-European cross-border
telecommunications transport services. Our Hermes Railtel network provides a
vehicle through which a carrier can compete in markets where it does not own
infrastructure. Our primary service offering is the sale of large capacity
cross-border circuits to our customers. Our network's focus on carriers is
designed to complement and not compete with such carriers' own business
objectives in providing services to their end-users.
As a result of our acquisition of Ebone, we are now accelerating our plans
to become a leading player in the provision of seamless transatlantic
city-to-city services in order to take advantage of the increased market demand
for low cost transatlantic city-to-city services. In 1998, we contracted for
long-term leased capacity on transatlantic cables linking the Hermes Railtel
network to North America. In addition, we intend to further increase our
transatlantic capacity through the purchase of capacity from the FLAG Atlantic
Limited joint venture. We also intend to invest further in extending and
increasing the capacity of the Hermes Railtel network.
To establish ourselves as the leading provider of telecommunications
services to carriers within Europe, we offer our customers significantly higher
quality transmission and advanced network capabilities at a competitive price by
focusing on the following:
- High Capacity Cross-Border Network Facilities. Our network is designed to
offer our customers 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
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range of capacity offerings. By utilizing dense wavelength division
multiplexing technology over our network, we anticipate that, once fully
deployed, this technology will enable our network to provide a minimum
speed of 800 gigabits per second on all major routes. Options are in
place to expand fiber capacity further on a number of routes.
- Uniform Network Architecture. Our 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 under the control of separate, not necessarily compatible,
network control systems. The Hermes Railtel network's uniform technology
enhances service by providing quality and reliability as well as
uniformity of features throughout the network.
- Diverse Routing. We have designed our network over multiple routes to
provide high levels of reliability so that if a failure occurs on one
route, traffic can be diverted to an alternate route. The network is
designed to provide availability of over 99.9% for most routes and to
provide customers with a wide range of telecommunications transmission
capacity. We believe that to achieve this level of reliability without
the use of a network similar to Hermes Railtel's network, carrier
customers would need to purchase additional dedicated circuits.
- Rapid Provisioning. Our customers can quickly obtain additional capacity
on our network. This ability to rapidly provide service is largely due to
our development of capacity substantially in excess of our forecasted
requirements.
- Flexibility. Our services provide customers flexibility across Hermes
Railtel's network so that the customer may minimize risk by enabling
network rerouting, eventually even under customer direct control.
- Advanced Technology. We are deploying dense wavelength division
multiplexing and synchronous digital hierarchy technology that can be
upgraded and will permit significant expansion of transmission capacity
without increasing the number of fiber pairs on a network. This
technology also provides the basis for structuring advanced operating
features, such as virtual private network services and IP-based services.
- Innovative Pricing. We believe that the price of high-bandwidth circuits
on transborder European routes is artificially high and not necessarily
related to the cost of such circuits. We offer competitive pricing with
tailored contract terms and volume discounts. This allows our customers
to plan more efficiently the fixed costs of their service portfolio. Our
customers can select varying capacity, access, guaranteed availability
and contract terms at competitive prices. Customers purchasing capacity
from public telecommunications operators generally choose from a narrow
set of capabilities under inflexible pricing plans.
For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."
PRICING AND DISTRIBUTION
We primarily conduct sales of Hermes Railtel's services through Hermes
Europe Railtel (Ireland) Limited, a subsidiary.
Currently, the price of cross-border pan-European calls is often
significantly higher than the underlying cost of transport and termination of
such calls and higher than the price of intra-country calls or transborder calls
to and from liberalized markets. The low cost of operating our network enables
us to attractively and competitively price services even as overall tariffs for
telecommunication services decline. Our low cost basis is a result of, among
other things, the application of new technologies to our network, which allows
us to operate our network with fewer employees than legacy networks.
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The term of a typical customer agreement currently ranges from one to three
years in length. The customer agrees to purchase, and we agree to provide,
cross-border transmission capacity. 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, the customer is generally required
to pay us a cancellation charge equal to three months' service for every twelve
months remaining in the contract term. We guarantee transmission services to a
certain service level. If such levels are not met or we fail to deliver service
by the committed delivery date, the customer is eligible for a credit against
charges otherwise payable for the failed link.
CUSTOMERS
At March 3, 1999, 54 customers were under contract for service on Hermes
Railtel's network, including public telecommunications operators and other
carriers, global consortia, Internet service providers and resellers. As of
December 31, 1998, our customers were contractually obligated to pay us an
aggregate of $418 million for future services, provided our network performs in
accordance with contractual specifications. We believe that the type and quality
of our customers validate our business plan and network concept and illustrate
the type of customers we expect to be attracted to the full network. The success
of our network to date also demonstrates the demand for cross-border transport
services. We are targeting seven major market segments or customer groups, which
can be characterized as follows:
- Existing Public Telecommunications Operators. This customer segment
consists of the traditional European public telecommunications operators
that generally participate in the standard bilateral agreements for
cross-border connectivity. We provide a vehicle for public
telecommunications operators to compete in non-domestic markets. As of
January 1, 1998, all public telecommunications traffic can be transported
by carriers other than the domestic public telecommunications operator,
thus vastly expanding the potential demand from public telecommunications
operators for our services.
- Global Consortia of Telecommunications Operators. Many of the largest
public telecommunications operators 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 was to
provide pan-European services to multinational business customers,
including X.25/frame relay (high speed data network) service and voice
services for a closed user group. We believe that we provide an
attractive alternative at better pricing in those environments where such
a consortium does not already own its infrastructure. Furthermore, we
believe that we are 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.
Existing customers in this segment include Teleglobe and targeted future
customers include the United States regional Bell operating companies. We
can provide these customers a pan-European distribution network to gather
and deliver traffic to and from their own and other hubs.
- Other Carriers. This segment consists of other European carriers
competing with existing public telecommunications operators, cable TV and
mobile carriers and competitive access providers. These other carriers
have chosen to compete with the incumbent public telecommunications
operators in their respective countries. We believe that these other
carriers will prefer to use the services of independent carriers such as
ourselves to meet their cross-border telecommunication transport needs.
- Internet Backbone Networks. Internet backbone networks are providers of
large capacity international connectivity services between Internet nodes
(points of interconnection between local Internet service providers).
These networks are a fast-emerging segment and are expected to
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generate significant demand for the services we offer. The Internet
segment is experiencing significant growth in demand for transmission
capacity.
- Resellers. Resellers are telecommunications service providers that do
not own transmission facilities, but obtain communications services from
other carriers for resale to the public. Resellers are a growing segment
of the market and are expected to increase in conjunction with the
liberalization of the European telecommunications market. In the United
States, for example, resellers were a significant factor in the expansion
of competition.
- Other Service Providers. We also target 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. Their basic network
transmission requirement is to connect data switches or processors, and
they currently purchase their own international circuits and build
additional resiliency into their network infrastructure. We expect to
allow them to meet these needs cost-effectively and to extend their
services to new markets or customers without substantial capital
investment.
We expect 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 for small and medium-sized
businesses and emerging broadband applications such as cable TV programming
distribution (other than broadcast) to the end-user.
NETWORK DESIGN
Network Architecture. Our network design is based on a layered architecture
that separates physical, optical and telecom layers of our network with standard
interfaces in order to optimize design and operation and provide flexibility for
introducing new technologies, such as IP.
Physical Layer. The physical layer of our network is based on a mesh of
routes comprised of dark fiber, or fiber optic cable that is not yet equipped or
activated for commercial use. When the network is completed, the physical layer
will interconnect cities on the network via at least two or three different
paths to minimize service interruptions when fiber or equipment failures occur.
In each major city, we intend to locate two additional customer access sites for
maximum reliability.
Optical Layer. The optical layer of our network is based on dense
wavelength division multiplexing. This is a cost-effective technology that
substantially increases the capacity of an existing fiber optic network by
multiplying the number of signals that it can carry simultaneously.
Specifically, this layer:
- supports the provision of optical services directly to customers at 2.5
gigabits per second, representing the speed for digital signal
transmission expressed in billions of bits per second; and
- provides for the operation of multiple synchronous digital hierarchy
transmission networks and/or IP systems to run concurrently on a single
fiber pair in a highly cost-efficient manner. Ciena 40 wavelength systems
are currently installed on our network in five countries with a potential
capacity of 100 gigabits per second on a fiber pair.
Telecom Layer. The synchronous digital hierarchy layer of our network,
running via dense wavelength division multiplexing channels in the core of the
network, and directly on fiber elsewhere, supports the provision of
point-to-point services to customers at speeds of 2 Mbps up to 155 Mbps. The
synchronous digital hierarchy layer is itself a multi-layered architecture
consisting of multiple synchronous digital hierarchy rings, or cables, which are
optimized for different telecommunications traffic characteristics. Each
synchronous digital hierarchy ring supports fully automatic re-routing of
traffic in the case of a break in the ring.
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We expect to add an IP layer to our network starting in the second quarter
of 1999. This layer will support high capacity IP routers, or computer devices
for routing packet-switched data traffic, which can deliver IP services to
customers at speeds up to 2.5 gigabits per second. These routers will be
supported on the dense wavelength division multiplexing layer of the network
directly and/or through asynchronous transfer mode technology in the core of our
network and on top of the synchronous digital hierarchy layer elsewhere. These
changes will also enhance the services that Ebone can offer to its Internet
service provider customers. We plan to extend our enhanced IP transport
capabilities to all cities on our network by 2000. This layer will be able to
handle failures independently of the lower layers by re-routing at the IP level.
Our network is controlled by a single active network operations center in
Brussels, Belgium. We maintain a backup center in Amsterdam, The Netherlands
that has equivalent management systems continuously synchronized with the
primary center.
Our network operations center can pinpoint potential service problems and
deal with service re-routing much more effectively than other networks that are
controlled by multiple operators in different countries. Our advanced
operational support systems also provide comprehensive support for:
- managing the large number of network components and local repair
organizations required for an extensive international network of our
size; and
- providing advanced customer support for customer operational activities.
Overall, our combination of backup paths and management components enable
recovery from individual failures at the optical, synchronous digital hierarchy
and IP layers. Our resilient approach provides for a high level of network
performance and reliability. As a result, we are able to enter into strong
performance commitments with our customers, and services on most routes of our
network have performed at or above 99.9% availability.
We expect to operate our network and to own substantially all of our
network equipment as well as some segments of the fiber optic cable. A
substantial portion of the fiber is leased from third parties on a long-term
basis. Long-term leases for fiber are advantageous to us because they reduce or
eliminate the costly burden of building large quantities of capacity before they
can be fully utilized. Where we lease dark fiber, the owner of such fiber will
generally be responsible for maintaining such fiber optic cable. In general, we
will enter into agreements with equipment vendors and infrastructure providers
and other third parties to supply and/or maintain the necessary equipment for
our network. For a discussion of the risks associated with the Hermes Railtel
network technology, see "Risk Factors -- The technology of our Hermes Railtel
network could become obsolete and harm our competitiveness."
NETWORK CAPACITY
We are building our network to include Ciena 40 dense wavelength division
multiplexing systems on a majority of our routes. This allows for synchronous
digital hierarchy and IP systems of 2.5 gigabits per second to be installed only
when required, thus providing for efficient management of capital investment.
Should capacity be required beyond the initial 100 gigabits per second on
the first fiber pair, we can bring additional fiber pair(s) into operation that
utilize either higher capacity dense wavelength division multiplexing systems at
2.5 gigabits per second or at 10 gigabits per second. Such systems have been
available on some routes on our network since 1998. The remaining routes are
planned to have this upgrade in 1999. We plan to have a minimum of two fiber
pairs on all routes. This approach will extend capacity as we implement it on
new paths and on selected existing paths over time.
NETWORK AGREEMENTS
We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our network. Our agreements for leases of portions of our network
typically require the infrastructure provider to provide a certain number of
pairs of dark
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fiber and in some cases facilities along our network route commencing on dates
we provide. 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. We are allowed to use the cable for the transmission of
messages and other purposes, including increasing capacity. The infrastructure
provider is responsible for maintenance of the cable facilities. The
infrastructure provider may also provide space for the location of our equipment
and related maintenance. The agreements typically provide for termination by the
parties only for material breach, but allow the breaching party 90 days to cure
their breach. The agreements typically contain a transition period after
termination of the agreement to allow us to continue to serve our customers
until we can reach agreement with an alternative infrastructure provider. In
certain areas of our network where it is not possible to lease dark fiber, we
have signed agreements or letters of intent for the right to use managed
bandwidth. The terms of these agreements typically range from 10 to 25 years.
For a discussion of the risks associated with our network agreements, see "Risk
Factors -- Failure to obtain new leases of transmission capacity or renew
existing leases on our leased lines could cause us to incur losses on the leased
portions of our network" and "Risk Factors -- Failure to carry sufficient
traffic on our leased lines could cause us to incur losses on the leased portion
of our network."
We are also deploying our network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. We constantly evaluate multiple alternative infrastructure suppliers
in order to maximize our flexibility. Many portions of our network utilize
long-term right-of-way agreements with landowners. As a result of our network
development activities to date, we have gained access to infrastructure for our
network routes which we believe will be difficult for competitors to duplicate.
LOCAL ACCESS
We expect to provide customer access to our network primarily through our
Access Services line of business using synchronous digital hierarchy access
lines in those cities where Access Services will be present and the Hermes
Railtel network has nodes. Arrangements with our Access Services line of
business are expected to be on an arms length basis. In each city, as one of our
points of presence is deployed, we may contract with one or more suppliers to
provide local access service to customer locations. Currently, we have
contracted with a number of unaffiliated local access providers to connect our
network to intra-city networks. Under these agreements, we can offer our carrier
customers service from their premises in one city to their premises in another
city. Various local access network suppliers may also be interested in linking
the business centers in which they are active to our network. Therefore, we
believe that the relationships between ourselves and local access network
suppliers can benefit both parties.
TRANSOCEANIC SERVICES
In January 1999, we signed an agreement with FLAG Telecom, to establish a
50/50 joint venture to build and operate the world's first transoceanic dual
cable system designed to carry voice, high-speed data and video traffic at
speeds up to 1.28 terabits or trillions of bits per second. The high-capacity
fiber optic link between Europe and the United States, to be known as FLAG
Atlantic-1, is expected to begin offering services in the last quarter of 2000.
The joint venture plans to offer a direct link between New York City, London and
Paris, with connections to numerous other cities in the United States, Europe
and other countries in the Middle East and Asia Pacific. The project is subject
to financing, the execution of related agreements and other conditions.
Construction of the initial 160 Gbps portion of FLAG Atlantic-1 will cost
approximately US$1 billion. Financing will be provided by a combination of
equity contributions and capacity purchases by the joint venture participants,
customer sales, and non-recourse bank debt. A contract to build the cable has
been awarded to Alcatel Submarine Networks, the general contractor. The system's
design allows for 160 Gbps incremental upgrades as demand warrants. Under the
terms of the joint venture agreement, we will be responsible for the
construction and maintenance of the land-based portion of FLAG Atlantic-1.
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The two subsea sections of the cable are approximately 5,900 kilometers and
6,350 kilometers for each link, with an overall system length of approximately
12,500 kilometers. The joint venture will provide links from the European
landing points to the cities of Paris and London where plans are for customers
to be able to connect to Carrier Services' network as well as to other networks
that customers may choose.
BUSINESS AND MARKETING STRATEGY
We believe that a large portion of Carrier Services' market growth will
come in the form of IP-based voice and data services. Because a majority of the
world's IP traffic originates in the United States, our Carrier Services line of
business has chosen to invest in its own capacity infrastructure through
Transoceanic Services' participation in FLAG Atlantic Limited. We believe that
owning a large volume of capacity will provide us with a competitive low cost
position to serve existing and future customers. We also intend to utilize FLAG
Atlantic Limited as a lessor of transatlantic capacity to Hermes Railtel, thus
extending the Hermes Railtel network at favorable prices. Transoceanic Services
will also provide backhaul services which it will market through a newly
developed sales force. For a discussion of the risks associated with our
business strategy, see "Risk Factors -- We may encounter delays in implementing
key elements of our business strategy which could adversely affect our projected
revenue growth."
CUSTOMERS
In addition to selling capacity to Hermes Railtel, Transoceanic Services
intends to target customers, including emerging alternative carriers, incumbent
telecommunications carriers and Internet service providers that require high
quality dedicated transmission capacity to major commercial and financial
centers. Sales will be made with our direct sales forces, as well as through
indirect channels.
IP SERVICES
In order to capitalize on the projected growth in IP voice and data
transmission services and to take full advantage of Hermes Railtel's network, as
well as its Ebone subsidiary and transoceanic capacity, we intend to offer
IP-based services to telecommunications carriers, businesses and other high
usage customers. We have recently developed a strategic plan which envisions
progressing from a service offering focused on IP transport to one which focuses
on value-added IP-based service offerings.
PRODUCTS AND SERVICES
We intend to offer a broad array of competitively priced comprehensive IP
services to meet our customers' requirements.
- Connectivity. Connectivity services may include dial-up and dedicated
access, IP transport, voice over IP, fax over IP, virtual private
networks and IP clearinghouse services;
- Network and Management Services. These services may include security and
network integration as well as router and server management, billing and
information services to managed IP networks; and
- Value Added Services. These services may include web hosting,
collocation, unified messaging and basic Internet service provider
services such as newsgroups, mail, groupware and directory services. We
are also considering metering and billing services as well as e-commerce
and call center applications.
BUSINESS AND MARKETING STRATEGY
We estimate that a large portion of our market growth will come in IP-based
voice and data services. These services will range from Internet access and IP
transport to value-added services such as
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e-commerce and unified messaging. We expect to use a number of complementary
strategies to enter these service markets, including:
- acquisition or partnership with emerging providers of value-added
services and IP-based application companies;
- expansion of Internet access and IP transport capabilities and service
offerings;
- development of a full web hosting capability either through acquisition,
partnership or our own development; and
- expansion of virtual private network, intranet and extranet service
offerings.
For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."
GTS BUSINESS SERVICES
OVERVIEW
Through our Business Services line of business we provide high quality,
competitively priced long distance voice and fax services for retail business
customers to worldwide destinations and network management, access and
termination services to telecommunications service providers such as calling
card companies and resellers in the United Kingdom, Germany, The Netherlands,
Spain, France, Italy, Norway, Sweden, Belgium, Denmark and Ireland. We provide
these services using our switches, fiber optic cable and other infrastructure,
as well as leased lines and capacity provided by other carriers and service
providers. We established our Business Services customer base and sales network
and acquired additional switches, routers and other infrastructure through the
recent acquisitions of Esprit Telecom, NetSource and Omnicom.
We are in the process of developing our plans for integrating Esprit
Telecom, NetSource and Omnicom into our Business Services, Carrier Services and
Wholesale Services lines of business. We may have one or more of our other
entities purchase assets from Esprit Telecom as part of our strategy. Any such
transaction must be effected in accordance with the applicable covenants in the
indentures governing the Esprit Telecom 11.5% senior notes due 2007 and 10.875%
senior notes due 2008. In addition, we may also decide in the future to execute
a tender or exchange offer or consent solicitations with respect to these notes,
if we determine that it is advisable to better integrate Esprit Telecom into our
overall corporate structure.
Other than references to Omnicom as a newly acquired subsidiary, the
following discussion of GTS Business Services does not reflect the effect of the
Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."
PRODUCTS AND SERVICES
We currently offer a range of telecommunications services to two targeted
business customer segments: (i) retail business customers consisting of small,
medium and large-sized businesses, governmental agencies and other organizations
with significant international traffic and (ii) telecommunications service
providers and resellers. We have recently introduced a new category of
service -- enhanced services -- to complement our established telecommunications
services and products. In some markets, we plan to target small and medium-sized
enterprises, small and home offices and high-value residential customers.
Retail Services. The largest share of the business and corporate retail
market is currently international voice and fax transmission services. In most
of our Business Services markets, we also provide our retail clients with
national long distance services. As we integrate Esprit Telecom and NetSource
and build out local access in targeted metropolitan markets throughout Europe,
we intend to
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provide our retail clients with seamless national and international city-to-city
service through our Carrier Services and Access Services infrastructure. We
believe that customers have selected us as a provider on the basis of
competitive pricing, network quality, responsive account management and
customized services. See "-- Competition Faced by Our Lines of Business."
We distinguish our retail business customers between direct access retail
customers and indirect access retail customers. Our direct access customers use
our owned or dedicated leased lines, while our indirect access customers access
our services indirectly on a switched basis using the public telecommunications
operator network by means of an access code. Our direct access retail customers
are generally users of telecommunication services who generate relatively large
amounts of long distance traffic, with such traffic usually being important to
the execution of their core businesses. We offer retail direct access in all of
our existing Business Services markets.
Our indirect access retail clients access our services by dialing an access
code, generally either using an auto dialer or via a code programmed directly
into their own switches so that it is transparent to the user. These customers
generally consist of small and medium-size businesses whose telecommunication
requirements do not warrant the costs associated with the dedicated leased lines
of direct access service. Contracts for both direct and indirect access are
typically for a period of one year. See "-- Business and Marketing Strategy
- -- Target High Users of Long Distance Traffic." For a discussion of regulatory
issues relating to the provision of retail indirect access services, see
"-- Licenses and Regulatory Issues."
Service Provider/Reseller Services. We provide network management, access
and termination services to a number of telecommunications service providers,
such as calling card companies and Internet service providers, and to resellers
which distribute our telecommunication services to customers with average
monthly revenue levels below those that we currently target. These companies are
typically marketing-focused rather than network-focused, and we are able to
provide a high degree of telecommunication support to such providers, including
stationing their equipment at our switch sites, incoming call verification and
bill generation. In some cases, these customers use competitor carriers to
either seek lower costs overall or to have backup services. Contracts for our
service provider and reseller services are typically for a period of one year.
Enhanced Services. We focus on developing new products and services which
address the specific needs of our customer base including calling cards, an
international toll free service and itemized billing, which we target to
organizations that require their customers or employees to be able to simply and
cost-effectively call them from other countries. We plan to introduce additional
services, including unified messaging, interactive voice services, prepaid
calling cards and prepaid mobile phone services. Our target customers include
calling card operators, hotels and information technology companies. In
addition, we provide itemized billing and detailed costing for accounting and
control purposes, national freephone services, as well as limited prepaid and
account-based calling card services in some markets, and limited data services
on a trial basis.
Fixed-to-Mobile Traffic. This service allows our Business Services
customers with a router to place calls to cellular phone subscribers at more
favorable rates than if they were placed directly to the relevant cellular phone
service through the public telecommunications operator. Due to the relatively
high penetration of cellular phones throughout Europe, the cost of calls to such
phones is an increasingly significant part of companies' total telephony costs.
Consequently, we believe that this service will continue to prove attractive.
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BUSINESS AND MARKETING STRATEGY
In order to achieve our objective of becoming one of the largest
pan-European independent telecommunications service providers to business and
other high-usage customers, we intend to implement the following strategies:
TARGET HIGH USERS OF LONG DISTANCE TRAFFIC
We have an established retail customer base of leading international
businesses, organizations and governmental agencies, including a number of
international financial institutions and large global hotel chains. We intend to
continue to focus a significant part of our retail marketing efforts on medium-
to large-sized businesses, governmental agencies and other organizations that
have extensive telecommunications needs and which typically generate long
distance telecommunications expenditures in excess of $5,000 per month. We will
increasingly focus our marketing efforts on small to medium-sized enterprises
that utilize significant amounts of long distance services, and plan to target
small offices and home offices and high value residential customers in certain
countries. We believe that these market segments offer significant
opportunities, because a substantial portion of them have traditionally been
under-served by the public telecommunications operators.
PROVIDE CUSTOMER VALUE AND SERVICE
We seek to offer our business services to our customers not only at a
discount to the prices charged by public telecommunications operators, but with
a level of service superior to that provided by such other service providers. We
believe that providing a high level of customer service is a key element in
establishing customer loyalty and attracting new customers. We focus on
providing individual attention to potential and current customers, beginning
early in the sales cycle and continuing throughout a customer's relationship
with us. We offer each client direct, personalized service to ensure full access
and a smooth transition to the services we provide.
DEVELOP OUR PRODUCT AND SERVICES PORTFOLIO
We seek to develop new products and services which address the specific and
changing needs of our current customer base and to attract and retain new
customers. Our infrastructure gives us the flexibility to offer new products and
services without undertaking major network modifications, and we believe that we
are well positioned, both from a technical and marketing perspective, to add
additional products and service offerings. The provision of national long
distance services is one of our rapidly growing businesses and we expect that
this will offer us major opportunities, as liberalization leads to more
favorable public telephone operator connection rates in Europe.
NETWORK AND OPERATIONS
Through our acquisitions of Esprit Telecom and NetSource, we have acquired
a core infrastructure network for providing services to business customers. This
consists of three components: the switching equipment, the transmission
infrastructure and network between those switches, and systems to support the
management of the network.
SWITCHING EQUIPMENT
We utilize advanced digital switching equipment and network routing
architecture from recognized industry manufacturers to form a reliable network
platform for the delivery of quality telecommunications transmissions. We own
and operate three switches at switching centers in London, Dusseldorf and
Amsterdam for switching national and international long distance calls. We own
and operate a switch in Mannheim, Germany and a switch in Dublin, Ireland for
switching national and international long-distance calls. We have has also
acquired additional switches, in Dusseldorf, Frankfurt and Hamburg. We have
installed and are currently testing additional switches which have been
installed in Paris and Barcelona. We will add more switches to the network as
traffic flows, capacity and business conditions warrant and as we expand into
new markets.
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We continuously evaluate developments in switching technology and products
offered by other companies, and will add different platforms which are
complementary and beneficial to our service network. We maintain our switches
with up-to-date software and ensure their compatibility with the large number of
signaling systems in use in the European and United States markets. Using
least-cost routing technologies, each switch is programmed to select the most
cost-efficient route or carrier for the required destination. We also employ
dynamic compression equipment to improve utilization of our most costly
transmission lines.
TRANSMISSION INFRASTRUCTURE AND NETWORK
We currently maintain network sites in 31 locations in 11 European
countries, 11 of which locations are primary switching centers and 20 are local
points of presence, as well as network connections to certain carriers located
in the United States. In most cases, network sites are situated at the site of
the sales offices. We intend to extend the reach of our services network by
linking new sales offices and terminating sites with a view to providing
seamless and cost-effective transmission. Overall management of our services is
carried out centrally from our network management center in the United Kingdom,
with additional support staff based locally to facilitate complete oversight of
all network functions. Thus, we are able to evaluate current and projected
traffic patterns in order to establish buildout priorities.
One of our key services is least cost routing. The equipment required to
provide this service consists of a small programmable call router which is
connected to the PBX of a corporate customer or, in the case of a smaller office
without a PBX, connected directly to an outbound telephone cable. In certain
service areas such as The Netherlands, we also market telephone equipment with
routing technology already incorporated into the equipment (called a dialer). We
offer different types of routers depending on the market being served and local
technological requirements.
MONITORING AND MAINTENANCE
From our network management center in the United Kingdom, we monitor our
equipment and facilities and provide technical assistance and support 24 hours a
day, year-round. Various quality measures are monitored on an ongoing basis,
with the aim of identifying problems at an early stage before they affect the
customer. Through the use of sophisticated network management equipment, we are
able to effectively control bandwidth and provide diagnostic services. We use an
internal staff of technicians both to install and repair electronics and to
provide service to customers.
NETWORK RESILIENCE
Our network infrastructure is designed to provide resilience through
back-up power systems, automatic traffic re-routing and computerized automatic
network monitoring. If our network experiences a failure of one of its links,
the routing intelligence of the switch is designed to enable the call to be
transferred to the next choice route or, if all other routes are unavailable, to
the public switched telephone network, thus ensuring call delivery without
affecting the customer.
SALES
The local managing directors in each country are responsible for all local
sales activities and local marketing, local regulatory compliance and licensing
requirements, and the relationship with the local telecommunications companies.
A central marketing organization is responsible for coordinating the country
market initiatives, driving product development, market research and analysis,
and promotion and advertising. From our network management center in the United
Kingdom we provide transmission, technical support and billing services to each
of our sales offices and terminating sites. In addition, our network management
center is also responsible for the implementation, upgrading and functionality
of information technology systems (including the billing and management
information systems).
Direct sales constitute our principal sales method in the United Kingdom,
Germany, Spain, France, Belgium, Luxembourg, Italy, Sweden, Norway, Denmark, The
Netherlands and Ireland. We support our
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direct sales effort by telemarketing and telesales, and complement it to a
lesser extent by independent sales intermediaries and resellers. In Sweden,
Denmark and Norway we market our products and services principally through sales
agents. In addition, because we have begun to increase our focus on specific
industry groups, such as financial institutions, hotels, travel service
organizations and transport companies, we have assigned specialists to
particular industries.
We currently operate in eleven countries that account for approximately 80%
of the international long distance telecommunications minutes that originated in
EU member states in the 1998 calendar year, and maintain sales offices in 42
cities. Each country's sales operation is run as a profit center by a country
manager, and varies from smaller operations in the early stages of development,
to fully operational businesses in the more developed markets consisting of
support and sales staff, as well as customer service personnel. The sales
operation in each country is responsible for originating and managing business
in its respective local market, and is staffed with employees who understand our
Business Services line of business, philosophy, products and systems and local
telecommunication systems and products, business practices, languages and
customs. As of December 31, 1998 we had approximately 245 direct sales people,
300 sales agents and 150 full-time equivalent telemarketing employees in our
Business Services line of business.
The United Kingdom. From sales offices in London, Reading, the Midlands,
Manchester and Glasgow, we currently offer both direct and indirect retail
access and service provider and reseller services to all international and
national long distance destinations in our Business Services line of business.
Germany. We offer both direct and indirect retail access and service
provider and reseller services to all international and national long distance
locations and through NetSource, we also provide services to small-office and
home-office and residential customers. In addition, we offer retail services to
businesses through six regional sales offices located in Frankfurt, Hamburg,
Berlin, Munich, Oberhausen and Stuttgart and through relationships with
third-party distributors. In June 1998, Esprit Telecom acquired the switch-based
telecommunications services business of Plusnet, which at that date offered
national and international long distance voice telephony to approximately 700
business customers.
The Netherlands. We have sales offices in Amsterdam, Rotterdam, Leiden,
Zwolle, Eindhoven and Venray. We currently offer both direct and indirect retail
access, wholesale and service provider and reseller services to all
international and national long distance destinations.
Scandinavia. We operate in Sweden, Norway and Denmark as a reseller,
providing our business customers with indirect retail access and service
provider and reseller services to all international and national long distance
destinations using least cost routing.
Spain. We operate one of the few alternative telecommunications providers
currently operating in the Spanish market. From sales offices in Madrid,
Barcelona and Bilbao, we currently offer both direct and indirect retail access
and service provider and reseller services to all international and national
long distance destinations.
France. We operate sales offices in Paris, Lille, Lyon, and Strasbourg. We
currently offer both direct and indirect retail access, wholesale and service
provider and reseller services to all international and national long distance
destinations.
Belgium. From sales offices in Brussels and Antwerp, we currently offer
direct and indirect retail access wholesale and service provider and reseller
services to all international and national long distance destinations.
Italy. From a sales office in Milan, we currently offer direct and indirect
retail access to all international and national long distance destinations.
Ireland. From sales offices in Dublin and Cork, we offer both direct and
indirect retail access services to all international and national long distance
destinations.
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BILLING AND MANAGEMENT INFORMATION SYSTEMS
Our detail records for customers we acquired through the acquisition of
Esprit Telecom are collected and backed-up locally and transmitted to the
internal billing center in the United Kingdom for processing. Call records are
transmitted electronically to Tel Labs Inc., a data processing company in the
United States, for final processing of customer records, which are then returned
for verification, printing and distribution to customers. In 1997, we began to
consider an upgrade to our information and management systems, which we believed
to be required in order to provide the capability and flexibility to support our
anticipated growth. We have selected a new customer care and billing system from
Seville Systems, a billing system vendor headquartered in Edmonton, Canada. The
new system is undergoing final customization and testing. The introduction of
the new system will be accompanied by additional systems designed to support the
critical service activation, customer care and service assurance processes. We
expect that investment will continue with major additional systems in the
billing, customer care, network management, product management, prospect
management and information systems areas being introduced over the next several
years. We expect to integrate the acquired legacy billing systems at NetSource
and Esprit Telecom into our new Business Services billing process by mid-1999.
See "Risk Factors -- We may not implement billing and management information
systems effectively and on schedule."
GTS WHOLESALE SERVICES
OVERVIEW
By utilizing the existing infrastructure of Esprit Telecom, we are creating
a sixth line of business to be known as Wholesale Services. Wholesale Services
will provide international traffic termination services to other
telecommunication carriers, including public telecommunications companies, new
operators, global alliances and regional telephone companies, to which it is
able to provide highly responsive and flexible services. Wholesale traffic will
enable us to benefit from greater purchasing power and higher network
utilization. Through our Wholesale Services line of business, we will integrate
the wholesale services activities of Esprit Telecom with the international
switching and transit service activities of GTS -- Monaco Access. At a later
date, our Wholesale Services line of business will also incorporate the
wholesale activities of NetSource.
Through our Wholesale Services line of business, we offer 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. These services include:
- international switched traffic;
- international private lines;
- facilities management, including billing, customer management and fault
reduction systems;
- resale distribution for Internet service providers; and
- prepaid calling card platform services.
Wholesale customers are other international and national carriers that
connect with Wholesale Services to carry their traffic to destinations where our
rates are competitive, both on the Hermes Railtel network and on other
off-network routes. Wholesale Services has contracts with these customers, but
they generally do not include minimum usage levels. Our wholesale customers
generally maintain relationships with a number of telecommunications providers.
In several cases, Wholesale Services will also use its wholesale customers as
suppliers for termination of its off-network calls. We believe that success in
the wholesale business is predicated on high network quality at a low cost base.
At present, the majority of our Wholesale Services' wholesale customers are
located throughout Europe. We expect that demand for our Wholesale Services line
of business will further increase in other European markets as these markets
mature. As we continue to increase the capacity of Hermes Railtel's network, we
anticipate that our
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resultant cost base will enable us to price our wholesale services more
competitively and therefore increase the volume of such services.
Our partner in GTS-Monaco Access, SNF, is an investment fund designated by
the Principality of Monaco to represent its interests. We exercise operational
control of the joint venture, and provide managerial and financial support,
international telecommunications expertise and strategic planning. We have
entered into an agreement with SNF and Monaco Telecom to purchase for
approximately $5 million SNF's 50% interest in GTS-Monaco Access, terminate the
GTS-Monaco Access joint venture and transfer its customers and revenues to the
UK as we combine with Esprit Telecom's wholesale activities.
By utilizing our Carrier Services and Access Services networks as well as
over 25 third-party carriers in London and 40 third-party carriers across Europe
and North America, we provide telecommunications termination to destinations
world-wide and a wide range of alternative routing paths that facilitate cost-
effective termination and ensure reliability and increased call/termination
success rates. Calls are carried from the entry switch point to the switch point
from which the call can be terminated most economically. If this exit switch
site is within the country of the termination, we consider the call to be an
"on-net" call, whereas we otherwise consider it to be an "off-net" call. Off-net
calls are passed on to other carriers for transmission and termination. In
general, we realize higher gross margins with respect to on-net calls because we
utilize our own infrastructure. We expect that the expansion of the our Carrier
Services and Access Services networks will allow us to increase the proportion
of on-net calls as well as further reduce the cost of these calls.
BUSINESS AND MARKETING STRATEGY
Our strategy for developing our Wholesale Services line of business
includes the following:
- Develop Advanced Carrier Services Offerings. Wholesale Services may
develop its "advanced carrier services" offerings to include global 0800
services and international free phone services, which we believe will
broaden customer relationships, enhance revenues and help to protect us
from price-based competition.
- Develop Relationships to Broaden Service Offerings. Our Wholesale
Services line of business may develop relationships to broaden its
service offerings. Wholesale Services has entered into agreements with
UUNET, one of its gateway customers, to provide wholesale Internet access
to Wholesale Services' carrier customers in a number of Western European
countries. The agreement allows these services to use the same brand
names as those of our 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.
Wholesale Services intends to price its services competitively with the
prevailing price for comparable inter-public telecommunications operators
transit and gateway services. Wholesale Services is not bound by legacy
systems, infrastructure and personnel levels and can, therefore, manage
competitive cost operations.
- Attractiveness of Independence. Because our Western European activities
are not affiliated with any of the major consortia or large Western
European telecommunications companies, our Wholesale Services line of
business 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 Internal Opportunities. Wholesale Services may collaborate with
our other companies in Europe and the CIS. Wholesale Services is expected
to realize significant reductions in its cost structure through access to
low-cost European transmission capacity through an alternative
infrastructure provider such as Hermes Railtel. Wholesale Services will
act as the international carrier for traffic generated by our other lines
of business.
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For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."
TARGETED CUSTOMERS
Targeted customers for our Wholesale Services line of business include:
- Non-Affiliated Public Telecommunications Operators. We believe that
various large American and Western European public telecommunications
operators that lack adequate international switching and transport
facilities of their own may be persuaded to purchase international
services from Wholesale Services rather than from competing public
telecommunications operators or consortia;
- Mobile Carriers. We believe that some of the alternative mobile
carriers, which currently provide only a small percentage of Western
European mobile telecommunications traffic, may prefer the "independent"
international gateway service offerings of Wholesale Services to those
of their public telecommunications operator competitors;
- Internet Service Providers. Growth in Internet usage creates a
significant opportunity for a nonaligned Internet access provider such
as Wholesale Services, since many Internet service providers will be in
direct competition with public telecommunications operator-owned
services in large European markets;
- Second Carriers/Resellers. We believe that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity; and
- Established Public Telecommunications Operators. This customer segment
will be a niche market for Wholesale Services. As markets are
deregulated and carriers become increasingly competitive, opportunities
may emerge to leverage our non-aligned status to route traffic between
those new competitors.
GTS ACCESS SERVICES
OVERVIEW
Through Access Services, we intend to capitalize on our experience in
developing and operating local telecommunications networks in Russia and Central
Europe by building, acquiring or leasing technologically advanced fiber optic
networks in order to provide local access services in up to 12 metropolitan
markets throughout Europe, by 2001. We presently provide local telecommunication
access infrastructure and leased lines in several cities in Russia, the CIS and
Central Europe, including Moscow, St. Petersburg, Kiev, Prague and Budapest.
Currently, the regulatory regimes in Europe vary from country to country and
some countries do not permit alternative providers of local access to operate.
PRODUCTS AND SERVICES
Together with our Business Services line of business, we intend to offer
through Access Services 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 local access network interconnection services, virtual
private network services, video transmission services and IP-based services,
including voice over IP, web hosting and data transmission services. According
to industry sources, demand for data transmission in the United States is
currently growing much faster than voice, and we expect that this trend will
develop in Europe as competitively priced telecommunications services become
available. In addition, we intend to develop competitively priced value-added
telecommunications services that are tailored to the specific needs of
individual customers.
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The types of services that we intend to offer in combination with our
Business Services include:
- Switched Services. Switched services involve the transmission of voice,
data or video to locations specified by end-users or carriers. Through
our Business Services, we have the technological capability to offer a
full range of switched service, including local, national and
international calls as well as enhanced services. We intend to own and
operate switches and enter into interconnection agreements with other
telecommunication service providers and carriers, including Hermes
Railtel's network, in order to offer to customers cost-effective local,
national and international calling services. Switched service features
are expected to include, to the extent 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. Businesses
commonly use this service to obtain a private direct link between
multiple business facilities or to another end-user/carrier. We expect to
provide high capacity, advanced technology to deliver customer traffic
with a lower cost and higher reliability as compared to the local public
telephone operator. Through a highly reliable and cost-efficient network
that can carry significant amounts of capacity, we intend to provide
non-switched voice, data and video transmission between (1) end users,
(2) end users and carriers and (3) multiple carriers, allowing our
customers the option to bypass the older, less efficient technology and
higher priced services of the incumbent public telecommunications
operators.
- Other Services. We also intend to develop service offerings to take
advantage of new market opportunities. We expect such services to include
one or more of the following: high speed data transmission services,
IP-based services, including Internet for multi-media applications, Web
hosting, voice over IP, 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. We believe 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.
BUSINESS AND MARKETING STRATEGY
We believe 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 the provision of local access to retail customers in metropolitan
markets throughout Europe.
Our strategy for entering into a specific metropolitan market will be
determined through an analysis of a number of demographic and economic factors,
including:
- business concentration;
- presence of governmental, financial and business customers;
- local economic trends and prospects;
- demand and spending for switched and non-switched voice, data and video
telecommunications services;
- feasibility of construction;
- presence of existing and potential competitors;
- the regulatory environment;
- the market's proximity to the Hermes Railtel network; and
- the presence of local access companies that may be potential acquisition
candidates.
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In targeting cities in which our entry strategy will be the construction of a
fiber optic cable network, we will initially focus on cities in which there are
no competitive local exchange carrier competitors providing local access
services or only one other such competitor. Our current intention is to enter
two metropolitan markets by the end of 1999 and to provide services in up to 12
target metropolitan markets by 2001.
We expect to use one or more of the following strategies to enter a market:
- constructing a fiber-loop network;
- purchasing or leasing fiber optic cable which has not been equipped or
activated for commercial use;
- obtaining licenses for telecommunications networks utilizing microwave
transmissions; or
- forming partnerships with or acquiring providers of local access services
that own and operate their own fiber loops and network equipment.
CUSTOMERS
We plan to offer local access and other telecommunications services
primarily to telecommunications-intensive businesses for which reliable
telecommunications services are critical, as well as to our Carrier Services and
Business Services lines of business. We will use our fiber switches and other
equipment where available and/or reselling other carriers' equipment as needed.
These businesses include financial services companies, multi-national companies,
governmental agencies, resellers, Internet service providers and wireless
communications companies.
NETWORK
In those markets in which we determine to build our own fiber loops, we
intend 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. We believe that a base of uniform, reliable networks, which employ
the most current technology and support a broad array of high quality services,
will allow us to compete cost-effectively against products and services offered
by public telecommunications operators and, in certain markets, other
competitive providers of local access.
Our plan for our basic transmission platform is fiber optic cable deployed
in rings, equipped with high-capacity synchronous digital hierarchy equipment.
These 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. These 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, we will undertake an analysis of a number of factors, as
discussed above, to determine whether the acquisition or construction is
economically justifiable. Wherever appropriate, we will seek to purchase or
lease fiber optic cable that is not equipped or has not been activated for
commercial use or utilize high-frequency short-haul microwave transmissions as a
method of accelerated entry into a selected market.
We expect that we will contract construction and installation services to
independent contractors selected through a competitive bidding process. Our
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, we expect to commence generating revenue. Further expansion of the network
will be dictated by customer growth and customers' relative proximity to the
initial loop.
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Our initial capital requirement to develop our Access Services business in
Europe will be financed with a majority of the proceeds from our July 1998 stock
and convertible debt offerings. In addition, we contemplate that we will raise
additional financing, the proceeds of which will be applied toward the
construction of our local access infrastructure. We have not yet determined the
size and timing of such financing. We cannot estimate with any degree of
certainty the amount and timing of our future capital requirements for the
development of our Access Services line of business, which will be dependent on
many factors, including the success of our Access Services business, the rate at
which we expand our networks and develop new networks, the types of services we
offer, staffing levels, acquisitions and customer growth, as well as other
factors that are not within our control including competitive conditions,
regulatory developments and capital costs. We believe that as we develop our
Access Services line of business, it is likely that we will need to raise
additional capital. See "Risk Factors -- We may be unable to raise the
additional capital necessary to implement our business strategy."
SALES AND MARKETING
In each of our target markets, we intend to establish our own direct sales
force. As we will be targeting large financial, corporate and governmental
customers with demanding telecommunications service requirements, we expect that
our internal sales force will include dedicated sales and customer service
representatives. Our Access Services sales force will offer direct local access
to Business Services customers in those metropolitan markets in which our Access
Services builds local fiber loops. In addition, our Access Services will work
closely with our Business Services to identify key customers and develop joint
service offerings.
GTS ACCESS SERVICES IN CENTRAL EUROPE
In Central Europe, we currently provide private data communications
services to government and commercial customers in Hungary, the Czech Republic,
Slovakia and Romania. In the Czech Republic, we provide outgoing voice services
and high-speed Internet access to business customers and operate an
international gateway and a data services network. In Hungary, we provide data
transmission services through a nationwide microwave network and a
satellite-based network installed at customer sites throughout the country. We
plan to develop two fiber loops in Budapest. Subject to certain regulatory
approvals, we have also obtained a license to provide international data
services in Poland and expect to begin operations during the first quarter of
1999.
In January and February 1999, we acquired an interest in two Internet
providers in Central Europe, DataNet in Hungary and NetForce in the Czech
Republic. In addition, we also acquired interests in two of the largest Internet
service providers in Poland, Internet Technologies and ATOM.
Our strategy in Central Europe is to expand our service offerings as the
regulatory environment permits, utilizing our existing infrastructure where
possible and providing a broad range of services to our target markets. The
establishment of competitive providers of local access in various Central
European cities is a major component of this strategy.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Sophisticated information and processing systems will be vital to the
success of Access Services. Specifically, we 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. We expect the development of our systems to require substantial
capital and management resources. See "Risk Factors -- We may not implement
billing and management information systems effectively and on schedule."
GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS
We provide digital voice, data, Internet and local services in Moscow
through our Sovintel, Sovam and TeleCommunications of Moscow ventures and
provide these same services to fourteen additional cities
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in the CIS through our TeleRoss long distance network. We continue to evaluate
the business environment in Russia and the CIS for possible attractive
opportunities for investments that may complement our existing operations in
Russia and the CIS. We are exploring with our advisors a number of potential
transactions, some of which may involve the sale, including through a public
offering, of certain of our Russian businesses, or the contribution of these
businesses in exchange for an interest of equivalent or greater value in the
surviving entity and, if consummated, may be material to our operations and
financial condition. Our ability to carry out these transactions is subject to
political, economic, market and other conditions, and we cannot assure you
whether or when these transactions would occur. We will effect any such
transactions in compliance with the provisions of the indenture governing our
9 7/8% senior notes.
BACKGROUND ON THE POLITICAL, ECONOMIC AND TAX ENVIRONMENT IN RUSSIA
Political. In recent years, Russia has been undergoing a substantial
political transformation. The various government institutions in Russia and the
other independent countries of the CIS 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.
The political and economic changes in Russia have resulted in significant
dislocations of authority. As a result of the turmoil at the federal government
level and the continuing absence of a strong central government, the regions of
Russia are exercising more independence in both political and economic policies.
Significant organized criminal activity and high levels of corruption among
government officials exist where we operate. For a description of political
risks our operations in Russia and the CIS face, see "Risk Factors -- Turmoil in
Russia and the CIS creates significant uncertainty for our operations."
Economic. In May and early June 1998, the Central Bank of Russia 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. These measures failed to stabilize the economy or provide
adequate liquidity.
On August 17, 1998, the Russian government and the Central Bank of Russia
announced emergency steps to improve liquidity. Pursuant to this decision, the
ruble's value was allowed to float between 6.0 and 9.5 rubles to the United
States Dollar. Also, a 90-day moratorium was placed on the payment of foreign
exchange to meet certain obligations of Russian entities. Finally, the Russian
government announced that it intended to restructure the payment terms of
certain treasury bills. Since the decision on August 17th, the ruble's value has
declined substantially below the 9.5 ruble/United States Dollar floor set on
that date. Although the 90-day moratorium has not been extended, the
consequences of the decision on August 17 and its aftermath remain unclear. The
International Monetary Fund and the G-7 have thus far refused to advance
emergency funds to Russia to address the recent liquidity crisis. For a
description of economic risks relating to our operations in Russia and the CIS
face, see "Risk Factors -- Turmoil in Russia and the CIS creates significant
uncertainty for our operations."
Taxes. Generally, taxes payable by Russian companies are substantial. There
is no consolidation provision, and thus, dividends are subject to Russian taxes
at each level that they are paid. 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 us. For a description of tax risks relating to our operations in Russia
and the CIS face, see "Risk Factors -- Turmoil in Russia and the CIS creates
significant uncertainty for our operations -- Our Russian tax burden may be
significantly greater than anticipated."
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OVERVIEW OF RUSSIAN TELECOMMUNICATIONS MARKET
We believe 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, although recent political and
economic developments have created considerable uncertainty. 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 other
independent republics of the CIS.
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the other
independent republics of 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.
Despite the recent changes in the Russian telecommunications industry, the
level and quality of telecommunications service generally available from most
public operators in Moscow remains significantly below that available in cities
of Western Europe and the United States, although in recent years, the Moscow
local telephone infrastructure has benefitted from significant capital
investment. Outside Moscow (and to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete.
MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN RUSSIA AND THE CIS
We have a policy worldwide of complying with all applicable laws. However,
emerging market countries often have commercial practices and less developed
legal and regulatory frameworks that differ significantly from practices in the
United States and other Western countries. In addition, some local 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
and other countries.
In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. We recruited a more experienced financial and legal team, including a
new Chief Financial Officer, a senior finance officer overseeing all of the
regions in which we operate, a senior finance officer for the CIS region, and a
senior legal officer for the CIS region and adopted a more rigorous Foreign
Corrupt Practices Act and applicable local laws compliance program.
In addition, in early 1997, we retained special outside counsel to conduct
a thorough review of certain of our business practices in the emerging markets
in which we operate to determine whether deficiencies existed that needed to be
remedied. In the course of this review, we replaced certain senior employees in
Russia and instituted additional and more stringent management and financial
controls. The review did not identify any violations of law that we believe
would have a material adverse effect on our financial condition. However, if we
were found by government authorities to have violated any law, depending on the
penalties assessed and the timing of any unfavorable resolution, future results
of operations and cash flows could be materially adversely affected in a
particular period.
We believe that the special counsel review was properly conducted and
sufficient in scope and that the actions taken since the review to strengthen
our management, financial controls and legal compliance will be adequate to
address any possible deficiencies. However, we cannot assure you that all
potential deficiencies have been identified or that the control procedures and
compliance programs we have implemented will be effective. The audit committee
of our board recently reviewed our legal compliance procedures. We believe that
this continued oversight will help to ensure that any problems in these
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procedures are addressed. For a discussion of the risks we face, see "Risk
Factors -- Our management, legal and financial controls may be inadequate to
ensure that we comply with applicable laws."
GTS BUSINESS SERVICES - CIS
OPERATIONS
We provide 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. Dedicated and leased capacity supplements our own
infrastructure, allowing us to bypass the severely congested and poorly
maintained local, domestic and long distance circuits of the Russian and
Ukrainian carriers.
Our business units seek to integrate and co-market their service offerings,
utilizing TeleRoss as the long distance provider, Sovintel as the international
gateway, TeleCommunications of Moscow and Mobile Services for local access, and
Sovam Teleport as the data communications and Internet access network for
business applications and on-line services. This integrated marketing approach
enables us to provide comprehensive telecommunications solutions to
multinational corporations operating throughout Russia and the other independent
countries of the CIS. We have taken preliminary steps to combine
Telecommunications of Moscow, TeleRoss and Sovam. For a discussion of the risks
associated with our joint ventures, see "Risk Factors -- Turmoil in Russia and
the CIS creates uncertainty for our operations -- We may be overly dependent on
our joint ventures partners."
Sovintel. We own 50% of Sovintel, a joint venture with Rostelecom, the
national long distance carrier. Sovintel markets a broad range of high quality
telecommunications services by (i) directly providing international direct dial
access to over 180 countries and private line dedicated voice channels and (ii)
leveraging the infrastructure and services of our other Russian ventures,
including TeleRoss, TeleCommunications of Moscow and Sovam. 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
continues construction of its St. Petersburg network which is interconnected to
Sovintel's Moscow network and is intended to support Sovintel's Moscow clients
which have a presence in St. Petersburg.
Telecommunications of Moscow. During the third quarter of 1998, we
increased our beneficial ownership of Telecommunications of Moscow to 95%.
Telecommunications of Moscow provides a licensed numbering plan and
interconnection to the Moscow city telephone network for carriers needing basic
local access service in Moscow. Telecommunications of Moscow is currently
licensed to provide 100,000 numbers in Moscow, of which over 78,000 have been
leased. Telecommunications of Moscow has completed agreements required to
construct and provide an additional 50,000 numbers. The construction started in
1998 and is expected to be completed by the end of 1999. Telecommunications of
Moscow's switching facilities are fully integrated with the networks of
Rostelecom, Sovintel, and Moscow city telephone network, allowing it to provide
high quality digital service to its customers.
Telecommunications of Moscow acts as a local gateway by providing numbers
and ports to carriers in Moscow, including Sovintel, VimpelCom 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."
TeleRoss. TeleRoss is a wholly owned subsidiary that operates a domestic
long distance network. In addition, TeleRoss has a 50% ownership interest in 14
joint ventures that originate traffic and provide local termination of calls.
The TeleRoss domestic long distance network serves 15 major Russian cities,
including Moscow and, through satellite technology, 21 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
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telephone network through Telecommunications of Moscow's switching facilities.
Sovam uses the TeleRoss digital channels to provide regional data service and
has co-located its access facilities with TeleRoss.
Sovam. Sovam provides high-speed data communications services, electronic
mail and database access over a high-speed packet/frame relay network to its
customers in a large number of major Russian and CIS cities. Sovam also offers
Russia On Line, the first Russian language Internet service. Russia on Line
(which is our registered trademark) provides direct access to the Internet as
well as access to a wide range of local and international information services
and databases. In addition to serving the Moscow and St. Petersburg markets,
Sovam offers its services in all TeleRoss cities, as well as 32 additional
cities in Russia and the CIS.
Sovam employs a dedicated sales and marketing force. Sovam's sales efforts
are focused primarily on the banking and financial communities and large
multinational companies. We frequently market bundled service packages, which
include Sovam's data and Internet service, Sovintel's international service and
TeleRoss's long distance service in order to offer customers a comprehensive
telecommunications solution.
GTS MOBILE SERVICES - CIS
Our Mobile Services line of business operates cellular businesses in Russia
and the Ukraine. In Russia, we have a wholly owned subsidiary, Vostok Mobile,
which currently operates thirteen AMPS cellular companies in Russian regions
located primarily west of the Urals under the trade name Unicel. Vostok Mobile
owns between 50% and 100% of the Unicel cellular joint ventures in Russia.
Unicel provides analog cellular telephone service based on the Advanced Mobile
Phone System, or AMPS technology. In addition, through Vostok Mobile, we
participate in PrimTelefone, a 50%-owned joint venture that operates an analog
network in Vladivostok and other cities in the Primorsky region of Russia based
on the Nordic Mobile Telephone System, or NMT technology. In April 1998,
PrimTelefone was also awarded a license to operate GSM-1800 in 14 regions of the
Russian Far East. In the Ukraine, we have an approximately 57% beneficial
interest in Golden Telecom, which operates a digital GSM-1800 cellular network
in Kiev, and an international overlay network in the Ukraine. Our Mobile
Services entities hold licenses covering major Russian and the Ukrainian markets
excluding Moscow and St. Petersburg, with an aggregate 1997 population of
approximately 42 million people.
COMPETITION FACED BY OUR LINES OF BUSINESS
The European and international telecommunications industries are highly
competitive. Our competitors in these markets include the following entities,
many of which have substantially greater technical, financial, marketing and
other resources:
- established national or regional public telecommunications operators and
providers;
- private multinational telecommunications carriers;
- other private telecommunications developers and niche providers; and
- consortia of telecommunications providers.
Historically, the European public telecommunications operators monopolized
the provision of telecommunications services in their national or regional home
markets and designed their networks according to national rather than
international considerations. Between 1990 and 1997, however, the European Union
implemented a series of directives designed to open up European
telecommunications markets to competition. These directives required EU member
states to implement legislation liberalizing their respective telecommunications
markets to permit alternative telecommunications companies both to provide
telecommunications services and to access the existing telecommunications
infrastructure controlled by these national and regional providers. In response
to these European regulatory changes, a number of companies, including our
company, have emerged to compete with the European public
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telecommunications operators. We believe that competition for telecommunications
services in Europe will continue to increase as a result of continuing
liberalization.
Accordingly, we compete primarily with national public telecommunications
operators and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than ours and, in the case of many public telecommunications operators,
control over the intra-national transmission lines and connections to such
lines. Additionally, the ownership of such infrastructure provides them with
significant cost advantages. Since we utilize many of these networks to provide
our services, the failure to gain cost-oriented access to such networks could
have a material adverse impact on our business, results of operations and
financial condition.
We believe that other competitors in the European markets will include
private multinational consortia such as Unisource, Concert and Global One, as
well as resellers, microwave and satellite carriers, mobile wireless
telecommunications providers, cable television companies, utilities and other
competitive local telecommunications providers. We also compete with other
medium-sized private carriers and resellers in Europe. These companies are
generally more aggressive than the public telecommunications operators and other
dominant providers and sometimes bring experience from more mature marketplaces.
Like ourselves, these providers often target medium-to large-sized business
customers and other big market segments. In addition, the development of new
technologies could give rise to significant new competitors.
Competition in the European telecommunications industry is based upon
price, customer service, type and quality of services and customer
relationships. Our strategy is predicated on our ability to reduce our prices
below the prices charged by the public telecommunications operators or dominant
carriers in each of our markets, yet offer high-quality products and
telecommunications services. However, prices have decreased substantially over
the last few years in most of our markets. Some of our larger competitors may be
able to use their greater financial resources to cause severe price competition
in the countries in which we operate. We expect that prices will continue to
decrease for the foreseeable future and that public telecommunications operators
and other providers will continue to improve their product offerings. For a
discussion of the risks posed by our competitors' operations, see "Risk
Factors -- Established competitors with greater resources may make it more
difficult for us to effectively market our services, offer our services at a
profit and attract and retain customers and "Risk Factors-- Our competitive
position may be compromised by our dependence on other telecommunications
service providers."
We have outlined below the competitive environment with respect to each of
our six lines of business.
GTS CARRIER SERVICES
The success of our Carrier Services line of business depends upon our
ability to compete with a variety of other telecommunications providers offering
or seeking to offer cross-border services, including (1) the respective public
telecommunications operator in each country in which Hermes Railtel's network
operates, (2) global alliances among some of the world's largest
telecommunications carriers, and (3) global operators. We expect that some of
these current and future competitors may also become our customers. We also
believe that the ongoing liberalization of the European telecommunications
market will attract additional entrants to the carrier's carrier market and
increase the intensity of competition. Competitors in this market compete
primarily on the basis of price and quality. We intend to focus on these factors
and on service innovation as well. Our Carrier Services business plan
anticipates substantial direct and indirect competition. For a discussion of the
risks associated with our Carrier Services line of business, see "Risk
Factors -- Our Access Services and Business Services activities may cause our
Carrier Services line of business to lose customers" and "Risk Factors -- The
technology of our Hermes Railtel network could become obsolete and harm our
competitiveness."
Various telecommunications companies, including MCI/WorldCom, Inc., Viatel,
Inc., KPN-Qwest, Deutsche Telekom AG, France Telecom S.A., Global Crossing Ltd.,
and British Telecommunications plc, have announced plans to construct, have
begun to construct or are operating fiber optic networks across various European
countries. Some of these networks include, or their promoters have expressed
their intentions to include, transatlantic connectivity.
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GTS BUSINESS SERVICES
We have not achieved and we do not expect to achieve a significant market
share for our services in any of Business Services' markets. We expect that
prices for our Business Services line of business will continue to decrease for
the foreseeable future. In addition, certain of our customers, in particular
wholesale carriers, may sometimes use more than one service provider and may
reduce their use of our services and switch to other providers.
The following discussion of GTS Business Services does not reflect the
effect of the Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."
In each of our current Business Services markets we compete primarily with
the national public telecommunications providers. Other competitors of Business
Services include private multinational consortia as well as microwave and
satellite carriers, mobile wireless telecommunications providers, cable
television companies, utilities and competing local telecommunications providers
and other medium-sized carriers and resellers in Europe. Some of these carriers
have established their own switch sites and operate their own networks.
Competitors in this segment include MCI/WorldCom, COLT, Viatel and RSL, which
compete in multiple countries, and country-specific competitors such as Energis
(UK), Arcor (Germany), Telfort (The Netherlands), Retevision (Spain), Infostrada
(Italy) and Cegetel (France). These providers are generally more entrepreneurial
than the public telecommunications operators and other dominant providers and
sometimes bring experience from more mature markets. Like us, these providers
often target small, medium and large-sized business customers or other market
niches.
GTS WHOLESALE SERVICES
Our Wholesale Services line of business will face competition from a
consortia of telecommunications operators, large public telecommunications
operators and other international telephone operators with advanced network
infrastructures, access to large quantities of long-haul capacity and
established customer bases. Public telecommunications operators 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 Wholesale Services.
With deregulation of the telecommunications markets, opportunities for the
establishment of international gateways will likely develop and, as a result,
competition in the market for our Wholesale Services will increase. We intend to
relocate and consolidate our Wholesale Services operations in London, which is
served by the Hermes Railtel network. This will allow us to route our Wholesale
Services customers' traffic through the Hermes Railtel network and incur reduced
transmission expenses, thereby enhancing the competitiveness of Wholesale
Services' operations.
GTS ACCESS SERVICES
Public telecommunications operators often offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. We believe that the market for the provision
of local services is sufficiently attractive to cause additional competitive
local exchange carriers, including multi-national carriers, to enter the market
to offer products and services which would compete with ours.
We will compete with public telecommunications providers and, in certain
markets, competitive local exchange carriers, including, among others, COLT
TeleCom Group plc, which is providing service through networks in London,
Frankfurt, Munich, Hamburg, Berlin, Paris, Zurich, Amsterdam, Brussels, Madrid
and Dusseldorf, and MCI/WorldCom, whose pan-European fiber network connects
London, Amsterdam, Brussels, Frankfurt and Paris. We believe, based on our
experience in Western and Central Europe, Russia and the CIS, that we have the
knowledge and ability to develop products and services which will be competitive
with other competitive local exchange carriers in terms of content, quality and
price.
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GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS
We face significant competition in virtually all of our existing
telecommunications businesses in Russia and the other independent countries of
the CIS. We believe that we have certain competitive advantages in each of these
markets because of our operating history, our ability to bundle a broad range of
telecommunications services in the region and our ability to make rapid
decisions in pursuing new business opportunities and addressing customer service
needs. We also believe that our local partnerships and reliance on nationals in
the management of its businesses and joint ventures provide us with better
knowledge of local political and regulatory structures, cultural awareness and
access to customers.
LICENSES AND REGULATORY ISSUES
OVERVIEW
The regulation of the European telecommunications industry is in the midst
of significant changes. In 1987, a policy document, the EC Green Paper on
Telecommunications, charted the course for the current changes in the EU
telecommunications industry by advancing principles such as separation of
operators from regulators, transparency of procedures and information, cost
orientation of tariffs, access to monopoly public telephone operator networks
and the liberalization of services. In 1990, the EU member states approved two
directives that established these principles in EU law: the Open Network
Provision Framework Directive and the EU Services Directive. Combined, these two
directives set forth the basic rules for access to public telephone networks and
the liberalization of the provision of all telecommunications services within
the EU except for certain reserved services, including voice telephony.
In 1992, the EU approved the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and end
users, and to establish cost accounting systems for these products by the end of
1993. The national regulatory authorities were to use this cost information to
set cost-orientated tariffs for leased lines. Even though most EU member states
have established regulatory frameworks requiring public telecommunications
operators to lease lines to competitors and end users, we believe that, in some
EU member states, such lines are not yet being offered at cost-orientated
prices.
In 1996, the EU issued the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the date by which all EU member states must remove all remaining restrictions on
the provision of telecommunications services, including voice telephony.
However, the following EU member states were granted a delay in implementing
this liberalization directive:
- Greece, through December 31, 2000;
- Ireland, through January 1, 2000;
- Luxembourg, through July 1, 1998;
- Portugal, through January 1, 2000; and
- Spain, until November 30, 1998.
Ireland implemented the Full Competition Directive in December 1998.
Subject to the foregoing, each EU member state is obliged, under EU law, to
enforce the terms of the Full Competition Directive in such a manner so as to
ensure that its aim and purpose is carried out. Enforceability of the Full
Competition Directive may be challenged at the EU level or at the EU member
state level. In practice, implementation and enforcement of the directive has
been and may also continue to be delayed on a country by country basis.
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As a complement to the Full Competition Directive, the European Parliament
and Council of Ministers in June 1997 adopted a directive which governs the
manner in which public network operators and service providers interconnect with
the public telecommunications operators' public networks. Among other things,
this directive requires EU member states to ensure that public
telecommunications operators with significant market power should provide
interconnection on the basis of cost-oriented charges.
In April 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 be restricted only to the extent required to
ensure the efficient use of scarce resources, such as radio frequencies or
numbers.
In February 1998, the European Parliament and the Council of Ministers
adopted a directive on the application of the Open Network Provision to voice
telephony and on universal service.
Despite these regulatory initiatives supporting the liberalization of the
telecommunications market, most EU member states are still in the initial stages
of liberalizing their telecommunications markets and establishing regulatory
structures suitable for a competitive environment. For example, most EU member
states have only recently established a national regulatory authority. In
addition, the implementation, interpretation and enforcement of EU directives
differs significantly among the EU member states. While some EU member states
have embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintain
several levels of restrictions on full competition.
Member states of the EU are also bound as a matter of international law to
comply with certain multilateral trade rules and regulations. On February 15,
1997, over 60 members of the World Trade Organization committed to open their
telecommunications markets for basic telecommunications services to foreign
competition and ownership and to adopt regulatory measures designed to protect
foreign telecommunications providers against anticompetitive behavior by
domestic public telecommunications operators. For most signatories to this World
Trade Organization Telecommunications Agreement, these commitments took effect
on February 5, 1998 (including the EU member states). We believe that the World
Trade Organization Telecommunications Agreement will contribute to the creation
of a more competitive environment internationally. Specifically, it will result
in downward pressure on call termination charges outside the EU. For a
discussion of the regulatory risks involved, see "Risk Factors -- Delays in
regulatory liberalization in EU member states could adversely affect our service
offerings in those countries."
As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services. Local laws and regulations and the interpretation of such laws and
regulations differ significantly among the jurisdictions in which we operate.
For a discussion of the regulatory risks we face, see "Risk Factors -- Delays in
regulatory liberalization in EU member states could adversely affect our service
offerings in those countries."
We are in the process of reviewing the licenses, permits and authorizations
that we obtained through our acquisition of NetSource and Esprit Telecom. It may
be possible for us to use certain of these licenses to provide services through
our Carrier Services, Business Services or Access Services lines of business.
GTS CARRIER SERVICES
HERMES RAILTEL
A summary discussion of the regulatory framework in certain countries where
Hermes Railtel has developed and is developing its network is described 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.
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National authorities in individual member states of the EU are responsible
for regulating the construction and operation of telecommunications
infrastructure. We believe 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 construction and operation of telecommunications infrastructure in the
countries of the EU where we currently operate.
Hermes Railtel requires licenses, authorizations or registrations in almost
all countries to operate the network. Licenses, authorizations or registrations
have been obtained in Belgium, France, Germany, Italy, Luxembourg, The
Netherlands, Spain, Sweden, Switzerland, the UK and the United States. No
license or authorization is required to operate a network in Denmark. Hermes
Railtel intends to file applications in other countries in anticipation of
service launch in accordance with the network roll-out plan.
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 took place
in July 1998. Until such entry into force, the Belgian Telecommunication
Authority continued to work with the system of provisional licenses. Hermes
Railtel 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. Hermes Railtel
also had an authorization to provide liberalized services using alternative
infrastructure. The liberalization legislation requires all previously licenced
operators to apply for new licenses or authorizations. Hermes Railtel applied
for a new license in October 1998 and was granted its license to build and
operate its network under the new regulatory framework on January 26, 1999.
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. According to the Danish rules,
Hermes Railtel will not require any regulatory approval in order to install or
operate the network in Denmark.
France. A new regulatory agency, the Autorite de Regulation des
Telecommunications, 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. In
October 1997, Hermes Railtel obtained authorization to operate its network in
specific regions of France. In August 1998, Hermes Railtel was granted an
extension of its license in order to extend its network in France to reach Italy
and Spain. Such authorization requires prior notification to and approval of the
Autorite de Regulation des Telecommunications of any substantial changes in the
capital of Hermes Railtel or its controlling shareholder.
Germany. Germany has approved legislation to implement the Full Competition
Directive and remove all remaining restrictions on competition from August 1996.
Hermes Railtel was granted a license by the German regulatory authorities on
July 18, 1997. The license permits Hermes Railtel to operate the portions of the
network in Germany connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to
the Dutch border; and Stuttgart to the French border. In 1998, Hermes Railtel
was granted extensions to its license to include operation of routes linking
Hamburg, Hanover, Munich and Berlin and of routes to Denmark.
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. 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 and universal service
have been approved. Hermes Railtel was granted a license by the Italian
authorities in August 1998, enabling the development of its network in the
northwest region of Italy and the offering of services in Milan.
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Luxembourg. A new Telecommunication Act entered into force in April 1997,
and a Royal Decree on licensing conditions entered into force in July 1998.
Hermes Railtel applied to the Luxembourg regulatory authority for a license to
build and operate its network in Luxembourg in October 1998. On February 11,
1999, we were granted a license to build and operate a public telecommunications
network.
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, Hermes Railtel was
granted an authorization for the installation, maintenance and use of a fixed
telecommunications infrastructure.
A new Telecommunications Act came partly into force on December 15, 1998.
The new Act confirms the full liberalization of the telecommunications market
according to European Community standards. When the new Telecommunications Act
entered into force, the authorization held by Hermes Railtel ceased to exist.
Under the new Telecommunications Act, Hermes Railtel has an obligation to
register its activities. A request for registration with the Dutch regulatory
authority ("OPTA") was filed in February 1999 and the OPTA granted Hermes
Railtel its registration as a public telecommunications operator on March 3,
1999.
Spain. Spain was granted the right to delay in liberalizing its
telecommunications market until November 30, 1998. In April 1998, Spain adopted
the LGT, its new telecommunications law. The LGT was implemented through the use
of secondary legislation. The LGT and the secondary legislation resulted in the
full liberalization of the Spanish telecommunications market on December 1,
1998. On December 3, 1998, the Spanish regulatory authority began to issue
licenses under the new regime. Hermes Railtel was granted a license to install
and operate a telecommunications network in Spain on January 14, 1999.
Sweden. Full liberalization of the Swedish telecommunications market
occurred in 1993. A new Telecommunications Act was passed in 1997 to reinforce
the powers of the national regulatory authority, to ensure conformity with EC
Directives and to supplement the pre-existing licensing regime with a general
authorization regime for certain services. Hermes Railtel registered with
Swedish authorities and has been able to provide service in Sweden since July
1998.
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. From that date, voice telephony
monopoly was abolished and services fully liberalized. In September 1998, the
Swiss regulatory authority granted Hermes Railtel a definitive concession
(replacing an earlier provisional concession) to build and operate its network
in Switzerland.
United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the UK telecommunications regulatory authority, to create
a competitive marketplace from which detailed regulation could eventually be
withdrawn. The UK 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. Hermes Railtel has received a license
from the Secretary of State for Trade and Industry dated December 18, 1996 which
grants it the right to run a telecommunications system or systems in the UK
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 Hermes Railtel
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 to facilitate reforms to the
licensing regime which are expected in 1999. The Department of Trade and
Industry 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 Department of Trade
and Industry is currently discussing with license holders the arrangements to
put these new licenses into effect. Although the Department of Trade and
Industry has indicated that the new
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licenses are expected to be of 25 years' duration, we cannot assure you that
this will be the case or that the new licenses will not contain terms or
conditions unfavorable to Hermes Railtel.
United States. Hermes Railtel was granted a license by the FCC pursuant to
section 214 of the Communications Act of 1934 authorizing it to provide limited
global facilities-based and global resale services (subject to the terms and
conditions imposed by the law and authorization), effective October 23, 1998.
The 214 authorization does not allow Hermes Railtel to offer US services to or
from Hungary, Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine,
Kazakhstan, Uzbekistan, Azerbaijan, China and India.
Hermes Railtel intends to file applications in other countries (including
Austria, Croatia, Czech Republic, Hungary, Poland, Portugal, Slovakia and
Russia) in anticipation of service launch in accordance with the Hermes Railtel
network roll-out plan. With the exception of Austria and Portugal, which are
members of the EU and whose laws must comply with EC Directives, these countries
have not generally liberalized their telecommunications sector. We cannot assure
you that they will do so in a timely manner or at all. In addition, the terms
and conditions of Hermes Railtel's licenses, authorizations or registrations may
limit or otherwise affect Hermes Railtel's scope of operations.
We cannot assure you that (1) Hermes Railtel will be able to obtain,
maintain or renew licenses, authorizations or registrations to provide the
services it currently provides and plans to provide, (2) such licenses,
authorizations or registrations will be issued or renewed on terms or with fees
that are commercially viable, or (3) the licenses, authorizations or
registrations required in the future can be obtained by Hermes Railtel. 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 Hermes Railtel.
TRANSOCEANIC SERVICES
A summary discussion of the regulatory framework in the United Kingdom,
United States and France that will apply to Transoceanic Services has already
been provided in the section on Hermes Railtel above. Transoceanic Services,
like Hermes Railtel, will require licenses, authorizations or registrations to
operate its own network in the United Kingdom, United States and France. Since
Hermes Railtel has obtained similar licenses, authorizations or registrations in
the United Kingdom, United States and France, Transoceanic Services will
endeavor to use the same (where allowed by national licensing frameworks) in
order to build its initial network, while it obtains its own licenses,
authorizations and registrations. Alternatively, Transoceanic Services may seek
to benefit from Hermes Railtel's licenses to the extent that they may be
transferred from Hermes Railtel to GTS Carrier Services. The transfer of these
licenses could be undertaken in the event that the Hermes Railtel network and
Transoceanic Services can be operated under one license. Such a transfer
initially may be envisaged in France where licenses may be transferred subject
to ministerial approval. The regulatory framework in the United Kingdom and
United States, however, would require GTS Carrier Services to obtain new
licenses, authorizations or registrations.
In addition, the terms and conditions of the licenses, authorizations or
registrations may limit or otherwise affect Transoceanic Services' scope of
operations. We cannot assure you that Transoceanic Services will be able to
obtain such licenses, authorizations or registrations or that Transoceanic
Services' operations will not become subject to other regulatory, authorization
or registration requirements in the countries in which it plans to operate. For
a discussion of these risks, see "Risk Factors -- Delays in regulatory
liberalization in EU member states could adversely affect our service offering
in those countries."
IP SERVICES
At present there is no general consensus on the regulatory position of IP
services in Europe and the United States. At the moment IP services are
generally treated as unregulated or, in some European countries, as a
telecommunications service subject to minimal regulatory requirements. We cannot
assure
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you that IP services will not be regulated in the future in Europe or the United
States. We will continue to monitor regulatory developments that may impact IP
services' operations.
GTS BUSINESS SERVICES
A summary discussion of the regulatory framework in the countries in which
Business Services operates has already been provided in the section on Hermes
Railtel above.
The following discussion of GTS Business Services does not reflect the
effect of the Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."
UNITED KINGDOM
The telecommunications services which we provide through Business Services
are subject to and affected by licenses issued by the United Kingdom's
Department of Trade and Industry and regulations introduced by Oftel, the United
Kingdom telecommunications regulatory authority. Business Services' UK
subsidiary received an international simple resale license from the Department
of Trade and Industry in 1993, which permitted us to provide international
telecommunications services by way of resale of other carriers' facilities. In
December 1996, Business Services' UK subsidiary was among the first recipients
of an international facilities license, which permits us to purchase, lease or
build our own international infrastructure and to interconnect to the public
network. In December 1997, we were granted a domestic public telephone operator
license that will enable us to build out our network and obtain more favorable
interconnect terms from British Telecom.
Business Services' UK subsidiary also holds a license issued by the U.S.
Federal Communications Commission under Section 214 of the United States
Communications Act of 1934, as amended. Subject to certain restrictions, the
Section 214 authorization permits us to originate and terminate facilities-based
and resold private line and switched telecommunications services in the United
States, including among other things, reselling international private lines
interconnected at both ends to the public switched telephone network on the
United States-United Kingdom route for the provision of switched services. Under
the FCC's rules, such interconnected private lines may at present be used only
for switched traffic that either:
(1) originates in the United Kingdom and terminates in the United
States or vice versa;
(2) originates in the United States, the United Kingdom, Canada, New
Zealand, Australia, Sweden, The Netherlands, France, Germany, Belgium,
Denmark, Norway, Luxembourg, Austria, Switzerland, Japan, Italy, Ireland
and Hong Kong and terminates in another of those countries, having been
routed through the third country via private lines; or
(3) uses the interconnected international private lines to reach a
switching hub.
This third routing arrangement, termed "switched hubbing," may involve
several configurations:
(1) traffic originates in the United States, is carried via private
lines to the United Kingdom and is routed through a switch to points beyond
the United Kingdom;
(2) traffic originates in the United Kingdom, is carried over private
lines to the United States, and is routed through a switch to points beyond
the United States; or
(3) traffic originates in points beyond the United States or the
United Kingdom and is routed via a United States or United Kingdom switch
to terminate in another country (provided that no traffic originates or
terminates in a country that we are not authorized to serve). With respect
to switched hubbing traffic originated or terminated on the Esprit Network
at switches in EU member states other than the United Kingdom, domestic
laws of such EU member states require that the leased lines be
interconnected with the public switched telephone network at one end only.
In addition, the FCC has not made any pronouncement about the legality of
switched hubbing arrangements where the carrier in the destination country
does not consent to receiving traffic
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indirectly from the originating country and does not realize the traffic it
receives from the "hub" country is actually originating from a different
country.
GERMANY
Our German subsidiaries have authority to provide value-added
telecommunications services throughout Germany. In June 1997, we also received
Type 3 and Type 4 licenses authorizing us to build, acquire and operate
infrastructure and to provide public voice telephony services and to
interconnect with the incumbent public telecommunications operators' network.
These licenses applied initially to restricted areas within Dusseldorf but have
since been expanded to the whole Dusseldorf area and to permit connection to a
cable landing station in northern Germany. In addition, the acquisition of
Plusnet has provided us with a national network licensed to provide
point-to-point service on 55 national routes and 300 local routes. We have also
been granted a carrier select code to provide Indirect Access to our retail
services. We entered into an interconnect agreement with Deutsche Telekom in
November 1997. Pursuant to this agreement, we interconnect with Deutsche
Telekom's network in five locations, while Plusnet's network interconnects with
Deutsche Telekom's network in six locations.
NetSource received a Type 4 license and entered into interconnect
agreements in February 1998.
FRANCE
In March 1998, our French subsidiary was granted a public voice telephony
and public network operator license permitting us to serve all of France. This
license permits us to provide all services, including managed bandwidth on the
London-Paris ring. They also facilitate our building out the fiber optic ring to
Belgium. In July 1998, our French subsidiary was granted the right to receive
one of the seven available one digit access codes. After a challenge by a
disappointed applicant, the Conseil d'Etat, the French high court, affirmed the
ART's decision. In July 1998, our license was amended to impose certain network
deployment obligations on us. We are now in the process of building out a
national network.
THE NETHERLANDS
NetSource is qualified as a telecommunications provider and obtained a
carrier selection code license in September 1997.
BELGIUM
The Belgian regulator, BIPT, has granted our Belgian subsidiary provisional
national voice telephony and network operator licenses, and our Belgian
subsidiary was the first independent operator to achieve interconnection with
the incumbent public telephone operator, Belgacom. Following the recent adoption
of final legislation, our Belgian subsidiary has filed an application for
definitive national voice telephony and network operator licenses and expects to
receive the same shortly. NetSource plans on using the Esprit Telecom licenses
for its Belgian operations.
SPAIN
On December 3, 1998, Business Services' Spanish subsidiary was granted
class B1 licenses for Madrid, Barcelona and Gerona. We were also granted similar
licenses for Bilbao and Valencia. These licenses permit us to provide public
telephony services and operate a network in those cities. A C1 license allowing
the installation of a national network was granted on December 17, 1998.
ITALY
Our Italian subsidiary received a closed user group voice telephony license
in May 1998. We filed an application for authorization to install infrastructure
and provide services on a national basis in March 1999.
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IRELAND
Through NetSource we received a general telecommunications license to
operate in Ireland in December 1998.
NORWAY
Through NetSource, we are registered as a public telecommunications
provider. We expect to enter into interconnection agreements shortly.
DENMARK
Under Danish rules, we do not require any regulatory approvals to install
or operate a network in Denmark. Through a subsidiary of NetSource, we are
registered as a public telecommunications provider. We expect to enter into
interconnection agreements shortly.
SWEDEN
Through NetSource, we were registered as a public telecommunications
provider in October 1998 and we entered into interconnection agreements in
January 1999.
LUXEMBOURG
Through NetSource, we have applied for licenses to operate in Luxembourg.
WHOLESALE SERVICES
Currently, GTS-Monaco Access's telecommunications activities in Monaco
require no telecommunications license. 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. In certain
of our existing and target markets, there are laws and regulations which affect
the number and types of customers which we 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, 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, we cannot assure you 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. We are currently reviewing licenses we will need in connection
with our transfer of business of GTS-Monaco Access to the U.K.
ACCESS SERVICES
Access Services has been granted Type 3 (infrastructure) and Type 4 (voice
telephony) licenses authorizing it to serve seven major cities in Germany. In
April 1999, we were granted licenses authorizing us to install local access
networks and to provide voice telephony services in Geneva and Zurich. We are
currently evaluating Access Services' ability to build out fiber loops and
provide access services in its target metropolitan markets under existing
infrastructure licenses and authorizations to provide telephony services held by
our Business Services line of business.
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Our determination as to which markets we may enter will depend in part on
our 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 us from entering a particular market or
offering our services in any European market, restrict the types of services
offered by us, constrain our deployment of its networks or otherwise adversely
affect our operations.
We cannot assure you that Access Services will be able to obtain the
necessary regulatory approvals on a timely basis or that we will not otherwise
be affected by regulatory developments, either of which may have a material
adverse effect on us.
BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS
Telecommunications operators in Russia are nominally subject to the
regulations of Goskomsvyaz, the successor of the Russian Ministry of
Communications, and its subordinated bodies, Gossvyaznadzor and the State Radio
Frequency Commission. As a practical matter, these national telecommunications
authorities as well as certain regional and local authorities generally regulate
telecommunications operators in their jurisdictions 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. Separate
legislation implements this institutional framework.
Goskomsvyaz issues licenses to provide telecommunications services on the
basis of a decision by the Licensing Commission at Goskomsvyaz. Goskomsvyaz has
generally issued no new licensing regulations since the enactment of the
Communications Law, and in practice Goskomsvyaz continues to issue licenses
based on the pre-existing licensing regulations, except to the extent such
regulations have been modified by licensing regulations with respect to cellular
services. According to the general licensing regulations, licenses for rendering
telecommunications services may be issued and renewed for periods which range
from 5 to 15 years and several different licenses may be issued to one person.
Under the cellular licensing regulations, licenses for rendering cellular
services may be issued only on the basis of a competitive tender for longer
periods ranging from five to 15 years. 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 Goskomsvyaz and verification by appropriate government
authorities that the licensee has conducted its activities in accordance with
the licenses. Officials of Goskomsvyaz have fairly broad discretion with respect
to both the issuance and renewal procedures. The Communications Law as well as
the general and cellular licensing regulations provide that a license may not be
transferred or assigned to another holder. Regional authorities also exercise
some influence especially in directly influencing the issuance of AMPS licenses
because AMPS has been designated a "regional standard." 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. In addition, entities such as Svyazinvest at the federal level, as
well as other entities at the oblast and krai levels (administrative regions
within Russia) and Moscow and St. Petersburg exercise significant control over
their respective local telephone networks and may therefore affect the licensing
process.
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. Our Ukrainian joint venture
agreements provide us with the option of purchasing an additional 1% of the
cellular network if these rules are liberalized. The Ukrainian government has
imposed substantial frequency permit fees in connection with providing GSM
service in Ukraine, and Golden Telecom has paid a $2.9 million
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frequency license fee on Golden Telecom's license. We cannot assure you that
additional fees will not be imposed in the future upon the reissuance and/or
renewal of such license. For a comprehensive discussion of these regulatory
risks, see also "Risk Factors -- Turmoil in Russia and the CIS creates
significant uncertainty for our operations."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JP Advisors, a Delaware limited liability company ("JP Advisors"), entered
into a consulting agreement with the Company dated as of February 22, 1999,
whereby JP Advisors provides services in the identification, assessment,
evaluation of potential acquisition targets. W. James Peet, the sole member of
JP Advisors, is a member of the Board of Directors of the Company. JP Advisors
may also assist in the negotiation, documentation and consummation of certain
acquisitions as agreed from time to time. The agreement has no specified
duration and may be terminated by either party at will. During the term of the
agreement, the Company will pay JP Advisors $25,000 per month and upon
consummation of a transaction with certain target companies, a success fee of
(A) 0.5% of the transaction's value up to $100 million or (B) 0.25% of the
transaction's value in excess of $100 million, plus $500,000. However, in no
event will the fee paid in connection with any single transaction exceed $1
million. Upon mutual agreement, instead of cash, fees may be paid in stock,
warrants, options or other form of consideration.
DESCRIPTION OF CERTAIN INDEBTEDNESS
DEBENTURES DUE 2010
On July 8 and July 22, 1998, we issued approximately U.S.$466.9 million of
debentures. The debentures will mature on July 1, 2010 and are unsecured senior
subordinated obligations of GTS. In the event of our change of control, holders
of the debentures will have the right to require us to purchase such holder's
debentures at a price equal to 100% of the principal amount plus accrued
interest. The debentures will bear interest payable semiannually at a rate of
5 3/4% per annum.
Each debenture will be convertible into such number of shares of our common
stock as is equal to the principal amount of such debenture divided by
U.S.$55.05. We covenanted that at all times we will cause there to be authorized
and reserved for issuance upon conversion of the debenture such number of shares
of our common stock as would be issuable upon conversion of all the debentures
then outstanding. The debentures are subordinated to all existing and future
senior indebtedness of GTS and to all current and future obligations of our
subsidiaries, including trade obligations. The debentures rank pari passu with
the convertible bonds.
We, at our option, may elect to redeem all or a portion of the debentures
commencing on July 1, 2001, at redemption prices beginning at 104.025% of
principal amount for the twelve-month period commencing July 1, 2001 declining
to par at July 1, 2008 and thereafter.
SENIOR NOTES DUE 2005
Concurrently with the initial public offering, we offered $105 million of
9 7/8% notes. The notes were issued pursuant to an indenture between us and The
Bank of New York as trustee, dated February 10, 1998. The notes mature in 2005
and bear interest, payable semi-annually, at 9 7/8% per annum. The indenture
governing the notes does not provide for a sinking fund. The notes are subject
to redemption at any time on or after February 15, 2002, at our option, in whole
or in part, at declining redemption prices set forth in the indenture governing
the notes. Notwithstanding the foregoing, during the first three years after the
date of the indenture, we will be permitted to redeem up to 33 1/3% of the
aggregate principal amount of the notes with the net proceeds of any public
equity offerings or strategic equity investments at 109.875% of the principal
amount thereof. We placed net proceeds of U.S.$19.6 million from the offering of
the 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 notes, into an escrow
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account to be held by The Bank of New York as trustee for the benefit of the
holders of the notes. We granted to the trustee for the benefit of the holders,
a first priority and exclusive security interest in the escrow account and the
proceeds thereof. Funds will be disbursed from the escrow account for interest
payments (but not additional interest) on the notes. Pending such disbursement,
all funds contained in the escrow account are invested in cash equivalents.
Upon a change of control of GTS, or in the event of asset sales (as defined
in the related indenture) in certain circumstances, we are required by the terms
of the indenture to make an offer to purchase the outstanding notes at a
purchase price equal to 101% and 100%, respectively, of the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase.
Our indebtedness evidenced by the 9 7/8% notes ranks pari passu in right of
payment with all of our other existing and future unsubordinated indebtedness
and senior in right of payment to all of our existing and future obligations
expressly subordinated in right of payment to the 9 7/8% notes. The indenture
governing the notes contains a number of covenants restricting our operations
and our restricted group members, including those restricting: the incurrence of
indebtedness; the making of restricted payments unless no default or event of
default exists, our leverage ratio does not exceed 6.0 to 1.0 and such
restricted payments do not exceed the basket; 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 our assets; and requiring
the purchase of notes, at the option of the holder, upon the occurrence of a
change of control and certain asset sales.
The events of default under the indenture governing the 9 7/8% notes
include provisions that are typical of senior debt financings, including a
cross-acceleration to a default by us or any restricted group member on any
indebtedness that has an aggregate principal amount in excess of certain levels.
Upon the occurrence of such an event of default, the trustee or the holders of
not less than 25% in principal amount at maturity of the outstanding notes may
immediately accelerate the maturity of all the notes as provided in the related
indenture.
HERMES RAILTEL NOTES
Hermes Railtel sold U.S.$265 million aggregate principal amount of notes in
August 1997. These notes have a ten year maturity and are unsecured, senior
obligations of Hermes Railtel. Hermes Railtel placed approximately $56.6 million
of the net proceeds in escrow for the first two years' interest payments on the
notes. The notes were issued pursuant to an indenture containing certain
covenants for the benefit of the holders of the notes, including, among other
things, covenants limiting the incurrence of indebtedness, restricted payments,
liens, payment restrictions affecting certain subsidiaries and joint ventures,
transactions with affiliates, assets sales and mergers. The notes are redeemable
in whole or part, at the option of Hermes Railtel at any time on or after August
15, 2002 at a price ranging from 105.75% to 100.0% of the principal amount.
A portion of the notes are also redeemable at any time or from time to time
prior to August 15, 2000 at a redemption price equal to 111.5% of the principal
amount of the notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the date of redemption with the net cash proceeds of one or more public
equity offerings or strategic equity investments resulting in aggregate gross
cash proceeds to Hermes Railtel of at least U.S.$75 million. In the event of a
change of control of Hermes Railtel, holders of the notes have the right to
require Hermes Railtel to purchase such holder's notes at a price equal to 101%
of the aggregate principal amount plus accrued and unpaid interest thereon to
the date of repurchase.
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NEW HERMES RAILTEL NOTES
On December 21, 1998, Hermes Railtel sold U.S.$200 million aggregate
principal amount of U.S. dollar notes and Euro 85 million aggregate principal
amount of Euro denominated notes. This transaction closed on January 4, 1999.
The U.S. dollar notes have a ten year maturity, and the Euro denominated notes
have a seven year maturity. The notes are unsecured, senior obligations of
Hermes Railtel. The notes were issued pursuant to two indentures among Hermes
Railtel and The Bank of New York as trustee, both dated January 4, 1999, which
are substantially similar to the indenture governing the notes sold in August
1997 by Hermes Railtel. Both indentures dated January 4, 1999, contain certain
covenants made by Hermes Railtel for the benefit of the holders of the notes,
including, among other things, covenants limiting the incurrence of
indebtedness, restricted payments, liens, payment restrictions affecting certain
subsidiaries, transactions with affiliates, asset sales and mergers. The U.S.
dollar notes are redeemable in whole or in part, at the option of Hermes Railtel
at any time on or after January 15, 2004 at a price ranging from 105.188% to
100.0% of the principal amount. The Euro denominated notes are redeemable in
whole or in part, at the option of Hermes Railtel at any time on or after
January 15, 2003 at a price ranging from 105.188% to 100.0% of the principal
amount.
A portion of the notes are also redeemable at any time prior to or from
time to time prior to January 15, 2002 at a redemption price equal to 110.375%
of the principal amount of the notes so redeemed, plus accrued and unpaid
interest thereon, if any, to the date of redemption with the net cash proceeds
of one or more public equity offerings or strategic equity investments resulting
in aggregate gross cash proceeds to Hermes Railtel of at least U.S.$75 million,
provided, however, that following such redemption at least two-thirds of the
principal amount of each of the original U.S. dollar notes and Euro notes remain
outstanding. In the event of a change of control of Hermes Railtel or us,
holders of the notes have the right to require Hermes Railtel to purchase such
holder's notes at a price equal to 101% of the aggregate principal amount plus
accrued and unpaid interest thereon to the date of repurchase.
THE ESPRIT TELECOM NOTES
Pursuant to our acquisition of Esprit Telecom, we assumed all of Esprit
Telecom's outstanding indebtedness. This includes $230,000,000 principal amount
of 11 1/2% senior notes due 2007 and DM 125,000,000 principal amount of 11 1/2%
senior notes due 2007 issued in December 1997. In June 1998, Esprit Telecom also
issued $150,000,000 principal amount of 10 7/8% senior notes due 2008 and DM
150,000,000 principal amount of 11% senior notes due 2008. Interest on both the
1997 notes and the 1998 notes is paid semi-annually on each June 15 and December
15. We may redeem any 1997 notes, at our option, at any time on or after
December 15, 2002 at 105.75% of their principal amount at maturity, plus accrued
interest, declining to 100%, on or after December 2005. We may redeem any 1998
notes, at our option, at any time on or after June 15, 2003, at 105.438% of
their principal amount at maturity, plus accrued interest, declining to 100% on
or after December 2006. We may redeem, at our option, up to 35% of the principal
amount of each series of the 1997 and 1998 notes prior to December 15, 2000 and
June 15, 2001, respectively, at redemption prices equal to 111.50% of the
principal amount of the 1997 notes, and 110.875% of the principal amount of the
1998 notes, in addition to other amounts. We may also redeem, at our option, the
1997 and 1998 notes, in whole but not in part, in the event of certain changes
affecting UK withholding taxes or in the event definitive notes are issued at a
redemption price equal to their principal amount plus accrued and unpaid
interest in addition to other amounts. The 1997 and 1998 notes rank pari passu
with each other and all other senior indebtedness of Esprit Telecom.
The material terms of the indentures governing the 1997 and 1998 notes are
substantially the same and contain covenants with respect to Esprit Telecom,
including limitations on indebtedness, restricted payments, dividends and other
payments affecting Esprit Telecom subsidiaries, the issuance and sale of capital
stock of Esprit Telecom subsidiaries, transactions with stockholders and
affiliates, liens, asset sales, issuances of guarantees of indebtedness by
Esprit Telecom subsidiaries, sale-leaseback transactions, consolidations and
mergers and provision of financial statements and reports.
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EQUIPMENT FINANCING
In connection with the purchase of equipment and services for certain
cellular ventures in the CIS region, we entered into a credit agreement with a
bank providing for up to $30.7 million financing. The facility is guaranteed by
the vendor of such equipment and services, and is insured against certain
political risks by the Overseas Private Investment Corporation. The loans under
the facility bear interest at LIBOR plus 35 basis points, with principal and
interest payments due semiannually in June and December of each year through
December 15, 2002. At December 31, 1998, U.S.$16.5 million was outstanding under
the facility.
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DESCRIPTION OF THE BONDS
The following terms and conditions (subject to attachment and except for
the sentences in italics) will be endorsed on the certificates issued in respect
of the bonds.
GENERAL
Our Senior Subordinated Convertible Bonds due 2000 were initially issued
under an indenture dated as of July 14, 1997 between GTS, The Bank of New York,
as trustee, registrar and paying, conversion and transfer agent. The issue of
the bonds was authorized by a resolution of our board of directors on June 18,
1997. Some of the following statements are summaries of, and are subject to, the
detailed provisions of the Indenture, which contains the forms of bonds. Copies
of the indenture are available for inspection at the registered office of the
trustee, located at One Wall Street, New York, New York, 10286 and at the
specified offices of each of the paying agents. The bondholders are entitled to
the benefit of, are bound by, and are deemed to have notice of all the
provisions of the indenture. The bonds mature on June 30, 2000.
The bonds are limited in aggregate original principal amount to
U.S.$155,250,000; provided, however, that we may issue an additional $18,000,000
principal amount of bonds under the Indenture to satisfy any preemptive rights
of our existing shareholders. Pursuant to such preemptive rights, some of our
existing shareholders acquired approximately $3.5 million in aggregate principal
amount of bonds on August 29, 1997.
STATUS, FORM, DENOMINATION AND TITLE
(A) STATUS
The bonds are direct, unsecured, senior subordinated obligations of GTS and
will rank equally with each other and with all other present and future
unsecured, senior subordinated indebtedness of GTS.
(B) FORM AND DENOMINATION
The bonds are issued in registered form in the minimum denomination of
U.S.$10,000 and integral multiples of $1,000 in excess thereof.
(C) TITLE
Title to the bonds passes only by registration in the register of
bondholders maintained by the registrar. The registered holder of any bond will
(except as otherwise required by law) be treated as its absolute owner for all
purposes (whether or not such bond is overdue and regardless of any notice of
ownership, trust or any interest in it or any writing on, or the theft or loss
of, the certificate issued in respect of it) and no person will be liable for so
treating the holder.
INTEREST
The bonds bear interest payable at the rate of 8.75% per annum from and
including the date of their issuance. Interest on each bond will cease to accrue
from the redemption date or conversion date thereof unless, upon due
presentation of such bond, payment of principal is improperly withheld or
refused or conversion is not consummated, as the case may be. In such event,
interest will continue to accrue on such bond up to and including (a) the date
on which payment in full of the principal thereof (plus accrued interest) is
made or (if earlier) the date on which the funds for the payment in full of the
principal thereof (plus accrued interest) have been received in New York City by
the trustee or (b) the bonds are converted to shares of our common stock.
Interest shall be computed on the basis of a 360 day year consisting of twelve
(12) months of 30 days each and, in the case of an incomplete month, the number
of days elapsed.
Interest is payable semiannually in arrears on July 15 and January 15 of
each year commencing January 15, 1998, to the person in whose name a bond (or
any predecessor bond) is registered at the close
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of business on the preceding June 30 or December 31, as the case may be. Each
bond will carry a right to interest in respect of all periods from the date of
issue thereof, or the date from which interest has been paid to, whichever is
later, up to but excluding the relevant redemption date or conversion date.
The Luxembourg Stock Exchange will be informed of each change in the
interest rate of the bonds on the date of such change.
TRANSFERS OF BONDS; ISSUE OF CERTIFICATES
(A) TRANSFERS
A bond may be transferred by depositing the certificate issued in respect
of that bond, with the form of transfer on the back duly completed and signed,
at the specified office of the registrar or any of the transfer agents.
Except as set forth below, the Global Certificates may be transferred in
whole, but not in part, solely to another nominee of DTC or to a successor of
DTC or its nominee.
(B) DEFINITIVE BONDS
Bonds represented by interests in Global Certificates are exchangeable for
certificated physical bonds in registered form only if (i) DTC is at any time
unwilling or unable to continue as a depositary and we do not appoint a
successor depositary within 90 days of notice of such fact, or (ii) the trustee
has instituted or been directed to institute any judicial proceeding in a court
to enforce the rights of the bondholders under the bonds and has been advised by
counsel that it is necessary or appropriate to obtain possession of certificated
physical bonds.
(C) REPLACEMENTS OF BONDS
In case any certificate representing a bond becomes mutilated, defaced,
destroyed, lost or stolen, we will execute and, upon our request, the trustee
will authenticate and deliver a new certificate of like tenor (including the
same date of issuance) and equal principal amount, registered in the same
manner, dated the date of its authentication and bearing interest from the date
to which interest has been paid on such bond, in exchange and substitution for
such certificate (upon surrender and cancellation thereof in the case of
mutilated or defaced certificates) or in lieu of and substitution for such
certificate. In case such certificate is destroyed, lost or stolen, the
applicant for a substitute certificate shall furnish to us satisfactory evidence
of the destruction, loss or theft of such certificate and of the ownership
thereof. Upon the issuance of any substituted certificate, we may require the
payment by the registered holder thereof of a sum sufficient to cover fees and
expenses connected therewith, together with such indemnity as we and the trustee
shall require.
(D) FORMALITIES FREE OF CHARGE
Registration of transfer of bonds will be effected without charge but only
upon payment (or the giving of such indemnity as we, the trustee or any of the
paying agents may require) in respect of any tax or other governmental charges
which may be imposed in relation to it.
(E) CLOSED PERIODS
No bondholder may require the transfer of a bond to be registered during
the period of 15 days ending on the due date for any payment of principal of or
interest on or additional amounts, if any, on that bond or after a conversion
notice has been delivered.
(F) REGULATIONS
All transfers of bonds and entries on the register will be made subject to
the detailed regulations concerning transfer of bonds set forth in the
Indenture. We may change the regulations with the prior
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written approval of the trustee. A copy of the current regulations will be
mailed (at our expense) by the trustee to any bondholder who asks for one.
(G) PAYMENTS
The principal of, and premium, if any, on the bonds will be paid against
surrender thereof at the main office of the paying agent in New York City or,
subject to applicable laws and regulations, at the offices of the paying agent
in Luxembourg by U.S. dollar check drawn on a bank in the City of New York, or
by a wire transfer to a U.S. dollar account maintained by the payee with a bank
in the City of New York. We will at all times maintain a principal paying agent
and conversion agent in New York City, and, so long as the bonds are listed on
the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so
requires, a paying agent, conversion agent and transfer agent in Luxembourg.
Payment in respect of interest on any interest payment date with respect to
any bond will be made to the person in whose name such bond is registered at the
close of business on the June 30 or December 31, as the case may be, preceding
such interest payment date by U.S. dollar check drawn on a bank in the City of
New York mailed to such person at the address specified in the register on such
day or, under certain circumstances, by wire transfer to a U.S. dollar account
maintained by the payee with a bank in the City of New York, provided that a
written request from such holder to such effect designating such account is
received by the relevant paying agent no later than fifteen days before the
relevant interest payment date. Unless such designation is revoked, any such
designation made by such person with respect to such bond will remain in effect
with respect to any future payments with respect to such bond payable to such
person.
If any payment on a bond is due on a day that is, at any place of payment,
a day on which banking institutions are authorized or obligated by law or
executive order to close, then, at each place of payment, such payment need not
be made on such day but may be made on the next succeeding day that is not, at
such place of payment, a day on which banking institutions are authorized or
obligated by law or executive order to close, with the same force and effect as
if made on the originally scheduled date of such payment, and no interest will
accrue for the period from and after such date.
ADDITIONAL AMOUNTS
All payments of principal, premium, if any, and interest with respect to
the bonds will be made without withholding or deduction at source for, or on
account of, any present or future taxes, fees, duties, assessments or
governmental charges of whatever nature imposed or levied by the United States
or any political subdivision or taxing authority thereof or therein, unless such
withholding or deduction is required by (i) the laws (or any regulations or
rulings promulgated thereunder) of the United States or any political
subdivision or taxing authority thereof or therein or (ii) an official position
regarding the application, administration, interpretation or enforcement of any
such laws, regulations or rulings (including, without limitation, a holding by a
court of competent jurisdiction or by a taxing authority in the United States or
any political subdivision thereof). If a withholding or deduction at source is
required, we will, subject to certain limitations and exceptions, pay to a
holder of bonds who is a non-U.S. holder such additional amounts as may be
necessary so that every net payment of principal, premium, if any, or interest
with respect to such bonds after such withholding or deduction, will not be less
than the amount provided for in the bonds. However, we shall not be required to
make any payment of additional amounts for or on account of:
(a) any tax, fee, duty, assessment or other governmental charge which
would not have been imposed but for (i) the existence of any present or
former connection between such bondholder (or between a fiduciary, settlor,
beneficiary, member or shareholder of, or possessor of a power over, such
bondholder, if such bondholder is an estate, trust, partnership or
corporation) and the United States, including without limitation, such
bondholder (or such fiduciary, settlor, beneficiary, member, shareholder or
possessor) being or having been a citizen or resident thereof or being or
having been present or engaged in trade or business therein or having or
having had a permanent establishment
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therein, or (ii) the presentation of a bond for payment on a date more than
15 days after the date on which such payment became due and payable or the
date on which payment thereof is duly provided for whichever occurs later;
(b) any estate, inheritance, gift, sales, transfer, personal property
or similar tax, assessment or other governmental charge;
(c) any tax, fee, duty, or future assessment or other governmental
charge imposed by reason of such bondholder's past or present status as a
personal holding company, foreign personal holding company, passive foreign
investment company or controlled foreign corporation with respect to the
United States or as a corporation which accumulates earnings to avoid
United States federal income tax;
(d) any tax, fee, duty, assessment or other governmental charge which
is payable otherwise than by withholding from payments of principal or
interest with respect to the bonds;
(e) any tax, fee, duty, assessment of other governmental charge
imposed on any interest received (x) by a holder or beneficial owner of
bonds that for U.S. federal income tax purposes is treated as actually or
constructively owning 10% or more of the voting power of our stock, (y) on
an extension of credit made pursuant to a loan agreement entered into in
the ordinary course of business by a holder or beneficial owner of bonds
that is a bank and (z) by a holder or beneficial owner of bonds that is a
controlled foreign corporation and with respect to which we are a related
person;
(f) any tax, fee, duty, assessment or other governmental charge
required to be withheld by any paying agent from any payment of principal,
premium, if any, or interest with respect to any bond, if such payment can
be made without such withholding by any other paying agent with respect to
the bonds;
(g) any tax, fee, duty, assessment or other governmental charge which
would not have been imposed but for the failure to comply with
certification, identification, documentation, information or other
reporting requirements concerning the nationality, residence, identity or
connection with the United States of the bondholder or of the beneficial
owner of such bond, if such compliance is required by a present or future
statute, treaty, regulation, ruling or administrative practice as a
precondition to a reduction of or relief or exemption from such tax,
assessment or other governmental charge; or
(h) any combination of items (a), (b), (c), (d), (e), (f) and (g);
nor shall Additional Amounts be paid to any holder of a bond who is a fiduciary
or partnership or other than the sole beneficial owner of the bond to the extent
a beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner of the bond would not have been entitled to
payment of additional amounts had such beneficiary, settlor, member or
beneficial owner been the holder of the bond.
The term "non-U.S. holder" means any corporation, individual, fiduciary or
partnership that for United States federal income tax purposes is a foreign
corporation, nonresident alien individual, nonresident alien fiduciary of a
foreign estate or trust, or foreign partnership one or more members of which is
a foreign corporation, nonresident alien individual or nonresident alien
fiduciary of a foreign estate or trust.
REDEMPTION FOR TAX RESOURCES
We may redeem any bond in whole but not in part at any time at a redemption
price equal to the principal amount thereof together, if appropriate, with
accrued interest to but excluding the date fixed for redemption, if we
determine, based upon a written opinion of independent counsel selected by us,
that as a result of any change in or amendment to the laws (or any regulations
or rulings promulgated thereunder) of (i) the United States or any political
subdivision or tax authority thereof affecting taxation or (ii) the relevant
taxing jurisdiction or any political subdivision or taxing authority thereof or
therein affecting
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taxation, or any change in application or official interpretation of such laws,
regulations or rulings, which amendment or change is effective on or after the
original issue date, we would be required to pay additional amounts on the
occasion of the next payment due with respect to such bond.
We will provide notice of our intention to redeem bonds not less than 30
days nor more than 60 days prior to the date fixed for redemption, provided that
no such notice of redemption shall be given earlier than 90 days prior to the
effective date of such change or amendment and that at the time notice of such
redemption is given, such obligation to pay such additional amounts remains in
effect and we cannot avoid by taking reasonable measures available to us. From
and after any redemption date, if monies for the redemption of bonds shall have
been made available for redemption on such redemption date, such bonds shall
cease to bear interest and the only right of the holders of such bonds
appertaining thereto shall be to receive payment of the principal amount
thereof, premium if any, and, if appropriate, all unpaid interest accrued to
such redemption date.
SUBORDINATION
The indebtedness evidenced by the bonds will, to the extent set forth in
the Indenture, be subordinated in right of payment to the prior payment in full
in cash or cash equivalents of all existing and future senior indebtedness. In
the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relating to us or our assets, or any liquidation,
dissolution or other winding-up of GTS, whether voluntary or involuntary, or any
assignment for the benefit of creditors or other marshalling of assets or
liabilities, all senior indebtedness will be entitled to be paid in full before
any payment or distribution is made on account of the principal of (including
upon redemption), premium, if any, or interest on the bonds or additional
amounts. Notwithstanding the foregoing, bondholders may receive shares of stock
and any debt securities that are subordinated at least to the same extent as the
bonds to senior indebtedness and any securities issued in exchange for senior
indebtedness.
During the continuance of any default in the payment of principal, premium,
if any, or interest on any designated senior indebtedness, when the same becomes
due and such default is continuing beyond any applicable grace periods, and
after receipt by the trustee and us from the representative of holders of such
designated senior indebtedness of written notice of such default, no direct or
indirect payment by or on our behalf of any kind or character may be made on
account of the principal of (including redemption amount), premium, if any, or
interest or additional amounts on, or the purchase, redemption, or other
acquisition of, the bonds unless and until such default has been cured or waived
or has ceased to exist or such designated senior indebtedness shall have been
discharged or paid in full.
In addition, upon the occurrence and during the continuance of any other
default with respect to any designated senior indebtedness pursuant to which the
maturity thereof may be accelerated as a result of such default and upon receipt
by the trustee and us from the representatives of holders of such designated
senior indebtedness of written notice of such non-payment default, no payment of
any kind or character may be made by us on account of the principal of, premium,
if any, or interest or additional amounts on, or the purchase, redemption or
other acquisition of, the bonds for the period specified below.
This period shall commence upon receipt of written notice of a non-payment
default by the trustee from the representatives of holders of designated senior
indebtedness and shall end on the earliest to occur of the following events: (i)
179 days has elapsed since the receipt of such notice (provided such designated
senior indebtedness shall not theretofore have been accelerated), (ii) such
default is cured or waived or ceases to exist or such designated senior
indebtedness is discharged or paid in full, or (iii) such period shall have been
terminated by written notice to us or the trustee from the representative of
holders of designated senior indebtedness initiating such period, after which we
shall promptly resume making any and all required payments in respect of the
bonds, including any missed payments. Only one period with respect to the bonds
may be commenced within any 365 consecutive day period. No non-payment default
that existed or was continuing on the date of the commencement of any such
period will be, or can be, made the basis for the commencement of a second such
period, whether or not within a period of
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365 consecutive days, unless such default has been cured or waived for a period
of not less than 90 consecutive days. In no event will such a period extend
beyond 179 days from the receipt by the trustee of the notice initiating such
period and there must be a 186 consecutive day period in any 365 day period
during which no such period is in effect. Notwithstanding the foregoing, no
further notice may be given in respect of any non-payment default unless and
until all scheduled payments of principal, premium, if any, and interest not
paid on the bonds during any such period as a result of any notice or
acceleration shall have been paid in full in cash.
If we fail to make any payment on the bonds when due after giving effect to
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an event of default
under the Indenture and would enable the holders of the bonds to accelerate the
maturity thereof. We will promptly notify holders of senior indebtedness if
payment of the bonds is accelerated because of an event of default. See
"-- Events of Default."
By reason of such subordination, in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or similar case or proceeding of GTS, our creditors who are holders of senior
indebtedness may recover more, ratably, than the holders of the bonds and funds
which would be otherwise payable to the holders of the bonds will be paid to the
holders of the senior indebtedness to the extent necessary to pay the senior
indebtedness in full, and we may be unable to meet our obligations fully with
respect to the bonds.
At March 31, 1999 we had $105.0 million of senior indebtedness outstanding.
The indenture limits, but does not prohibit, the incurrence by us of additional
indebtedness (including indebtedness which is senior to the bonds). See "Risk
Factors -- We may default on our obligations to bondholders because the bonds
are subordinate obligations."
CONVERSION
(A) CONVERSION RIGHT
Subject to and upon compliance with the provisions of the Indenture, any
bondholder shall have the right, at its option, at any time and from time to
time on or after the occurrence of a complying public equity offering and prior
to the close of business on June 30, 2000, to convert the principal amount of
any such bond, or any portion of such principal amount (subject to minimum
authorized denominations of the bonds), into that number of fully paid and
non-assessable shares of our common stock (as such shares shall then be
constituted) obtained by dividing the principal amount of the bond or portion
thereof surrendered for conversion by the conversion price in effect at such
time, by surrender of the bond so to be converted in whole or in part in the
manner provided in paragraph (B)(i) below. A bondholder is not entitled to any
rights of a holder of shares of our common stock until such holder has converted
its bonds to shares of common stock, and only to the extent such bonds are
deemed to have been converted to shares of common stock under the Indenture. A
complying public equity offering occurred on February 10, 1998 and the
conversion price is $20 per share.
(B) EXERCISE OF CONVERSION RIGHT; ISSUANCE OF SHARES OF COMMON STOCK ON
CONVERSION
(i) Exercise of Conversion Right
Bondholders have a conversion right which is exercisable in whole or in
part at any time and from time to time subsequent to the conversion date but not
later than the maturity of the bond. In order to exercise its conversion right,
a bondholder shall complete a notice in the then current form obtainable from
the trustee or a specified office of a conversion agent (which may be
accompanied by a share transfer form, or other instrument which may be required,
signed by the bondholder or may include an authorization signed by the
bondholder, authorizing the bondholder's nominee to become the registered
transferee and to execute any requisite transfer form or other instrument which
may be required, on behalf of the bondholder) and deliver such conversion notice
and where appropriate, an executed share transfer form, or other instrument
which may be required, to the trustee or a specified office of any conversion
agent (together with the relevant bond or bonds if in definitive form) and any
payment required by
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paragraph (D) below. Once given, a conversion notice shall be irrevocable and
may not be withdrawn without our consent in writing.
(ii) General
In the event where bondholders have elected to convert their bonds by
giving notice thereof to us in accordance with the terms of the Indenture, then
any subsequent redemption of the bonds shall not affect the right of the holders
of such bonds to receive shares of our common stock and such bonds shall not be
so redeemed. No earlier than 60 days and no later than 30 days prior to the
maturity of the bonds, we shall deliver a notice to the trustee, the bondholders
and the Luxembourg Stock Exchange of the status of the conversion rights, if
any, of the bondholders.
(C) CONVERSION PRICE
Each bond will be converted into such number of shares of common stock as
is equal to the principal amount of such bond divided by $20.
(D) STAMP AND OTHER DUTIES AND EXCHANGE COSTS
Payment of all stamp, transfer and registration duties (if any) and any
brokers' commission and stock exchange transaction charges and any other tax
thereon arising on exercise of conversion rights and/or on the transfer or
delivery of shares of common stock by us (or the trustee pursuant to the
Indenture) to or to the order of the trustee or the relevant bondholder in
connection therewith, payable in or imposed by the United States, any state or
other political sub-division thereof and any other jurisdiction in which the
register in respect of any securities is located will be made or procured by us.
If we shall fail to pay any such duties or costs, the relevant bondholder shall
be entitled to tender and pay the same. We have covenanted in the indenture to
reimburse each such bondholder in respect of the payment of such duties or costs
and any penalties paid in respect thereof. A bondholder exercising conversion
rights must pay to the relevant conversion agent any such duties or costs
arising in any other circumstances.
(E) CASH PAYMENT INSTRUCTIONS
Upon the exercise of conversion rights, a bondholder shall, when delivering
the relevant conversion notice, give directions to the relevant conversion agent
for payment of any cash sum which such bondholder is entitled to receive
pursuant to the indenture and which shall be paid by way of U.S. dollar check
drawn on a bank in the City of New York or by wire transfer to a U.S. dollar
account maintained by the payee with a bank in the City of New York.
(F) FRACTIONS ARISING ON CONVERSION
No fraction of a share of common stock shall be delivered on exercise of
conversion rights but a cash payment shall be made by us to the relevant
bondholder, pursuant to directions given to the relevant conversion agent by the
bondholder as provided in (E) above, not later than 21 days after the conversion
date, of an amount equal to the value of such fraction (such amount to be
rounded up to the nearest U.S.$0.01).
REDEMPTION AND PURCHASE
(A) FINAL REDEMPTION AT MATURITY
Unless previously redeemed or converted or to be converted or purchased and
cancelled, on June 30, 2000 outstanding bonds will be redeemed by us at their
principal amount plus accrued interest, if any. However, in the event that a
complying public equity offering has not occurred prior to June 30, 2000,
outstanding bonds will be redeemed at maturity at 121.0% of their principal
amount, plus accrued interest, if any.
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(B) ACCELERATION FOLLOWING AN EVENT OF DEFAULT
If the bonds are accelerated following the occurrence of an event of
default, the bonds will be repaid at their principal amount multiplied by 106.5%
plus accrued interest to the date of acceleration, if the date of acceleration
occurs on or before June 30, 1998; 113.5% plus accrued interest to the date of
acceleration if the date of acceleration occurs after such date but on or before
June 30, 1999; and 121.0% if the date of acceleration occurs thereafter;
provided that notwithstanding the foregoing, each bondholder shall have the
option to exercise its conversion right, if any.
The payment of the premium referred to above upon the occurrence of an
event of default may not be enforceable under U.S. federal or New York Law.
(C) CANCELLATION
All bonds redeemed pursuant to the Indenture or purchased by us in the open
market will be forthwith cancelled and may not be reissued or sold. We will not
permit our subsidiaries and will to the fullest extent of the rights available
to us under the relevant contractual or organizational documents not permit our
significant joint ventures to purchase any of the bonds.
(D) LIMITED OPTIONAL REDEMPTION
The bonds are redeemable at our option, in whole but not in part on or
after the second anniversary of a complying public equity offering, on not less
than 90 nor more than 120 days' prior notice (which notice shall provide the
trustee and the bondholders information concerning the right of bondholders to
convert prior to the redemption date and information pertinent to the conversion
price) at the principal amount thereof plus accrued interest to the redemption
date, provided that the shares of common stock into which bonds are convertible
would not be at the time of redemption "restricted securities" in the hands of
any bondholder not affiliated with us, within the meaning of the Securities Act,
and provided further, that the average closing price of the shares of common
stock for the 20 consecutive trading days prior to the date of our notice of
redemption is greater than 130% of the conversion price determined in
conjunction with such complying public equity offering.
The redemption of the bonds at the option of GTS under the Indenture may be
prohibited by the terms of or result in an event of default under or require the
consents of holders of senior indebtedness of GTS. Our obligations under our
senior indebtedness represent obligations senior in right of payment to the
bonds. Consequently, the purchase of the bonds pursuant to an optional
redemption will be precluded, absent any required consent of the lenders under
senior indebtedness or repayment of all amounts outstanding thereunder or the
waiver of any event of default caused thereunder.
EVENTS OF DEFAULT
The following are "events of default" under the indenture:
(a) we fail to pay the principal of or any premium (if any) or
interest (including additional amounts) on any of the bonds when due (upon
maturity, acceleration, redemption, required purchase or otherwise and
whether or not prohibited by the subordination provisions) and, in the case
of interest only, such failure continues for a period of 30 days; or
(b) we do not perform or comply with any one or more of its other
obligations in the bonds or the Indenture (other than a default under (a)
above) for a period of 60 days after written notice of such default shall
have been given to us by the trustee or to us and the trustee by holders of
at least 25% in aggregate principal amount of bonds then outstanding; or
(c) (i) one or more defaults in the payment of principal of or
premium, if any, on our indebtedness or that of any material subsidiary or
any significant joint venture aggregating U.S.$10 million (or the foreign
currency equivalent thereof) or more, when the same becomes due and payable
at the maturity thereof, and such default or defaults shall have continued
after any applicable grace period and shall not have been cured or waived
or (ii) our indebtedness or that of
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any material subsidiary or any significant joint venture aggregating
U.S.$10 million (or the foreign currency equivalent thereof) or more shall
have been accelerated or otherwise declared due and payable, or required to
be prepaid or repurchased (other than by regularly scheduled required
prepayment) prior to the maturity thereof, or
(d) any holder or holders of indebtedness aggregating U.S.$10 million
(or the foreign currency equivalent thereof) or more of GTS or that of any
material subsidiary or any significant joint venture shall notify us or the
trustee of the intended sale or disposition of any of our assets, those of
any of our material subsidiaries or significant joint ventures that have
been pledged to or for the benefit of such person to secure such
indebtedness, or shall commence proceedings, or take action (including by
way of set-off) to retain in satisfaction of any such Indebtedness, or to
collect on, seize, dispose of or apply, any such assets pursuant to the
terms of any agreement or instrument evidencing any such indebtedness or in
accordance with applicable law; or
(e) one or more final judgments (or judgments which can no longer be
appealed) or orders or similar judicial or administrative action shall be
rendered against us or any material subsidiary or significant joint venture
for the payment of money, either individually or in an aggregate amount, in
excess of U.S.$10 million (or the foreign currency equivalent thereof) and
which shall not have been discharged and either (i) an enforcement
proceeding shall have been commenced by any creditor upon such judgement or
order or similar judicial or administrative action or (ii) there shall have
been a period of 60 consecutive days during which a stay of enforcement of
such judgment or order, by reason of a pending appeal or otherwise, was not
in effect; or
(f) we or any material subsidiary or material joint venture, pursuant
to or under or within any applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or like law; (i) commences a
voluntary case or proceeding; (ii) consents to the entry of an order for
relief against it in an involuntary case or proceeding; (iii) makes a
general assignment for the benefit of its creditors; (iv) or shall
generally not pay its debts when such debts become due or shall admit in
writing its inability to pay its debts generally; (v) or a court of
competent jurisdiction (or like entity) shall enter an order or decree
under any applicable law described above that is for relief against us or
any material subsidiary or material joint venture, as applicable in an
involuntary case or proceeding, appoints a custodian for us or such other
entity for all or substantially all of our properties or orders the
liquidation of us or such other entity, as applicable and in each such case
in this clause (v), the order or decree remains unstayed and in effect for
60 days; (vi) or we or such other entity shall take any corporate action
regarding any of the foregoing; or
(g) excluding the events referred to in paragraph (f) above, any
seizure, compulsory acquisition, expropriation or nationalization of any of
our assets, those of any subsidiary or significant joint venture for which
there is not paid fair market value and where the seizure, compulsory
acquisition, expropriation or nationalization (whether by an outright
taking or by confiscatory tax or other policies), individually or in the
aggregate, could reasonably be expected to result in a material adverse
effect on the business, (including without limitation the ability to
generate cash flow over the life of the bonds) the condition (financial or
other), our properties or our results of operations, our subsidiaries, and
significant joint ventures on a combined basis.
If an event of default (other than as specified in subparagraph (f) above)
shall occur and be continuing, the trustee, by notice to us, or the holders of
at least 25% in aggregate principal amount of the bonds then outstanding by
notice to the trustee and to us, may declare the principal of, premium, if any,
and accrued and unpaid interest on all of the outstanding bonds due and payable
immediately upon which declaration, all amounts payable in respect of the
outstanding bonds shall be due and payable immediately. If an event of default
specified in subparagraph (f) above occurs and is continuing, then the principal
of, premium, if any, and accrued and unpaid interest, on all of the outstanding
bonds shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the trustee or any holders of bonds.
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After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
trustee, the holders of a majority in aggregate principal amount of the
outstanding bonds, by written notice to us and the trustee, may rescind such
declaration if (a) we have paid or deposited with the trustee a sum sufficient
to pay (i) all sums paid or advanced by the trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the trustee,
its agents and counsel, (ii) all overdue interest on all bonds, (iii) the unpaid
principal of and premium, if any, on any outstanding bonds which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate borne by the bonds, and (iv) to the extent that payment of such interest is
lawful, interest upon overdue interest and overdue principal at the rate borne
by the bonds which has become due otherwise than by such declaration of
acceleration; (b) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction; and (c) all events of default, other than
the non-payment of principal of, premium, if any, and interest on the bonds that
have become due solely by such declaration of acceleration, have been cured or
waived.
The holders of not less than a majority in aggregate principal amount of
the outstanding bonds may on behalf of the holders of all the bonds waive any
past defects under the Indenture, existing default or event of default, except a
default or event of default in the payment of the principal of, premium, if any,
or interest on any bond, or in respect of a covenant or provision which under
the Indenture cannot be modified or amended without the consent of the holder of
each bond outstanding.
No holder of any of the bonds has any right to institute any proceeding
with respect to the Indenture or the bonds or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of outstanding bonds have
made written requests, and offered reasonable indemnity, to the trustee to
institute such proceeding as trustee under the bonds and the Indenture, and the
trustee has failed to institute such proceeding within 30 days after receipt of
such notice and the trustee, within such 30-day period, has not received
directions inconsistent with such written request by holders of a majority in
aggregate principal amount of the outstanding bonds. Such limitations do not
apply, however, to a suit instituted by a holder of a bond for the enforcement
of the payment of the principal of, premium, if any, or interest on such bond on
or after the respective due dates expressed in such bonds.
During the existence of an event of default, the trustee is required to
exercise such rights and powers vested in it under the indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
trustee, whether or not an event of default shall occur and be continuing, the
trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the indenture at the request or direction of any of the
holders unless such holders shall have offered to the trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the trustee, the holders of not less than a majority in aggregate principal
amount of the outstanding bonds have the right to 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 the trustee under the indenture.
If a default or an event of default occurs and is continuing and is known
to the trustee, the trustee shall mail to each holder of the bonds, and to the
Luxembourg Stock Exchange for so long as the bonds are listed thereon, notice of
the default or event of default within 30 days after obtaining knowledge
thereof. Except in the case of a default or an event of default in payment of
principal or premium, if any, or interest on any bonds, the trustee may withhold
the notice to the holders of such bonds if a committee of its trust officers in
good faith determines that withholding the notice is in the interest of the
holders of the bonds.
REPORTING REQUIREMENTS
For the fiscal quarters ending June 30, 1997 and September 30, 1997 and for
the fiscal year ended December 31, 1997 we will (i) transmit by mail to all
bondholders, as their names and addresses appear in the register, without cost
to such bondholders, and (ii) file with the trustee copies of our quarterly and
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audited annual financial reports (including our condensed, combining financial
data in the form and scope set forth in the condensed, consolidated financial
statements for the first quarter of 1997 and for the fiscal year ending December
31, 1996, respectively) that are generally distributed to its shareholders at
the time such reports are so distributed.
Beginning with our financial statements for the quarter ending March 31,
1998 and thereafter, whether or not we are subject to Section 13(a) or 15(d) of
the Exchange Act, or any successor provision thereto, we shall prepare the
annual and quarterly reports which we would have been required to file with the
Securities and Exchange Commission pursuant to such Section 13(a) or 15(d) or
any successor provision thereto (including, until such time as we are required
to file reports with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act, the condensed, combining financial data in the form and scope set
forth in the condensed, consolidated financial statements described above) on or
prior to the respective dates by which we would have been required so to file
such documents. We shall also in any event within 15 days of each required
filing date (i) transmit by mail to all bondholders, as their names and
addresses appear in the register, without cost to such bondholders, and (ii)
file with the trustee, copies of such annual and quarterly reports.
We are required to furnish to the trustee annual and quarterly statements
as to our performance of our obligations under the Indenture and as to any
default in such performance. We are also required to notify the trustee within
thirty (30) days after we have knowledge of any event which is, or after notice
or lapse of time or both would become, an event of default under the indenture.
REGISTRATION RIGHTS
We filed a registration statement, of which this prospectus forms a part
pursuant to the terms of a registration rights agreement with the trustee,
amongst others, for the benefit of the holders of the bonds. Under the
registration rights agreement with respect to the bonds, we agreed, at our
expense, to cause a shelf registration statement covering the issuance, or
issuance and resale as the case may be, and resale of a sufficient number of
shares of common stock that may be issuable upon conversion of the bonds to be
declared effective under the Securities Act prior to the first date on which any
of such shares of common stock may be issued upon such conversion. We agreed to
use our best efforts to maintain the effectiveness of such shelf registration
statement until the earliest of (i) the expiration of the time period referred
to in Rule 144(k) under the Securities Act with respect to all beneficial
holders of shares of common stock that are not our affiliates within the meaning
of the Securities Act, and (ii) such time as all the shares of common stock
covered by such registration statement have been sold pursuant to such
registration statement. We will provide to each bondholder, each holder of
shares of common stock into which bonds are converted, and the paying agent,
conversion agent and transfer agent in Luxembourg copies of the prospectus that
is part of such registration statement, notify such holders of the effectiveness
of such registration statement and take all other action required to permit
unrestricted resales of such shares of common stock. A holder who sells the
shares of common stock pursuant to the shelf registration statement generally
will be required to be named as a selling stockholder in the related prospectus
and to deliver a prospectus to purchasers and will be bound by the provisions of
the registration rights agreement which are applicable to such holder (including
certain indemnification provisions).
Each holder must notify us not later than three business days prior to any
proposed sale by such holder of shares of common stock pursuant to the shelf
registration statement, which notice shall be effective for five business days.
We may, upon written notice to such holder, suspend such holder's use of the
prospectus (which is part of the shelf registration statement) for up to two
periods not to exceed 45 consecutive days but not more than 60 days in any
365-day period if we in our reasonable judgment believes it may possess material
non-public information the disclosure of which would have an adverse effect on
us or any of our subsidiaries or any significant joint venture. Each holder, by
its acceptance of a bond, agrees to hold any communication by us in response to
a notice of a proposed sale under the shelf registration statement in
confidence.
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If the registration statement of which this prospectus is a part does not
remain effective with the SEC as required by the registration rights agreement,
additional interest will accrue on the bonds from and including the day
following such registration default to but excluding the day on which such
registration default has been cured. These liquidated damages will be paid
semi-annually in arrears, with the first semi-annual payment due on the first
interest payment date, as applicable, following the date on which such
liquidated damages begin to accrue and will accrue at a rate per annum of one
quarter of one per cent (.25%) of the principal amount, to and including the
90th day following such registration default and at a rate per annum of one half
of one cent (.5%) thereof from and after the 91st day following such
registration default. In no event will liquidated damages accrue at a rate per
annum exceeding one half of one per cent (.5%).
The specific provisions relating to the registrations described above will
be contained in the registration rights agreement which is filed as an exhibit
hereto.
RESERVATION OF SHARES OF COMMON STOCK
We shall at all times reserve and keep available out of our authorized
common stock, solely for the purpose of issuance or delivery upon conversion of
the bonds, the number of shares of common stock that it reasonably believes will
be required to be delivered in connection with such conversion pursuant to the
terms of the Indenture.
GOVERNING LAW
The indenture and the bonds will be governed by the laws of the State of
New York.
CERTAIN 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.
"asset sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any person other than GTS or a wholly-owned subsidiary of GTS, in
one or a series of related transactions, of (a) any capital stock of any
subsidiary or significant joint venture (other than in respect of director's
qualifying shares or investments by foreign nationals mandated by applicable
law); (b) all or substantially all of the properties and assets of any division
or line of business of GTS or any subsidiary or significant joint venture; or
(c) any other properties or assets of GTS or any subsidiary or significant joint
venture other than in the ordinary course of business. For the purposes of this
definition, the term "asset sale" shall not include (i) any sale, transfer or
other disposition of equipment, tools or other assets (including capital stock
or other equity of any subsidiary or significant joint venture) by GTS or any of
its subsidiaries or significant joint ventures in one or a series of related
transactions in respect of which GTS or such subsidiary or significant joint
venture receives cash or property with an aggregate fair market value of
U.S.$10,000,000 (or the foreign currency equivalent thereof) or less; (ii) any
sale, issuance, conveyance, transfer, lease or other disposition of properties
or assets that is governed by the provisions described under "-- Merger, Sale of
Assets, Etc." above and (iii) any direct or indirect sale, transfer or other
disposition of shares of capital stock of Hermes so long as after such sale,
transfer or other disposition GTS owns or controls at least 51% of the voting
stock of Hermes Railtel.
"cash equivalents" means, at any time, (a) any evidence of indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (b) certificates of deposit or acceptances with a
maturity of 180 days or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than U.S.$500,000,000 (or the foreign currency equivalent
thereof); (c) certificates of deposit with a maturity of 180 days or less of any
financial institution that is not organized under the laws of the United States,
any state thereof or the District of Columbia that are rated at least A-1 by S&P
or at least P-1 by Moody's or at least an equivalent rating category of another
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nationally recognized securities rating agency; and (d) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the government of the United States of
America or issued by any agency thereof and backed by the full faith and credit
of the United States of America, in each case maturing within 180 days from the
date of acquisition; provided that the terms of such agreements comply with the
guidelines set forth in the Federal Financial Agreements of Depository
Institutions With Securities Dealers and Others, as adopted by the Comptroller
of the Currency on October 31, 1985.
"closing price" means the closing price of the shares of common stock on a
qualifying stock exchange or if the shares of common stock are listed on more
than one such exchange the average of such closing prices on all such exchanges.
"common stock" means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the issue date or issued after the issue date, and includes,
without limitation, all series and classes of such common stock.
"conversion agent" means the office or agency (which shall be located in
the Borough of Manhattan, the City of New York, State of New York) where bonds
may be presented for conversion.
"conversion date" means the earliest date possible after the listings of
the shares of common stock on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market that GTS may deliver shares of common
stock to converting bondholders.
"default" means any event that is, or after notice or passage of time or
both would be, an event of default.
"designated senior indebtedness" means senior indebtedness permitted under
the Indenture, the principal amount of which is $30 million (or the foreign
currency equivalent) or more and has been designated by GTS as designated senior
indebtedness (which includes the Chatterjee notes and the capital research
notes).
"event of default" has the meaning set forth under "events of default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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 transaction; (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
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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 bonds (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 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.
"joint venture" means joint venture, partnership or other similar
arrangement, whether corporation, partnership or other legal form where GTS or
one or more subsidiaries has, directly or indirectly, less than a majority of
the voting stock or other ownership interest.
"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% of the
total combined assets of GTS at the end of such period or (ii) total revenues
which exceeded 15% of the total combined revenues of GTS for such period.
"material subsidiary" means a subsidiary that, as of the end of the most
recent four-quarter period, had (i) total assets which exceeded 10% of the total
combined assets of GTS at the end of such period or (ii) total revenues which
exceeded 15% of the total combined revenues of GTS for such period.
"maturity" means, (i) when used with respect to the bonds, June 30, 2000
and (ii) when used with respect to any Indebtedness other than the bonds, 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.
"paying agent" means the office or agency (which shall be located in the
Borough of Manhattan, the City of New York, State of New York) where bonds may
be presented for payment of principal, premium, if any, and interest.
"person" means any individual, corporation, limited liability company
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"redemption date" means with respect to any bonds to be redeemed, the date
fixed by GTS for such redemption pursuant to the indenture and the bonds.
"senior indebtedness" means the principal of, premium, if any, interest,
and other amounts payable on or in respect of any indebtedness of GTS, whether
outstanding on the issue date 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
bonds. Notwithstanding the foregoing, "senior indebtedness" shall not include
(a) indebtedness evidenced by the bonds, (b) indebtedness that is pursuant to
the instrument creating such indebtedness expressly subordinate or junior in
right of payment to any Indebtedness of GTS, (c) indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title 11,
United States Code, is without recourse to GTS, (d) indebtedness which is
represented 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 GTS for
compensation to employees or for services rendered to GTS, (g) any liability for
federal, state, local or other taxes owed or owing by GTS, (h) other than the
Chatterjee notes and the capital research notes, indebtedness of GTS to a
wholly-owned subsidiary or any other affiliate of GTS or any of such affiliate's
wholly-owned subsidiaries, (i) that portion of any indebtedness which is
incurred by GTS in violation of the indenture and (j) amounts owing under leases
(other than capitalized lease obligations).
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"significant joint venture" means any existing joint venture or any
eligible joint venture.
"subordinated indebtedness" means Indebtedness of GTS which is by its terms
subordinated in right of payment to the bonds.
"subsidiary" means, with respect to GTS, (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 GTS or by GTS and one or more subsidiaries and
(ii) any other person (other than a corporation), including, without limitation,
a joint venture, in which GTS, one or more subsidiaries of GTS or GTS 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.
"transfer agent" means the office or agency (which shall be located in the
Borough of Manhattan, the city of New York, state of New York) where bonds may
be presented for registration of transfer or for exchange.
ENFORCEMENT
At any time after the bonds shall have become due and payable, the trustee
may, at its discretion and without further notice, take such proceedings against
us as we may think fit to enforce repayment of the bonds together with premium
(if any) and accrued interest and to enforce the provisions of the indenture,
but it shall not be bound to take any such proceedings unless (a) it shall have
been so directed in writing by the holders of at least 25% in principal amount
of the bonds then outstanding, and (b) it shall have been indemnified to its
satisfaction. No bondholder shall be entitled to proceed directly against us
unless the trustee, having become bound so to proceed, fails to do so within 30
days after the receipt of the request and offer, such request has not been
rescinded pursuant to the terms of the Indenture, and such failure to proceed
shall be continuing.
NOTICES
Notices to bondholders shall be validly given if (i) mailed to them at
their respective addresses in the register and (ii) published in an English
language newspaper of general circulation in Europe approved by the trustee,
currently expected to be the Financial Times, and, so long as the bonds are
listed on the Luxembourg Stock Exchange, published in a daily newspaper of
general circulation in Luxembourg approved by the trustee, currently expected to
be the Luxemburger Wort. Any such notice shall be deemed to have been given on
the first date on which both conditions shall have been met.
MEETINGS OF BONDHOLDERS, MODIFICATION AND WAIVER
The indenture contains provisions for convening meetings of bondholders to
consider any matter affecting their interests, including any modification of, or
arrangement in respect of, the terms and conditions of the bonds or of the
provisions of the indenture. Certain special quorum provisions apply for
meetings of bondholders convened for the purpose of amending certain terms
concerning, inter alia, the amounts payable on and the currency of payment of
the bonds and the conversion rights. Any resolution duly passed at any such
meeting will be binding on all bondholders, whether present or not.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
bonds, as expressly provided for in the indenture) as to all outstanding bonds
when either (a) all the bonds theretofore authenticated and delivered (except
lost, stolen or destroyed bonds which have been replaced or repaid and bonds for
whose payment money has theretofore been deposited with the trustee or any
paying agent in trust or segregated and held in trust by
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us and thereafter repaid to us or discharged from such trust) have been
delivered to the trustee for cancellation and we have paid all other sums
payable by it under the indenture or (b)(i) we have distributed to the trustee
and each holder of bonds notice of redemption or all bonds have otherwise become
due and payable; (ii) all bonds not theretofore delivered to the trustee for
cancellation (except lost, stolen or destroyed bonds which have been replaced or
paid) have been called for redemption pursuant to the terms of the bonds or have
otherwise become due and payable and we have irrevocably deposited or caused to
be deposited with the trustee funds in an amount sufficient to pay and discharge
the entire indebtedness on the bonds not theretofore delivered to the trustee
for cancellation, for principal of, premium, if any, and interest on the bonds
to the date of deposit together with irrevocable instructions from us directing
the trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (iii) we shall have irrevocably deposited or
caused to be deposited with the trustee or a trustee reasonably satisfactory to
the trustee, under the terms of an irrevocable trust agreement in form and
substance satisfactory to the trustee, as trust funds in trust solely for the
benefit of you for that purpose, money in such amount as is sufficient without
consideration of reinvestment of such interest, to pay principal of, premium, if
any, and interest on the outstanding bonds to maturity or redemption, as
certified in a certificate of a nationally recognized firm of independent public
accountants, provided that the trustee shall have been irrevocably instructed to
apply such money to the payment of said principal, premium, if any, and interest
with respect to the bonds and, provided, further, that from and after the time
of deposit, the money deposited shall not be subject to the rights of holders of
senior indebtedness' pursuant to the provisions of Article Ten; (iv) there
exists no default or event of default under the Indenture; (v) we shall have
paid all other sums payable under the Indenture by us; and (vi) we have
delivered to the trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
termination of our obligations under the bonds and the Indenture have been
complied with.
AMENDMENTS AND WAIVERS
From time to time, we, when authorized by a resolution of our board of
directors, and the trustee may, without the consent of the holders of any
outstanding bonds, amend, waive or supplement the indenture or the bonds for
certain specified purposes, including, among other things, (a) curing
ambiguities, defects or inconsistencies, (b) qualifying, or maintaining the
qualification of, the indenture under the Trust Indenture Act of 1939, (c)
evidencing the succession of another person to us or any other obligor on the
bonds, and the assumption by any such successor of the covenants of us or such
obligor in the Indenture and in the bonds in accordance with the "Merger, Sale
of Assets, Etc." covenant; (d) adding to our covenants of or any other obligor
upon the bonds for the benefit of the holders of the bonds or surrendering any
right or power conferred upon us or any other obligor upon the bonds, as
applicable, in the indenture or in the bonds; (e) evidencing the replacement of
the trustee by a trustee that is appointed to so act pursuant to the terms of
the indenture; and (f) evidencing or making any other change that does not
adversely affect the rights of any holder of bonds; provided, however, that such
change does not adversely affect the rights of any holder of bonds and we have
delivered to the Trustee an opinion of counsel to such effect.
Other amendments and modifications of the indenture or the bonds may be
made by us and the trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding bonds; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding bond affected thereby, (i) reduce the principal
amount of, extend the fixed maturity of or alter the redemption provisions of,
the bonds, (ii) change the currency in which any bonds or any premium or the
interest thereon is payable or make the principal of, premium, if any, or
interest on any bond payable in money other than that stated in the bond, (iii)
reduce the percentage in principal amount of outstanding bond that must consent
to an amendment, supplement or waiver or consent to take any action under the
indenture or the bonds, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to the bonds, (v) waive a default
in payment with respect to the bonds, (vi) amend, change or modify our
obligations to make and consummate a change of control offer in the event of a
change of control or make and consummate the offer with respect to any asset
sale
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or modify any of the provisions or definitions with respect thereto, (vii)
reduce or change the rate or time for payment of interest on the bonds, (viii)
modify or change any provision of the indenture affecting the subordination or
ranking of the bonds in manner adverse to the holders of the bonds, or (ix) take
any other action otherwise prohibited by the indenture or be taken without the
consent of each bondholder affected thereby.
THE TRUSTEE
The indenture provides that, except during the continuance of an event of
default, the trustee thereunder will perform only such duties as are
specifically set forth in the indenture. If an event of default has occurred and
is continuing, the trustee will exercise such rights and powers vested in it
under the indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The trustee may, without the consent of the bondholders:
(i) agree to any modification of the provisions of the indenture or
the bonds which, in the opinion of the trustee, is of a formal, minor or
technical nature, is made to correct a manifest error or to comply with
mandatory provisions of law or is not materially prejudicial to the
interests of the bondholders;
(ii) waive or authorize any breach or proposed breach by us of the
provisions of the indenture or the bonds, or determine that the occurrence
of any event of default shall not be treated as such, which, in the opinion
of the trustee, is not materially prejudicial to the interests of the
bondholders.
Any such modification, waiver or authorization shall be binding on the
bondholders and, if the trustee so requires, such modification shall be notified
by us to the bondholders as soon as possible.
INDEMNIFICATION OF THE TRUSTEE
The indenture contains provisions for the indemnification of the trustee
and for its relief from responsibility, including provisions relieving it from
taking proceedings to enforce repayment or taking steps to enforce the
conversion rights unless indemnified to its satisfaction. The trustee is
entitled to enter into business transactions with us or any entity related to us
without accounting for any profit.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 135,000,000 shares of common
stock, par value $0.10 per share, of which 81,221,352 shares were issued and
outstanding as of March 31, 1999, and 10,000,000 shares of preferred stock, par
value $0.0001 per share, of which none were issued and outstanding as of March
31, 1999.
In addition, we:
- agreed to issue up to 4,037,500 shares of common stock in connection with
our acquisition of NetSource (of which 3,873,705 shares of common stock
were issued as of December 31, 1998 and up to 1.4 million additional
shares of common stock may be issued, at our option, contingent on
NetSource achieving certain performance targets in the first two quarters
of 1999),
- issue an additional 1,784,205 shares of common stock to holders of Esprit
Telecom stock options, and
- issued 1,850,497 shares of common stock as consideration for the 52% of
the shares of Omnicom which we acquired on April 26, 1999.
For a discussion of the risks associated with these additional issuances of
stock, see "Risk Factors -- Substantial resales of our common stock may depress
our stock price and dilute stockholders' ownership interest."
On April 23, 1999, we issued 100,000 shares of the 7 1/4% convertible
preferred stock.
In our annual shareholders meeting scheduled for June 16, 1999, we intend
to seek approval to increase our authorized capital stock from 135,000,000
shares of common stock to 270,000,000 shares of common stock. The vote of the
holders of at least a majority of the issued and outstanding shares of common
stock, voting together as a single class is required to approve the increase in
the authorized common stock. We believe the increase in the number of authorized
shares of common stock will provide flexibility in connection with financings,
acquisitions of other companies, other investment opportunities, stock dividends
or splits, and for other corporate purposes that our board of directors deems
advisable.
The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares we issue 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, which we refer to as the DGCL.
OUR 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 all
dividends that are declared from time to time by the board of directors out of
funds legally available for that purpose. For more information, we refer you to
"Dividend Policy." Upon dissolution, holders of common stock are entitled to
share pro rata in our assets remaining after payment in full of all of our
liabilities and obligations, including payment of the liquidation preference, if
any, of any preferred stock then outstanding.
OUR PREFERRED STOCK
The board of directors may authorize the issuance of one or more series of
preferred stock having rights, including voting, conversion and redemption
rights, and preferences, including dividend and liquidation preferences, that
our board of directors may determine, without further action by our
stockholders.
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The issuance of preferred stock by the board of directors could adversely
affect the rights of the holders 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, have all the rights
appurtenant to the common stock. As of March 31, 1999, we have authorized
200,000 shares of Series A junior participating preferred stock, par value
$.0001 per share. Other than our convertible preferred stock, no other series of
preferred stock has been issued. There are no issued and outstanding shares of
Series A preferred stock and no Series A preferred stock is being offered by
this prospectus. A right to purchase shares of Series A preferred stock,
however, is attached to each share of common stock. We have authorized 200,000
shares of Series A preferred stock initially for issuance upon exercise of those
rights.
The units 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 we may issue. 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.
OUR DEPOSITARY SHARES AND 7 1/4% CONVERTIBLE PREFERRED STOCK
In April 1999, we issued and sold pursuant to exemptions from registration
under the Securities Act, 10,000,000 depositary shares. Each depositary share
represents 1/100 of a share of 7 1/4% convertible preferred stock deposited
under the deposit agreement dated as of April 23, 1999, among GTS, The Bank of
New York as depositary, and all holders from time to time of depositary receipts
issued under the deposit agreement. Subject to the terms of the deposit
agreement, each owner of a depositary share is entitled, proportionately, to all
the rights, preferences and privileges of the shares of 7 1/4% convertible
preferred stock represented by those depositary shares (including dividend,
conversion, voting, and liquidation rights), and is subject to all of the
limitations of the fractional shares of 7 1/4% convertible preferred stock
represented by those depositary shares. The depositary shares are evidenced by
depositary receipts.
In summary, the holders of the depositary shares
- have the option to convert the 7 1/4% convertible preferred stock
represented by those depositary shares into our common stock,
- are entitled to receive dividends, and
- are entitled to vote in certain circumstances.
DTC will act as securities depositary for the depositary shares.
The following is a summary of certain terms of the 7 1/4% convertible
preferred stock. The terms of the 7 1/4% convertible preferred stock are
contained in the Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and
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Restrictions which shall be referred to as the "certificate of designations."
This summary is not intended to be complete and is subject to, and qualified in
its entirety by reference to, the certificate of designations.
Under the certificate of designations, 100,000 shares of 7 1/4% convertible
preferred stock with a liquidation preference of $5,000 per share have been
authorized for issuance. The 7 1/4% convertible preferred stock is fully paid
and nonassessable, and the holders have no preemptive rights in connection with
those shares. We do not expect that there will be any trading market for the
7 1/4% convertible preferred stock except as represented by the depositary
shares.
The 7 1/4% convertible preferred stock:
- ranks junior in right of payment to all of our existing and future debt
obligations and to each senior class or series of our capital stock, and
pari passu or senior to all of our of the capital stock
- has a liquidation preference of $5,000 per share ($50 per depositary
share) plus accrued and unpaid dividends and additional dividends,
- is convertible at the option of the holder into shares of our common
stock at a rate and subject to restrictions as described below, and
- is redeemable in whole or in part, at our option at any time on or after
March 15, 2002 at the prices described below plus accrued and unpaid
dividends, if any, to the redemption date.
The holders of 7 1/4% convertible preferred stock (and the corresponding
depositary shares):
- will have no voting rights except as required by law and as specified in
the certificate of designations unless the events described below happen,
and
- may require us, upon a change of control event, to repurchase all of a
portion of such holder's convertible preferred stock (and the
corresponding depositary shares).
We cannot assure you that any trading market for the depositary shares will
develop. If any such market does develop, the liquidation preference of the
7 1/4% convertible preferred stock per depositary share is not necessarily the
price at which depositary shares will actually trade, and the depositary shares
may trade at lower prices.
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). A corporation may indemnify that person if he or she is or was a
director, officer, employee or agent of the corporation. A corporation may also
indemnify that person if he or she 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. That person may recover
the following from the corporation:
- expenses (including attorneys' fees);
- judgments;
- fines; and
- amounts paid in settlement actually and reasonably incurred by him or her
in connection with any action, suit or proceeding if he or she 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 or
her 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
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completed action or suit by or in the right of the corporation to procure a
judgment in its favor. Such person may recover 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
or she reasonably believed to be in or not opposed to the best interests of the
corporation. However, 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
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:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders,
- for acts or omission not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the DGCL (relating to unlawful payment of dividends
and unlawful stock purchase and redemption), or
- for any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation provides that our directors shall not be
liable to us or our 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 the
preceding paragraph. Our Certificate of Incorporation and our By-laws further
provide that we will indemnify our directors and officers to the fullest extent
permitted by the DGCL.
Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. 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 our board of directors. Such provisions may also adversely
affect prevailing market prices for the common stock which is discussed in the
section "Risk Factors -- We have anti-takeover provisions that could delay or
prevent a change in control, even if it would benefit shareholders."
Classified Board of Directors and Related Provisions. Our Certificate of
Incorporation provides that our board of directors 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 our 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 those 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 terminates on the date of the
1999 annual meeting of stockholders.
- The term of the initial class III directors terminates on the date of the
2000 annual meeting of stockholders.
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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 our outstanding voting stock from obtaining
control of the board of directors until the second annual shareholders meeting
following the date that party obtains the controlling interest.
Subject to the rights of the holders of any series of preferred stock or
any other class of our capital stock (other than common stock) then outstanding,
directors may only be removed for cause by a majority vote of our holders of
capital stock 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. Our
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 our
By-laws. Our 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.
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 our capital stock 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." An interested stockholder is
defined as a person who, together with any affiliates or associates of that
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.
Section 203 further provides that under certain circumstances, business
combinations are allowed, such as when:
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder,
- 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
- 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, our Certificate of Incorporation 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 the issued
preferred stock without any further vote or action by the stockholders. The
provisions of Section 203 of the DGCL described above and our Certificate of
Incorporation, and any issuance of preferred stock with voting or conversion
rights, may adversely affect your voting power and may have the effect of
delaying or preventing a change of control of GTS or adversely affect the market
price of our common stock.
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SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
Shareholder Rights Plan. We have entered into a rights agreement. In
connection with the rights agreement, our board of directors declared a
distribution of one right for each outstanding share of common stock, each share
of common stock offered by this prospectus and each share of our common stock
issued (including shares distributed from treasury) thereafter and prior to a
distribution date. Each right will entitle the registered holder, subject to the
terms of the rights agreement, to purchase from us one one-thousandth of a share
or 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:
- 10 days following a public announcement that a person or group of
affiliated or associated persons (other than us, any of our subsidiaries
or any of our employee benefit plans or such subsidiary) 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
- 10 business days (or such later date determined by action of the board of
directors prior to such time as any person makes such announcement)
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.
The Soros associates and Alan B. Slifka and his affiliates are excluded from
being an acquiring person described above under the rights agreement unless they
increase the aggregate percentage of their ownership interest in us to 20%.
Until a distribution date:
- the rights will be evidenced by common stock certificates and will be
transferred with and only with such common stock certificates,
- new common stock certificates issued after date of consummation of the
offerings in July 1998 (also including shares distributed from treasury)
will contain a notation incorporating the rights agreement by reference,
and
- 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 those certificates.
The rights will not be exercisable until a distribution date and will
expire at the close of business on the tenth anniversary of the rights agreement
unless we redeem them earlier.
In the event that:
- we are the surviving corporation in a merger with an acquiring person
described above and shares of common stock shall remain outstanding,
- a person becomes an acquiring person,
- an acquiring person engages in one or more "self-dealing" transactions as
set forth in the rights agreement, or
- during such time as there is an acquiring person, an event occurs which
results in that 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 person) will
thereafter have the right to receive, upon exercise, units of Series A preferred
stock (or, in some circumstances, our common stock, cash, property or other
securities) having a value equal to two times the exercise price of the right.
The
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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 a stock acquisition date:
- we are acquired in a merger or other business combination transaction and
we are not the surviving corporation (other than a merger described in
the preceding paragraph),
- any person consolidates or merges with us and all or part of our common
stock is converted or exchanged for securities, cash or property of any
other person, or
- 50% or more of our 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 such
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:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A preferred stock,
- 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
- 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 a stock acquisition date,
either
- 75% of our board of directors, or
- a majority of our board of directors and a majority of the continuing
directors,
may redeem the rights in whole, but not in part, at a nominal price. Immediately
upon the action of a majority of our 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 the redemption price. As used in the rights agreement,
a continuing director means any person (other than a person attempting to
acquire us or an affiliate or associate of such a person or a representative of
such 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:
- 75% of our board of directors, or
- a majority of our board of directors and a majority of the continuing
directors, may exchange each right for (1) one unit of Series A preferred
stock or (2) such number of units of Series A preferred stock as will
equal the spread between the market price of each unit to be issued and
the purchase price of such unit set forth in the rights agreement.
Any of the provisions of the rights agreement may be amended without the
approval of either:
- 75% of our board of directors, or
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SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1999, 81,221,352 shares of common stock were outstanding,
excluding
- 16,443,464 shares of common stock that are issuable pursuant to 4,386,313
exercisable warrants and the exercise of 12,057,151 options under GTS'
option plans, of which 4,190,792 options are exercisable,
- 5,875,700 shares of common stock into which the 8.75% senior subordinated
bonds are convertible,
- 8,481,417 shares of common stock into which the 5 3/4% convertible senior
subordinated debentures are convertible,
- 163,795 of additional shares of common stock to be issued resulting from
the NetSource acquisition and an additional 1.4 million shares of common
stock which may be issued, subject to NetSource meeting certain
performance targets during the first two quarters of 1999,
- 7,246,000 shares of our common stock issuable on conversion of the
convertible preferred stock, not including an indeterminate number of
shares of common stock may be issued as dividends on the convertible
preferred stock or as a result of anti-dilution provisions of the
convertible preferred stock, and
- 1,850,497 shares of common stock issued in the Omnicom acquisition.
Of the 81,221,352 outstanding shares of our common stock, the 12,765,000
shares registered in the initial public offering and the 14,506,900 shares
registered in the stock offering in July 1998 will be freely tradable without
restriction under the Securities Act. However those shares held by affiliates
may generally be resold only in compliance with applicable provisions of Rule
144 under the Securities Act, as described below. Of the remainder,
approximately 20,000,000 additional shares have been resold or may be resold
under Rule 144 without restriction under the Securities Act. An additional
approximately 2,000,000 shares have been resold or may be resold under Rule 144
subject to volume and manner of sale limitations. In addition, the 8,481,417
shares into which the debentures are convertible will be freely tradable without
restriction under the Securities Act. We have registered 7,246,000 shares of our
common stock issuable on the conversion of the convertible preferred stock in a
registration statement.
In addition, we have filed three registration statements which the SEC has
declared effective. One registration statement covers the resale of the
convertible bonds and the shares of our common stock into which the convertible
bonds are convertible. Two registration statements on Form S-8 cover the resale
of shares of our common stock issued to employees, officers and directors under
our employee benefit plans.
Furthermore, on April 19, 1999 the SEC declared effective a shelf
registration statement, covering 24.1 million shares of our common stock held by
a number of our stockholders, including all of the shares of common stock (and
securities convertible into or exercisable for shares of common stock) owned by
Alan B. Slifka and his affiliates and the Soros associates that were not sold in
the offering in July 1998. These persons have agreed, in consideration for our
filing of the shelf registration statement, that they may sell up to only 75% of
their shares up to July 1999. The Soros associates have expressed to us that the
above contractual restrictions may no longer apply and that they are free to
enter into transactions in respect of their shares subject to applicable
provisions of United States securities law. We have expressed to them our view
that such restrictions continue to apply. This shelf registration statement
contained a prospectus supplement for an underwritten public offering of
4,265,224 shares owned by Apax Funds Nominees Limited and 1,962,642 shares owned
by Warburg, Pincus Ventures L.P.
Certain former limited partners of partnerships formerly affiliated with
Alan B. Slifka and dissolved in October 1998 may, upon giving us advance notice,
withdraw some or all of their shares of common stock from registration under the
shelf registration statement. By withdrawing their shares, those persons would
no longer be bound by the restrictions on sale. The number of shares of our
common stock that such
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persons may withdraw is capped at 726,953 shares of common stock minus the
number of shares such persons sold in the July 1998 stock offering.
On April 19, 1999, the SEC declared effective a registration statement
covering all of the shares of common stock that may be issued to holders of
NetSource stock in connection with the acquisition of NetSource. Up to 4,037,500
shares, plus up to an additional 1.4 million shares issuable contingent on
NetSource achieving certain performance targets during the first two quarters of
1999, may be issued by us in connection with this acquisition. This shelf
registration statement also includes shares issued to Apax Funds Limited and
Warburg, Pincus Ventures, L.P., two institutional shareholders of Esprit
Telecom, upon the closing of our offer for Esprit Telecom. We issued
approximately 6.2 million shares of common stock to these two Esprit Telecom
shareholders when our offer closed.
We are obligated to file a registration statement with respect to 1,850,497
shares of our the common stock issued in the Omnicom acquisition by October 1,
1999.
We cannot predict what effect, if any, that future sales of common stock or
the availability of common stock for sale will have on the market price for
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 common stock. See "Risk
Factors -- Substantial resales of our common stock may depress our stock price
and dilute stockholders' ownership interest."
In general, under Rule 144 as currently in effect, a person (or persons
whose GTS shares 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 GTS 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 U.S. TAX CONSIDERATIONS
The following is a summary of the principal U.S. federal income tax
considerations relevant to ownership, disposition and conversion of the bonds.
This summary is based on the Internal Revenue Code of 1986, as amended, existing
and proposed Treasury regulations, revenue rulings, administrative
interpretations and judicial decisions (all as currently in effect and all of
which are subject to change, possibly with retroactive effect). Except as
specifically set forth herein, this summary deals only with bonds purchased by a
U.S. Holder (as defined below) at original issue and held as capital assets
within the meaning of Section 1221 of the Code. This summary does not discuss
all of the tax consequences that may be relevant to holders in light of their
particular circumstances or to holders subject to special tax rules, such as
insurance companies, dealers in securities or foreign currencies, tax-exempt
investors, persons holding the Bonds as part of a hedging transaction,
"straddle," conversion transaction, or other integrated transaction, or U.S.
holders whose functional currency (as defined in Section 985 of the Code) is not
the U.S. dollar. Persons considering the purchase of the bonds should consult
with their own tax advisors with regard to the application of the U.S. federal
income tax laws to their particular situations as well as any tax consequences
arising under the laws of any state, local or foreign jurisdiction.
As used herein the term "U.S. holder" means a beneficial owner of a bond
who or that is for U.S. federal income tax purposes (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (iv) a trust if both: (A) a U.S. court is
able to exercise primary supervision over the administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial
decisions of the trust. A non-U.S. holder means a holder of bonds who or that is
not, for U.S. federal income tax purposes, a U.S. holder.
THE BONDS
Based on currently applicable authorities, we will treat the bonds as
indebtedness for U.S. federal income tax purposes. However, since the bonds have
certain equity characteristics, it is possible that the IRS will contend that
they should be treated as an equity interest in, rather than one indebtedness.
In the event the bonds are treated as equity, distributions received on a bond
would first be taxable to the holder as dividend income to the extent of our
accumulated earnings and profits, and next would be treated as a return of
capital to the extent of the holder's tax basis in the bond, with any remaining
amount treated as gain from the sale of a bond. Further, payments on bonds
treated as equity to non-U.S. holders would not be eligible for the portfolio
interest exception from U.S. withholding tax, and those payments would be
subject to U.S. withholding tax at a flat rate of 30% unless reduced under an
applicable tax treaty or unless we qualify as an "80/20 Company," as discussed
below. Moreover, in the event of equity treatment, we would never be entitled to
deduct interest or original issue discount on such bonds for U.S. federal income
tax purposes. Except as otherwise noted, the remainder of this discussion
assumes that the bonds will constitute indebtedness for U.S. tax purposes.
Investors should also be aware that recently enacted legislation disallows
deductions for interest paid or accrued on debt instruments issued after June 8,
1997 by a corporation if either (i) a substantial amount of the principal or
interest is required to be paid in or converted into equity of the issuer, (ii)
a substantial amount of the principal or interest is required to be determined,
or at the option of the issuer or a related party is determined, by reference to
the value of such equity, or (iii) the indebtedness is part of an arrangement
that is reasonably expected to result in a transaction described in either (i)
or (ii). For these purposes, principal or interest shall be required to be so
paid, converted, or determined if it may be required at the option of the holder
and there is a substantial certainty the option will be exercised.
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TAX CONSEQUENCES TO U.S. HOLDERS
Payments of Interest and Original Issue Discount on the Bonds
Except as otherwise provided below, U.S. holders will include payments of
stated interest on the bonds to the extent of the lowest fixed rate provided by
the bonds throughout their term as ordinary interest income when accrued or
received in accordance with their respective method of tax accounting. Unless de
minimis in amount, stated interest on the bonds in excess of such rate will be
taxable to U.S. holders on the economic accrual basis as original issue discount
("OID") under the rules described below.
A debt instrument is issued with OID if its "stated redemption price at
maturity" exceeds its issue price by more than a de minimis amount. In general
terms, U.S. holders are required to include OID gross income as ordinary
interest income on the economic accrual basis in advance of the cash
attributable to that income. Under Treasury regulations, the stated redemption
price at maturity of a debt instrument is equal to the sum of all payments to be
made thereon other than qualified stated interest. Qualified stated interest is
stated interest which is unconditionally payable at least annually at a single
fixed rate throughout the term of the debt instrument. The Treasury regulations
further provide that, for purposes of the OID rules, if (i) a debt instrument
provides for alternative payment schedules based on the occurrence of a
contingency (or contingencies), (ii) the timing and amounts of the payments that
comprise each payment schedule are known as of the issue date, and (iii) as of
the issue date, based on all the facts and circumstances, a single payment
schedule is significantly more likely than not to occur, then the yield and
maturity of the debt instrument for purposes of computing OID are computed based
on that payment schedule. When a debt instrument provides for alternative
payment schedules upon the occurrence of one or more contingencies, the debt
instrument provides for qualified stated interest to the extent of the lowest
fixed rate of interest that would be payable under any payment schedule.
The rate of stated interest payable on the bonds will increase on June 30,
1998 and June 30, 1999 if we had not made a complying equity offering by those
dates. Further, absent such an offering during the term of the bonds, the bonds
will be retired at maturity for 121% of their stated principal amount. If a
complying equity offering occurs by June 1998, however, the rate of interest
payable on the bonds will remain constant, and the bonds will be retired at
maturity for their stated principal amount. As such, different payment schedules
for the bonds will result depending on the timing or occurrence of a complying
equity offering. For each of these schedules, the timing and amount of the
payments will be known as of the issue date. As of the issue date, we took the
position that it was significantly more likely than not that a complying equity
offering would occur after June 30, 1998 and before July 1, 1999. As such, the
payment schedule under which the bonds bore interest with one interest rate
increase, and under which the bonds would be retired at their stated principal
amount, was considered significantly more likely than not to occur. Under this
approach, the stated redemption price at maturity of the bonds included a
portion of the excess interest payable at the rate in effect after June 30,
1998, but not the 21% retirement premium payable at maturity of the bonds. The
amount of such excess interest represented OID taxable to U.S. holders on the
accrual basis prior to the receipt of cash attributable to that interest.
Because a complying equity offering occurred before June 30, 1998, solely
for purposes of the OID rules, the bonds will be treated as retired and reissued
on the date of such occurrence for their adjusted issue price on such date,
which generally will equal the bonds' stated principal amount increased by the
total amount of OID required to be included in income in respect of the bonds by
U.S. holders prior to that date. As a result of the deemed reissuance, (i) all
stated interest on the bonds should be treated as qualified stated interest and
a U.S. holder should include such interest in income as it accrues or is
received, in accordance with its method of tax accounting, (ii) except as
provided below, the bonds should not be treated as bearing OID upon reissuance,
and (iii) a U.S. holder that included OID in income on the bonds based on the
payment schedule treated by us as significantly more likely than not to occur as
described above should be treated as reacquiring the bonds with "amortizable
bond premium," as described below in "-- Market Discount and Premium," to the
extent that such holder's adjusted tax basis in the bonds exceeds their
principal amount.
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If a shelf registration statement does not remain effective with the SEC as
described in the Registration Rights Agreement, additional interest will accrue
on the bonds in the manner described therein. According to Treasury Regulations,
the possibility of a change in the interest rate will not affect the amount of
interest income recognized by a U.S. holder (or the timing of such recognition)
if the likelihood of the change, as of the date the bonds are issued, is remote.
We believe that the likelihood of a change in the interest on the bonds due to a
Registration Default is remote and does not intend to treat the possibility of
such a change in the interest rate as affecting the yield to maturity of any
bond. In the unlikely event that the interest rate on the bonds is increased,
then such increased interest may be treated as additional OID, includible by a
holder in income as such interest accrues, in advance of receipt of any cash
payment thereof.
U.S. holders are permitted to elect to include all interest on a bond using
the constant yield method. For this purpose, interest includes stated interest,
acquisition discount, OID, de minimis OID, market discount, de minimis market
discount, and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium. Special rules apply to elections made with respect to Bonds
with amortizable bond premium or market discount and U.S. holders considering
such an election should consult their own tax advisors. The election cannot be
revoked without the approval of the Internal Revenue Service.
Contingent Payment Debt Instrument Regulations
Certain Treasury Regulations provide for special tax treatment of
"contingent payment debt instruments" (the "contingent debt regulations"). These
regulations apply to debt instruments with contingent interest that do not fall
within the scope of the rules described above for debt instruments providing for
alternative payment schedules, each of which can be determined (as to timing and
amount) as of the issue date. By their terms, however, the contingent debt
regulations do not apply where the contingency is remote or incidental or
because the holder of the debt instrument has an option to convert the
instrument into stock of the issuer. In general, if a debt instrument is subject
to the contingent debt regulations, a U.S. holder must accrue contingent
interest income as OID over the term of the debt instrument and in advance of
the cash payments attributable thereto based upon a projected payment schedule
(subject to later adjustments) provided by the issuer. Further, any gain and
(subject to certain limitations) loss recognized by a holder with respect to the
sale or other disposition of such an instrument will be ordinary, rather than
capital, in nature.
The application of the contingent debt regulations to instruments such as
the bonds is uncertain. In particular, the bonds provide for (i) the payment of
additional amounts in the event U.S. withholding tax is imposed and (ii)
depending on certain contingencies, for (A) the payment of additional interest
and retirement premium and (B) periodic decreases over the term of the bonds in
the price at which bonds may be converted into shares of common stock. We are
taking the position that the contingent debt regulations should not apply to the
bonds because we believe the Bonds had, at the time of issuance, a payment
schedule that was significantly more likely than not to occur. However, since
the scope of the contingent debt regulations is not clear, it is possible that
the Internal Revenue Service will take the position that the bonds are subject
to the contingent debt regulations. If the bonds are ultimately found to be
subject to the contingent debt regulations, U.S. holders, including U.S. holders
using the cash method of tax accounting, would be required to accrue interest
income as "original issue discount" over the term of the debt instrument based
upon a projected payment schedule (subject to later adjustments) that could
include projected values for the retirement premium and conversion price
adjustments, and any gain and (subject to certain limitations) loss recognized
by a holder on a sale or other taxable disposition with respect to such
instrument would be ordinary, rather than capital, in nature. In addition, all
or a portion of the gain or loss recognized on sale or other taxable disposition
of shares of common stock received in exchange for bonds might be ordinary,
rather than capital, in nature.
Market Discount and Premium
If a U.S. holder purchases a bond for an amount that is less than its
stated redemption price at maturity or its adjusted issue price for bonds
purchased prior to their deemed reissuance as described
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above the amount of the difference will be treated as "market discount" for U.S.
federal income tax purposes, unless such difference is less than a specified de
minimis amount.
Under the market discount rules of the Code, a U.S. holder will be required
to treat any partial principal payment on, or any gain realized on the sale,
exchange, retirement or other disposition of, a bond as ordinary income to the
extent of the lesser of (i) the amount of such payment or realized gain or (ii)
the market discount that has not previously been included in income and is
treated as having accrued on such bond at the time of such payment or
disposition. If such bond is disposed of in a nontaxable transaction (other than
a nonrecognition transaction described in Code Section 1276(c)), the amount of
gain realized on such disposition for purposes of the market discount rules
shall be determined as if such holder had sold the bond at its then fair market
value. Market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the bond, unless the U.S.
holder elects to accrue on the basis of a constant interest rate.
A U.S. holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry such bond until the maturity of the Bond or its earlier
disposition (except for certain nonrecognition transactions). A U.S. holder may
elect to include market discount in income currently as it accrues (on either a
ratable or a constant interest rate basis), in which case the rules described
above regarding the treatment as ordinary income of gain upon the disposition of
the Bond and upon the receipt of certain cash payments and regarding the
deferral of interest deductions will not apply.
If a U.S. holder's tax basis in a bond (either (i) its purchase price or
(ii) in the case of a U.S. holder that included OID in income prior to the
deemed reissuance discussed above in "Payments of Interest and Original Issue
Discount on the Bonds," the sum of the purchase price and the amount of OID
included by such holder) reduced by the portion of the tax basis attributable to
the bond's conversion feature exceeds the amount payable at maturity (or on the
earlier call date, in the case of a bond that is redeemable at our option), such
holder will be considered to have purchased such bond with "amortizable bond
premium" equal in amount to such excess, and may elect (in accordance with
applicable Code provisions) to amortize such premium, using a constant yield
method over the remaining term of the bond and to offset interest otherwise
required to be included in income in respect of such bond during any taxable
year by the amortized amount of such excess for such taxable year. However, if
such bond may be optionally redeemed after the U.S. holder acquires it at a
price in excess of its stated redemption price at maturity, special rules would
apply which could result in a deferral of the amortization of some bond premium
until later in the term of such bond.
Adjustment to Conversion Ratio
The conversion price applicable to the bonds is subject to adjustments
under certain circumstances. Under Section 305 of the Code and the Treasury
Regulations promulgated thereunder, holders of the bonds may be treated as
having received a constructive distribution, resulting in ordinary income to the
extent of our current and accumulated earnings and profits, if, and to the
extent that, adjustments in the conversion price occur within thirty-six months
of certain taxable distributions on shares of common stock and increase the
proportionate interest of a holder of a bond in our earnings and profits. As
such, under certain circumstances that may or may not occur, such an adjustment
may be treated as a taxable distribution to holders of the bonds, without regard
to whether such holders receive any cash or other property. Further, in the
event the bonds were treated as equity interests in, rather than our
indebtedness, any change in the conversion price that increased the ratio at
which bonds could be converted into shares of common stock would be treated as a
taxable distribution with respect to the bonds under section 305 of the Code.
Sale or Other Disposition
In general, a U.S. holder of bonds will recognize gain or loss upon the
sale, exchange, redemption, or other taxable disposition of such bonds measured
by the difference between (i) the amount of cash and
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<PAGE> 95
the fair market value of property received (except to the extent attributable to
accrued interest on the bonds previously taken into account) and (ii) the U.S.
holder's tax basis in the bonds (as increased by any accrued OID (net of all
amortized acquisition premiums) and market discount previously includible in
income by the U.S. holder and decreased by amortizable bond premiums, if any,
deducted over the term of the bonds.) Subject to the market discount rules
discussed above and except if the bonds are subject to the contingent debt
regulations described above, any such gain or loss generally will be capital
gain or loss and will be long-term capital gain or loss if the bonds have been
held for more than one year.
No gain or loss will be recognized for U.S. federal income tax purposes by
holders of the bonds upon the conversion thereof in exchange for shares of
common stock (except to the extent of cash, if any, received in lieu of the
issuance of fractional shares of common stock and for shares of common stock
received on accrual of accrued interest, OID or retirement premium). A U.S.
holder's tax basis in the shares of common stock will equal the sum of the
adjusted tax basis in the bonds reduced by the portion of adjusted tax basis
allocated to any fractional shares of common stock exchanged for cash. The
holding period of the shares of common stock received on the conversion of the
bonds will include the period during which the bonds were held by such U.S.
holder, except that the holding period of shares of common stock allocable to
accrued original issue discount may commence on a later date. If any cash is
received in lieu of fractional shares, the U.S. holder will recognize gain or
loss, and the character and the amount of such gain or loss will be determined
as if the U.S. holder had received such fractional shares and then immediately
sold them for cash.
THE SHARES OF COMMON STOCK
Dividends
We do not presently intend to pay dividends on shares of common stock in
the foreseeable future. If we should pay a dividend on shares of common stock,
the dividend will be taxable as ordinary income to the extent of our current and
accumulated earnings and profit. If there are no such earnings and profits, such
dividend would be treated first as a return of capital to the extent of the U.S.
holder's tax basis in the shares of common stock, and then, if the amount of the
dividend exceeds such tax basis, as capital gain to the extent of such excess.
As a result, until such time as we have current or accumulated earnings and
profits, cash distributions on shares of common stock will be a nontaxable
return of capital and will be applied against and reduce the adjusted tax basis
of any shares of common stock (but not below zero) in the hands of its holder.
We believe that it does not presently have accumulated earnings and profits for
tax purposes. However, we cannot predict whether it will have earnings and
profits for future taxable years. See "Risk Factors."
Sale of Shares of Common Stock
Gain or loss will generally be recognized upon a sale or other taxable
disposition of the shares of common stock in an amount equal to the difference
between the amount realized on the transfer and the holder's adjusted tax basis
in the shares of common stock. Except as provided below, such gain or loss will
be capital gain or loss, provided the shares of common stock are held as a
capital assets and will be long-term capital gain or loss with respect to shares
of common stock held for more than one year. If the bonds converted into shares
of common stock are subject to the contingent debt regulations, a portion of
such gain or loss might be ordinary rather than capital.
Backup Withholding
"Backup withholding" at a rate of 31% may apply to payments of interest on
the bonds, dividends on the shares of common stock and to payments of the
proceeds of a sale or exchange of the bonds or shares of common stock that are
made to a non-corporate U.S. holder if such holder fails to provide a correct
taxpayer identification number or otherwise comply with applicable requirements
of the backup withholding rules. The backup withholding tax is not an additional
tax and may be credited against a U.S.
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<PAGE> 96
holder's U.S. federal income tax liability, provided that correct information is
provided to the Internal Revenue Service.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The Bonds
Under present U.S. federal income tax law, and subject to the discussion
below concerning backup withholding:
(a) payments of principal, interest and premium, if any, on our bonds
or any paying agent to any Non-U.S. holder will not be subject to U.S.
withholding tax, provided that, in the case of interest, either (i) we are
an "80/20 company," as described below, or, (ii) if we are not an 80/20
company, the requirements for the "Portfolio Interest Exemption" are
satisfied; and
(b) a non-U.S. holder of a bond will not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of
such bond, unless (i) such holder is an individual who is present in the
United States for 183 days or more in the taxable year of disposition and
certain other conditions are met, or (ii) such gain is effectively
connected with the conduct by such holder of a trade or business in the
United States.
U.S. withholding tax will not be imposed on interest paid by a U.S.
corporation if at least 80% of the gross income derived by such corporation
(either directly or through its subsidiaries) during the applicable testing
period is "active foreign business income," as defined in section 861 of the
Code (an "80/20 company"). At present, we believe that we qualify as an 80/20
company. However, the 80% test for active foreign business income is applied on
a periodic basis, our operations and business plans may change in subsequent
taxable years. Therefore, while at present it appears that this exception from
withholding is available, we cannot assure you as to its future availability.
If we are not an 80/20 company, a non-U.S. holder will be exempt from U.S.
withholding tax under the portfolio interest exemption, provided that (A) such
holder does not own, actually or constructively, 10 percent or more of the total
combined voting power of all of our classes of stock entitled to vote, is not a
controlled foreign corporation related, directly or indirectly, to us through
stock ownership, and is not a bank receiving interest described in section
881(c)(3)(A) of the Code and (B) the certification requirement set forth in
section 871(h) or section 881(c) of the Code has been fulfilled with respect to
the beneficial owner. Such requirement will be fulfilled if the beneficial owner
of a bond certifies on IRS Form W-8, under penalties of perjury, that it is not
a U.S. person and provides its name and address, and (i) such beneficial owner
files such Form W-8 with the withholding agent or (ii) in the case of a bond
held by a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business, such financial institution files with the withholding agent a
statement that it has received such a statement from the Holder and furnishes
the withholding agent with a copy thereof. Certain pass-through entities may be
required to comply with additional certification requirements.
If a non-U.S. holder of a bond is engaged in a trade or business in the
United States, and if interest on the Bond is effectively connected with the
conduct of such trade or business, the non-U.S. holder, although exempt from the
withholding tax discussed in the preceding paragraph, generally will be subject
to regular U.S. federal income tax on interest and on gain realized on the sale,
exchange or other disposition of a Bond in the same manner as if it were a U.S.
holder. See "U.S. Holders" above. In lieu of the certificate described in the
preceding paragraph, such a holder will be required to provide to us a properly
executed IRS Form 4224 in order to claim an exemption from withholding tax on
stated interest paid on the bonds on or before December 31, 1998 and payments
made on or before such date of proceeds from a sale or exchange of a bond. Under
recently finalized Treasury regulations (the "Final Regulations"), such a
non-U.S. holder will be required to provide a Form W-8 to the withholding agent
on which such Holder provides its name, address and TIN and states, under
penalty of perjury, that the interest paid on a bond and the gain on the sale or
exchange of a bond is effectively connected with such
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<PAGE> 97
holder's U.S. trade or business in order to obtain an exemption from withholding
tax on payments made after December 31, 1998. In addition, if such non-U.S.
holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
The Shares of Common Stock
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 an 80/20 company. See "Non-U.S. Holders --
The Bonds." 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, we believe that we qualifies as an 80/20 company.
However, the 80% active foreign business income test is applied on a periodic
basis, our operations and business plans may change in subsequent taxable years.
Therefore, we cannot assure you of our future status as an 80/20 company. If,
for any period or periods, we fail to satisfy the requirements applicable to an
80/20 company, the withholding agent generally would be required to withhold tax
from dividends paid on shares of common stock. If withholding tax is collected
on distributions that do not constitute dividends because the Company lacks
earnings and profits, a non-U.S. holder may obtain a refund of the excess
amounts withheld by timely filing a claim for refund with the Internal Revenue
Service. 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-U.S.
holder may have to file with us or our dividend paying agent an exemption or
reduced treaty rate certificate or letter in accordance with the terms of such
treaty. Under 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, we ordinarily will presume that dividends
paid to the address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, under the
Final Regulations, a non-U.S. holder seeking a reduced rate of withholding under
an income tax treaty generally would be required to provide to us a valid
Internal Revenue Service Form W-8 certifying that such non-U.S. 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-U.S 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-U.S. holder that 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-U.S.
holder's conduct of a trade or business within the United States or, if an
income tax treaty applies, attributable to a U.S. permanent establishment of the
non-U.S. holder, the non-U.S. holder will generally be subject to regular U.S.
income tax in the same manner as if the non-U.S. holder were a U.S. resident,
and will be exempt from U.S. withholding tax provided that the non-U.S. holder
complies with the requirements for the exemption from withholding for
effectively connected interest described above. A non-U.S. 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-U.S.
corporation's "effectively connected earnings and profits," subject to certain
adjustments.
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<PAGE> 98
Gain on Disposition of Shares of Our Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of shares of common
stock unless (i) the gain is effectively connected with a trade or business of
such non-U.S. holder in the U.S., (ii) in the case of certain non-U.S. holders
who are non-resident alien individuals and hold shares of common stock as
capital assets, 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 U.S. federal income tax purposes) in the United States or
(b) the gain is attributable to an office or other fixed place of business
maintained by such individuals in the United States, (iii) the non-U.S. holder
is subject to tax, pursuant to the provisions of the U.S. tax law applicable to
certain U.S. expatriates whose loss of U.S. citizenship has as one of its
principal purposes of avoidance of U.S. taxes, or (iv) under certain
circumstances if we are or have 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 shares of our common stock are
regularly traded on an established securities market for tax purposes, the
non-U.S. holder held, directly or indirectly, at any time within the five-year
period preceding such disposition more than 5% of the outstanding shares of our
common stock. We are not, and does not anticipate becoming, a United States real
property holding corporation.
Information Reporting Requirements and Backup Withholding
Under the Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of interest and 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-U.S. 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-U.S. holder is a resident
under the provisions of an applicable income tax treaty or agreement.
U.S. 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 U.S. information reporting requirements) generally will
not apply to (i) payments on bonds received by non-U.S. holders if the
certifications required by sections 871(h) and 881(c), discussed above, are
received, provided in each case that we or such paying agent, as the case may
be, does not have actual knowledge that the payee is a United States person,
(ii) dividends paid to non-U.S. 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 (iii) under current law,
dividends paid to a non-U.S. holder at an address outside of the United States.
However, under the Final Regulations, effective as of January 1, 1999, a
non-U.S. holder generally will be subject to backup withholding tax on dividends
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 our common
stock to beneficial owners that are not "exempt recipients" and that fail to
provide in the manner required certain identifying information.
Non-U.S. holders should consult their tax advisers regarding the
application of information reporting and backup withholding in their particular
situations, the availability of an exemption therefrom, and the procedure for
obtaining such an exemption, if available. Any amounts withheld from a payment
to a non-U.S. holder under the backup withholding rules will be allowed as a
credit against such holder's U.S. federal income tax liability and may entitle
such holder to a refund, provided that the required information is furnished to
the Internal Revenue Service.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX
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ADVISOR WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF THE BONDS AND SHARES OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
JURISDICTION.
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SELLING HOLDERS
We originally issued and sold the bonds to certain accredited investors and
UBS Securities, Donaldson, Lufkin & Jenrette Securities Corporation and Merrill
Lynch, Pierce, Fenner & Smith Incorporated sold the bonds in a transaction
exempt from the registration requirements of the Securities Act, to persons
reasonably believed by the managers to be "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act), or outside the United States to
non-U.S. persons in offshore transactions in reliance on Regulation S under the
Securities Act. The selling holders may from time to time offer and sell
pursuant to this prospectus any or all of the bonds or shares issued upon
conversion of the bonds.
The following table sets forth information concerning the aggregate
principal amount of bonds beneficially owned by each selling holder and the
number of shares of common stock issuable upon conversion of bonds held thereby,
which may be offered from time to time pursuant to this prospectus. The table
below has been prepared on the basis of information furnished to us by or on
behalf of the selling holders. Because the selling holders may, pursuant to this
prospectus, offer all or some portion of the bonds or the common stock issuable
upon conversion of the bonds, no estimate can be given as to the amount of the
bonds or the common stock issuable upon conversion of the bonds that will be
held by the selling holders upon termination of any such sales. In addition, the
selling holders identified below may have converted, sold, transferred or
otherwise disposed of all or a portion of their bonds since the date on which
they provided the information regarding their bonds, in transactions exempt from
the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT OF SHARES OF OF COMMON
BONDS HELD COMMON STOCK
PRIOR TO THE PERCENTAGE STOCK THAT OUTSTANDING
OFFERING THAT OF BONDS MAY BE AFTER THE
SELLING HOLDER MAY BE SOLD OUTSTANDING(1) SOLD(2) OFFERING(3)
-------------- ------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
1. Aim Balance Fund........................ $ 2,050,000 1.4% 102,500 *
2. Aim Charter Fund........................ 10,000,000 6.9 500,000 *
3. Aim Global Utilities Fund............... 620,000 * 31,000 *
4. Aim V.I. Global Utilities Fund.......... 80,000 * 4,000 *
5. Aim V.I. Growth & Income Fund........... 1,500,000 1.0 75,000 *
6. Alexandra Global Investment Fund I,
Ltd.(5)................................... 18,655,000 12.9 932,750 *
7. Aristeia International Limited.......... 750,000 * 37,500 *
8. Bank of New York -- InterMaritime Bank,
Geneva.................................. 250,000 * 12,500 *
9. Banque Cantonale Vaudoise............... 300,000 * 15,000 *
10. Baring Emerging Europe Trust PLC........ 2,700,000 1.9 135,000 *
11. Barings (Ireland) as trustee to Baring
Eastern Europe Fund..................... 1,800,000 1.2 90,000 *
12. Cassa Di Risparmio Di Firenze Spa....... 2,735,000 1.9 136,750 *
13. CFW-C, L.P.............................. 3,300,000 2.3 165,000 *
14. Credit Suisse First Boston
Corporation(6)............................ 1,870,000 1.3 93,500 *
15. Daiwa Europe Ltd........................ 3,025,000 2.1 151,250 *
16. Deutsche Morgan Grenfell Inc.(6)........ 250,000 * 12,500 *
17. Donaldson, Lufkin & Jenrette Securities
Corporation(6).......................... 7,625,000 5.3 381,250 *
18. Fidelity Investment Trust:
Fidelity International Growth & Income
Fund........................................ 3,000,000 2.1 150,000 *
19. Finter Bank Zurich...................... 911,360 * 45,568 *
20. Goldman, Sachs & Co.(6)................. 5,300,000 3.7 265,000 *
21. Global Bermuda Limited Partnership...... 8,300,000 5.7 415,000 *
22. Halcyon Distressed Securities,
L.P.(4)................................... 1,940,000 1.3 97,000 *
23. Halcyon Special Situations, L.P.(4)..... 222,000 * 11,100 *
24. Halcyon Private Paper, L.P.(4).......... 438,000 * 21,900 *
25. Halcyon SFMT 1994, L.P.(4).............. 200,000 * 10,000 *
26. Halcyon SFMT 1994 II, L.P.(4)........... 100,000 * 5,000 *
27. Highbridge International LLC............ 3,500,000 2.4 175,000 *
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT OF SHARES OF OF COMMON
BONDS HELD COMMON STOCK
PRIOR TO THE PERCENTAGE STOCK THAT OUTSTANDING
OFFERING THAT OF BONDS MAY BE AFTER THE
SELLING HOLDER MAY BE SOLD OUTSTANDING(1) SOLD(2) OFFERING(3)
-------------- ------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
28. John M. Bader(4)........................ 87,000 * 4,350 *
29. KA Management........................... 2,663,239 1.8 133,162 *
30. KA Trading.............................. 1,311,761 * 65,588 *
31. Kevah Konner(4)......................... 20,000 * 1,000 *
32. Lakeshore International, Ltd............ 2,915,000 2.0 145,750 *
33. Merrill Lynch International
Limited(6)................................ 1,540,250 1.1 77,013 *
34. Morgan Stanley Dean Witter Convertible
Securities Trust........................ 4,000,000 2.8 200,000 *
35. Oz Master Fund, Ltd..................... 3,500,000 2.4 175,000 *
36. Palladin Overseas Fund Limited.......... 500,000 * 25,000 *
37. Pictet & Cie............................ 610,000 * 30,500 *
38. Ponderosa Value Partners, L.P.(7)....... 200,000 * 10,000 *
39. Sage Capital............................ 100,000 * 5,000 *
40. Salomon Brothers Capital Structure
Arbitrage
Fund - LT............................... 300,000 * 15,000 *
41. Salomon Brothers Diversified Arbitrage
Strategies Fund......................... 1,150,000 * 57,500 *
42. Salomon Brothers Equity Arbitrage
Finance
Limited I............................... 550,000 * 27,500 *
43. Santander Merchant Bank, Ltd............ 600,000 * 30,000 *
44. SBC Warburg Dillon Read Inc.(6)......... 650,000 * 32,500 *
45. Solar Group S.A......................... 250,000 * 12,500 *
46. The American High Income Trust.......... 7,500,000 5.2 375,000 *
47. The Bond Fund of America, Inc........... 7,500,000 5.2 375,000 *
48. The Gleneagles Fund Company............. 500,000 * 25,000 *
49. Tribeca Investments L.L.C............... 11,260,000 7.8 563,000 *
50. Von Eck/Chubb Global Fund............... 1,000,000 * 50,000 *
51. Ziff Asset Management, L.P.............. 10,000,000 6.9 500,000 *
52. Unnamed holders of bonds or any future
transferees, pledgees, donees or
successors of or from any such unnamed
holders(8).............................. $ 4,658,390 3.2% 232,920 *
</TABLE>
- ---------------
* Less than 1%.
(1) The information set forth in this column is based upon $144,787,000
aggregate principal amount of bonds originally issued.
(2) Assumes conversion of the full amount of bonds held by such holder at the
conversion rate of $20 in principal amount of bonds per share of common
stock. The conversion rate and the number of shares of common stock issuable
upon conversion of the bonds is subject to adjustment under certain
circumstances. See "Description of the Bonds -- Conversion." Accordingly,
the number of shares of common stock issuable upon conversion of the bonds
may increase or decrease from time to time. Under the terms of the
Indenture, fractional shares will not be issued upon conversion of the
bonds; cash will be paid in lieu of fractional shares, if any.
(3) Based upon 81,221,352 shares of common stock outstanding, as adjusted to
give effect to the offerings, as of March 31, 1999, treating as outstanding
the total number of shares of common stock shown as being issuable upon the
assumed conversion by the named selling holder of the full amount of such
selling holder's bonds but not assuming the conversion of the bonds of any
other selling holder.
(4) Halcyon Distressed Securities, L.P., Halcyon Special Situations, L.P.,
Halcyon Private Paper, L.P., Halcyon SFMT 1994, L.P. and Halcyon SFMT 1994
II, L.P. are all managed by Halcyon/Alan B. Slifka Management Company LLC,
of which Alan B. Slifka, the Chairman of the board of directors, is the
Managing Principal. Kevah Konner and John M. Bader are principals of
Halcyon/Alan B. Slifka Management Company LLC. Alan B. Slifka and affiliates
beneficially owned 5,564,325 shares of common stock, representing 10.6% of
the outstanding common stock and warrants to purchase common stock prior to
the stock offerings. Such number of shares of common stock includes
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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 230,000
shares of common stock; 2,563,041 shares of common stock owned by the
Halcyon Partnerships 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, we have agreed to register all of the common stock
owned by such holders, other than the conversion shares registered hereby
and 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. See "Shares Eligible for Future Sale."
(5) This selling holder has already converted aggregate principal amount of
bonds equal to $5,155,000 into conversion shares.
(6) Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Morgan
Grenfell, Inc. and Merrill Lynch, Pierce, Fenner and Smith Incorporated
acted as Managers in the Original Offering, pursuant to a Subscription
Agreement dated July 9, 1997. DLJ was also an Initial Purchaser of HER
Notes. DLJ, Merrill Lynch Credit Suisse First Boston Corporation, Goldman
Sachs & Co. and SBC Warburg Dillon Read Inc., among others, acted as
underwriters in the IPO, DLJ and Merrill Lynch acted as underwriters in our
offering of our 9 7/8% notes. In addition, DLJ, Merrill Lynch and Goldman,
Sachs & Co. are acting as underwriters in the offerings. Each of the
entities named above or their affiliates have provided, and may provide in
the future, investment banking services to us, for which they received or
will receive, customary fees. Deutsche Morgan Grenfell, Inc. may also
perform lending or other credit services to us, for which they will receive
customary fees.
(7) An affiliate of this holder acted as a consultant to us in connection with
the original offering, the initial public offering and the offering of
Hermes Railtel notes.
(8) Assumes that the unnamed holder of the bonds or any future transferees,
pledgees, donees or successors of or from any such unnamed holder do not
beneficially own any common stock other than the common stock issuable upon
conversion of the bonds at the conversion rate of $20. No such unnamed
holder may offer bonds pursuant to this prospectus until such unnamed holder
is included as a selling holder in a supplement to this prospectus in
accordance with the Registration Rights Agreement.
Because the selling holders may, pursuant to this prospectus, offer all or
some portion of the bonds or the common stock issuable upon conversion of the
bonds, no estimate can be given as to the amount of the bonds or the common
stock issuable upon conversion of the bonds that will be held by the selling
holders upon termination of any such sales. See "Plan of Distribution." In
addition, the selling holders identified below may have converted, sold,
transferred or otherwise disposed of all or a portion of their bonds since the
date on which they provided the information regarding their bonds, in
transactions exempt from the registration requirements of the Securities Act.
Other than as set forth above, none of the selling holders listed above has
had any material relationship with us within the past three years. We and our
directors, executive officers and certain stockholders have agreed, subject to
certain exceptions, not to offer, pledge or sell bonds or common stock for a
period of 90 days after the consummation of the offerings. In addition, we have
agreed to register certain shares held by affiliates of Mr. Slifka within in
consideration of such shareholders' undertaking to be bound by restrictions.
Only selling holders identified above who have complied with the conditions
to being included as selling holders and who beneficially own the bonds set
forth opposite each such selling holders' name in the foregoing table on the
effective date of the registration statement may sell such bonds pursuant to
this prospectus. We may from time to time, in accordance with the Registration
Rights Agreement, include additional selling holders in supplements to this
prospectus.
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PLAN OF DISTRIBUTION
The offered securities may be sold from time to time to purchasers directly
by the selling holders. Alternatively, the selling holders may from time to time
offer the offered securities to or through underwriters, broker/dealers or
agents, who may receive compensation in the form of underwriting discounts,
concessions or commissions from the selling holders or the purchasers of such
securities for whom they may act as agents. The selling holders and any
underwriters, broker/dealers or agents that participate in the distribution of
offered securities may be deemed to be "underwriters" within the meaning of the
Securities Act and any profit on the sale of such securities and any discounts,
commissions, concessions or other compensation received by any such underwriter,
broker/dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
The offered securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of offered securities may be effected in transactions (which may involve
crosses or block transactions) (i) on any national securities exchange or
quotation service on which the offered securities may be listed or quoted at the
time of sale, (ii) in the over-the-counter markets, (iii) in transactions
otherwise than on such exchange or in the over-the-counter market or (iv)
through the writing of options. At the time a particular offering of the offered
securities is made, a prospectus supplement, if required, will be distributed
which will set forth the aggregate amount and type of offered securities being
offered and the terms of the offering, including the name or names of any
underwriter, broker/dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling holders and any discounts,
commissions or concessions allowed or reallowed or paid to broker/ dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the offered securities will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the offered securities may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or any exemption
from registration or qualification is available and is complied with.
The selling holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the offered securities by the
selling holders. The foregoing may affect the marketability of such securities.
Pursuant to the Registration Rights Agreement, we will pay all expenses of
the registration of the offered securities, including without limitation, SEC
filing fees and expense of compliance with state securities or "blue sky" laws;
provided, however, that the selling holders will pay all underwriting discounts
and selling commissions, if any. The selling holders will be indemnified by us
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith. We
will be indemnified by the selling holders severally against certain civil
liabilities including certain liabilities under the Securities Act, or will be
entitled to contribution in connection with those liabilities.
LEGAL MATTERS
The validity of the offered securities offered hereby has been passed upon
for us by Shearman & Sterling, New York, New York.
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WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. In addition, we have filed a Registration Statement on
Form S-3 of which this prospectus is a part. All of the references in this
prospectus to contracts, agreements and other documents are summaries of the
actual documents which are contained as exhibits in the Registration Statement.
Since the prospectus may not contain all the information that you may find
important, you should review the full text of these documents.
You may read and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
at 7 World Trade Center, 13th floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such material at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, Washington, D.C. 20549. You may obtain copies from the
Public Reference Room by calling the SEC at (800) 732-0330. In addition, we are
required to file electronic versions of such material with the SEC through the
SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. Our common stock is listed on Nasdaq and
Easdaq and reports and other information concerning us can also be inspected at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20001-1500 U.S.A. and the Easdaq Market
Authority, Rue des Colonies 56, Brussels 1000, Belgium.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
This prospectus incorporates certain documents about us by reference which
are not presented in this prospectus or delivered with this prospectus. We
incorporate by reference the documents listed below which were filed with the
SEC under the Exchange Act:
- our Quarterly Report on Form 10-Q for the three month period ended March
31, 1999, filed on May 17, 1999;
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998, filed on March 23, 1999; and
- our Current Reports on Form 8-K filed on January 13, 1999, March 9, 1999
and April 28, 1999 and our Amendment to our Current Reports on Form 8-K/A
filed on January 20, 1999.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all the
depositary shares offered by this prospectus have been sold:
- reports filed under Sections 13(a) and (c) of the Exchange Act;
- definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and
- any reports filed under Section 15(d) of the Exchange Act.
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You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Global TeleSystems Group, Inc.
1751 Pinnacle Drive
North Tower - 12th Floor
McLean, VA 22102
(703) 918-4573
EXPERTS
The consolidated financial statements and schedules of Global TeleSystems
Group, Inc. as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998 appearing in Global TeleSystems Group, Inc.'s
Annual Report (Form 10-K) for the year ended December 31, 1998, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein which is based in part on the report of
PricewaterhouseCoopers, independent accountants, and incorporated herein by
reference. The consolidated financial statements and schedules referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
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EXHIBIT A
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 the common stock offered
under this prospectus nor of the situation of GTS.
On December 23, 1997, the Market Authority of EASDAQ approved the admission
to trading of all of the common stock 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 GTS.
PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION
GTS, represented by Mr. William H. Seippel, Chief Financial Officer, takes
responsibility for the contents of this prospectus.
GTS, having made all reasonable inquiries, accepts responsibility for, and
confirms that this prospectus contains all information with regard to GTS and
the common stock of GTS 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 GTS 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 of GTS 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
GTS 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, GTS may exercise its right
to repurchase common stock.
AUTHORIZATION OF INCREASE IN AUTHORIZED CAPITAL OF GTS; AUTHORIZATION OF THE
ISSUANCE OF COMMON STOCK IN THE STOCK OFFERINGS
Effective December 1, 1997, the board of directors and stockholders of GTS
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
common stock of GTS. In
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addition, the board of directors of GTS has adopted a resolution approving the
offering and issuance of 12,765,000 shares of common stock in the IPO and
2,801,000 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 GTS 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 GTS). 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
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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 under the provisions of the Belgian-French Treaty, (b) such holder's
ownership of the common stock is not effectively connected with a permanent
establishment or fixed base in France, and (c) such holder meets all the
requirements of the Belgian-French Treaty for obtaining the benefit of the
reduced rate of withholding tax and the right to payment of the French avoir
fiscal. For example, GTS 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 GTS. GTS 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
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due). Any Belgium withholding tax is creditable against the final income tax
due, provided that the holder has the full ownership of the common stock at the
time of payment of the dividends.
Income tax for Belgian Resident Companies
Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40.17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due).
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, GTS 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 GTS 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.
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FRENCH WEALTH TAX
The French wealth tax (impot de solidare sur la fortune) does not apply to
an Eligible Belgian Holder.
BELGIAN INDIRECT TAXES
Stamp tax on securities transactions
In principle, a stamp tax is levied upon the subscription of shares of
common stock and the purchase and sale in Belgium of common stock through a
professional intermediary. The rate applicable to subscriptions of new shares of
common stock is 0.35% but there is a limit of BEF 10,000 per transaction. The
rate applicable for secondary sales and purchases in Belgium of common stock
through a professional intermediary is 0.17% but there is a limit of BEF 10,000
per transaction.
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.
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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 SELLING HOLDERS. 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary................................ 3
Risk Factors........................... 7
Forward-Looking Statements............. 20
Use of Proceeds........................ 20
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends............................ 20
Price Range of Common Stock............ 21
Industry Overview...................... 22
Business............................... 24
Certain Relationships and Related
Transactions......................... 61
Description of Certain Indebtedness.... 61
Description of the Bonds............... 65
Description of Capital Stock........... 82
Shares Eligible for Future Sale........ 89
Certain U.S. Tax Considerations........ 91
Selling Holders........................ 100
Plan of Distribution................... 103
Legal Matters.......................... 103
Where You Can Find More Information.... 104
Incorporation of Information We File
with the SEC......................... 104
Experts................................ 105
Exhibit A -- Supplemental EASDAQ
Information.......................... A-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$144,787,000
8.75% SENIOR SUBORDINATED
CONVERTIBLE BONDS DUE 2000
7,239,350 SHARES
OF COMMON STOCK OF
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
GLOBAL TELESYSTEMS
GROUP, INC.
---------------
PROSPECTUS
---------------
JUNE 8, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 113
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........................................ $ 42,712
Accounting Fees and Expenses................................ 10,000
Legal Fees and Expenses..................................... 15,000
Printing Expenses........................................... 10,000
Miscellaneous............................................... 10,000
----------
TOTAL............................................. $ 87,712
==========
</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.
GTS' Certificate of Incorporation (the "Certificate") provides that the
GTS' 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 GTS'
II-1
<PAGE> 114
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 GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.
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 GTS issued securities which were not registered
under the Securities Act of 1933, as amended (the "Securities Act") as follows:
On March 13, 1995, GTS 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 interest of GTS 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, GTS 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, GTS granted the Soros associates 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 GTS' issuance for cash of $40 million of
notes to the Soros associates, 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, GTS 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 GTS' 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 GTS 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.
II-2
<PAGE> 115
On July 14, 1997 and July 31, 1997, GTS 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, GTS 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, GTS 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.
In connection with the acquisition of NetSource discussed in Item 2 of this
report on December 31, 1998, GTS issued 3,873,705 shares of its common stock to
holders of NetSource stock who accepted, as of October 30, 1998, GTS' offer to
purchase the NetSource stock owned by such holders. GTS received the NetSource
shares tendered as consideration for the common stock. No underwriters were
involved in the issuance of the common stock. GTS issued the common stock
pursuant to Rule 903 under the Securities Act and GTS' offer was made
exclusively to non-U.S. persons, within the meaning of Rule 902 under the
Securities Act, not in the United States. GTS extended its offer to purchase the
NetSource stock to December 15, 1998 and, consequently, additional shares of the
GTS's common stock will be issued pursuant to this transaction. That additional
issuance also will be effected in accordance with Rule 903 of the Securities Act
and will be disclosed in a subsequent filing with the SEC.
In connection with the acquisition of Omnicom, GTS issued 1,850,497 shares
of its common stock as partial consideration for the purchase of 52% of the
shares of Omnicom.
ITEM 16. EXHIBITS
(a) Exhibits:
The following is a list of exhibits filed as a part of this registration
statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1*** -- Offer Agreement dated as of December 8, 1998 between the
Registrant and Esprit Telecom Telecom Group plc
2.2*** -- Irrevocable Undertaking by Walter Anderson dated as of
December 8, 1998
2.3*** -- Irrevocable Undertaking by Apax Funds Nominees Limited
dated as of December 8, 1998
2.3(a)*** -- Amendment to the Irrevocable Undertaking by Apax Funds
Nominees Limited dated as of December 8, 1998, dated
December 12, 1998
2.4*** -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
dated as of December 8, 1998
</TABLE>
II-3
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
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 Global TeleSystems Group, Inc.
3.13++++++ -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
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.
</TABLE>
II-4
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
4.10***** -- Registration Rights Agreement dated as of April 23, 1999
by and among Global TeleSystems Group, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
Inc.
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
</TABLE>
II-5
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 20,
1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 11,
1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 21,
1997
</TABLE>
II-6
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
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
</TABLE>
II-7
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
</TABLE>
II-8
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent
10.56***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc., and Apax Funds
Nominees Limited and Warburg, Pincus Ventures, L.P. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc.,
Dresdner Kleinwort Benson North American LLC, BT Alex.
Brown Incorporated, Lehman Brothers Inc., Prudential
Securities Incorporated, ING Baring Furman Selz LLC,
BancBoston Robertson Stephens Inc., CIBC Oppenheimer
Corp., ABN Amro Incorporated, Arnhold and S.
Bleichroeder, Inc. and Credit Suisse First Boston
Corporation
10.57***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc. and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated
and Lehman Brothers Inc.
10.58***** -- Agreement for the transfer of Omnicon Shares dated as of
April 14, 1999 by and among Alain Nicalazzi, Florent
Martenne-Duplan, Philippe Ait Yahia and various other
Omnicon shareholders and Esprit Telecom Holdings, Limited
and Global TeleSystems Group, Inc.
12.1# -- Statement Re: Computation of Deficiency of Earnings
Available to Cover Fixed Charges.
21.1* -- List of Subsidiaries of the Registrant
23.1## -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1)
</TABLE>
II-9
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2# -- Consent of Ernst & Young LLP, Independent Auditors
23.3 -- Intentionally Omitted
23.4# -- Consent of PricewaterhouseCoopers, Independent
Accountants
24.1## -- Powers of Attorney (included on signature page to this
registration statement)
27.1****** -- Financial Data Schedule extracted from our March 31, 1999
unaudited financial statements
</TABLE>
- ---------------
#Filed herewith.
##Previously filed.
*Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1998, filed on March
23, 1999.
**Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-36555), filed on
September 26, 1997.
*** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-4 (File No. 333-68511), filed on
December 8, 1998.
**** Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Annual Report on Form 20-F for the year ended September
30, 1998, filed on December 24, 1998.
***** Incorporated by reference to the exhibit to our Current Report on Form
8-K, filed on April 28, 1999.
****** Incorporated by reference to the corresponding exhibit to our Quarterly
Report on Form 10-Q for the three month period ended March 31, 1999,
filed on May 17, 1999.
+Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1997, filed on March
31, 1998.
++Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-52733), filed on May 14,
1998.
+++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-4 (File No. 333-9292),
filed on August 13, 1998.
++++ Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.
+++++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-1 (File No. 333-8012),
filed on December 10, 1997.
++++++ Incorporated by reference to the corresponding exhibit to Amendment No. 1
to our Registration Statement on Form S-3 (File No. 333-78097), filed on
June 4, 1999.
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.
II-10
<PAGE> 123
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the forms of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-11
<PAGE> 124
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 8th day of
June, 1999.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ GRIER C. RACLIN
------------------------------------
Name: Grier C. Raclin
Title: Senior Vice
President -- External
Affairs,
General Counsel and
Corporate Secretary
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 8th day of June, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ H. BRIAN THOMPSON Chairman and Chief Executive
- ----------------------------------------------------- Officer (principal executive
H. Brian Thompson officer)
* President and Director
- -----------------------------------------------------
Robert J. Amman
* Executive Vice President --
- ----------------------------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)
* Executive Vice Chairman of the
- ----------------------------------------------------- Board of Directors
Gerald W. Thames
* Executive Vice Chairman of the
- ----------------------------------------------------- Board of Directors
Alan B. Slifka
* Director
- -----------------------------------------------------
David Dey
* Director
- -----------------------------------------------------
Roger Hale
* Director
- -----------------------------------------------------
Bernard McFadden
* Director
- -----------------------------------------------------
Stewart J. Paperin
</TABLE>
II-12
<PAGE> 125
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
* Director
- -----------------------------------------------------
W. James Peet
* Director
- -----------------------------------------------------
Jean Salmona
* Director
- -----------------------------------------------------
Joel Schatz
Director
- -----------------------------------------------------
Frank V. Sica
* Director
- -----------------------------------------------------
Adam Solomon
By: /s/ GRIER C. RACLIN
-------------------------------------------------
Grier C. Raclin
Attorney-in-Fact
for the Directors
</TABLE>
II-13
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1*** -- Offer Agreement dated as of December 8, 1998 between the
Registrant and Esprit Telecom Telecom Group plc
2.2*** -- Irrevocable Undertaking by Walter Anderson dated as of
December 8, 1998
2.3*** -- Irrevocable Undertaking by Apax Funds Nominees Limited
dated as of December 8, 1998
2.3(a)*** -- Amendment to the Irrevocable Undertaking by Apax Funds
Nominees Limited dated as of December 8, 1998, dated
December 12, 1998
2.4*** -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
dated as of December 8, 1998
2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
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.
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.12+ -- Certificate of Designation of the Series A Preferred
Stock of Global TeleSystems Group, Inc.
3.13++++++ -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
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 July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
4.10***** -- Registration Rights Agreement dated as of April 23, 1999
by and among Global TeleSystems Group, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
Inc.
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
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
</TABLE>
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement 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
</TABLE>
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent
10.56***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc., and Apax Funds
Nominees Limited and Warburg, Pincus Ventures, L.P. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc.,
Dresdner Kleinwort Benson North American LLC, BT Alex.
Brown Incorporated, Lehman Brothers Inc., Prudential
Securities Incorporated, ING Baring Furman Selz LLC,
BancBoston Robertson Stephens Inc., CIBC Oppenheimer
Corp., ABN Amro Incorporated, Arnhold and S.
Bleichroeder, Inc. and Credit Suisse First Boston
Corporation
</TABLE>
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.57***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc. and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated
and Lehman Brothers Inc.
10.58***** -- Agreement for the transfer of Omnicon Shares dated as of
April 14, 1999 by and among Alain Nicalazzi, Florent
Martenne-Duplan, Philippe Ait Yahia and various other
Omnicon shareholders and Esprit Telecom Holdings, Limited
and Global TeleSystems Group, Inc.
12.1# -- Statement Re: Computation of Deficiency of Earnings
Available to Cover Fixed Charges.
21.1* -- List of Subsidiaries of the Registrant
23.1## -- Consent of Shearman & Sterling (included in its opinion
delivered under Exhibit No. 5.1)
23.2# -- Consent of Ernst & Young LLP, Independent Auditors
23.3 -- Intentionally Omitted
23.4# -- Consent of PricewaterhouseCoopers, Independent
Accountants
24.1## -- Powers of Attorney (included on signature page to this
registration statement)
27.1****** -- Financial Data Schedule extracted from our March 31, 1999
unaudited financial statements
</TABLE>
- ---------------
#Filed herewith.
##Previously filed.
*Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1998, filed on March
23, 1999.
**Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-36555), filed on
September 26, 1997.
*** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-4 (File No. 333-68511), filed on
December 8, 1998.
**** Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Annual Report on Form 20-F for the year ended September
30, 1998, filed on December 24, 1998.
***** Incorporated by reference to the exhibit to our Current Report on Form
8-K, filed on April 28, 1999.
****** Incorporated by reference to the corresponding exhibit to our Quarterly
Report on Form 10-Q for the three month period ended March 31, 1999,
filed on May 17, 1999.
+Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1997, filed on March
31, 1998.
++Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-52733), filed on May 14,
1998.
+++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-4 (File No. 333-9292),
filed on August 13, 1998.
++++ Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.
+++++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-1 (File No. 333-8012),
filed on December 10, 1997.
++++++ Incorporated by reference to the corresponding exhibit to Amendment No. 1
to our Registration Statement on Form S-3 (File No. 333-78097), filed on
June 4, 1999.
<PAGE> 1
EXHIBIT 12.1
GLOBAL TELESYSTEMS GROUP, INC.
EARNINGS/DEFICIENCIES TO COVER FIXED CHARGES
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED
------------ ------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------ --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Loss before
extraordinary loss........ ($162,208) ($243,052) ($134,761) ($76,205) ($44,196) ($17,951)
Addback: Income tax
expense................... 3,764 7,752 2,485 1,360 2,565 --
--------- --------- --------- -------- -------- --------
Pretax Loss................. (158,444) (235,300) (132,276) (74,845) (41,631) (17,951)
Adjustments: Fixed
charges................... 47,673 129,712 29,273 367,464 33,914 100
--------- --------- --------- -------- -------- --------
Adjusted earnings from
continuing operations..... (110,771) (105,588) (103,003) 292,619 (7,717) (17,851)
Interest expense
indebtedness, including
amortization of dis-
count..................... 47,673 129,712 29,273 367,464 33,914 100
--------- --------- --------- -------- -------- --------
Total fixed charges.... 47,673 129,712 29,273 367,464 33,914 100
Deficiency of earnings
available to cover fixed
charges................... ($158,444) ($235,300) ($132,276) ($74,845) ($41,631) ($17,951)
========= ========= ========= ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Post-Effective Amendment No. 5 to the Registration Statement (Form S-3 No.
333-45915) and related Prospectus of Global TeleSystems Group, Inc. and to the
incorporation by reference therein of our report dated March 8, 1999, with
respect to the consolidated financial statements and schedules of Global
TeleSystems Group, Inc. included in its Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Vienna, Virginia
June 2, 1999
<PAGE> 1
EXHIBIT 23.4
[PRICEWATERHOUSECOOPERS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 (Post-Effective Amendment No. 5) of our report dated
March 3, 1999, relating to the financial statements and financial statements
schedules of Esprit Telecom Group plc, which appears in Global TeleSystems
Group, Inc. Annual Report on Form 10-K for the year ended December 31, 1998. We
also consent to the references to us under the headings "Experts" in such
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers
London, England
June 3, 1999
