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REGISTRATION NO. 333-47573
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3068423
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1751 PINNACLE DRIVE
NORTH TOWER - 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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GLOBAL TELESYSTEMS GROUP, INC. AMENDED AND RESTATED
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
STOCK OPTION AGREEMENTS WITH CERTAIN INDIVIDUALS
(Full title of plan)
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GRIER C. RACLIN, ESQ.
1751 PINNACLE DRIVE
NORTH TOWER - 12TH FLOOR
MCLEAN, VA 22102
(703) 918-4573
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: Upon exercise
of the options granted under the Stock Option Plan, but in no event prior to the
effective date of this Registration Statement.
If the only 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 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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TITLE OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 519,000 $ 0.533 $ 276,627.00
$.10 par value 225,000 10.7944 2,331,590.40 $ 10,883.54(1)
1,059,000 32.375 34,285,125.00
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</TABLE>
(1) This amount was paid when these shares of Common Stock were initially
registered on March 9, 1998.
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GLOBAL TELESYSTEMS GROUP, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
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Item No. Description in Form S-3 Caption or Location in Prospectus
- -------- ----------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Forepart and Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Available
Cover Pages of Prospectus Information; Incorporation of
Documents by Reference
3. Summary Information, Risk Risk Factors
Factors and Ratio of
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholder
8. Plan of Distribution Plan of Distribution
9. Description of Securities Incorporation of Documents by
to be Registered Reference
10. Interests of Named Experts Legal Matters
and Counsel
11. Material Changes Not Applicable
12. Incorporation of Certain Incorporation of Documents by
Information by Reference Reference
13. Disclosure of Commission Not Applicable
Position on Indemnification for
Securities Act Liabilities
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EXPLANATORY NOTE
This Registration Statement contains two parts. The first part contains
a Reoffer Prospectus ("Prospectus") prepared in accordance with the requirements
of (i) Part I of Form S-3 and (ii) Section C of the General Instructions to Form
S-8. The Prospectus covers reoffers and resales by Halcyon / Alan B. Slifka
Management Company LLC (successor to Alan B. Slifka & Co.) (the "Selling
Stockholder") of certain shares of Common Stock, par value $.10 per share (the
"Common Stock"), of Global TeleSystems Group, Inc. ("GTS" or the "Company")
which will be issued to the Selling Stockholder upon the exercise of its
options, from time to time, to acquire, in whole or in part, 225,000 shares of
Common Stock (the "Option Common Stock") and reoffered and resold by the Selling
Stockholder to certain of its employees and former employees upon the exercise
of their individual options, from time to time, to acquire, in whole or in part,
the Option Common Stock from the Selling Stockholder. The Option Common Stock
will be "control securities" for purposes of General Instruction C(3)(a) of Form
S-8. The second part contains "Information Required in the Registration
Statement" pursuant to Part II of Form S-8.
Information required by Part I of Form S-8 to be contained in the
Section 10(a) prospectus is omitted from this Registration Statement in
accordance with Rule 428 under the Securities Act of 1933, as amended (the
"Securities Act"), and the "Note" to Part I of Form S-8.
Because the Company does not satisfy the requirements for its separate
use of a Form S-3 at this time, the amount of securities to be reoffered or
resold by means of the Prospectus, by each person, and any other person with
whom he or she is acting in concert for the purpose of selling securities of the
Company, may not exceed, during any three-month period, the amount specified in
Rule 144(e) under the Securities Act in accordance with General Instruction
C(2)(b) of Form S-8.
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REOFFER AND RESALE PROSPECTUS
GLOBAL TELESYSTEMS GROUP, INC.
225,000 SHARES
COMMON STOCK ($.10 PAR VALUE PER SHARE)
This Prospectus relates to 225,000 shares of Common Stock, $.10 par
value per share (the "Common Stock"), of Global TeleSystems Group, Inc. ("GTS"
or the "Company"), which may be sold from time to time by Halcyon / Alan B.
Slifka Management Company LLC (successor to Alan B. Slifka & Co.) (the "Selling
Stockholder") upon the exercise of options, from time to time, to acquire, in
whole or in part, 225,000 shares of Common Stock (the "Option Common Stock") in
accordance with the Non-Statutory Stock Option Agreement dated as of November 5,
1991 (the "Option"). The Selling Stockholder may offer and sell the Common Stock
to its employees and former employees in connection with options granted by the
Selling Stockholder. See "Selling Stockholder" and "Plan of Distribution." The
Company will receive $0.533 for each share issued upon the exercise of the
Options. The Company will not receive any of the proceeds from the sale of the
Common Stock by the Selling Stockholder. All expenses of registration incurred
in connection with this offering are being borne by the Selling Stockholder,
along with any selling and other expenses incurred by the Selling Stockholder.
The Company is not aware of any underwriting arrangements with respect
to the sale by the Selling Stockholder of any of the shares offered and sold
hereby.
The Common Stock may be offered by or for the account of the Selling
Stockholder to its employees and former employees upon the exercise of
individual options granted by the Selling Stockholder and, in turn, from time to
time, on the Nasdaq National Market or on any stock exchange on which the Common
Stock may be listed at the time of sale, in negotiated transactions, or through
a combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices.
The Common Stock is traded on the Nasdaq National Market and the
European Association of Securities Dealers Automated Quotation ("EASDAQ") under
the symbol "GTSG." On January 7, 1999, the last reported sale price of the
Common Stock on the Nasdaq National Market was $59.94 per share.
The Company's principal executive offices are located at 1751 Pinnacle
Drive, North Tower - 12th Floor, McLean, VA 22102. The Company's phone number is
(703) 918-4500.
See "Risk Factors" beginning on page 7 for a discussion of certain
factors that should be considered by prospective purchasers of the common stock
offered hereby.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is January 8, 1999.
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No person is authorized to give any information or to make any
representation, other than as contained herein, in connection with the offering
described in this Prospectus, and any information or representation not
contained herein must not be relied upon as having been authorized by the
Company or the Selling Stockholder. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby in
any jurisdiction in which it is not lawful or to any person to whom it is not
lawful to make any such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances, create any
implication that information herein is correct as of any time subsequent to the
date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Northeast Regional Office, 7
World Trade Center, 7th Floor, New York, New York 10048. Copies of such
materials may be obtained from the Web site that the Commission maintains at
http://www.sec.gov.
The Company has filed with the Commission a registration statement on
Form S-8 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any person
to whom this Prospectus is delivered may obtain a copy of the Registration
Statement, including the exhibits thereto, without charge upon written or oral
request to the Secretary of the Company at 1751 Pinnacle Drive, North Tower -
12th Floor, McLean, VA 22102, Telephone (703) 918-4573.
The Common Stock of the Company is listed on the Nasdaq National
Market. Reports, proxy statements, and other information concerning the Company
can be inspected at the offices of the Nasdaq National Market, 1735 K Street,
N.W., Washington, D.C. 20006-1506.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents (or parts thereof filed with the Commission by
the Company) are incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, as amended;
(b) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998;
(c) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998;
(d) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998, as amended;
(e) the description of the Common Stock of the Company
contained in the Company's Registration Statement dated
December 24, 1998 (File No. 333-68511); and
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(f) the Company's Current Report on Form 8-K dated November
30, 1998, as amended.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the filing of a
post-effective amendment which indicates that all securities offered have been
sold or which deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference in this registration statement and to be part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Registration Statement
to the extent that a statement herein, or in any subsequently filed document
which also is or is deemed to be incorporated by reference, modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Registration Statement.
The Company shall furnish without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, copies of any or all of the documents
which are incorporated by reference herein (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents). Requests for copies of such documents should be addressed to
Secretary of the Company, Global TeleSystems Group, Inc., 1751 Pinnacle Drive,
North Tower - 12th Floor, McLean, VA 22102. The Company's phone number is (703)
918-4500.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Prospectus,
and particularly in the risk factors set forth herein under "Risk Factors."
Among the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under "Risk
Factors," and elsewhere in this Prospectus.
The risk factors described herein could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company, and investors,
therefore, should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
THE COMPANY
Introduction
GTS provides a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia,
the Commonwealth of Independent States ("CIS")and Central Europe. Through its
subsidiary Hermes Europe Railtel B.V. ("HER"), GTS is developing and operating a
pan-European high
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capacity fiber optic network that is designed to interconnect a majority of the
largest Western and Central European cities and to transport international
voice, data and multimedia/image traffic for other carriers throughout Western
and Central Europe. GTS' strategy in emerging markets to develop its businesses
generally has been to establish joint ventures with a strong local partner or
partners while maintaining a significant degree of operational control. GTS'
business activities consist of the ownership and operation of (i) international
long distance businesses, which operate through international gateways that
provide international switching services and transmission capacity, (ii) local
access networks, which provide local telephone service, (iii) cellular networks,
which provide wireless telecommunications services, (iv) a domestic long
distance business, (v) data networks, which are wired and wireless, and (vi)
carriers' carrier networks, which provide high volume transmission capacity to
other carriers. In addition, GTS has recently developed a business plan to offer
facilities-based telecommunications products and services to businesses and
other high-usage customers in certain metropolitan markets throughout Europe.
See "-- Business Strategy -- European Services Strategy" and "-- Western Europe
- -- European Services Strategy."
In Western Europe, GTS believes that it is well-positioned to establish
itself as the leading independent carriers' carrier through the development of
two ventures, HER and GTS-Monaco Access S.A.M. ("GTS-Monaco Access"). HER is one
of the leading carriers' carriers providing centrally managed cross-border
telecommunications transmission capacity in Europe. Its network when completed
by the end of 2000, will extend approximately 25,000 kilometers, with points of
presence in approximately 50 cities in 20 European countries. GTS-Monaco Access
operates an international gateway in Monaco in partnership with, and utilizing
the existing gateway infrastructure of, the Principality of Monaco and provides
transit and routing of international calls to other telecommunications
operators. Through its HER and GTS-Monaco Access ventures, GTS is building a new
network for transporting voice, data and multimedia/image traffic for other
carriers throughout Western and Central Europe and for worldwide international
voice, data and multimedia/ image traffic that either originates or terminates
in, or transits through, Western and Central Europe. See "-- Western Europe."
In Central Europe, GTS' objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic, Slovakia and Romania. In the Czech Republic, GTS
provides outgoing voice services and operates an international gateway and a
data services network. In Hungary, GTS operates a nationwide microwave network
and a VSAT network, which GTS believes is the largest VSAT network in Central
Europe as measured by number of VSAT sites. In Slovakia and Romania, GTS
provides VSAT services using its VSAT hub in Hungary. Subject to certain
regulatory approvals, GTS has also obtained a license to provide international
data services in Poland and expects to being operations during the first quarter
of 1999. GTS' strategy is to expand its service offerings as the regulatory
environment permits, leverage its existing VSAT and international gateway
infrastructure where possible and provide a broad range of services to its
target markets. See "-- Central Europe."
In Russia and the CIS, GTS' objective is to become the premier
alternative telecommunications operator. To attain its objective, GTS has
partnered with regional telephone companies and with Rostelecom, the national
long distance carrier in Russia. GTS currently operates in 34 regions and the
city of Moscow in Russia, as well as in 14 additional cities in the CIS, and
believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. These businesses include: (i) EDN
Sovintel ("Sovintel"), which provides Moscow, and recently St. Petersburg, with
international long distance and local telephone services and access to the major
domestic long distance carriers; (ii) TeleCommunications of Moscow ("TCM"),
which provides local access services in Moscow; (iii) TeleRoss (as defined
below), which provides domestic long distance services in fifteen cities in
Russia, including Moscow, as well as VSAT service to customers outside its
primary long distance satellite network; (iv) Sovam Teleport ("Sovam"), which
provides data services, including high-speed data transmission, electronic mail,
Internet access services, as well as Russia On Line, the first Russian language
Internet service; and (v) GTS' cellular operations ("GTS Cellular"), which
operate cellular networks in 14 regions in Russia and also in Kiev, Ukraine,
with licenses covering regions with an aggregate population of approximately 48
million people at September 30, 1998. Whenever practical, GTS' businesses
integrate and co-market their service offerings in Russia and the CIS, utilizing
TeleRoss as the domestic long distance provider, Sovintel as the international
gateway, TCM and GTS Cellular for local access, and Sovam as the data
communications and Internet access
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network for business applications and on-line services. Together, GTS' Russian
and CIS ventures carried approximately 442 million and 462 million minutes of
traffic for the year ended December 31, 1997 and the nine months ended September
30, 1998, respectively, and had approximately 34,100 customers, including
approximately 25,200 cellular subscribers, as of September 30, 1998. See "--
Russia and the CIS."
GTS does not currently own or operate significant telecommunication
assets in Asia. See "-- Asia."
Restructuring
In October 1998, GTS announced it would restructure its business operations into
five primary lines of business as follows:
o GTS Carrier Services, which will include HER's cross-border transport
carrier services in Europe, Ebone Internet transit services,
transoceanic infrastructure and services, and Internet service units;
o GTS Access Services, which will pursue GTS's entry into the Western
European competitive local exchange carrier ("CLEC") market;
o GTS Business Services -- Western Europe, which will offer voice, data,
Internet and other telecommunications services to businesses in Western
Europe, principally in locations not served by GTS Access Services;
o GTS Business Services -- CIS, which will incorporate all of GTS's CIS
"wireline" assets, including Sovintel, Sovam, TeleRoss and TCM; and
o GTS Mobile Services, which will operate all of GTS's cellular
businesses in Russia and the Ukraine.
RECENT DEVELOPMENTS
On December 8, 1998, GTS agreed with Esprit Telecom Group plc ("Esprit
Telecom"), subject to the satisfaction of certain conditions precedent,
including the approval of GTS' shareholders, to acquire in an exchange offer
each Esprit Telecom Ordinary Share and each Esprit Telecom American Depository
Share ("ADS"). Each Esprit Telecom Ordinary Share tendered will be exchanged for
0.1271 of a new share of GTS common stock and each Esprit Telecom ADS tendered
will be exchanged for 0.89 of a new share of GTS common stock. The exchange
ratio is fixed and will not be adjusted should any increase or decrease occur in
the price of any Esprit Telecom Ordinary Shares, Esprit Telecom ADSs or GTS
common stock. Esprit Telecom is a rapidly growing European telecommunications
company, providing high quality, competitively priced, international and
national long distance telecommunications services to retail customers and other
telecommunication service providers. Esprit Telecom has a network and sales
office infrastructure in 31 locations in eight countries in Europe generating a
run rate of over one billion minutes of traffic per annum. Esprit Telecom
Networks Limited, an independent operations subsidiary of Esprit Telecom, is
currently building a 9,000 route kilometer SDH and DWDM fiber optic network
through six European countries. Esprit Telecom also has links to Washington and
New York via a transatlantic circuit owned by other carriers.
On November 30, 1998, GTS completed the acquisition of NetSource Europe
ASA ("NetSource") for an initial purchase price consisting of 4,037,500 newly
issued shares of GTS common stock and $46.1 million in cash. In addition to the
initial consideration paid at the closing, GTS has agreed to make additional
payments of up to $35 million in either cash or shares of GTS common stock,
contingent on NetSource's achieving certain performance targets during the first
two quarters of 1999. NetSource is a pan-European provider of long distance
telecommunications services focusing primarily on small- to medium-sized
businesses, with operations in Norway, Sweden, Germany and Ireland, as well as
in the Netherlands, Belgium and Denmark. At June 30, 1998, NetSource had 27,900
business customers throughout Europe and 61,400 residential customers in Germany
and the Netherlands. NetSource will become part of GTS Business Services --
Western Europe. The acquisition of
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NetSource provides the GTS Business Services -- Western Europe line of business
with a customer and revenue base in several key Western European countries, a
portfolio of licenses and interconnection agreements and an entrepreneurial
management team.
On December 21, 1998, HER sold $200 million principal amount of 10 3/8%
Senior Notes due 2009 and Euro 85,000,000 principal amount of 10 3/8% Senior
Notes due 2006 in a private placement (collectively, the "New HER Notes"). The
transaction will closed in early January 1999. The net proceeds of this
offering, expected to be approximately $299.8 million, will be used to finance
the cost of HER network assets, to expand the HER network beyond the currently
contemplated scope, including by adding transatlantic capacity, enhancing the
speed of the HER network and continuing the buildout of the HER network.
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market
demand for telecommunications services. GTS seeks to position itself as the
leading independent telecommunication service provider in Europe through the
development of a pan-European fiber optic network and an international gateway
in Monaco. In addition, GTS has introduced a business plan to offer a broad
range of integrated telecommunications services to businesses and other
high-usage customers in certain metropolitan markets throughout Europe. See "--
Western Europe -- European Services Strategy." GTS' goal in emerging markets is
to establish itself as the leading alternative to the incumbent
telecommunications service providers and as a premier provider of value-added
services.
GTS has developed market strategies to achieve its goals in both
emerging markets and Western Europe. It has developed and is implementing a
business plan to offer comprehensive telecommunications services to business end
users throughout Europe.
Western Europe. GTS believes it is well-positioned to establish itself
as the leading independent carriers' carrier within Western Europe through the
development of HER's pan-European fiber optic network and the operation by GTS
of international gateway switching capacity. HER and the international gateway
switching capacity are complementary and enhance the services provided by large
established national carriers ("PTOs") and new entrants in a way that helps them
to more successfully meet the needs of their end-user customers. HER has been
able to enter the market ahead of competition and encourage a wide variety of
carriers to use its network with service offerings that meet their needs. To
establish itself as the leading carriers' carrier for international
telecommunications within Europe, HER intends to provide its customers with
significantly higher quality transmission and advanced network capabilities at a
competitive price by utilizing advanced, uniform technology across the region
and providing redundant routing for higher levels of reliability.
European Services Strategy. In June 1998, GTS introduced a business
plan to offer, through several new subsidiaries, facilities-based
telecommunications products and services to businesses and other high usage
customers in certain metropolitan markets throughout Europe. GTS believes that
the size and growth potential of the European market combined with increasing
liberalization of European telecommunications regulations provides GTS with the
opportunity to successfully develop local networks and other end-user services.
Through GTS Business Services -- Western Europe, GTS intends to enter up to 50
metropolitan markets as a reseller of services to end-users. Through GTS Access
Services, GTS proposes to develop CLECs in up to 12 European cities.
Implementation of the European Services Strategy may involve one or more of the
following: (i) the construction of fiber loop networks, (ii) the purchase or
lease of dark fiber, (iii) obtaining high frequency microwave licenses for
"wireless fiber," or (iv) partnership with, or acquisition of, resellers or
facilities-based CLECs. In evaluating potential markets GTS will consider among
others the following characteristics of each market: (i) its business
concentration, (ii) the national and local regulatory environment, (iii) the
technical difficulties of local network construction and (iv) the extent of
existing competition. See "Risk Factors -- Risks Relating to European Services
Strategy" "Recent Developments" and "-- Western Europe -- European Services
Strategy."
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Emerging Markets. GTS pursues its goals in emerging markets through a
three-stage approach of market entry, market expansion and market integration.
o Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii)
the provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or are expected to have
over a clearly defined time horizon, the ability to compete on a
substantially equal basis with the incumbent providers in terms of
certain services and the cost of providing those services. Once GTS has
identified a market as suitable for entry, GTS seeks to establish its
presence in that market by establishing a venture with a strong local
partner or partners. In general, GTS maintains a significant degree of
operational control in such ventures. Through such ventures, GTS
benefits from its partners' ability to provide infrastructure,
regulatory expertise and personnel that will provide GTS with a
competitive advantage in entering that market. When entering a new
market, GTS' strategy is to provide its customers with service of
higher quality than that provided by incumbents.
o Market Expansion. Having entered a market successfully and established
a limited service offering to its targeted customer base, GTS then
seeks to expand the range of services it offers to existing and
potential customers and to further develop its relationships with local
partners. By broadening its service offerings and providing a bundled
service offering, GTS expects to both expand its customer base and
increase GTS' share of each customer's telecommunications spending. GTS
also expects to achieve increased economies of scale through the common
use of administrative and operating functions already in place. GTS
also seeks to expand its targeted geographic market by forming new
partnerships and installing infrastructure and offering services in
additional geographic regions, allowing GTS to further enhance its
operating leverage and ability to service its customers'
telecommunications needs.
o Market Integration. GTS ultimately intends to integrate and co-market
its service offerings in each of the markets in which it operates. GTS
believes such integration will enable it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure,
networks and management information systems. As customers develop a
need for a broader variety of telecommunications services, GTS believes
that GTS' integrated operations will represent an attractive service
alternative for customers seeking a single provider that can meet all
their telecommunications needs.
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in GTS. As a GTS 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 as well as
other information contained in this prospectus before deciding to invest in
shares of our common stock.
RISKS RELATING TO THE COMBINED OPERATIONS OF THE COMPANIES
Nonrealization of Synergies. The combination of GTS and Esprit Telecom
involves the integration of separate companies that have previously operated
independently. The process of combining the companies may be disruptive to the
businesses and may cause an interruption of, or a loss of momentum in, the
businesses as a result of a number of obstacles such as:
o loss of key employees or customers;
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o 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;
o failure to maintain the quality of customer service that such
companies have historically provided;
o the need to coordinate geographically diverse organizations;
o incompatible equipment;
o limitations under existing Esprit Telecom debt covenants; and
o the resulting diversion of management's attention from the
day-to-day business of GTS and the need to hire management
personnel to address such obstacles.
GTS may fail to realize the expected cost savings, synergies and
revenue enhancements from such integration and may suffer material adverse short
and long-term effects on its operating results and financial condition.
Even if GTS is able to integrate the operations of the companies
successfully, there can be no assurance that GTS will realize the expected cost
savings, synergies or revenue enhancements from such integration or that GTS
will realize such benefits within the time frame that GTS currently expects.
o Whether GTS achieves expected economies of scale depends, in part,
on negotiations with third party providers of goods and services,
the results of which are difficult to predict. Accordingly, the
amount and timing of the resulting cost savings are inherently
difficult to estimate.
o Any cost savings and other synergies from the transaction will be
offset by costs incurred in integrating the companies.
o The cost savings and other synergies may also be offset by
increases in other expenses, by operating losses or by problems
unrelated to the transaction.
See "-- Integration of Recent Acquisitions."
RISKS RELATING TO THE COMBINED BUSINESS AND THE INDUSTRY
ADDITIONAL CAPITAL REQUIREMENTS
The combination of GTS and Esprit Telecom will need substantial capital
to:
o implement GTS' European Services Strategy,
o develop and expand the Esprit Telecom and HER networks,
o open new sales offices,
o introduce new telecommunications services,
o fund operating losses and net cash outflows, and
o make future acquisitions and investments in joint ventures.
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As part of its business strategy, GTS regularly evaluates potential
acquisitions and joint ventures. GTS believes that additional attractive
acquisition opportunities currently exist in its markets in Western and Central
Europe and the CIS. GTS continuously considers a number of potential
transactions, some of which may involve GTS contributing some of its Russian
businesses in exchange for an interest of equal or greater value in the
surviving entity and, if consummated, may be material to its operations and
financial condition. GTS does not have a definitive agreement with respect to
any material acquisition or joint venture, although it periodically has
discussions with other companies to assess opportunities on an on-going basis.
GTS may need to raise additional capital to fund such acquisitions or joint
ventures.
The amount of the combined company's future capital requirements will
depend upon the performance of its business, the rate and manner in which it
expands, develop and increases customer growth, its decision to acquire or
divest business or invest in joint ventures and other factors that are not
within its control, including competitive conditions, regulatory or other
government actions and capital costs. The actual amount and timing of its future
capital needs, however, may differ materially from GTS' estimates as a result of
the following factors:
o The accuracy of its estimates of future capital needs is subject to
changes and fluctuations in its revenues, operating costs and
development expenses. Actual revenues and costs may vary materially
from expected amounts and depend on:
o Esprit Telecom and HER's abilities to effectively and efficiently
manage the expansion of their networks and operations;
o HER's ability to obtain infrastructure contracts, rights-of-way,
licenses and other regulatory approvals that it needs to complete
and operate its network;
o the combined company's ability to purchase equipment for building
networks which support products and services and to negotiate
favorable contracts with suppliers, including large volume
discounts on its purchases of capital equipment;
o the combined company's ability to access targeted customers and
markets, attract sufficient numbers of customers and provide and
develop services for which customers will subscribe; and
o factors outside the combined company's control, such as political
and economic developments and trends, regulatory changes, changes
in technology, increased competition, strikes, weather, performance
by third parties and other factors in connection with its
operations.
o If the combined company expands its operations at an accelerated
rate or acquires any businesses, its funding needs may increase,
possibly to a significant degree, and the combined company may
spend its cash balances sooner than currently expected.
o As a result of acquiring, on June 24, 1998, a majority interest in
Ebone, HER may need to fund Ebone if Ebone is not self-funding in
accordance with GTS' business plan.
o As a result of acquiring, on November 30, 1998, a majority interest
in NetSource, the combined company may need to fund NetSource if
NetSource is not able to self-fund its business plan.
GTS cannot estimate with any degree of certainty the amount and timing
of its future capital requirements to implement such strategy. GTS anticipates
that the amount of capital it needs to continue to implement its European
Services Strategy will depend on several factors including, among others, the
demand for its services, the markets in which it builds or buys networks and
regulatory, technological and competitive developments. As a result of the
foregoing, in the event that the combined company's plans or assumptions change
or that its capital resources prove to be insufficient to fund growth and
operations in the manner and at the rate it currently anticipates, the combined
company may be required to raise additional capital. If the combined company
decides to
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raise additional funds by incurring debt, it may become subject to additional or
even more restrictive financial covenants (as a result of the assumption of
Esprit Telecom's outstanding debt securities) and its cash interest expense
obligations may increase. If the combined company decides to raise additional
funds by issuing equity, your ownership of the combined company's stock may be
diluted. GTS cannot assure you that additional financing will be available to it
on favorable terms or at all. If the combined company fails to generate
sufficient funds in the future, whether from operations or by raising additional
debt or equity capital, it may have to delay or abandon some or all of its
development, expansion and acquisition plans, or it may have to sell assets. As
a result, it may not have the ability to develop the necessary geographic reach,
networks, offer products, services and compete as effectively as contemplated.
These outcomes could have a material adverse effect on GTS' operations and on
the market price of its stock.
RISKS SPECIFIC TO GTS
SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS; RESTRICTIONS IN DEBT
AGREEMENTS ON GTS' OPERATIONS
GTS is, and will continue to be, highly leveraged as a result of the
substantial indebtedness it has incurred and intends to incur to implement its
business plans. GTS had approximately $1.2 billion of debt outstanding at
September 30, 1998. Upon consummation of the offer, GTS will assume Esprit
Telecom's debt, which was $554.9 million at September 30, 1998. GTS' debt
instruments permit GTS and its subsidiaries to incur certain additional
indebtedness to fund expansion of its businesses and for other permitted
purposes. In addition, GTS contemplates that it will raise additional debt
financing to implement its European Services Strategy. On December 21, 1998, HER
sold the New HER Notes. This transaction closed in early January 1999. GTS,
however, has not yet decided on the size and timing of any additional financing.
Esprit Telecom's debt instruments permit Esprit Telecom, and upon consummation
of the offer, will permit GTS, to incur certain additional indebtedness,
including indebtedness incurred to finance the expansion of Esprit Telecom's
network.
The high level of GTS's indebtedness could have important consequences
on its operations, including that it:
o will need significant cash to service its debt, thereby reducing
funds available for operations, future business opportunities and
investments in new or developing technologies and making GTS more
vulnerable to adverse economic conditions;
o may have difficulty refinancing GTS' existing debt or may be
restricted from obtaining additional financing to fund future
working capital, capital expenditures, debt service requirements,
acquisitions or other general corporate requirements;
o may have less flexibility in planning for, or reacting to, changes
in GTS' business and in the telecommunications industry;
o may have less flexibility in responding to changes which affect how
GTS implements its financing, construction or operating plans;
o will be more highly leveraged than some of GTS' competitors, which
may place it at a competitive disadvantage with respect to such
competitors; and
o will limit GTS' ability to withstand adverse economic conditions or
take advantage of significant business opportunities that may
arise.
In addition, GTS will be required to comply with certain financial
covenants and other restrictions contained in GTS's existing debt agreements.
Certain of the covenants included in Esprit Telecom's debt agreements are more
restrictive than those in GTS' existing debt agreements. Upon consummation of
the offer, GTS will assume
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Esprit Telecom's debt, and any GTS businesses contributed to Esprit Telecom will
become subject to these more restrictive covenants. Among other things, the GTS
financial covenants limit GTS' ability to:
o incur additional indebtedness,
o make capital expenditures,
o pay dividends, make distributions on GTS Stock or make certain
other restricted payments,
o create certain liens upon assets,
o dispose of certain assets, or
o enter into certain transactions with affiliates.
GTS cannot assure you that such covenants will not materially and
adversely affect its ability to finance its future operations or capital needs
or to engage in other business activities which it deems to be in its interest.
GTS will need to substantially increase net cash flow in order to pay
the principal of and interest on its debt, including debt assumed as a result of
the Esprit acquisition, and GTS cannot assure you that it will be able to meet
such obligations. If GTS is unable to generate sufficient cash flow or to
otherwise obtain the funds necessary to make required payments, or if it
otherwise fails to comply with the various covenants under the debt, it would be
in default under the terms of such debt. A default under such debt may permit
the holders thereof to accelerate the maturity of such debt, which in turn could
cause defaults under GTS, other indebtedness. GTS cannot assure you that under
these circumstances it would have sufficient funds or other resources to satisfy
all such obligations, on a timely basis or otherwise. Such default or
acceleration would also be likely to adversely affect the market price of GTS
Stock.
HISTORY OF OPERATING LOSSES
GTS has historically sustained substantial operating and net losses.
For the following periods, GTS's reported net losses of:
<TABLE>
<CAPTION>
PERIOD NET LOSS
------ --------
<S> <C>
Year ended December 31, 1995.................................. $40.4 million
Year ended December 31, 1996.................................. $68.0 million
Year ended December 31, 1997.................................. $117.0 million
Nine months ended September 30, 1998.......................... $100.8 million
Inception through September 30, 1998.......................... $343.7 million
</TABLE>
GTS' net losses in the first three quarters of 1998 exceeded those in
the comparable prior period in 1997, and GTS expects this trend to continue in
the fourth quarter of 1998. Further development of its business, including its
European end-user services business, will require significant additional
expenditures and GTS expects that it will have significant operating and net
losses and will record significant net cash outflow, before financing, in coming
years. GTS cannot assure you that its operations, including its European
end-user services business, will achieve or sustain profitability or positive
cash flow in the future. If GTS cannot achieve and sustain operating
profitability or positive cash flow from operations, it may not be able to meet
its debt service obligations or working capital requirements, which would have a
material adverse effect on its operations, and would adversely affect the market
price of GTS Stock.
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HER NETWORK ROLL-OUT
Risks Relating to Completing HER Network
HER's ability to achieve its strategic objective will depend in large
part on the successful, timely and cost-effective completion of the HER network.
HER currently operates commercially over a portion of the network linking
Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg,
Zurich, Geneva, Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen and
Stockholm. However, various factors, uncertainties and contingencies may delay
or adversely affect the development of the remainder of the network. Many of
these factors, such as strikes, natural disasters and other casualties, are
beyond HER's control. In addition, HER will need to negotiate and conclude
additional agreements with various parties regarding, among other things,
rights-of-way and development and maintenance of the network infrastructure and
equipment. GTS cannot assure you that HER will conclude necessary agreements.
Any delays in concluding such agreements would materially and adversely affect
the speed or successful completion of the network. The successful and timely
completion of the network will also depend on, among other things, (i) third
parties performing their contractual obligations to engineer, design and
construct portions of the network on a timely basis and (ii) HER's ability to
obtain and maintain applicable governmental approvals.
HER is operating its network in Belgium, The Netherlands, the UK,
France, Germany, Switzerland, Italy, Denmark and Sweden, and HER expects that
the 25,000 kilometer network will be operational by the end of the year 2000.
HER believes that its cost estimates and the build-out schedule are reasonable.
However, the actual construction costs or time required to complete the network
build-out could substantially exceed current estimates. Any significant delay or
increase in the costs to develop the HER network could have a material adverse
effect on HER and GTS' operations.
Development of the HER network is capital intensive. HER expects that
approximately $835 million in additional capital expenditures, including capital
lease obligations, will be incurred through the end of the year 2000 in
connection with the buildout of the HER network. HER believes that the net
proceeds from the issuance of the New HER Notes and its current indebtedness
combined with HER's projected internally generated funds, should be sufficient
to fund HER's expected capital expenditures. However, the accrual amount and
timing of HER's future capital requirements may differ materially from
management's estimates. Thus, additional financing may be needed to construct
the HER network, and GTS cannot assure you that such additional financing will
be available on terms acceptable to HER or at all. Failure to obtain necessary
financing may require HER to delay or abandon its plans for deploying the
remainder of the HER network, which may have a material adverse effect on HER
and GTS. However, the actual amount and timing of HER's future capital
requirements may differ materially from GTS' estimates. HER may need additional
financing to construct the HER network. GTS cannot assure you that such
additional financing will be available to HER on favorable terms or at all. If
HER fails to obtain necessary financing, HER might have to delay or abandon its
plans for deploying the remainder of the network, which would adversely affect
the viability of HER. HER's failure to obtain financing might also require GTS
to make additional capital contributions to HER at the expense of its other
operations. Either of these two outcomes could have a material adverse effect on
its operations and would adversely affect the value of GTS Stock.
Risks Relating to HER's Operations
HER's revenues and the cost of deploying its network and operating its
business will depend upon a variety of factors including:
o HER's ability to effectively and efficiently manage the expansion
of its network and operations;
o HER's ability to negotiate favorable contracts with suppliers;
o HER's ability to obtain additional licenses, regulatory approvals,
rights-of-way and infrastructure contracts to complete and operate
the network;
o HER's ability to access markets and attract sufficient customers;
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<PAGE> 16
o HER's ability to provide and develop services for which customers
will subscribe; and
o strikes, weather, performance by third parties and other factors
that are outside of HER's control.
Due to the uncertainty of these factors, actual costs and revenues may vary
from expected amounts, possibly to a material degree, and such variations would
likely affect HER's future capital requirements.
HER must obtain additional agreements for the long-term lease of dark
fiber, rights-of-way and other permits to install fiber optic cable from
railroads, utilities and governmental authorities (known as infrastructure
providers) to build out the network. GTS cannot assure you that HER will be able
to maintain all of its existing agreements, rights and permits. Nor can GTS
assure you that HER will be able to obtain and maintain the additional
agreements, rights and permits it needs to implement its business plan on
acceptable terms. If HER lost substantial agreements, rights and permits or
failed to enter into and maintain required arrangements for the HER networks,
such events would have a material adverse effect on HER's business. In addition,
HER depends on third parties for leases of dark fiber for substantial portions
of its network. If HER is unable to enter into or maintain such leases, this
could have a material adverse effect on HER's business, as well as on GTS'
operations and the market price of GTS Stock.
Falling Prices/Depressed Gross Margins
Prices in the European long distance industry have declined over the
past few years. GTS expects that prices will continue to decline as competition
increases and that continuing price cuts in certain retail markets will affect
the gross margins of certain of its customers. This, in turn, could affect HER's
gross margins, if not offset by increases in volume and reductions in costs.
Risks Relating to Regulatory Approvals
To construct and operate the network in accordance with current plans,
HER must obtain the necessary regulatory approvals. Licenses, authorizations or
registrations have been obtained in Belgium, Denmark, France, Germany, Italy,
The Netherlands, Sweden, Switzerland, the UK and the United States. HER 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 roll-out plan. With the exception of
Austria and Portugal, which are members of the European Union and whose laws
must comply with European Commission directives, these other countries have not
generally liberalized their telecommunications sectors. There can be no
assurance that they will do so in a timely manner or at all.
In addition, the terms and conditions of the licenses, authorizations
or registrations granted to HER may limit or otherwise affect HER's scope of
operations. There can be no assurances that HER will be able to obtain, maintain
or renew licenses, authorizations or registrations to provide the services it
currently provides and plans to provide, that such licenses, authorizations or
registrations will be issued or renewed on terms or with fees that are
commercially viable or that the licenses, authorizations or registrations
required in the future can be obtained by HER. The loss of, or failure to
obtain, these licenses, authorizations or registrations or a substantial
limitation upon the terms of these licenses, authorizations or registrations
could have a material adverse effect on HER and could adversely affect the
market price of GTS Stock.
GTS cannot assure you that the HER network will achieve the technical
specifications for which it was designed. HER also may be unable to upgrade the
network as technological improvements are introduced.
INTEGRATION OF RECENT ACQUISITIONS
GTS acquired NetSource in November 1998 and, upon the consummation of
the offer, will acquire Esprit Telecom, which in turn acquired Plusnet in May
1998 and three other telecommunications businesses in 1997. In
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<PAGE> 17
order to integrate these businesses, GTS must continue to develop its financial
and management controls and information systems. The integration of these
acquisitions has required and will continue to require additional expenditures.
Although GTS expects these acquisitions to result in operating synergies, it
cannot assure you that these acquisitions will achieve the expected benefits or
that such benefits will be realized within the time frames that it contemplates.
See "-- Risks Relating to the Combined Operations of the Companies --
Nonrealization of Synergies."
RISKS RELATING TO EUROPEAN SERVICES STRATEGY
Early Stage of European Services Strategy. Although GTS has recently
completed the acquisition of NetSource, hired certain key personnel and filed
certain licensing applications, GTS is still in the early stages of implementing
its European Services Strategy. GTS' decision to proceed with the European
Services Strategy will depend on its ability to assess potential markets, obtain
required governmental authorizations, franchises and permits, identify
appropriate additional acquisition candidates, implement efficient information
processing systems for billing and customer service and develop a sufficient
customer base. If GTS fails to achieve any of the foregoing, it may need to
modify, delay or abandon some or all of its European Services Strategy. GTS
cannot estimate with certainty the amount and timing of its future capital
requirements to implement such strategy. See "-- Additional Capital
Requirements."
Regulatory. Because GTS plans to provide, through GTS Business Services
- -- Western Europe and GTS Access Services, an expanded array of
telecommunications services in Europe, it will become subject to significant
additional regulation at the European Union, national and local levels. GTS has
applied for licenses to operate as a competitive local exchange carrier in seven
cities in Germany and the greater Paris metropolitan area. Delays in receiving
regulatory approvals, or the enactment of adverse regulations or regulatory
requirements, may have the following adverse consequences:
o delay or prevent GTS from offering its end-user services in certain
European markets;
o restrict the types of end-user services GTS can offer;
o restrict GTS from deploying its local networks; and
o otherwise adversely affect GTS' operations.
GTS cannot assure you that it will be able to obtain the necessary
regulatory approvals on a timely basis or that it will not otherwise be affected
by regulatory developments, any of which may have a material adverse effect.
Competition. The business of providing telecommunications services in
Europe is extremely competitive. GTS' success will depend upon its ability to
compete with a variety of telecommunications providers in each of its markets.
Competitors will include large established national carriers, alliances among
telecommunications companies (such as Global One, an alliance among Sprint,
Deutsche Telekom AG and France Telecom SA, and KPN/Qwest, an alliance between
KPN N.V. and Qwest Communications International, Inc.), facilities-based
competitors (including MCI WorldCom, Inc., Viatel, Inc., Econophone, Inc.,
Primus Telecommunications Group, Incorporated and Cable & Wireless, plc),
resellers, data providers, Internet service providers and other providers of
bundled services. GTS may also face competition in one or more of its markets
from competitors using new or alternative technologies or new applications of
existing technologies. These competitors include cable television companies,
wireless telephone companies, microwave carriers and satellite companies. Many
competitors will have established customer bases and extensive brand name
recognition. Many competitors will have greater financial, management and other
resources.
GTS will compete primarily on the basis of price and, to a lesser
extent, on the type and quality of services offered. Many potential competitors
are able to use their substantial financial resources to cause severe price
competition in the markets in which GTS plans to operate, which would force GTS
to lower its prices to remain
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<PAGE> 18
competitive. GTS also expects to lose a significant number of customers as a
result of the highly competitive nature of the markets. It may be difficult for
GTS to attract and retain a sufficient number of customers to sustain its
business. GTS cannot assure you that it will be able to effectively market its
expanded service offerings or that competitive pressures will not have a
material adverse effect.
Entering New Markets. GTS will have to make additional significant
operating and capital investments to implement the European Services Strategy.
GTS will need to develop new products and services and to establish direct
and/or indirect sales channels to market its offerings. Sophisticated
information and processing systems will be vital to its success, and it will
need to implement and integrate the necessary provisioning, billing and
collection systems for its services. Prior to its acquisition of NetSource, GTS
had no prior experience in offering expanded services in Europe or in targeting
European business and government customers. GTS may also rely on third party
vendors and contractors for network buildouts and information systems upgrades
and will need to obtain rights-of-way and other consents to develop its
networks. It cannot assure you that it will be able to implement the European
Services Strategy on a timely basis, or at all. Any delays in establishing its
business in one or more of its targeted markets may have a material adverse
effect.
Reliance on Other Telecommunications Service Providers. To implement
the European Services Strategy, GTS will need to enter into interconnection
agreements with the large established national carriers and other local service
providers operating in its target markets. GTS may also need to enter into
collocation agreements with, and lease trunking capacity from, such third
parties. GTS cannot assure you that it will be able to enter into these
interconnection and other agreements on terms that are satisfactory.
With respect to long distance and international services, GTS will need
to enter into resale agreements with long distance and international carriers.
These agreements often contain minimum volume commitments. GTS may be obligated
to pay underutilization charges if it overestimates its need for transmission
capacity. If GTS underestimates its need for transmission capacity, it may need
to pay more for the extra capacity needed.
Acquisition-Related Risks. GTS may enter its targeted markets through
additional acquisitions following the NetSource and Esprit Telecom acquisitions.
Buying businesses will subject it to certain risks, including, among others:
o acquired operations and personnel may be difficult to integrate
into its operations;
o GTS' ongoing operations may be disrupted;
o integrating the acquired business may divert resources and
management time from running GTS' ongoing business; and
o changes in management may impair relationships with employees and
customers.
In addition, GTS' high level of debt (which, upon consummation of the
offer, will include the assumed debt of Esprit Telecom) and the terms of its
outstanding debt agreements may limit its ability to consummate additional
acquisitions. GTS cannot assure you that it will close any such acquisitions or
that it will be able to obtain any additional financing needed to finance such
acquisitions. Nor can GTS assure you that if GTS closes any acquisitions, the
acquired business will be successfully integrated into its operations or will
perform as expected.
Potential Adverse Impact on HER. Many of the services GTS plans to
offer in its European end-user services business will compete with the services
offered by the customers HER targets as an independent carriers' carrier. If GTS
Business Services -- Western Europe and GTS Access Services contract with HER
for capacity, GTS expects that they will enter into such arrangements on an
arms-length basis. However, the European Services Strategy could affect the
perception of HER as an independent operator and could negatively impact HER's
ability to attract and retain customers, which could, in turn, have a material
adverse effect on HER's operations.
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RISKS RELATING TO REORGANIZATION OF RUSSIAN TELECOMMUNICATIONS INDUSTRY
The Russian government established Svyazinvest in 1994 to hold the
government's interest in 85 regional telecommunication companies. In April 1997,
President Yeltsin approved the transfer of additional government-owned
telecommunications assets to Svyazinvest. This transfer included the
government's 51% stake in Rostelecom (the government controlled international
and long distance operator). On July 30, 1997, Mustcom Ltd., a Cyprus-based
company that represents the interests of a consortium which includes ICFI
Cyprus, Renaissance International Ltd., Deutsche Morgan Grenfell, Morgan
Stanley, and certain entities affiliated with an affiliate of George Soros,
purchased a 25% stake in Svyazinvest for $1.87 billion. The President had also
authorized the sale of another 24% of Svyazinvest at a future date. This sale
was scheduled to occur in the second half of 1998. However, in view of the
recent deterioration of the Russian economy and political instability, the sale
was cancelled. See "-- Risks Relating to Russia and the CIS -- Political" and
"-- Economic."
As a result of the government's actions, a single entity, Svyazinvest,
now owns a majority interest in most of GTS' principal venture partners and
other telecommunication service providers in Russia. These companies together
provide a range of international and domestic long distance and local
telecommunications services throughout Russia. The consolidation of many of its
partners under Svyazinvest and the possible sale of a significant interest in
Svyazinvest to foreign and/or Russian investors is likely to make Svyazinvest a
stronger competitor, and may lead to material adverse changes in the business
relationships between GTS and its Russian partners. The continuing privatization
of Svyazinvest and the evolution of Russia's government policy regarding
Svyazinvest and Rostelecom may have a material adverse effect on GTS and its
Russian ventures.
MANAGING RAPID GROWTH
GTS continues to construct segments of the HER network, expand its
existing operations and expand into additional geographic and service markets
when business and regulatory conditions warrant. GTS cannot assure you that it
will be able to construct and operate the entire HER network as currently
planned, that it will be able to expand with the markets in which its ventures
are currently operating or into additional markets at the rate it presently
plans or that any existing regulatory barriers to such expansion will be reduced
or eliminated.
As a result of past and expected continued growth and expansion,
significant demands have been placed on GTS' management, operational and
financial resources and on its systems and controls. In order to manage GTS'
growth effectively, including growth resulting from acquisitions, GTS must
continue to implement and improve its operational and financial systems and
controls, purchase and utilize additional telecommunications facilities and
expand, train and manage the employee base. Inaccuracies in GTS' forecasts of
market demand could result in insufficient or excessive telecommunications
facilities and disproportionate fixed expenses for certain of its operations. As
GTS proceeds with its development and expansion, there will be additional
demands on its customer support, sales and marketing and administrative
resources and network infrastructure. GTS cannot assure you that GTS and its
ventures' operating and financial control systems and infrastructure will be
adequate to maintain and effectively manage future growth. If GTS fails to
continue to upgrade its administrative, operating and financial control systems
or unexpected expansion difficulties arise, there could be a material adverse
effect on its business, results of operations and financial condition.
RISKS RELATING TO OPERATIONS IN EMERGING MARKETS
GTS derives substantial revenues from its operations in emerging
markets. Emerging markets subject GTS to numerous risks, including the
following:
o underdeveloped and unstable banking systems;
o corruption;
o unexpected changes in regulatory requirements, tariffs, customs and
duties and other trade barriers;
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o difficulties in staffing and managing foreign operations;
o foreign exchange controls, which may restrict or prohibit funds
from being exchanged into US dollars and/or transferred abroad;
o potential adverse tax consequences from operating in multiple
jurisdictions with different tax laws;
o problems in collecting accounts receivable and devaluation of
accounts receivable in an inflationary economy;
o political risks and expropriation;
o technology export and import restrictions and prohibitions;
o delays from customs brokers or government agencies;
o seasonal reductions in business activity; and
o fluctuations in currency exchange rates.
The emerging market risks described above could have a material adverse
effect on business, results of operations and financial condition of GTS.
The political systems of many of the emerging market countries in which
GTS operates or plans to operate are slowly emerging from an extended period of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance and investment. Expropriation of private
businesses in such jurisdictions remains a possibility. Seizures of businesses
or assets may take the form of an outright taking, a ban on the exercise of
foreclosure rights, a confiscatory tax, refusal to renew licenses or other
policies. Such factors or actions to expropriate or seize its operations could
have a material adverse effect on GTS or its operations or frustrate or deny the
exercise of its rights. GTS cannot assure you that free market reforms
undertaken in certain of the emerging market countries in which it operates will
continue to proceed, let alone succeed, and signs of economic instability,
retrenchment and scapegoating are evident. These factors may reduce and delay
business activity, economic development and foreign investment.
Judicial officials operating in legal systems in emerging market
countries frequently have little or no experience with commercial transactions
between private parties. The extent to which GTS' contracts and other
obligations owed to GTS will be honored and enforced in emerging market
countries is uncertain. GTS may not be able to protect and enforce its rights in
emerging market countries, which could have a material adverse effect upon its
operations. Additionally, its businesses operate in uncertain regulatory
environments. The laws and regulations applicable to its activities in emerging
market countries are in general new and subject to change and, in some cases,
inconsistent and incomplete. GTS cannot assure you that local laws and
regulations will become stable in the future. Changes to such laws and
regulations could materially adversely affect operations and GTS' ability to pay
our debts. Such changes could adversely affect the value of GTS Stock.
RISKS RELATING TO OPERATIONS IN RUSSIA AND THE CIS
To date, GTS has earned substantially all of its revenue from
operations in Russia and the CIS. Foreign companies conducting operations in the
former Soviet Union face significant political, economic, and legal risks. GTS
continuously evaluates a number of potential transactions, some of which may
involve the contribution of certain of its Russian businesses in exchange for an
interest of equal or greater value in the surviving entity. The
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completion of any such transaction could be material to operations and financial
condition and could increase GTS' exposure to such risks.
Political. The political systems of Russia and the other independent
countries of the CIS are in a stage of transition. These systems have been and
may become more unstable due to political gridlock, as well as the populace's
dissatisfaction with reform, social and ethnic unrest, economic difficulties and
changes in government policies. Such instability could lead to events that could
have a material adverse effect on operations in these countries.
In recent years, Russia has been undergoing a substantial political
transformation. During this transformation, the Russian parliament enacted
legislation to protect private property against expropriation and
nationalization. However, due to the lack of experience in enforcing these
provisions during the period they have been in effect and due to potential
political changes in the future, GTS cannot assure you that such protections
would be enforced. Expropriation or nationalization of all or a portion of its
business or its assets, whether by an outright taking, a ban on the exercise of
foreclosure rights or by confiscatory tax or other policies potentially without
adequate compensation, would have a material adverse effect on operations and
the market price of GTS Stock.
The various government institutions in Russia and 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. Any major changes in, or rejection of, previous policies
favoring political and economic reform by the President may have a material
adverse effect.
In March 1998, President Yeltsin dismissed his entire cabinet,
including Prime Minister Victor Chernomyrdin, citing, among other things, a need
for more dynamism and initiative in the Russian government. At that time,
President Yeltsin directed the formation of a new government led by Sergei
Kireyenko, the young Prime Minister committed to continuing political and
economic reforms. Since March 1998, dramatic political changes have occurred in
Russia. In August 1998, Yeltsin dismissed the Kireyenko government and engaged
in a struggle with Parliament over leadership of the new government. Ultimately,
under pressure from Parliament, Yeltsin withdrew his nomination of Victor
Chernomyrdin and accepted Yevgeny Primakov as a compromise candidate. Primakov
rapidly received approval from the Duma.
Primakov has formed his government and is seeking to develop and
implement policies to address Russia's current economic crisis. Primakov is not
expected to follow the pro-market reform policies of his predecessors. His
appointments and policy pronouncements to date are mixed, suggesting that he
favors lower value-added, profit taxes and greater government intervention in
the economy, deficit spending and stricter currency controls. It is too soon to
determine what impact Prime Minister Primakov's policies will have on GTS'
business in Russia. The political situation remains very unsettled, especially
in view of President Yeltsin's deteriorating health and erratic stewardship of
the country. In addition, it is uncertain whether the resolution of these and
other issues could have a material adverse effect on the operations of GTS.
Furthermore, 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 GTS operates.
While GTS does not believe it has been adversely affected by these factors to
date, organized or other crime could in the future have a material adverse
effect.
Economic. Russia's serious economic crisis places at risk the economic
reforms the Russian government has enacted. In particular, the government has
suffered serious setbacks in reducing inflation and stabilizing the currency.
These reforms were designed to create the conditions for a more market-oriented
economy. For some time, Russia has experienced generally rising unemployment and
underemployment, high government debt relative to gross domestic product and
high levels of corporate insolvency. Russia continues to experience chronic
problems
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in its tax collection policies. Low tax receipts, coupled with the recent
downturn in commodity prices on world markets, have created a serious liquidity
problem. The Russian stock market lost approximately 85% of its value during the
first ten months of 1998 over concerns about Russia's economy and political
instability. Under these circumstances, GTS cannot assure you that (i) reform
policies will continue to be implemented and, if implemented, will be
successful, (ii) Russia will remain receptive to foreign trade and investment or
(iii) the economy will not suffer additional substantial setbacks. If the
Russian economy does not improve, it is likely this will have a material adverse
effect on the demand for GTS' services offered in Russia.
In response to these economic problems, in May and early June 1998, the
Russian Central Bank and other Russian governmental authorities adopted a number
of measures, including increasing the inter-bank lending rate charged by the
Russian Central Bank and the rate offered on sovereign debt obligations, in
order to maintain the value of the ruble and reduce the risk of the flight of
foreign capital from the Russian economy. On July 13, 1998, the International
Monetary Fund, the World Bank and the Japanese government announced a plan to
lend Russia $22.6 billion by the end of 1999. Since its disbursement of a first
tranche of $4.8 billion at the end of July 1998, the International Monetary Fund
has refused to release additional funds until the Russian government implements
a number of economic reforms, including measures to enhance tax collections and
narrow the budget deficit. The World Bank and the Japanese government appear to
be following the International Monetary Fund's lead with respect to their
remaining commitments under the $22.6 billion loan. The measures taken in May,
June and July 1998 failed to stabilize the economy and to provide adequate
liquidity.
On August 17, 1998, the Russian government and the Central Bank of
Russia announced emergency steps to improve liquidity (the "August 17
Decision"). Pursuant to this decision, the ruble's value was allowed to float
between 6.0 and 9.5 rubles to the US 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 August 17
Decision, the ruble's value has declined substantially below the 9.5 ruble/US
Dollar floor set in the August 17 Decision. As a result, GTS' financial
performance has been negatively affected. GTS recorded a $13.1 million pre-tax
charge for the quarter ended September 30, 1998, which consisted primarily of
foreign currency exchange losses for ruble-denominated net monetary assets. The
remainder of the charge consists of estimates for uncollectible accounts
receivable and unrecoverable cash deposits in certain Russian banks.
In addition, the Russian government has defaulted on payments, and
proposed a restructuring, of certain commercial and sovereign debt obligations
which has been criticized by Western holders of such obligations. As a result,
it is likely that the Russian government and Russian businesses will have
difficulty accessing Western financial markets for the foreseeable future.
Although the 90-day moratorium has not been extended, the consequences
of the August 17 Decision and its aftermath remain unclear. GTS cannot assure
you that these emergency measures, coupled with the policies of Russia's new
government, will be sufficient to stabilize the currency, enhance liquidity,
avoid hyperinflation, improve the collections, narrow the budget or prevent
further economic dislocation. In particular, there is a risk that there could be
a further significant and sudden decline in the value of the ruble resulting in
additional exchange-related losses for GTS and increased loss of investor
confidence in the Russian economy. Such consequences could have a material
adverse effect on GTS and its financial condition and results of operations and
the Russian economy generally. See "-- Currency and Exchange Risks."
The International Monetary Fund and the G-7 have thus far refused to
advance emergency funds to Russia to address the recent liquidity crisis. In
addition, the International Monetary Fund may not disburse the remaining
portions of the $22.6 billion loan referenced above, unless the Russian
government complies with the conditions of such loan. This underscores the
extent to which Russia, the CIS and other emerging countries in which GTS
operates are dependent upon substantial financial assistance from several
foreign governments and international organizations. If any of this financial
assistance is reduced or eliminated, economic development in Russia, the CIS and
such other countries may be adversely affected.
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Russian and CIS businesses have a limited operating history in
market-oriented conditions. The relative infancy of the business culture is
reflected in the Russian banking system's under-capitalization and lack of
liquidity. Many Russian banks continue to have cash shortages. The Russian
Central Bank has reduced banks' reserve requirements in order to inject more
liquidity into the Russian financial system, but has stressed that it will not
bail out the weaker banks. Many of these banks are expected to disappear over
the next several years as a result of bank failure and anticipated consolidation
in the industry. A general Russian banking crisis could have a material adverse
effect on GTS' financial performance and the viability of GTS' receivables, GTS'
ability to recover funds deposited in Russian banks and on GTS' operations. The
banking crisis could also adversely affect the value of GTS Stock.
Regulation of the Telecommunications Industry. The Russian
telecommunications system is currently regulated largely through the issuance of
licenses. There is currently no comprehensive legal framework with respect to
the provision of telecommunications services in Russia, although a number of
laws, decrees and regulations govern or affect the telecommunications sector. As
a result, ministry officials have a fairly high degree of discretion to regulate
the industry. Although telecommunication licenses may not be transferred under
Russian law, Goskomsvyaz, the successor of the Russian Ministry of
Communications, has adopted the position that licensees may enter into
agreements with third parties to provide services under the licensee's license.
However, the Goskomsvyaz does not generally review agreements entered into by
licensees. Current or future regulation of the Russian telecommunications
systems could have a material adverse effect.
Current Russian legislation governing foreign investment activities
does not prohibit or restrict foreign investment in the telecommunications
industry. However, press reports from Russia reveal that certain factions of the
Russian government are considering nationalizing certain strategic industries
and imposing foreign ownership restrictions as a result of the August 17
Decision and its aftermath. Nationalization of industries or future regulation
of foreign investment in the telecommunications industry could have a material
adverse effect.
In addition, members of the Russian government cannot agree on the
manner and scope of government control over the telecommunications industry.
Because the telecommunications industry is widely viewed as strategically
important to Russia, GTS cannot assure you that government policies liberalizing
control over the telecommunications industry will continue. Any change in or
reversal of such governmental policies could have a material adverse effect.
Legal Risks. The Russian and CIS governments have made an effort to
transform their economies into more market-oriented economies. In particular
they have rapidly introduced laws, regulations and legal structures intended to
give participants in the economy a greater degree of confidence in the legal
validity and enforceability of their obligations. Risks associated with the
legal systems of Russia and the other independent republics of the CIS include:
o the untested nature of the independence of the judiciary and its
immunity from economic, political or nationalistic influence;
o the relative inexperience of judges and courts in commercial
dispute resolutions and legal interpretation;
o inconsistencies among laws, presidential edicts, government decrees
and ministerial orders;
o the lack of legislative, judicial or administrative guidance on
interpreting the applicable rules;
o a high degree of discretion on the part of government authorities
and arbitrary decision making which increases, among other things,
the risk of property expropriation; and
o problems in enforcing judicial and administrative decisions.
The result has been considerable legal confusion, particularly in areas
such as company law, commercial and contract law, securities and antitrust law,
foreign trade and investment law and tax law. Accordingly, GTS
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cannot assure you that it will be able to enforce its rights in any disputes
with its joint venture partners or other parties in Russia or the CIS. In
addition, GTS cannot assure you that its ventures will be able to enforce their
respective rights in any disputes with partners, customers, suppliers,
regulatory agencies or other parties in Russia or that it will be found to be in
compliance with all applicable laws, rules and regulations.
Taxes. Generally, taxes payable by Russian companies are substantial.
In addition, taxes payable by Russian companies are numerous and include taxes
on profits, revenue, assets and payroll as well as value-added tax. In addition,
statutory tax returns of Russian companies are not consolidated and therefore,
each company must pay its own Russian taxes. Because there is no consolidation
provision, dividends are subject to Russian taxes at each level 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 GTS.
Because of uncertainties associated with the laws and regulations of
the Russian tax system and the increasingly aggressive interpretation,
enforcement and collection activities of the Russian tax authorities, GTS'
Russian taxes may be in excess of the estimated amount expensed to date and
accrued on GTS' balance sheets. It is the opinion of GTS that the ultimate
resolution of GTS' Russian tax liability, to the extent not previously provided
for, will not have a material adverse effect on its Russian shareholding and
financial condition. However, depending on the amount and timing of an
unfavorable resolution of this contingency, it is possible that its future
results of operations or cash flows could be materially affected in a particular
period.
In various foreign jurisdictions, GTS is obligated to pay value-added
tax on the purchase or importation of assets, and for certain other
transactions. In many instances, value-added tax liabilities can be offset
against value-added tax which GTS collects and otherwise would remit to the tax
authorities, or may be refundable. Because the law in some jurisdictions is
unclear, the local tax authorities could assert that GTS is obligated to pay
additional amounts of value-added tax. In the opinion of GTS, any additional
value-added tax which GTS may be obligated to pay would not be material.
ADEQUACY OF MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN EMERGING MARKETS
Many of the emerging market countries in which GTS operates, including
Russia and the CIS, are deficient in management and financial reporting concepts
and practices, and lack modern banking, computer and other control systems. GTS
has also historically had difficulty hiring and retaining a sufficient number of
qualified employees to work in these markets. As a result, GTS has had
difficulty:
o establishing management, legal and financial controls;
o collecting financial data;
o preparing financial statements, books of account and corporate
records; and
o instituting business practices that meet Western standards.
GTS has a policy worldwide of complying with all applicable laws and
ensuring that all of its employees understand and comply with such laws. The
application of the laws of any particular country, however, is not always clear
or consistent. 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
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 western countries. As a result of the difficulty GTS has
experienced in
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emerging markets in instituting business practices that meet Western reporting
and control standards, it has been unable to ascertain whether certain practices
by its ventures, which were not in accordance with GTS policy, were in
compliance with applicable US and foreign laws. If it were to be determined that
GTS or any of its ventures were involved in unlawful practices and were the
factual and legal issues relating thereto to be resolved adversely, GTS or its
ventures could be exposed, among other things, to significant fines, risk of
prosecution and loss of its licenses. See "-- Risks Relating to Emerging
Markets" and "-- Government Regulation."
In light of these circumstances, in the second half of 1996 GTS
increased its efforts to improve its management and financial controls and
business practices. GTS recruited a more experienced financial and legal team,
including a new Chief Financial Officer of GTS, a senior finance officer
overseeing all of the regions in which GTS operates, a senior finance officer
for the CIS region, and a senior legal officer for the CIS region. GTS also
established a treasury group and adopted a more rigorous Foreign Corrupt
Practices Act compliance program. GTS has developed and implemented a training
program for employees regarding US legal and foreign local law compliance. GTS
also appointed a Compliance Officer responsible for monitoring compliance with
such laws and training GTS personnel around the world. In connection with these
developments, GTS expanded its corporate business practices policy to include,
in addition to compliance with US laws such as the Foreign Corrupt Practices
Act, compliance with applicable local laws such as the conflict of interest
rules under the 1996 Russian Joint Stock GTS Law, currency regulations and
applicable tax laws.
In addition, in early 1997, GTS retained special outside counsel to
conduct a thorough review of certain of its business practices in the emerging
markets in which GTS operates to determine whether deficiencies existed that
needed to be remedied. As a result of this review, GTS 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 GTS
believes would have a material adverse effect on its financial condition.
However, if GTS 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.
Although GTS believes that the special counsel review was properly
conducted and was sufficient in scope, it cannot assure you that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated will be effective. GTS believes, however, that the actions
taken since the review to strengthen GTS' management, financial controls and
legal compliance will be adequate to address any possible deficiencies. In
addition, the Audit Committee of the GTS Board recently reviewed the legal
compliance procedures. The implementation of their recommendations and their
continued oversight of the compliance process in the future will help to ensure
that any problems in such procedures are addressed.
DEPENDENCE ON CERTAIN LOCAL PARTIES; ABSENCE OF CONTROL
GTS developed many of its operations, including joint ventures, under
GTS Business Services -- CIS, such as Sovintel, TeleRoss and GTS Cellular, in
cooperation or partnership with key local parties, such as regional telephone
companies. GTS is substantially dependent on its local partners to provide it
with marketing expertise and knowledge of the local regulatory environment. This
local knowledge helps facilitate the acquisition of necessary licenses and
permits. GTS' failure to form or maintain alliances with local partners, or the
preemption or disruption of such alliances by its competitors or otherwise,
could adversely affect its ability to penetrate and compete successfully in the
emerging markets in which it operates or plans to enter. In addition, in the
uncertain legal environments in which GTS operates, certain of its businesses
may be vulnerable to local government agencies or other parties who wish to
renegotiate the terms and conditions of, or terminate, their agreements or other
understandings with GTS.
Under the terms of various joint venture agreements GTS has the right
to nominate key employees, direct the operations and determine the strategies of
such joint ventures' governance. However, its 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
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transactions effectively require the approval of its local partners. Further,
GTS would be unlikely as a practical matter to want to take significant actions
without the approval of its joint venture partners. Accordingly, GTS' inability
to unilaterally control the operations of its joint ventures could have a
material adverse effect on its operations and on the market price of GTS Stock.
In addition, GTS frequently competes with venture partners in the same
markets. For example, Rostelecom, GTS' partner in Sovintel, is the dominant
international and domestic long distance carrier in Russia. Similarly, many of
GTS' regional telephone company partners in the TeleRoss Ventures offer cellular
services in direct competition with certain of the operations of GTS Cellular.
Such competition may lead to conflicts of interest for GTS or its partners in
the operations of these ventures. GTS cannot assure you that any such conflicts
will be resolved in its favor. See "-- Risks Relating to Reorganization of
Russian Telecommunications Industry."
GOVERNMENT REGULATION
As a multinational telecommunications company, GTS is subject to
varying degrees of regulation in each of the jurisdictions in which its ventures
provide services. Local laws and regulations, and the interpretation of such
laws and regulations, differ significantly among the jurisdictions in which it
operates. Future regulatory, judicial and legislative changes could have a
material adverse effect. In addition, regulators or third parties may raise
material issues with regard to its compliance or noncompliance with applicable
regulations.
Many of GTS' ventures require telecommunications licenses, most of
which were granted for periods of 3 to 10 years. The terms and conditions of
these licenses may limit or otherwise affect the ventures' scope of operations.
GTS has had favorable experience obtaining, maintaining and renewing licenses in
the past. However, it cannot assure you that it will be able to obtain, maintain
or renew licenses to provide the services it currently provides and plans to
provide or that such licenses will be issued or renewed on terms or with fees
that are commercially viable. In addition, GTS cannot assure you that it can
obtain licenses required by future ventures. The loss of or a substantial
limitation upon the terms of these telecommunications licenses could have a
material adverse effect.
A substantial portion of HER's strategy is based upon the timely
implementation of regulatory liberalization of the European Union
telecommunications market. This liberalization occurred in accordance with
existing European Community directives. Although European Union member states
have a legal obligation to liberalize their markets in accordance with these
directives by January 1, 1998, further measures may be required to make markets
fully competitive. In addition, the European Commission granted Ireland,
Portugal, Spain, Luxembourg and Greece extensions from the January 1, 1998
deadline. Ireland and Spain, subsequently, liberalized on December 1, 1998.
In order to give effect to European Community directives in each member
state, national governments must pass legislation implementing the directives.
Some European Union member states have yet to implement existing European
Community directives fully and similar delays may occur in the implementation of
any future directives. This could limit, constrain or otherwise adversely affect
HER's ability to provide certain services. Even if an European Union member
state adopts liberalization measures in a timely way, there may be significant
resistance to the implementation of such measures from established national or
regional telecommunications operators, regulators, trade unions and other
sources. Further, HER's provision of services in Europe may be materially
adversely affected if any European Union member state imposes greater
restrictions on international services between the European Union and other
countries than on international services within the European Union These and
other potential obstacles to liberalization could have a material adverse effect
on HER's operations by preventing HER from establishing its network as currently
intended. These obstacles could also have a material adverse effect.
GTS cannot assure you that each European Union member state will
proceed with the expected liberalization on schedule, or at all, or that the
trend toward liberalization will not be stopped or reversed in any of
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the countries. Accordingly, HER faces the risk that it will establish the HER
network and make capital expenditures in a given country in anticipation of
regulatory liberalization which may not occur.
COMPETITION
GTS faces significant competition in all of its existing
telecommunications businesses and for acquisition and development opportunities
in both emerging and Western European markets.
GTS' competitors in these markets include the following:
o established national or regional telecommunications operators,
o multinational telecommunications carriers,
o other telecommunications developers,
o certain niche telecommunications providers and
o joint venture partners.
In addition, as a result of the recent combination under Svyazinvest of
the Russian government's majority interest in Rostelecom and 85 of the regional
telephone companies, GTS may be subject to more coordinated competition from its
partners in the Russian telecommunications market in the future. Although GTS
believes it has a favorable and cooperative relationship with its joint venture
partners, GTS cannot assure you that these partners will continue to cooperate
with it in the future or that they will not increase competitive pressures. Any
measures taken by the partners that reduce their level of cooperation with GTS
could jeopardize its ability to participate in the management and operation of
its joint ventures and could have a material adverse effect.
The European and international telecommunications industries are
competitive. 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.
HER "point-to-point" transborder service offering also competes with
circuits currently provided by large established national carriers through
international private leased circuits. The liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets. GTS cannot assure you
that HER will compete effectively against its current or future competitors.
Many of GTS' competitors have substantially greater technical,
financial, marketing and other resources. GTS cannot assure you that it will be
able to successfully overcome the competitive pressures to which it is subject
in its present and future operating markets.
Many of GTS' 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. GTS is subject to, and seeks to comply with, the
limitations and prohibitions of such law, and accordingly may be subject to
competitive disadvantages to the extent that its competitors are able to secure
business, licenses or other preferential treatment through the making of such
payments. Accordingly, GTS cannot assure you that it will be able to compete
effectively against companies free from such limitations in the emerging markets
where such commercial practices are commonplace. See "-- Adequacy of Management,
Legal and Financial Controls in Emerging Markets."
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CERTAIN STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS
At September 30, 1998, the Soros Associates beneficially owned
approximately 13.4% of GTS Stock (and 10.6%, assuming the Offer is consummated)
and Alan B. Slifka and certain of his affiliates beneficially owned 6.2% of GTS
Stock (and 4.9%, assuming the Offer is consummated). In addition, two persons
who are affiliated with the Soros Associates serve on the GTS 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.
RISKS OF CONDUCTING BUSINESS IN FOREIGN CURRENCIES
GTS conducts all of its operations outside the United States. As a
result, a substantial portion of its revenues (as well as the majority of its
operating expenses) are in foreign currencies, which will subject it to
significant foreign exchange risks. In particular, because GTS does business in
certain countries that have "soft currencies", it may accumulate cash in
currencies that are not readily convertible into hard currency, significantly
limiting its ability to repatriate its profits from those countries. These
factors may adversely affect GTS' operations, as well as limit its ability to
reinvest earnings from ventures in one country to fund the capital needs of its
ventures in other countries.
GTS has earned most of its revenue to date in Russia. The value of the
ruble against the US Dollar has steadily declined. As a result of the August 17
Decision and its aftermath, the value of the ruble against the US Dollar has
fallen even more significantly, negatively affecting GTS' financial performance.
During the quarter ended September 30, 1998, the Company recorded a $13.1
million pre-tax charge. The largest portion of the charge consisted of foreign
currency exchange losses on its net monetary assets that are denominated in
rubles. The remainder of the charge reflects its estimate on its ability to
collect accounts receivable and the potential loss of cash deposits in Russian
banks.
The tariffs GTS sets for its customers in Russia are generally
denominated in US Dollars whereas it invoices and collects its charges in
rubles. GTS' major capital expenditures are generally denominated and payable in
various foreign currencies. When these capital expenditures involve importing
equipment and the like, current law permits it to convert its ruble revenues
into foreign currency to make such payments. However, as a result of the August
17 Decision and its aftermath, it may become more difficult for GTS to convert
rubles to US Dollars or other "hard" currencies.
The ruble is generally non-convertible outside Russia, although, in
late April 1998, the Chicago Mercantile Exchange announced that the ruble is a
currency that will be available for futures and options trading. 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 as a result of policies the
new Russian government may implement. The limited availability of other
currencies may tend to inflate their values relative to the ruble. It is
uncertain whether such a market in Russia will continue to exist.
The banking system in Russia is in crisis as a result of the August 17
Decision and its aftermath. Considerable delays may occur in the transfer of
funds within, and the remittance of funds out of, Russia. The 90-day moratorium
that the August 17 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.
When the Russian government announced the August 17 Decision, it
abandoned its policy since November 1997 of pegging the ruble/US Dollar exchange
rate to fluctuate within a certain narrow range. Since the August 17 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. A significant and sudden devaluation of the ruble could have a
material adverse effect on GTS and its results of operations.
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GTS historically has not used hedging transactions to limit its
exposure to risks from doing business in foreign currencies. In April 1998, HER
entered into a currency swap contract to limit its exposure to currency risks
from the $265 million of 11.5% senior notes that HER issued in August 1997.
EXCHANGE CONTROLS AND RISKS OF NOT BEING ABLE TO REPATRIATE PROCEEDS FROM
RUSSIAN INVESTMENTS
Russia has adopted currency and capital transfer regulations to prevent
the flight of capital from its borders. These regulations require certain
licenses for the movement of capital. The incurrence and repayment of debt and
the payment of capital contributions in foreign currency to Russian entities are
subject to these regulations. GTS is resolving licensing issues with respect to
certain intercompany loans and capital contributions with the applicable
government agencies. GTS does not believe that the issues raised by these
agencies concerning its license will have a material adverse effect on its
financial condition or results of operations. It is possible, however, that the
Russian government authorities could take an unexpected adverse position on
these issues that could materially affect its business.
GTS cannot assure you that Russian foreign investment and currency
legislation will continue to permit it to repatriate the proceeds from its
investments. GTS also cannot be sure whether the Russian government authorities
will impose more restrictions on the conversion of ruble earnings into foreign
currency to pay dividends or repatriate profits. If further restrictions were
imposed, they would have a material adverse effect on its interests in Russia.
DEPENDENCE ON KEY PERSONNEL
GTS believes that its growth and future success will depend in large
part upon a small number of key executive officers, as well as on its ability to
attract and retain highly skilled personnel to work in the emerging markets in
which it operates. The competition for qualified personnel in the
telecommunications industry is intense, particularly in the emerging markets
where it operates. GTS cannot assure you that it will be able to hire and retain
qualified personnel. Despite changes of personnel in Russia and the CIS, GTS
believes it has maintained a strong management team. However, GTS cannot assure
you as to what effect such personnel changes will have on its operations in
Russia and the CIS.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
GTS must record and process massive amounts of data quickly and
accurately. While GTS believes its ventures' management information systems are
currently adequate, these systems will have to grow as the businesses expand.
GTS believes that the successful expansion of its information systems and
administrative support will be important to its continued growth, as well as to
its ability to monitor and control costs, to bill customers accurately and on
time and to achieve operating efficiencies. GTS may, however, encounter delays
or cost-overruns or suffer adverse consequences in implementing these systems.
Any such delay or other malfunction of its management information systems could
have a material adverse effect on GTS' business, financial condition and results
of operations.
TAXES; NET OPERATING LOSS CARRYFORWARDS MAY NOT BE USABLE
The tax rules and regimes which exist in certain emerging markets in
which GTS operates or plans to operate are, in many cases, new and rapidly
changing. If GTS repatriates profits from those countries, it may incur
additional taxes. Also, other taxes, such as value added tax, excise taxes and
import duties are changing at an unpredictable pace and could have an adverse
effect on its operations.
GTS relies on certain tax benefits in the countries in which it
operates as well as in the United States. GTS' ability to use these tax benefits
is subject to changes in the rules relating to tax holidays and in the
provisions of tax treaties with the United States. Some of its ventures in the
CIS and Hungary benefit from tax holidays granted by
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local governments. These tax holidays range from five to several years, and go
into effect once GTS' operations achieve profitability under local tax
regulations. In addition to those tax holidays, certain of GTS' foreign ventures
have accumulated foreign tax loss carryforwards in excess of $60.0 million.
As of December 31, 1997, GTS had net operating loss carryforwards for
US federal tax purposes of approximately $110 million expiring in 2003 through
2012. Because of the "change in ownership" provisions of the Tax Reform Act of
1986, GTS' ability to use the tax benefits from its net operating loss
carryforwards is subject to an annual limit as a result of the initial public
offering and the follow on stock offering and convertible senior subordinated
debenture due 2010 offering carried out in July 1998.
GTS' financial statements do not reflect any provision for the tax
benefits from the US and non-US loss carryforwards. GTS cannot assure you that
local tax authorities will allow it to apply these loss carryforwards, in part
or full, to reduce taxes on its future income.
CHANGES IN TECHNOLOGY
The telecommunications industry has experienced rapid changes in
technology. These technological advances may reduce the effectiveness of
existing technology and equipment. The cost to implement emerging and future
technologies could be significant. Also, GTS buys or uses telecommunications
equipment from a number of vendors. GTS depends on these vendors to adapt this
equipment to meet varying local telecommunications standards. GTS may be unable
to maintain competitive services or obtain new technology on a timely basis or
on satisfactory terms. If it fails to maintain competitive services, or obtain
new technologies, that could have a material adverse effect on business,
financial condition and results of operations.
Developing and operating the HER network also poses certain
technological risks. The network is designed to use SDH technology. While SDH is
an advanced new transmission technology, HER may need to upgrade its technology
from the SDH platform to be able to offer its services at a cheaper price than
its competitors. GTS cannot assure you that the HER network will achieve the
technical specifications for which it was designed. HER also may be unable to
upgrade the network as technological improvements are introduced. These factors
could materially and adversely affect the viability of the HER network, the
prospects of GTS, its operations and the market price of GTS Stock.
DIFFICULTY IN OBTAINING RELIABLE MARKET INFORMATION
GTS operates in markets in which it is difficult to obtain reliable
market information. GTS has based its business planning on certain assumptions
concerning total revenue, business and consumer breakdown revenue, revenue from
various products and services, pricing, competition, operating expenses and
capital expenditures and its own investigation of market size and conditions and
its experience in other markets. GTS cannot assure you that either its
assumptions or data provided by outside sources are accurate or that they are
indicative of actual market conditions.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE FROM SALES OF GTS STOCK
As of September 30, 1998, 60,495,446 shares of GTS Stock were
outstanding excluding (v) 9,781,336 shares for which outstanding warrants and
vested options are exercisable, (w) 5,970,050 shares into which the Convertible
Bonds are convertible, (x) the 8,481,417 shares into which the Debentures are
convertible, (y) 3,737,407 shares issued to holders of NetSource stock in
connection with GTS' acquisition of NetSource and (z) shares issued in
connection with the Offer.
Of the 60,495,446 outstanding shares of GTS Stock, the 12,765,000
shares registered in the IPO and the 14,506,900 shares registered in the July
1998 Stock Offering will be freely tradable without restriction under the
Securities Act. However such shares held by "affiliates" may generally be resold
only in compliance with applicable
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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 12,762,000 shares have been resold or may be resold
under Rule 144 subject to volume and manner limitations. In addition, the
8,481,417 shares into which the Debentures are convertible will be freely
tradable without restriction under the Securities Act.
In addition, GTS has filed and the SEC has declared effective three
registration statements. One registration statement covers the resale of the
Convertible Bonds and the shares of GTS Stock into which the Convertible Bonds
are convertible. Two registration statements on Form S-8 cover the resale of
shares of GTS Stock issued to employees, officers and directors under our
employee benefit plans.
Furthermore, GTS has agreed to file with the SEC a shelf registration
statement (the "Shelf Registration Statement") covering all of the shares of GTS
Stock (and securities convertible into or exercisable for shares of GTS Stock)
owned by Alan B. Slifka and his affiliates and the Soros Associates that were
not sold in the July 1998 Stock Offering (the "Affiliate Shares"). GTS agreed to
file the Shelf Registration Statement in exchange for these shareholders
agreeing to certain restrictions on their ability to resell such Affiliate
Shares. These restrictions apply for specified periods after closing of the July
1998 Offerings. Under these restrictions, holders of Affiliate Shares cannot,
subject to certain exceptions, sell any such shares during the first six months
after the closing date of the July 1998 Offerings. They may, however, sell 50%
of such shares six months after the closing date of the July 1998 Offerings; 75%
of such shares nine months after the closing date of the July 1998 Offerings;
and 100% of such shares twelve months after the closing date of the July 1998
Offerings.
Certain limited partners of partnerships affiliated with Alan B. Slifka
and currently in dissolution may, upon giving us advance notice, withdraw some
or all of their shares of GTS 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 GTS Stock
that such persons may withdraw is capped at 726,953 shares of GTS Stock minus
the number of shares such persons sold in the July 1998 Stock Offering.
GTS has also agreed to file a shelf registration statement covering all
of the shares of GTS Stock that may be issued to holders of NetSource stock in
connection with the acquisition of NetSource. Up to a total of 4,037,500 shares
may be issued by GTS in connection with this acquisition.
GTS cannot predict what effect, if any, that future sales of GTS Stock
or the availability of GTS Stock for sale would have on the market price for GTS
Stock. Sales of large numbers of shares of GTS 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 GTS Stock.
NO DIVIDEND PAYMENTS ARE EXPECTED
GTS does not intend to pay any cash dividends in the foreseeable
future. Also, its ability to pay dividends is prohibited under the terms of an
existing debt agreement. If GTS raises any capital in the future, it may be
restricted from paying dividends under the terms of such financings. In
addition, the August 17 Decision 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.
ANTI-TAKEOVER PROVISIONS
Certain anti-takeover provisions could delay or prevent a third party
from gaining control of GTS in a transaction that the GTS Board had not
negotiated and approved, even if such change in control would be beneficial to
stockholders. These anti-takeover provisions include:
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o Section 203 of the Delaware General Corporations 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 certain limited circumstances.
o Certain provisions of GTS' charter and by-laws, including:
o a classified GTS Board serving staggered three-year terms;
o restrictions on who may call a special meeting of stockholders;
o a prohibition on stockholder action by written consent;
o restrictions on the removal of directors;
o supermajority voting requirements with respect to certain amendments
to the Charter; and
o the authority to issue shares of preferred stock and to determine the
rights without stockholder approval.
o A shareholders' rights plan.
US JUDGMENTS MAY NOT BE ENFORCEABLE ABROAD
Substantially all of GTS' assets (including all of the assets of our
operating ventures) are located outside the United States. As a result, it will
be necessary for you to comply with foreign laws in order to enforce judgments
obtained in a US court (including those with respect to federal securities law
claims) against the assets of GTS' operating ventures. GTS cannot assure you
that any US judgments would be enforced under any such foreign laws.
STOCK PRICE MAY BE VOLATILE
The market price for GTS Stock could fluctuate due to various factors. These
factors include:
o political and economic development in emerging markets (including Russia
and the CIS);
o announcements by GTS or its competitors of new contracts, technological
innovations or new products;
o other announcements concerning GTS or its competitors;
o changes in government regulations;
o fluctuations in GTS' quarterly and annual operating results; and
o 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 GTS Stock.
RISKS SPECIFIC TO ESPRIT TELECOM
Set out below is a description of certain risk factors that may affect
Esprit Telecom's business and results of operations from time to time as an
independent company. Should the proposed Offer by GTS be completed, these risk
factors could change in certain significant respects. In addition, the
announcement of the offer by GTS could
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impact the business of Esprit Telecom in a variety of respects the effects of
which are not yet known to Esprit Telecom, but which could ultimately have
adverse effects on Esprit Telecom. In particular, should the proposed offer not
be completed, the business of Esprit Telecom may be materially adversely
affected.
LIMITED OPERATING HISTORY; HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES;
NEGATIVE EBITDA; NET LOSSES
Esprit Telecom commenced operations in June 1992 with limited business
in Spain and has since further expanded its operations to cover the United
Kingdom, Germany, The Netherlands, France, Belgium, Ireland and Italy. As a
result of its recent development, Esprit Telecom has generated limited revenue
in markets other than the United Kingdom, Germany and The Netherlands. Esprit
Telecom, its customer base and the Esprit Network have grown significantly in
the last three years as investments from its principal shareholders and proceeds
from financings have allowed Esprit Telecom to expand into key European markets.
In addition, Esprit Telecom intends to enter new European markets and offer new
telecommunications services. Accordingly, Esprit Telecom can offer no assurance
that Esprit Telecom's future operations will generate operating or net income,
and Esprit Telecom's prospects must therefore be considered in light of the
risks, costs and time constraints inherent in establishing operations and
introducing new telecommunications services in newly liberalizing markets.
Esprit Telecom has incurred and expects to continue to incur operating
losses, negative cash flow from operating activities and negative EBITDA while
it develops and expands the Esprit Network, integrates the Plusnet Business into
its current operations, opens new sales offices and introduces new
telecommunications services. Esprit Telecom could continue to generate net
losses even after Esprit Telecom begins to generate positive EBITDA. Although
Esprit Telecom has experienced net revenue growth in each of the last four
years, such growth should not be considered to be indicative of future net
revenue growth, if any. For the years ended September 30, 1997 and September 30,
1998, Esprit Telecom sustained, on a UK GAAP basis, net losses of approximately
L.10.9 million and L.42.3 million, respectively, and negative EBITDA of L.8.7
million and 18.3 million, respectively. Furthermore, Esprit Telecom expects
that operations in new markets will sustain negative cash flows until an
adequate customer base and the related revenue stream have been established. In
addition, prices in the long distance industry in Europe have declined in
recent years and, as competition continues to increase, Esprit Telecom expects
that prices will continue to decline. Although Esprit Telecom believes that
such decreases in price will be at least partially offset by increased traffic
volume and decreases in the cost of providing telecommunication services,
Esprit Telecom can offer no assurance that it will achieve or, if achieved,
will sustain profitability or positive cash flow from operating activities in
the future. If Esprit Telecom cannot achieve and sustain operating
profitability or positive cash flow, Esprit Telecom may not be able to meet its
debt service obligations or working capital requirements without additional
financing.
Esprit Telecom expects that due to continuing price cuts in certain
retail markets, its gross margins will be affected until such time as such price
cuts are offset by anticipated network cost savings arising from increased
capacity on the Esprit Network on certain key routes and Esprit Telecom derives
the benefits from expected reductions in interconnection charges. Price cuts
from PTOs have been and may continue to be significant in nature and network
cost reductions may take time to be brought into effect. For example, in
Germany, Deutsche Telekom has recently gained regulatory approval to implement
significant reductions in its national tariffs from January 1999, which Esprit
Telecom expects may have an adverse impact upon its national long distance
revenues and gross margins. In addition, Esprit Telecom intends to substantially
increase the capacity and reach of the Esprit Network and expects that the
resulting additional leased line costs operating and maintenance will depress
gross margins until additional traffic volume increases network utilization.
As a result of its limited revenue and significant expenses associated
with the expansion and development of the Esprit Network, the opening of new
sales offices and the introduction of new telecommunications services, and the
variations in international and national long distance traffic in certain
periods of the year, Telecom anticipates that its operating results could vary
significantly from quarter to quarter.
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SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
Esprit Telecom has substantial indebtedness. At September 30, 1998,
under UK GAAP, Esprit Telecom's total indebtedness was approximately
L.326.5 million, its shareholders' funds were a deficit of approximately L.7.2
million and its total assets were approximately L.394.5 million, of which
approximately 99.0 million would have been intangible assets. For the years
ended September 30, 1997 and September 30, 1998, under UK GAAP, Esprit
Telecom's consolidated EBITDA was negative L.8.7 million and negative 18.3
million, respectively, and its earnings would have been insufficient to cover
fixed charges by L.10.9 million and L.42.4 million, respectively. In addition,
Esprit Telecom and its subsidiaries may incur additional indebtedness in the
future, subject to limitations imposed by their debt instruments, including,
without limitation, the indentures governing the Esprit Telecom Bonds. The
Esprit Telecom Bond Indentures do not limit the amount of indebtedness that may
be incurred to finance the cost of the expansion of the Esprit Network.
Esprit Telecom's net interest expense for the year ended September 30,
1998 was L.12.2 million. Esprit Telecom will need to improve substantially its
cash flow from operating activities in order for Esprit Telecom to meet its
debt service obligations, including its obligations under the Esprit Telecom
Bonds. Esprit Telecom's ability to improve its operating performance and
financial results will depend not only on its ability to successfully implement
its business plan, but also upon economic, financial, competitive, regulatory
and other factors beyond its control, including fluctuations in exchange rates
and general economic conditions in Europe. Esprit Telecom can offer no
assurance that Esprit Telecom will generate sufficient positive cash flow from
operating activities in the future to service its debt and to allow Esprit
Telecom to make necessary capital expenditures. If Esprit Telecom is unable to
generate sufficient positive cash flow in the future, it may be required to
refinance all or a portion of its debt, including Esprit Telecom Bonds, to sell
assets or to obtain additional financing. Esprit Telecom can offer no assurance
that any such refinancing would be possible or that any such sales of assets or
additional financing could be achieved.
The high level of Esprit Telecom's indebtedness and the terms of such
indebtedness could have several important consequences in the future on Esprit
Telecom's operations, including the following:
o Esprit Telecom will have significant cash requirements to service
debt, thereby reducing funds available for operations and future
business opportunities and increasing the vulnerability of Esprit
Telecom to adverse general economic and industry conditions;
o Esprit Telecom may be restricted in the future from obtaining any
necessary financing for working capital, capital expenditures, debt
service requirements, acquisitions or other purposes;
o Esprit Telecom's flexibility in planning for, or reacting to,
changes in its business may be impeded;
o Esprit Telecom is more highly leveraged than some of its
competitors, which may place it at a competitive disadvantage; and
o Esprit Telecom will be required to comply with certain financial
covenants and other restrictions contained in its debt instruments,
including the Esprit Telecom Bond Indentures.
If Esprit Telecom failed to meet its debt service obligations or to
comply with any of the covenants contained in any of its debt instruments Esprit
Telecom could trigger a default under those agreements, permitting the
acceleration of the maturity of the indebtedness under such agreements. Any
default or acceleration under such agreement could also result in other debt of
Esprit Telecom and its subsidiaries becoming immediately payable. Under any of
these circumstances, Esprit Telecom can offer no assurance that Esprit Telecom
and its subsidiaries would have sufficient funds or other resources to satisfy
all of such obligations on a timely basis or otherwise.
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NEED FOR ADDITIONAL FINANCING
The development and expansion of the Esprit Network, the opening of new
sales offices and the introduction of new telecommunications services, future
acquisitions, as well as the funding of operating losses and net cash outflows,
will require substantial capital. During the years ended September 30, 1998,
1997 and 1996, Esprit Telecom made fixed asset investments of approximately
L.41.2 million, L.10.1 million and L.6.0 million, respectively. Esprit Telecom
has historically been funded by equity contributions from the Principal
Securityholders, financing from banks, vendors and other third parties and net
proceeds from financings. None of the Principal Securityholders has any
obligation to make additional investments in Esprit Telecom. Esprit Telecom
does not currently maintain lines of credit or similar facilities with
commercial banks, but has obtained credit through vendor financing and credit
secured by Esprit Telecom's receivables. Other future sources of capital for
Esprit Telecom could include additional public and private debt and equity
financings. Esprit Telecom can offer no assurance that such sources of
financing would be available to Esprit Telecom in the future or, if available,
that they could be obtained on terms acceptable to Esprit Telecom.
Esprit Telecom's future requirements will depend upon many factors.
Some of these factors include the performance of Esprit Telecom's business, the
rate and manner in which it expands the Esprit Network and opens new sales
offices, makes future acquisitions and increases staffing levels and customer
growth, as well as other factors that are not within Esprit Telecom's control,
including competitive conditions, regulatory or other government actions and
capital costs. In the event that Esprit Telecom's plans or assumptions change or
prove to be inaccurate or the funds from financings, internally generated funds,
working capital and financings by vendors prove to be insufficient to fund
Esprit Telecom's growth and operations in the manner and at the rate currently
anticipated, then some or all of Esprit Telecom's development and expansion
plans could be delayed or abandoned, or Esprit Telecom may be required to seek
additional funds earlier than currently anticipated, including from additional
debt and/or equity financings.
NETWORK DEVELOPMENT AND EXPANSION RISKS
Esprit Telecom's continued expansion and development of the Esprit
Network will depend on, among other things, Esprit Telecom's ability to enter
new markets, access transmission backbone network routes, install service and
sales facilities, acquire rights-of-way and building access, obtain required
governmental licenses, authorizations and permits and interconnect with the
networks of the incumbent PTOs or other infrastructure providers, all in a
timely manner, at reasonable costs and on terms and conditions acceptable to
Esprit Telecom. The successful implementation of Esprit Telecom's expansion
strategy will be subject to a variety of risks, including operating and
technical problems, regulatory uncertainties, possible delays in the full
implementation of the EU Directives regarding telecommunications liberalization,
competition and the availability of capital.
Esprit Telecom's ability to achieve its strategic objective is in large
part dependent on the successful, timely and cost-effective expansion of the
Esprit Network. The Esprit Network currently consists of leased fiber optic
lines, dark fiber, with associated SDH and WDM equipment, digital microwave
transmission facilities and MIUs and IRUs on undersea cables. The expansion and
development of the Esprit Network will focus on capacity that is owned or
controlled by Esprit Telecom. Such expansion and development may be delayed or
adversely affected by a variety of factors, uncertainties and contingencies many
of which, such as technical difficulties in an environment of multiple local
technical standards, are beyond Esprit Telecom's control. In addition, Esprit
Telecom may need to engage in time consuming negotiations for low cost access to
networks which may place Esprit Telecom at a disadvantage with respect to
competitors who have already entered into such agreements. Esprit Telecom can
offer no assurance that the Esprit Network will grow and develop as planned or,
if developed, that such growth or development will be completed on schedule, at
a commercially reasonable cost or within Esprit Telecom's specifications.
Although Esprit Telecom believes that its cost estimates and the build-out
schedule are reasonable, Esprit Telecom can offer no assurance that the actual
construction or acquisition costs or time required to complete the network
build-out will not substantially exceed current estimates. Any significant delay
or increase in the costs associated with the expansion and development of the
Esprit Network could have a material adverse impact on Esprit Telecom, including
its ability to make payments on Esprit Telecom Bonds, and on Esprit Telecom's
business, results of operations and financial condition generally.
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RISKS ASSOCIATED WITH THE OPERATION OF THE ESPRIT NETWORK
Esprit Telecom's success is dependent on the seamless technical
operation of the Esprit Network and on the management of traffic volumes and
route preferences over the same. Furthermore, as Esprit Telecom is continuously
expanding the Esprit Network to increase both its capacity and reach, and as
traffic volume continues to increase in accordance with anticipated growth,
Esprit Telecom will face increasing demands and challenges in running and
managing the network functions, including its circuit capacity and traffic
management systems. The Esprit Network is subject to several risks which are
outside of Esprit Telecom's control, such as the risk of damage to software and
hardware resulting from fire, power loss, natural disasters and general
transmission failures caused by a number of additional factors. Any failure of
the Esprit Network or other systems or hardware that causes significant
interruptions to Esprit Telecom's operations could have a material impact on
Esprit Telecom's business, financial condition or results of operations. Esprit
Telecom's operations are also dependent on its ability to successfully integrate
new and emerging technologies and equipment, in particular the technology and
equipment of the Plusnet Business, and the SDH and WDM equipment associated with
Esprit Telecom's broadband fiber network, into the Esprit Network, which could
increase the risk of system failure and result in further strains upon the
Esprit Network. Esprit Telecom attempts to minimize customer inconvenience in
the event of a system disruption by routing traffic to other circuits and
switches which may be controlled by other carriers. However, prolonged or
significant system failures, or difficulties for customers in accessing, and
maintaining connection with, the Esprit Network could threaten Esprit Telecom's
relationship with its clients, and would seriously damage the reputation of
Esprit Telecom and result in customer attrition and financial losses.
Additionally, any damage to Esprit Telecom's Network Management Center and major
switching centers could have a material negative impact on Esprit Telecom's
ability to monitor and manage the network operations and generate accurate call
detail reports from which billing information is derived.
The expansion and development of the Esprit Network will entail
significant expenditure and resources for projecting growth in traffic volume
and routing preferences, and determining the most cost-effective means of
growing the Esprit Network (i.e., through variable or fixed lease arrangements,
the purchase of transmission rights on fiber optic lines or digital microwave
equipment, or the construction of transmission infrastructure). If Esprit
Telecom fails to project traffic volume and route preferences correctly or to
determine the optimal means of expanding the Esprit Network resulting in less
than optimal utilization of the Esprit Network, Esprit Telecom's business,
results of operations and financial condition could be materially adversely
affected.
DEPENDENCE ON FACILITIES PROVIDERS AND INTERCONNECT ARRANGEMENTS
At the present time, Esprit Telecom has completed a relatively small
part of its planned telecommunications transmission infrastructure and leases
the remainder under a variety of arrangements with facilities-based long
distance carriers. As a result, Esprit Telecom depends upon facilities-based
carriers such as the PTOs and other alternative telecommunications networks in
each of the countries in which Esprit Telecom operates. Some of these carriers
are or may become competitors of Esprit Telecom. In addition, Esprit Telecom's
ability to connect its retail customers to the Esprit Network is dependent on
Esprit Telecom securing interconnection agreements with the local PTOs in the
markets where Esprit Telecom operates. Esprit Telecom has entered into
interconnection agreements in the United Kingdom, Germany, The Netherlands,
France and Belgium, and expects to secure additional agreements covering some of
its remaining markets as the EU telecommunications market continues to benefit
from the liberalization which took legal effect in January 1998. Esprit Telecom
can offer no assurance that it will be successful in securing such arrangements
at attractive rates. Esprit Telecom historically has not experienced material
difficulties with the quality of the services provided by facilities-based
carriers and, except for initial difficulties in Spain, has generally not
experienced material difficulties in accessing such carriers' transmission
infrastructure. Based on its experience in a number of other countries, Esprit
Telecom believes that facilities-based carriers often try to limit access to
their facilities by new competitors. Esprit Telecom's profitability depends in
part on its ability to obtain and utilize leased capacity arrangements on a
cost-effective basis and secure interconnection arrangements on a timely basis
and at favorable rates.
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Esprit Telecom currently leases a substantial portion of its network
transmission capacity pursuant to agreements which generally have twelve-month
or longer fixed terms. These lease arrangements present Esprit Telecom with high
fixed costs, while the revenues generated by the utilization of such leases will
vary with traffic volumes and prices. Accordingly, if Esprit Telecom does not
generate the requisite traffic volume over the particular route or is unable to
charge an appropriate price for such traffic, Esprit Telecom could fail to
generate revenue sufficient to meet the lease costs, and may incur operating
losses on the particular route or routes. In addition, most of Esprit Telecom's
off-network transmission is obtained under a variety of volume-based
arrangements with facilities-based carriers including PTOs. Under these
arrangements, Esprit Telecom is subject to the risk of unanticipated price
fluctuations and service restrictions or cancellations.
Esprit Telecom believes that its arrangements and relationships with
carriers generally are satisfactory. However, the deterioration or termination
of Esprit Telecom's arrangements and relationships, or Esprit Telecom's
inability to enter into new arrangements and relationships with one or more
carriers could have a material adverse effect upon Esprit Telecom's cost
structure, service quality, network coverage, results of operations and
financial condition.
DEPENDENCE ON EFFECTIVE BILLING AND MANAGEMENT INFORMATION SYSTEMS
Esprit Telecom must record and process millions of call detail records
quickly and accurately in order to efficiently produce customer bills in a
timely and flexible manner. While the Esprit Telecom's existing billing system
is sufficient for its current operations, Esprit Telecom has selected a new
billing system which Esprit Telecom believes will provide the capability and
flexibility to support Esprit Telecom's anticipated growth. The introduction of
this system will be accompanied by additional systems designed to support the
critical service activation, customer care and service assurance processes, and
is expected to enable Esprit Telecom to bring most of its billing processes in
house. Esprit Telecom is also planning to introduce new management information
systems which it believes will allow Esprit Telecom to continuously monitor its
operations, thus enabling Esprit Telecom to achieve additional network and
operating efficiencies and to improve management control. Esprit Telecom expects
that a number of new systems will be implemented by mid-1999, and that such
systems will require continuous enhancements and ongoing investments, especially
as traffic volume increases and as Esprit Telecom continues to improve its
systems to minimize problems common to the telecommunications industry, such as
call record losses, and to ensure the timely production of bills. While the
Plusnet Business and IMS continue to use their own billing systems, Esprit
Telecom expects that these systems will be integrated into Esprit Telecom's new
billing process by mid-1999. Esprit Telecom can offer no assurance that Esprit
Telecom will not encounter difficulties in implementing and enhancing the new
billing and management information systems and in integrating new technology
into such systems. If Esprit Telecom were to be unable to implement the new
systems or any required system enhancement, to acquire new systems or to
integrate new technology in a timely and cost-effective manner, its business,
results of operations and financial condition could be materially adversely
affected.
YEAR 2000 TECHNOLOGY RISKS
A significant percentage of the software running on most of the
computers worldwide relies on two-digit date codes to perform a number of
computation and decision making functions. The date change from 1999 to 2000 may
impair the ability of these programs to interpret date codes properly, which
could result in system failures, miscalculations or errors, causing disruptions
of operations or other business problems, including the inability to process
transactions, send invoices or engage in similar normal business activities.
Esprit Telecom is undertaking a comprehensive program to address the Year 2000
issue with respect to:
o its transmission, switching, billing and management information systems;
o its non-information technology systems (including buildings, plant,
equipment and other infrastructure that may contain embedded
technology); and
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o systems of its primary traffic carriers and vendors.
Esprit Telecom is also trying to raise awareness of Year 2000 issues in its
customers' systems.
This program involves four phased steps:
o identifying and assessing potential Year 2000 problems which may impact
Esprit Telecom;
o developing remedial strategies and actions to address those problems;
o implementing those remedial strategies and actions; and
o testing the foregoing solutions.
The program also involves analyzing Esprit Telecom's most reasonably
likely worst-case Year 2000 scenario. Esprit Telecom expects that this would
involve either or both of the following:
o a loss of interconnect capacity from one or more major suppliers of
transmission capacity; and/or
o Esprit Telecom's inability to record, track or invoice billable minutes
which could ultimately cause it to temporarily stop carrying traffic.
Either scenario would adversely affect Esprit Telecom's revenue and, if not
quickly remedied, would have a material adverse effect on its business, results
of operations and financial condition.
Assessment
Esprit Telecom is currently in the process of auditing and testing its
systems to determine if they will suffer problems associated with the transition
to the Year 2000. Since a complete analysis of Esprit Telecom's systems would
require an interruption of service, Esprit Telecom is selectively testing
various elements of such systems. Esprit Telecom has an active in-house
assessment program, with a staff of six persons assigned to Year 2000 compliance
issues. Despite devoting these resources to addressing the Year 2000 compliance,
Esprit Telecom has not delayed the implementation of any projects related to
management information systems. Esprit Telecom's Year 2000 compliance team is in
the process of reviewing each of Esprit Telecom's switching sites and other
network points to identify equipment, hardware and software that is unlikely to
function through the Year 2000 transition. Esprit Telecom is also in the process
of having its Year 2000 program audited by an outside consulting firm.
In addition, Esprit Telecom actively cooperates with other carriers in
a global Year 2000 program through ITU-T Year 2000 Taskforce, and the UK Year
2000 Operators forum. As part of the latter forum Esprit Telecom is
participating in a voluntary and independent health check review of its Year
2000 program (conducted by another operator).
Remedial Strategies and Actions
Following its assessment, Esprit Telecom expects to replace, rather
than upgrade, the majority of the problem equipment within its own network
systems, which includes information technology and non-information technology
systems. Esprit Telecom already requires that any systems being replaced or
upgraded be warranted as Year 2000 compliant by the vendors or suppliers of
these systems. Esprit Telecom is currently in the process of replacing its
billing and management information systems, which Esprit Telecom expects will be
implemented by mid-1999. Esprit Telecom also intends to provide back up power
and other equipment at switch sites, as well as alternative routing around
switch sites which experience problems despite these remedial actions.
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To address its worst case scenarios, Esprit Telecom has also determined
to obtain supplemental interconnect and transmission capacity in the event that
one or more of its primary carriers experience system failures. Esprit Telecom
has undertaken joint Year 2000 compliance reviews through industry forums and
with several of its major carriers. Ultimately, however, Esprit Telecom has no
control of the Year 2000 readiness of any of its suppliers or customers, and
will be exposed to risks associated with their failure to assess and address
Year 2000 problems. Esprit Telecom cannot control many Year 2000 issues that
could affect it, and like most telecommunications service providers. Esprit
Telecom believes it is inappropriate to provide specific guarantees that service
will not be affected by the transition to the new millennium.
Implementation
Esprit Telecom is in the process of securing supplemental interconnect
and transmission capacity from several carriers in addition to its current
primary carriers. Esprit Telecom has spent approximately $4.0 million for Year
2000 compliance on its own systems through September 30, 1998, and expects to
spend approximately an additional $4.0 million through the end of calendar year
1999. Out of this total of $8.0 million in expenditures, Esprit Telecom expects
to spend a total of $1.0 million on repairing existing systems and the remainder
on testing and replacement.
Testing
Esprit Telecom expects to test numerous elements of its systems for
Year 2000 compliance, as well as its ability to interconnect with and utilize
back-up carriers, throughout 1999. In particular, Esprit Telecom expects to test
its new billing and management information systems when the same become
operational in mid-1999. As noted above, however, Esprit Telecom will be unable
to test its network systems in their entirety since to do so would involve
shutting down its network for a period of time.
RISKS ASSOCIATED WITH A RAPIDLY CHANGING INDUSTRY; TECHNOLOGY; DEPENDENCE ON
EQUIPMENT AND TECHNOLOGY SUPPLIERS
The European telecommunications industry is changing rapidly due to,
among other factors, liberalization, privatization of PTOs, technological
improvements, expansion of telecommunications infrastructure and the
globalization of the world's economies and free trade. Such changes may happen
at any time and can significantly affect Esprit Telecom's operations from period
to period. Esprit Telecom can offer no assurance that one or more of these
factors will not have unforeseen effects, which could have a material adverse
effect on Esprit Telecom. Even if these factors turn out as anticipated, Esprit
Telecom can offer no assurance that it will be able to implement its strategy or
that its strategy will be accepted in this rapidly evolving market.
Much of Esprit Telecom's planned growth is predicated upon the
liberalization of telecommunications markets, and further, upon the
implementation and enforcement of existing EU Directives. Esprit Telecom can
offer no assurance that such liberalization will occur as anticipated, or that
the effects of such liberalization will not be different than expected.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new products and services, and
increased availability of transmission capacity, as well as the increasing
utilization of the Internet for voice and data transmission. Esprit Telecom's
success will depend substantially on its ability to predict which of the many
possible current and future networks, products and services will be important to
establish and maintain and which expenditures will be required to develop and
provide such networks, products and services. In particular, as Esprit Telecom
undertakes to further expand and develop the Esprit Network, it will become
increasingly exposed to the risks associated with the relative effectiveness of
its technology and equipment. The cost of implementation of emerging and future
technologies could be significant, and Esprit Telecom can offer no assurance
that it will maintain competitive services or that it will obtain appropriate
new technology on a timely basis, or on satisfactory terms. If Esprit Telecom
failed to maintain competitive services or obtain new technologies Esprit
Telecom's business, financial condition and results of operations could be
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materially adversely affected. The current operational network has performed at
or above design specifications. However, as traffic continues to grow and the
Esprit Network is further expanded, Esprit Telecom can offer no assurance that
the Esprit Network will continue to achieve its technical specifications. If
Esprit Telecom failed to achieve such technical specifications the viability of
the Esprit Network and Esprit Telecom's business, financial condition and
results of operations could be materially adversely affected.
Esprit Telecom purchases its international and local equipment from
telecommunications equipment manufacturers that may provide vendor financing
for, and maintenance of, this equipment. Esprit Telecom's main suppliers are
Nortel, Ericsson and Siemens. Esprit Telecom could obtain equipment of
comparable quality from several alternative suppliers. However, if Esprit
Telecom failed to acquire switches that are compatible from an alternative
source, or acquire additional equipment (regardless of the vendor) on a timely
and cost-efficient basis, Esprit Telecom could face delays, operational problems
and increased expenses.
The Esprit Network is significantly dependent on the technology and
products which Esprit Telecom acquires from its main suppliers. In addition,
Esprit Telecom occasionally enters into turn-key contracts with specific
suppliers as a means of reducing its costs and development risks. If any of
Esprit Telecom's technologies and products became obsolete or incompatible with
industry standards, or if any of Esprit Telecom's turn-key contracts failed to
provide the expected benefits, Esprit Telecom's business, results of operations
and financial condition could be materially adversely affected.
CERTAIN RISKS OF THE WHOLESALE AND RESELLER BUSINESS
Wholesale customers connect with Esprit Telecom to carry their traffic
to destinations where Esprit Telecom's rates are competitive. Esprit Telecom's
contracts with these Wholesale customers generally do not include minimum or
maximum usage levels, and such customers generally maintain relationships with a
number of telecommunications providers. As a result, wholesale customers
typically change their routing to take advantage of the lowest cost alternative,
resulting in potentially greater fluctuations in revenue generated by these
customers than for other categories of customers. Esprit Telecom's contracts
with its wholesale customers require Esprit Telecom to carry their traffic at a
contractually fixed price per minute for a designated time period. Esprit
Telecom contracts at prices which it believes are competitive and which provide
it with a projected acceptable margin over the anticipated cost of carrying such
traffic. However, Esprit Telecom, due to capacity and quality constraints on its
least-cost routes, has on occasion been forced to carry traffic over a
higher-cost route. In response to such constraints, Esprit Telecom decided to
reduce the volume of wholesale traffic on the Esprit Network until the third
quarter of the 1998 financial year when sufficient spare capacity became
available for the provision of such services to be profitable. Esprit Telecom
expects that in the medium term, revenue from wholesale services will increase
as network capacity is increased in connection with the expansion of the Esprit
Network. Certain resellers who are connected to multiple providers may also
change routing to take advantage of lower costs, which results in greater
fluctuations in Esprit Telecom's revenue derived from such resellers. Esprit
Telecom's credit exposure to such resellers may also be greater since, unlike
wholesale customers, resellers do not typically furnish any services to Esprit
Telecom.
RISK OF FRAUD AND BAD DEBT
Esprit Telecom has experienced problems relating to the fraudulent use
of its access codes and the failure of certain of its customers to make full
payment for services rendered. However, Esprit Telecom does not believe that its
experiences with such problems are substantially different from what is
generally experienced in the telecommunications industry. Esprit Telecom may
have to make provisions for non-payment if it believes that it will not be able
to collect. Esprit Telecom expects that the credit risk characteristic of its
customer base may increase as the share of Esprit Telecom's revenue deriving
from SMEs increases. In addition, the revenue derived from its service
provider/reseller business has increased during the 1998 financial year. In
general, service provider/reseller customers, owing to the significant size of
their bills relative to their asset base, may present a different or greater
risk of non-payment than retail or wholesale customers. Any significant increase
in the levels of fraud and bad debt could have a material adverse impact on
Esprit Telecom's financial condition and results of operations.
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ABILITY TO MANAGE GROWTH AND EXPANSION
Esprit Telecom's future performance will depend, in part, upon its
ability to manage its growth effectively. Esprit Telecom's rapid growth has
placed, and in the future will continue to place, a significant strain on its
administrative, operational and financial resources. Esprit Telecom's ability to
continue to manage its growth successfully will require Esprit Telecom to
further enhance its operational, management, financial and information systems
and controls and to expand, train and manage its employee base. As Esprit
Telecom evolves to a more mature phase of growth, increases its service
offerings and expands its targeted markets, there will be increasing demands on
Esprit Telecom's management, customer support, sales and marketing and
administrative resources and network infrastructure. In addition, Esprit Telecom
continues to examine opportunities to expand into other related
telecommunications services, such as Internet access and switched data services.
If Esprit Telecom expanded into such telecommunications services, it would face
certain additional risks in connection with such expansion, including
operational, financial, technological compatibility, legal and regulatory risks
and possible adverse reaction by some of its current customers.
INCREASING DEMAND FOR QUALIFIED PERSONNEL; NEW SENIOR MANAGEMENT AND DEPENDENCE
ON KEY PERSONNEL
Esprit Telecom competes with other telecommunications service providers
for qualified managerial, sales, marketing, administrative, operating and
technical personnel. Esprit Telecom's success will depend substantially upon its
ability to hire and retain such personnel. Competition for qualified employees
and personnel in the telecommunications industry in Europe is intense, and there
are generally a limited number of persons with the requisite knowledge and
experience in the particular sectors where Esprit Telecom operates. Esprit
Telecom can offer no assurance that it will be able to attract, recruit and
retain sufficient qualified personnel as Esprit Telecom grows and expands its
current operations and enters into new markets. In the past 20 months, Esprit
Telecom has hired a number of new senior managers, including a new Chief
Executive Officer, a new Chief Operations Officer and a new Managing Director --
Sales and Marketing, to fill certain existing and newly created positions.
Esprit Telecom's senior management team therefore includes a number of key
people who have been with Esprit Telecom for a relatively short period of time.
Esprit Telecom has also retained the managers of the businesses it has recently
acquired to assist it in integrating such businesses and in further developing
certain lines of business within Esprit Telecom. Although Esprit Telecom does
not foresee any difficulties in integrating such new managers into its senior
management team, any problems in integrating such managers could have a material
adverse impact on Esprit Telecom's business, its prospects and certain plans for
expansion and its results of operations. If Esprit Telecom failed to identify,
attract and retain the requisite personnel, Esprit Telecom's business, results
of operations and financial condition could be materially adversely affected.
Further, Esprit Telecom's business is currently managed by a small number of key
management and operating personnel, some of whom are only bound by six-month or
other short-term service agreements. If Esprit Telecom lost certain of these
people, Esprit Telecom's business, results of operations and financial condition
could be materially adversely affected.
ACQUISITION STRATEGY
The expansion of Esprit Telecom's business may involve investments,
acquisitions and strategic alliances which, if made, could divert the resources
and management time of Esprit Telecom and could require integration with Esprit
Telecom's operations. Esprit Telecom can offer no assurance that any desired
investment, acquisition or strategic alliance could be made in a timely manner
on terms and conditions acceptable to Esprit Telecom or that they could be
successfully integrated into Esprit Telecom's operations. Esprit Telecom can
offer no assurance that it will be successful in identifying attractive
acquisition candidates, completing and financing additional acquisitions on
favorable terms, or integrating the acquired businesses or assets, if any, into
its existing operations. Esprit Telecom's ability to make acquisitions may
depend on the availability of additional financing on acceptable terms and will
be subject to compliance with the covenants contained in its debt instruments.
In July 1998 Esprit Telecom completed the acquisition of the Plusnet Business,
and paid a consideration of approximately L.103.8 million (or approximately
DM 307 million), (based on the exchange rates ruling as at the date of the
acquisition), net of costs. Pursuant to the sale and purchase agreement between
Esprit Telecom and Thyssen, this consideration has since been
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recalculated at approximately L.90.0 million (or approximately DM 267 million
based upon the exchange rates ruling as at the date of the acquisition), based
upon a final determination of the revenues of the Plusnet Business for the year
ended September 30, 1998. As part of the integration of the business, systems
and culture of the Plusnet Business, among other things, Esprit Telecom will be
required to continue to develop its financial and management controls and
information systems and retrain existing personnel, all of which could place a
strain on the management resources of Esprit Telecom and require additional
expenditures. In addition, Esprit Telecom acquired three other
telecommunications businesses in 1997 for a minimum aggregate consideration
payable of approximately L.9.4 million over the next two years. This amount
could increase to L.13.9 million if these businesses achieve certain
financial and performance targets. Esprit Telecom has brought the senior
managers of each of the acquired businesses into its management team and is
relying on such individuals to assist Esprit Telecom in integrating such
acquired businesses. However, Esprit Telecom can offer no guarantee that Esprit
Telecom will be able to attract and retain managers from any additional acquired
businesses or be successful in integrating any such new managers and businesses.
Although management expects to realize operating synergies as a result of these
acquisitions, Esprit Telecom can offer no assurance that Esprit Telecom will
achieve the benefits that management expects to realize or that such benefits
will be realized within the time frames currently contemplated. In addition,
Esprit Telecom expects that the realization of certain acquisition-related
benefits may be dependent upon Esprit Telecom taking certain actions which will
result in one-time charges or expenses.
REGULATION
Esprit Telecom is subject to varying degrees of regulation in each of
the EU Member States where it currently operates or intends to operate. Esprit
Telecom's ability to penetrate several European markets, and its ability to
deploy and expand the Esprit Network and to universally provide certain services
such as indirect access to its retail customers, as well as the timing and cost
of providing such services, depends to a significant degree on the
implementation of liberalization initiatives in each such country. The European
Commission set January 1, 1998 as the deadline for mandatory liberalization of
public network infrastructure and of the provision of voice telephony services
throughout the EU. However, the following EU Member States have been granted a
delay in implementing this liberalization directive: Greece (until December 31,
2000), Ireland (until January 1, 2000), Luxembourg (until July 1, 1998),
Portugal (until January , 2000) and Spain (until November 30, 1998). Subject to
the foregoing each EU Member State must enact its own laws to implement the EU's
liberalization and harmonization directives for telecommunications such as the
Full Competition Directive and Licensing Directive. Esprit Telecom's ability to
purchase ownership rights in transmission lines or to build its own transmission
lines depends upon the timely implementation by EU Member States of the EU
Directives. Each EU Member State's implementation and enforceability of the EU
Directives is dependent on the action taken by each EU Member State and may be
subject to delays and variances in specific countries. If the implementation or
enforceability of EU directives is challenged or delayed in any of the markets
in which Esprit Telecom currently operates or in such other markets in which
Esprit Telecom may establish operations, Esprit Telecom's business, results of
operations and financial condition could be materially adversely affected. In
addition, the terms and conditions of interconnection to the PTOs' networks will
have a material effect on the competitive position of Esprit Telecom. Although
the EU has issued a directive governing the terms of such interconnection,
Esprit Telecom can offer no assurance that such directive will be implemented in
a timely and consistent manner or that it will provide Esprit Telecom with
economical access to and termination on the PTOs' networks. Accordingly,
customers' ability to access competitive telecommunications providers such as
Esprit Telecom may be restricted in some EU countries.
Esprit Telecom can offer no assurance that each EU Member State will
implement the EU directives within the time frame set by the European
Commission, or at all, or that the enforcement thereof will comply with the
intent and spirit of the EU directives. In fact, in November 1997, the European
Commission initiated infringement proceedings against seven EU Member States,
including Belgium, Italy and Germany for failure to fully implement the EU's
directives. The EU previously initiated a proceeding against Spain and has
announced plans to take action against certain other Member States for failure
to implement properly more recent directives. Because implementation of the
various EU directives will vary from country to country, Esprit Telecom's
ability to provide a full range of telecommunications services may be affected
with respect to both timing and cost. Also, Esprit Telecom can offer no
assurance that future regulatory, judicial and legislative changes will not have
a material
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adverse effect on Esprit Telecom. Similarly, national or international
regulators or third parties may raise material issues with regard to Esprit
Telecom's compliance or noncompliance with applicable regulations, which may
have a material adverse effect on Esprit Telecom.
Esprit Telecom may also be permitted by the FCC to use leased private
lines between the United States and a country that is a party to the WTO's Basic
Telecommunications Services Agreement if it satisfies a "benchmark" test that
became effective on January 1, 1998. Under the benchmark test, use of
international private lines will be permitted by the FCC if at least half of the
settled traffic on a route in question to a WTO member is being settled at rates
that are at or below a benchmark set by the FCC. The FCC has established the
following benchmark rates: 15 cents per minute for upper income countries; 19
cents per minute for middle income countries; and 23 cents per minute for lower
income countries. The FCC has made an "equivalency" determination or held that
the settlement "benchmark" has been reached, and accordingly sanctioned the use
of interconnected leased private lines, from the United States to the United
Kingdom, Canada, New Zealand, Australia, Sweden, The Netherlands, France,
Germany, Belgium, Denmark, Norway, and Luxembourg. However, with respect to
other countries to which Esprit Telecom would like to route traffic from the
United States, Esprit Telecom can offer no assurance that the FCC will find that
"equivalent" opportunities for international private line resale exist in these
other countries, or that the FCC will find that its settlement benchmark test
has been satisfied. Esprit Telecom can offer no assurance that the FCC will make
similar "equivalency" or settlement rate compliance determinations for other
international routes, and the failure to make such findings may limit the
ability of Esprit Telecom to route traffic through the United States in
connection with the provision of its Indirect Access services outside the United
Kingdom. However, more generally, the application of these lower benchmarks for
international settlement rates will likely reduce traffic termination costs for
calls originated in or routed through the United States, but may also
substantially decrease profit margins on the routes.
Esprit Telecom's operations are dependent on licenses which it acquires
from governmental authorities in each jurisdiction in which it operates.
Currently, Esprit Telecom has network operator or international facilities
licenses or otherwise has authority which allow it to purchase ownership rights
in transmission lines or construct its own international facilities in the
United Kingdom, Germany, The Netherlands, France, Belgium, Spain and the United
States. Esprit Telecom also holds licenses or otherwise has authority to provide
public voice telephony services in the United Kingdom, Germany, The Netherlands,
France, Belgium and Spain as well as authorizations to provide value added
services in Spain, Italy and Ireland. These licenses and authorizations
generally contain clauses pursuant to which Esprit Telecom may be fined or its
license may be revoked. In such an event, authorities may revoke such licenses
on short or no notice. If government authorities revoked such licenses or levied
fines, Esprit Telecom's business, results of operations and financial condition
could be materially adversely affected.
COMPETITION
Until recently, the telecommunications market in each EU Member State
has been dominated by the national PTO. Since the implementation of a series of
EU directives beginning in 1990, the EU Member States have begun to liberalize
their respective telecommunications markets, thus permitting alternative
telecommunications companies to provide telecommunications services.
Liberalization has coincided with technological innovation to create an
increasingly competitive market, characterized by still-dominant PTOs as well as
an increasing number of new market entrants. In addition, since the
implementation of the Full Competition Directive in 1998, the European
telecommunications market has become increasingly competitive. Nonetheless,
customers in most of these markets are not accustomed to alternative service
providers, and may be reluctant to switch from the dominant PTOs to competitors
such as Esprit Telecom. In particular, certain of Esprit Telecom's target
customers, which include medium-to-large-sized businesses and governmental
agencies and organizations, may be reluctant to entrust their telecommunications
needs to what they perceive to be a group of relatively new and unproven
operators.
Competition in the European long distance telecommunications industry
is based upon price, customer service, type and quality of services and customer
relationships. Esprit Telecom's strategy is predicated on its ability to price
its services at a discount to the prices charged by the PTOs or dominant
carriers in each of its markets, and to offer high-quality products and
telecommunications services. However, prices for international long distance
calls
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have decreased substantially over the last few years in most of the markets in
which Esprit Telecom currently maintains operations or in which it expects to
establish operations. Some of Esprit Telecom's larger competitors may be able to
use their greater financial resources to cause severe price competition in the
countries in which Esprit Telecom operates. Esprit Telecom expects that prices
for its services will continue to decrease for the foreseeable future and that
PTOs and other providers will continue to improve their product offerings. Any
price competition could have a material adverse effect on Esprit Telecom's
business, results of operations and financial condition. The improvement in
product offerings and service provision by the PTOs, and indeed the
liberalization of voice telephony and infrastructure in 1998, could similarly
have a material adverse effect on Esprit Telecom's competitiveness to the extent
that Esprit Telecom is unable to provide similar levels of offerings and
service.
In each of its current markets, Esprit Telecom competes primarily with
the national PTOs and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than those of Esprit Telecom. Additionally, such carriers own and
operate infrastructure which provides them with certain significant cost
advantages. Since Esprit Telecom utilizes such networks to provide its services,
if it failed to gain economical access to such networks, its business, results
of operations and financial condition could be materially adversely affected.
Such competitors include PTOs such as British Telecom (United Kingdom), KPN (The
Netherlands), Telefonica de Espana (Spain), Deutsche Telekom (Germany), France
Telecom (France), Belgacom (Belgium), Telecom Italia (Italy) and Telecom Eireann
(Ireland). Esprit Telecom believes that competition for telecommunications
services in Europe will continue to increase as a result of continuing
liberalization. Esprit Telecom also believes that other competitors in the
European markets include 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. In addition, the
development of new technologies could give rise to significant new competitors
to Esprit Telecom. Many of Esprit Telecom's competitors may have significantly
greater financial, managerial and operational resources and more experience than
Esprit Telecom.
Esprit Telecom has not achieved and does not expect to achieve a
significant market share for its services in any of its markets. The PTOs
generally have certain competitive advantages that Esprit Telecom and its other
competitors do not have due to their control over the intra-national
transmission lines and connection to such lines. Esprit Telecom relies on the
PTOs for timely access to their public networks and the provision of leased
lines, and if the PTOs fail to provide such access, Esprit Telecom's business,
results of operations and financial condition could be materially adversely
affected. The reluctance of some national regulators to accept liberalizing
policies, grant regulatory approvals and to enforce access to PTO networks may
have a material adverse effect on Esprit Telecom's competitive position. Esprit
Telecom can offer no assurance that it will be able to compete effectively in
any of its markets.
Esprit Telecom expects that prices for its services will continue to
decrease for the foreseeable future. In addition, certain of Esprit Telecom's
customers, in particular wholesale carriers, may sometimes use more than one
service provider and may reduce their use of Esprit Telecom's services and
switch to other providers. In order to be competitive, Esprit Telecom believes
that it must, among other things, be able to offer additional services required
by its customers, reduce its prices and offer other incentives in order to meet
price reductions and incentives offered by its competitors.
INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE RATE RISKS
Esprit Telecom's operations are or may become subject to many of the
risks inherent in international business activities. Some of these risks
include, in particular, difficulties in staffing and managing foreign
operations, general economic conditions in each such country, burdens of
complying with a variety of regulatory regimes, subjection to multiple taxation
regimes, longer accounts receivables payment cycles in certain countries,
receivable collection difficulties, burdens of varying pricing restrictions,
political risks, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions and
prohibitions and delays from customers, brokers or other government agencies,
any of which could have a material adverse effect on
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Esprit Telecom's business, financial condition and results of operations.
Currently, none of the markets where Esprit Telecom operates has applicable
foreign exchange restrictions.
Esprit Telecom is exposed, and as it expands into additional countries
in Europe may be increasingly exposed, to fluctuations in foreign currencies as
its revenue, and certain of its costs, assets and liabilities are denominated in
multiple local currencies, although these currencies will be reduced in number
upon the adoption of the Euro in certain countries. Esprit Telecom's proceeds
from its major financings were denominated and have been maintained in US
dollars and Deutschmarks, and Esprit Telecom expects to incur many of its
expenses in the expansion of the Esprit Network and the opening of new sales
offices in the local European currency of the country in which it is expanding
(which, in many cases, will be the Euro) and in pounds sterling. The
DM-denominated Esprit Telecom Bonds will be effectively redenominated in Euros.
A change in the currency exchange rates that reduces the amount obtained in
pounds sterling (or other non-Euro European currencies) upon conversion of the
US dollar and Deutschmark proceeds from its major financings could have a
material adverse effect on Esprit Telecom and its ability to make the planned
capital expenditures. Currently, the revenues of Esprit Telecom are largely
denominated in pounds sterling and Euro countries' currencies, but principal and
interest on the US dollar-denominated Esprit Telecom Bonds and the
DM-denominated Esprit Telecom Bonds will be payable in US dollars and DM (or
Euro), respectively. Therefore, the ability of Esprit Telecom to pay interest
and principal on the US dollar-denominated Esprit Telecom Bonds and the
DM-denominated Esprit Telecom Bonds when due is dependent on the then current
exchange rates between US dollars and DM (or Euro), on the one hand, and pounds
sterling (or other non-Euro European currencies), on the other hand, which rates
are and will be subject to fluctuation. Approximately 52.3% of revenue during
the year ended September 30, 1998 was denominated in the currencies of Euro
countries. Esprit Telecom expects that its share of revenue in such currencies
will continue to increase in future periods. Esprit Telecom does not currently
use financial hedging instruments, although in the future Esprit Telecom may
elect to manage the exchange rate exposure presented by the US dollar Esprit
Telecom Bonds and the DM Esprit Telecom Bonds by entering into certain hedging
transactions. Esprit Telecom can offer no assurance however, that exchange rate
fluctuations will not have a material adverse effect on Esprit Telecom's ability
to make principal and interest payments when due.
Stage III of the European Economic and Monetary Union will commence on
January 1, 1999, in the following Member States of the EU: Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal
and Spain. Part of Stage III is the locking of exchange rates and the
introduction of a single currency, the Euro, which is intended to replace the
national currencies of the EU Member States participating in Stage III, and the
transfer of authority for conducting monetary policy for such EU Member States
to the European Central Bank. Esprit Telecom can offer no assurance that the
Euro will maintain its value relative to other currencies.
CONTROL BY PRINCIPAL SHAREHOLDERS
The principal securityholders of Esprit Telecom currently own
approximately 65% of the outstanding shares of capital stock of Esprit Telecom.
As a result, the principal securityholders are in a position to significantly
influence Esprit Telecom through their ability to determine the outcome of votes
of the shareholders of Esprit Telecom regarding, among other things, election
and dismissal of the members of Esprit Telecom's Board of Directors, amendment
of the Articles of Association and other actions requiring the vote or consent
of the shareholders of Esprit Telecom under English law and the Articles of
Association. The concentration of share ownership could have the effect of
delaying or preventing a change of control of Esprit Telecom or the removal of
existing management and may discourage attempts to do so.
USE OF PROCEEDS
The Company will receive $0.533 for each share issued upon the exercise
of the Options, a total of $119,925 upon exercise of all of the Options.
42
<PAGE> 46
The Company will not receive any proceeds from the sale of the shares
of Option Common Stock by the Selling Stockholder.
SELLING STOCKHOLDER
The managing member of Halcyon / Alan B. Slifka Management Company LLC
(successor to Alan B. Slifka & Co.), the Selling Stockholder, is Alan B. Slifka
& Co. Ltd. Alan B. Slifka & Co. Ltd. is a company wholly-owned by Alan B.
Slifka. Mr. Slifka is the President of Alan B. Slifka & Co. Ltd. and a Principal
of the Selling Stockholder. He is the Chairman of the Company's Board of
Directors.
The Company intends to register all of the shares of the Company's
Common Stock (and securities convertible into or exercisable for shares of
Common Stock) owned by Alan B. Slifka and his affiliates, among others, that
were not sold in the Stock Offerings (the "Affiliate Shares") on a shelf
registration statement in consideration of such shareholders' undertaking to be
bound by certain restrictions on their ability to resell such Affiliate Shares
under such shelf registration statement for specified periods after the
consummation of the Offerings (the "Restrictions"). Under the Restrictions,
holders of Affiliate Shares are prevented, subject to certain exceptions, from
selling any such shares during the first six months after the closing date of
the Offerings and will be able to sell (i) 50% of such shares after the six
month anniversary of the closing date of the Offerings, (ii) 75% of such shares
after the nine month anniversary of the closing date of the Offerings and (iii)
100% of such shares after the twelve month anniversary of the closing date of
the Stock Offerings. Certain limited partners of partnerships affiliated with
Alan B. Slifka and currently in dissolution may, upon advance notice to the
Company, withdraw some or all of their shares of Common Stock from registration
under the shelf registration statement and from the Restrictions. See "Risk
Factors -- Shares Eligible For Future Sale; Registration Rights; Potential
Adverse Impact on Market Price From Sales of Common Stock."
Prior to this reoffering, the Selling Stockholder directly held options
on 225,000 shares of Common Stock. All 225,000 shares of Common Stock are
available for sale pursuant to this Prospectus. If all of the shares registered
under this Prospectus were sold, the Selling Stockholder would own no shares of
Common Stock or 0%.
Prior to this reoffering, Alan B. Slifka and affiliates beneficially
owned 3,749,112 shares of Common Stock (569,478 of which Mr. Slifka disclaimed
beneficial ownership), of which the aforementioned 225,000 shares of Common
Stock (all of which Mr. Slifka disclaimed beneficial ownership) are available
pursuant to this Prospectus. If all of the shares registered under this
Prospectus were sold, Alan B. Slifka and affiliates would own 3,524,112 shares
of Common Stock (over 344,478 of which Mr. Slifka would disclaim beneficial
ownership) or 5.8% of the issued and outstanding GTS common stock as of
September 30, 1998 (over 1.0% of which Mr. Slifka would disclaim beneficial
ownership).
PLAN OF DISTRIBUTION
Under the Registration Statement, the Selling Stockholder may, if it
desires, upon the exercise of options, from time to time, acquire, in whole or
in part, the Option Common Stock from the Company. The purpose of this
Prospectus is to permit the Selling Stockholder to offer and sell the Option
Common Stock to its employees and former employees in connection with individual
options granted by the Selling Stockholder. Whether offers and sales will be
made pursuant to this Prospectus, and the timing and amount of any offers or
sales that are made, is and will be within the sole discretion of the Selling
Stockholder and such employees and former employees.
If the Selling Stockholder determines, in its sole discretion, to make
sales pursuant to this Prospectus, it may sell the Option Common Stock being
offered hereby from time to time (i) through dealers or in ordinary broker
transactions, in the over-the-counter market or otherwise, (ii) "at the market"
to or through marketmakers or into an existing market for the shares, (iii) in
other ways not involving marketmakers or established trading markets, including
direct sales to purchasers or effected through agents, or (iv) in combinations
of any such methods of sale
43
<PAGE> 47
(which may involve block transactions), subject to applicable state and federal
securities laws. The Selling Stockholder may coordinate sales of stock pursuant
to this registration statement with sales pursuant to Rule 144 by other
stockholders of the Company. The shares will be sold at market prices prevailing
at the time of sale or negotiated prices. In connection with the distributions
of the common stock or otherwise, the Selling Stockholder may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with such transactions, broker-dealers or other financial institutions may
engage in short sales of common stock in the course of hedging the positions
they assume with the Selling Stockholder. The Selling Stockholder may also sell
common stock short and redeliver the shares to close out such short positions.
The Selling Stockholder may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or financial institutions of the common stock offered
hereby, which common stock such broker-dealer or other financial institutions
may resell pursuant to this Prospectus (as supplemented or amended to reflect
this transaction). The Selling Stockholder may also pledge the shares registered
hereunder to a broker-dealer or other financial institution who may effect sales
of the pledged common stock pursuant to this Prospectus (as supplemented or
amended to reflect such transaction). In addition, any shares covered by this
Prospectus which qualify for sale pursuant to Section 4(1) of the Securities
Act, Rule 144 or Rule 144A thereunder may be sold under such provisions rather
than pursuant to this Prospectus.
If a dealer is utilized in the sale of the Option Common Stock in
respect of which the Prospectus is delivered, sales will be made by the Selling
Stockholder to or through a marketmaker, acting as principal or as agent. Other
sales may be made, directly or through an agent, to purchasers outside existing
trading markets. A selling broker may act as agent or may acquire the shares,
warrants or interests therein, as principal or pledgee and may, from time to
time, effect distributions of such sales.
In connection with this offering, the Selling Stockholder will pay all
expenses of preparing and filing the registration statement, including, without
limitation, registration and filing fees, printing expenses, fees and
disbursements of legal counsel and accountants for the Company, transfer agents'
and registrars' fees, fees and disbursements of experts used by the Company in
connection with such registration, expenses of any special audits of the Company
incidental to or required by such registration, and expenses incidental to any
post-effective amendment to any such registration statement.
All dealers', brokers', or agents' commissions, concessions, discounts,
fees or other compensation will be paid by the Selling Stockholder.
The Company has advised the Selling Stockholder that, during such time
as it may be engaged in a distribution of the Shares included herein it is
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes the Selling Stockholder, any
affiliated purchasers and any broker-dealer or other person who participates is
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Option Common Stock.
No sales or distributions other than as described herein may be
effected until after this Prospectus shall have been appropriately amended or
supplemented.
There can be no assurance that the Selling Stockholder will sell some
or all of the shares of Option Common Stock which may be offered by it
hereunder.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law ("DGCL") provides,
in summary, that directors and officers of Delaware corporations such as the
Registrant are entitled, under certain circumstances, to be indemnified against
all expenses and liabilities (including attorneys' fees) incurred by them as a
result of suits bought against
44
<PAGE> 48
them in their capacity as a director or officer if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interest of the Registrant and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful; provided that no indemnification may be made against expenses in
respect of any claim, issue or matter as to which they shall have been adjudged
to be liable to the Registrant, unless and only to the extent that the 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, they are fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper. Any such indemnification may be made by the
company only as authorized in each specific case upon a determination by the
stockholders or disinterested applicable standard of conduct.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company's Directors shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided, however, that such exculpation from liabilities is not permitted with
respect to liability arising from items described in clauses (i) through (iv) in
the preceding paragraph. The Certificate and the Company's By-Laws further
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the DGCL.
The directors and officers of the Company are covered under directors'
and officers' liability insurance policies maintained by the Company.
LEGAL MATTERS
The validity of the Offered Securities offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc.
as of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of EDN Sovintel as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young (CIS) Ltd., independent auditors, as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
45
<PAGE> 49
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.
The following documents (or parts thereof filed with the Commission by
the Company are incorporated by reference in this Registration Statement:
(a) the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, as amended;
(b) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998;
(c) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998;
(d) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998, as amended;
(e) the description of the common stock of the Company
contained in the Company's registration statement on Form S-4
filed with the Commission on December 24, 1998 (File No.
333-68511); and
(f) the Company's Current Report on Form 8-K dated November
20, 1998, as amended.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a
post-effective amendment which indicates that all securities offered have been
sold or which deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference in this Registration Statement and to be part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Registration Statement
to the extent that a statement herein, or in any subsequently filed document
which also is or is deemed to be incorporated by reference, modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Registration Statement.
ITEM 4. DESCRIPTION OF SECURITIES.
Not applicable.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides,
in summary, that directors and officers of Delaware corporations such as the
Registrant are entitled, under certain circumstances, to be indemnified against
all expenses and liabilities (including attorneys' fees) incurred by them as a
result of suits bought against them in their capacity as a director or officer
if they acted in good faith and in a manner they reasonably believed to
II-1
<PAGE> 50
be in or not opposed to the best interest of the Registrant and, with respect to
any criminal action or proceeding, if they had no reasonable cause to believe
their conduct was unlawful; provided that no indemnification may be made against
expenses in respect of any claim, issue or matter as to which they shall have
been adjudged to be liable to the Registrant, unless and only to the extent that
the 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, they are fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper. Any such indemnification
may be made by the company only as authorized in each specific case upon a
determination by the stockholders or disinterested applicable standard of
conduct.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company's Directors shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided, however, that such exculpation from liabilities is not permitted with
respect to liability arising from items described in clauses (i) through (iv) in
the preceding paragraph. The Certificate and the Company's By-Laws further
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the DGCL.
The directors and officers of the Company are covered under directors'
and officers' liability insurance policies maintained by the Company.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
Not applicable.
ITEM 8. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
4.1 The Global TeleSystems Group, Inc. Amended and Restated
Non-Directors' Stock Option Plan (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form
S-8 (File No. 333-45669) as declared effective March 9, 1998).
4.2 Stock Option Agreement between the Registrant and Alan B.
Slifka & Co. (incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-8 (File No.
333-45669) as declared effective March 9, 1998).
4.3 Stock Option Agreement between the Registrant and John Steiner
(incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-8 (File No. 333-45669) as
declared effective March 9, 1998).
4.4 Stock Option Agreement between the Registrant and Joel Schatz
(incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8 (File No. 333-45669) as
declared effective March 9, 1998).
</TABLE>
II-2
<PAGE> 51
<TABLE>
<S> <C>
4.5 Stock Option Agreement between the Registrant and Elaine
Sandler (incorporated by reference to Exhibit 4.5 of the
Company's Registration Statement on Form S-8 (File No.
333-45669) as declared effective March 9, 1998).
5 Opinion of Shearman & Sterling, counsel to the Registrant as
to the legality of the securities registered hereby.
(previously filed)
* 23.1 Consent of Ernst & Young LLP.
* 23.2 Consent of Ernst & Young (CIS) Ltd.
23.3 Consent of Shearman & Sterling (previously filed).
24 Power of Attorney (incorporated by reference to signature page
of the Company's Registration Statement on Form S-8 (File No.
333-45669) as declared effective March 9, 1998).
</TABLE>
* Filed herewith.
ITEM 9. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) to reflect in the prospectus any facts or
events arising after the effective date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement;
(iii) to include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement:
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Company pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 (the
"Securities Exchange Act") that are incorporated by reference
in the Registration Statement;
(2) that, for the purpose of determining any liability
under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof; and
(3) to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering;
(b) For purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act
(and,
II-3
<PAGE> 52
where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities
Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering thereof; and
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company 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 Company
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 Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 53
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and 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 the 8th day
of January, 1999.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ Grier C. Raclin
------------------------------------------
Grier C. Raclin
Senior Vice President, General Counsel and
Corporate Secretary
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities indicated on the 8th day of January, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ GERALD W. THAMES* President, Chief Executive Officer
- ---------------------------------------- and Director (principal executive
Gerald W. Thames officer)
/s/ WILLIAM H. SEIPPEL* Executive Vice President of
- ---------------------------------------- Finance and Chief Financial
William H. Seippel Officer (principal financial and
accounting officer)
- ---------------------------------------- Chairman of the Board of Directors
Alan B. Slifka
- ---------------------------------------- Director
Michael Greeley
/s/ BERNARD MCFADDEN* Director
- ----------------------------------------
Bernard McFadden
/s/ STEWART J. PAPERIN* Director
- ----------------------------------------
Stewart J. Paperin
/s/ W. JAMES PEET* Director
- ----------------------------------------
W. James Peet
/s/ JEAN SALMONA* Director
- ----------------------------------------
Jean Salmona
/s/ JOEL SCHATZ* Director
- ----------------------------------------
Joel Schatz
- ---------------------------------------- Director
Adam Solomon
/s/ DAVID DEY* Director
- ----------------------------------------
David Dey
/s/ ROGER W. HALE* Director
- ----------------------------------------
Roger W. Hale
/s/ ROBERT J. AMMAN* Director
- ----------------------------------------
Robert J. Amman
*By: /s/ Grier C. Raclin
- ----------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post-Effective Amendment No.
1 to the Registration Statement (Form S-8 No. 333-47573), of our report dated
February 26, 1998 except for Note 17, as to which the date is November 12, 1998,
with respect to the consolidated financial statements and schedules of Global
TeleSystems Group, Inc. included in Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Vienna, Virginia
January 6, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG (CIS) LTD., INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post-Effective Amendment No.
1 to the Registration Statement (Form S-8 No. 333-47573), of our report dated
February 16, 1998 except for Note 12, as to which the date is November 12, 1998
(EDN Sovintel), with respect to the financial statements and schedules of Global
TeleSystems Group, Inc. included in Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997.
/s/ Ernst & Young (CIS) Ltd.
Moscow, Russia
January 6, 1999
