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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
(COMMISSION FILE NUMBER: 0-23717)
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
1751 PINNACLE DRIVE, NORTH TOWER, 12TH FLOOR
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 918-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At April 15, 1999, there were outstanding 83,094,955 shares of common stock
of the registrant.
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TABLE OF CONTENTS
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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS OF GLOBAL TELESYSTEMS GROUP, INC
(UNAUDITED).................................................
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998....................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998.................. 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations...................................
Item 3 Quantitative and Qualitative Disclosures About Market 19
Risk........................................................
PART II. OTHER INFORMATION
Item 1 Legal Proceedings........................................... 20
Item 2 Changes in Securities and Use of Proceeds................... 20
Item 3 Defaults Upon Senior Securities............................. 20
Item 4 Submission of Matters to a Vote of Security Holders......... 20
Item 5 Other Information........................................... 20
Item 6 Exhibits and Reports on Form 8-K............................ 21
Signatures................................................................ 22
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $1,124,994 $ 998,510
Accounts receivable, net.................................. 217,649 174,430
Restricted cash........................................... 58,497 82,025
Prepaid expenses.......................................... 20,567 21,640
Other assets.............................................. 13,535 16,752
---------- ----------
TOTAL CURRENT ASSETS.............................. 1,435,242 1,293,357
Property and equipment, net............................... 660,640 643,044
Investments in and advances to ventures................... 64,945 50,751
Goodwill and intangible assets, net....................... 522,596 543,524
Restricted cash and other non-current assets.............. 80,163 83,926
---------- ----------
TOTAL ASSETS...................................... $2,763,586 $2,614,602
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 283,224 $ 279,509
Debt maturing within one year............................. 26,702 23,859
Current portion of capital lease obligations.............. 77,031 43,102
Unearned revenue.......................................... 46,686 36,059
Other current liabilities................................. 27,710 28,530
---------- ----------
TOTAL CURRENT LIABILITIES......................... 461,353 411,059
Long-term debt, less current portion...................... 1,796,193 1,504,614
Long-term portion of capital lease obligations............ 190,081 218,139
Related party long-term debt, less current portion........ 2,600 2,600
Unearned revenue, less current portion.................... 44,343 34,093
Taxes and other non-current liabilities................... 18,421 40,784
---------- ----------
TOTAL LIABILITIES................................. 2,512,991 2,211,289
COMMITMENTS AND CONTINGENCIES
Minority interest......................................... 37,632 37,329
Common stock, subject to repurchase (288,441 shares
outstanding at March 31, 1999 and December 31, 1998)... 16,167 16,081
SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding)............... -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 81,221,352 and 80,733,372 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively).......................................... 8,122 8,073
Additional paid-in capital................................ 901,182 885,057
Accumulated other comprehensive income/(loss)............. (6,585) 488
Accumulated deficit....................................... (705,923) (543,715)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 196,796 349,903
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $2,763,586 $2,614,602
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues.................................................... $ 170,881 $ 46,248
Operating expenses:
Telecommunications services............................... 102,539 33,179
Selling, general and administrative....................... 78,595 30,242
Esprit Telecom business combination costs................. 63,714 --
Depreciation and amortization............................. 39,258 9,513
Equity in losses/(earnings) of ventures................... 4,125 (3,412)
--------- --------
Total operating expenses.......................... 288,231 69,522
Loss from operations........................................ (117,350) (23,274)
Other income (expense):
Interest, net............................................. (32,548) (13,447)
Foreign currency losses................................... (8,127) (2,191)
--------- --------
(40,675) (15,638)
--------- --------
Net loss before income taxes, minority interest and
extraordinary loss........................................ (158,025) (38,912)
Income taxes................................................ 3,764 555
--------- --------
Net loss before minority interest and extraordinary loss.... (161,789) (39,467)
Minority interest........................................... (419) 2,353
--------- --------
Net loss before extraordinary loss.......................... (162,208) (37,114)
Extraordinary loss -- debt refinancing...................... -- (12,704)
--------- --------
Net Loss.................................................... $(162,208) $(49,818)
========= ========
Net loss per share before extraordinary loss................ $ (2.00) $ (0.60)
Net loss per share -- extraordinary loss.................... -- (0.21)
--------- --------
Net loss per share.......................................... $ (2.00) $ (0.81)
========= ========
Weighted average common shares outstanding.................. 81,052 61,427
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
---------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (162,208) $(49,818)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Extraordinary loss........................................ -- 12,704
Depreciation and Amortization............................. 38,027 9,206
Amortization of discount on note payable.................. -- 477
Equity in losses (earnings) of ventures, net of dividends
received............................................... 4,125 (3,412)
Change in fair value of foreign currency instrument....... 22,769 --
Non-cash Esprit business combination costs................ 35,699 --
Non-cash compensation..................................... 789 178
Minority interest......................................... 406 (2,353)
Other..................................................... 2,038 1,181
Changes in assets and liabilities, excluding effects of
acquisitions and ventures:.............................
Accounts receivable.................................... (42,959) (8,425)
Prepaid expenses....................................... 1,410 (1,161)
Accounts payable and accrued expenses.................. 6,980 10,702
Other changes in assets and liabilities................ (8,579) (3,380)
---------- --------
NET CASH USED IN OPERATING ACTIVITIES............. (101,503) (34,101)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of
repayments............................................. (17,178) 2,370
Purchases of property and equipment....................... (20,310) (20,756)
Restricted cash........................................... 23,976 2,752
Purchases of intangible assets............................ (832) (14,634)
Acquisitions, net of cash................................. -- (1,053)
Other..................................................... -- 547
---------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (14,344) (30,774)
FINANCING ACTIVITIES
Proceeds from debt........................................ 302,458 105,300
Repayments of debt........................................ (23,687) (91,355)
Payment of debt issue costs............................... (9,973) (3,957)
Net proceeds from issuance of common stock................ 3,229 235,977
Other financing activities................................ -- 7,199
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 272,027 253,164
Effect of exchange rate changes on cash and cash
equivalents............................................... (29,696) (4,386)
---------- --------
Net increase in cash and cash equivalents................... 126,484 183,903
Cash and cash equivalents at beginning of period............ 998,510 538,757
---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $1,124,994 $722,660
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Global TeleSystems Group, Inc. ("GTS" or "the Company"), is a provider of a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers through its operation of
voice and data networks, international gateways, local access and cellular
networks and the provision of various value-added services in Western Europe,
Central Europe and the Commonwealth of Independent States ("CIS"), primarily
Russia.
The financial statements of GTS included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Material intercompany affiliate account transactions have been
eliminated; however, other adjustments may have been required had an audit been
performed. In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature necessary to present fairly the
Company's financial position, results of operations and cash flows for the
interim periods. These financial statements should be read in conjunction with
the Company's 1998 audited consolidated financial statements and the notes
related thereto. The results of operations for the three months ended March 31,
1999 may not be indicative of the operating results for the full year.
Effective March 4, 1999, the Company completed its business combination
with Esprit Telecom Group plc ("Esprit") which was accounted for as a pooling of
interests. Accordingly, these financial statements have been restated and are
presented as if the companies have been combined since inception.
2. POLICIES AND PROCEDURES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", comprehensive loss was $169.3 million and
$51.7 million for the three months ended March 31, 1999 and 1998, respectively,
and was comprised of net loss of $162.2 million and $49.8 million and foreign
currency translation adjustments of $7.1 million and $1.9 million for the three
months ended March 31, 1999 and 1998, respectively.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share for
all periods presented. In accordance with SFAS No.128, "Earnings per Share" the
Company's net loss per share calculation (basic and diluted) is based upon the
weighted average common shares issued. There are no reconciling items in the
numerator or denominator of the Company's net loss per share calculation.
Employee stock options have been excluded from the net loss per share
calculation because their effect would be anti-dilutive.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt the new
statement effective January 1, 2000. The statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of the statement will have a significant effect
on its results of operations or financial position.
3. INVESTMENT IN FLAG ATLANTIC LIMITED
On January 13, 1999, GTS, through its subsidiary GTS Transatlantic Holdings
Ltd., entered into an agreement with FLAG Telecom to form a 50/50 joint venture,
to be known as FLAG Atlantic Limited, that will build and operate a transoceanic
fiber optic link, known as FLAG Atlantic-1 between Europe and the United States.
FLAG Atlantic-1 is designed to carry voice, high-speed data and video traffic at
speeds of
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1.28 terabits per second, a 25-fold increase over current transatlantic cable
systems. The joint venture will also provide backhaul links from the European
landing points of the transoceanic link to Paris and London. By interconnecting
to FLAG Atlantic-1, GTS Carrier Services and its subsidiary Hermes Europe
Railtel B.V. ("Hermes Railtel") will be able to provide their carrier and
Internet service provider customers with high-capacity cable access from major
European cities to New York City. GTS's investment in FLAG Atlantic Limited is
designed to enable it to participate in the growth opportunity represented by
the rapid increase in demand by business customers for Internet Protocol-based
telecommunications services. The high-capacity fiber optic link will be based on
synchronous digital hierarchy and use dense wave division multiplexing
technology. FLAG Atlantic Limited is expected to begin offering services in the
last quarter of 2000. The project is subject to financing, the execution of
related agreements and other conditions. The Company has committed to a $100
million equity contribution and a commitment to purchase $150 million worth of
capacity.
3. DEBT OBLIGATIONS
In January 1999, our subsidiary Hermes Railtel issued, through a private
placement, aggregate principal amount $200 million of senior notes due January
15, 2009 (the "Dollar Notes") and Euro 85 million (approximately $100 million)
of senior notes due January 15, 2006 (the "Euro Notes" and together with the
Dollar Notes, the "New Senior Notes"). The New Senior Notes are general
unsecured obligations of Hermes Railtel, with interest payable semiannually at a
rate of 10.375%. Net proceeds from the issuance of the New Senior Notes was
approximately $289.3 million. Hermes Railtel filed an S-4 registration statement
with the Securities and Exchange Commission to exchange registered senior notes,
with the same terms and conditions as the New Senior Notes, for the New Senior
Notes, which became effective in February 1999. The exchange of registered notes
for the New Senior Notes was completed on March 24, 1999.
4. CAPITAL LEASE OBLIGATIONS
During the three months ended March 31, 1999, Hermes Railtel entered into
contractual commitments to lease fiber pairs, including facilities and
maintenance and utilizing the partial routes for laying fiber optic cable. Based
on the contract provisions, these commitments are currently estimated to
aggregate approximately $37.3 million. The commitments have expected lease terms
of ten to fifteen years.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
--------------
(IN THOUSANDS)
<S> <C>
Capitalization of leases.................................... $48,127
</TABLE>
7
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA
The Company has historically operated in five segments within the
telecommunications industry. The industry consists of a wide range of
telecommunications services to international business customers, including long
distance voice and data services and electronic messaging services. The
following tables present consolidated financial information segmented by the
Company's geographic areas and lines of businesses for the quarters ended March
31, 1999 and 1998. Transfers between geographic areas and lines of businesses
were not considered material for disclosure purposes.
Geographical Data:
<TABLE>
<CAPTION>
NORTHERN
AND CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
---------- -------- -------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Total revenue.............. $ 140,202 $ 24,186 $ 5,899 917 (323) $ 170,881
Gross margin............... 51,107 14,860 2,413 79 (117) 68,342
Selling, general and
administrative
expenses................ 86,523 9,066 2,072 983 43,665 142,309
Net loss................... (99,564) (9,670) (3,382) (1,001) (48,591) (162,208)
Identifiable assets........ 1,669,521 216,167 45,129 4,494 828,275 2,763,586
Liabilities................ 1,766,079 144,357 29,424 9,841 563,290 2,512,991
Net (liabilities)/assets... (96,558) 71,810 15,705 (5,347) 264,985 250,595
QUARTER ENDED MARCH 31, 1998
Total revenue.............. $ 28,137 $ 13,757 $ 3,904 $ 450 $ -- $ 46,248
Gross margin............... 6,467 4,824 1,768 47 (37) 13,069
Selling, general and
administrative
expenses................ 14,330 7,512 1,448 675 6,277 30,242
Extraordinary items........ -- -- -- -- (12,704) (12,704)
Net loss................... (22,616) (1,708) (474) (957) (24,063) (49,818)
Identifiable assets........ 901,656 105,574 25,044 2,600 406,328 1,441,202
Liabilities................ 817,931 77,987 42,419 19,871 183,263 1,141,471
Net (liabilities)/assets... 83,725 27,587 (17,375) (17,271) 223,065 299,731
</TABLE>
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Line of Business Data:
<TABLE>
<CAPTION>
BUSINESS MOBILE CORPORATE,
CARRIER BUSINESS ACCESS SERVICES SERVICES OTHER &
SERVICES SERVICES WE SERVICES CIS CIS ELIMINATIONS TOTAL
---------- ----------- -------- -------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Total revenue................ $ 57,225 $ 82,977 $ 5,899 $20,136 $ 4,050 $ 594 $ 170,881
Gross margin................. 37,701 13,406 2,413 11,846 3,014 (38) 68,342
Selling, general and
administrative services... 12,933 71,323 4,339 7,029 2,037 44,648 142,309
Net loss..................... (4,103) (93,184) (5,659) (4,633) (5,037) (49,592) (162,208)
Identifiable assets.......... 1,001,066 667,070 46,514 163,501 52,666 832,769 2,763,586
Liabilities.................. 951,906 811,358 32,239 92,955 51,402 573,131 2,512,991
Net (liabilities)/assets..... 49,160 (144,288) 14,275 70,546 1,264 259,638 250,595
QUARTER ENDED MARCH 31, 1998
Total revenue................ $ 4,706 $ 23,431 $ 3,904 $12,934 $ 823 $ 450 $ 46,248
Gross margin................. 1,854 4,613 1,768 4,303 388 143 13,069
Selling, general and
administrative services... 4,425 9,905 1,448 4,948 961 8,555 30,242
Extraordinary items.......... -- -- -- -- -- (12,704) (12,704)
Net loss..................... (9,511) (13,105) (474) 461 (1,218) (25,971) (49,818)
Identifiable assets.......... 508,064 393,592 25,044 76,608 29,298 408,596 1,441,202
Liabilities.................. 450,981 366,950 42,419 52,274 19,247 209,600 1,141,471
Net (liabilities)/assets..... 57,083 26,642 (17,375) 24,334 10,051 198,996 299,731
</TABLE>
7. SUBSEQUENT EVENTS
On April 26, 1999, GTS acquired a 52% ownership interest in Omnicom, a
French company, and assumed operational control. On April 27, 1999, GTS
initiated an offer for the remaining shares of Omnicom and as of May 12, 1999,
GTS had acquired 98.9 percent of the fully diluted capital and voting rights of
Omnicom and had paid approximately $314 million in cash and had issued 1,850,497
shares of the Company's common stock.
In April 1999, the Company issued in a private placement 10 million
depositary shares each representing 1/100th of a share of a new series of
cumulative convertible preferred stock. The Company received net proceeds of
$485 million from this issuance, excluding certain transaction costs. Holders of
the depositary shares will be entitled to a quarterly cash payment of $0.90625
per depositary share (or 7 1/4% per year per depositary share) payable on March
15, June 15, September 15 and December 15 of each year commencing on June 15,
1999. Each depositary share will have a liquidation preference of $50 per share
and will be convertible into GTS common stock at $69 per GTS common share. Due
to certain change of control provisions, the preferred stock will be classified
in the balance sheet as mezzanine equity. On May 7, 1999, the Company filed an
S-3 Registration Statement with the Securities and Exchange Commission ("SEC")
to register the depositary shares, the preferred shares and the common shares
into which the Depositary Shares are convertible. The Registration Statement has
not yet been declared effective by the SEC.
9
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition
and results of operations of the Company for the three months ended March 31,
1999 and 1998. This information should be read in conjunction with the Company's
Condensed, Consolidated Financial Statements and the notes related thereto
appearing elsewhere in the document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs,
(iii) changes in the Company's competitive environment and (iv) the performance
of future equity-method investments, contain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Report.
The factors described in this Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements of
the Company made by or on behalf of the Company, and investors, therefore,
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors may emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
OVERVIEW
We are a leading independent provider of telecommunications services to
businesses, other high usage customers and telecommunications carriers in
Western Europe. We also provide telecommunications services in Russia and the
Commonwealth of Independent States (CIS).
From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and (2)
establishing and developing Hermes Railtel, a venture designed to provide a high
speed transmission network across national borders in Western Europe. We
intended to capitalize on the rapidly growing demand for telecommunications
services in countries emerging from totalitarian rule and state-controlled
economies. In addition, in Western Europe, growing liberalization of regulations
governing the provision of telecommunications services has resulted in a
proliferation of new competitors to the incumbent public telecommunications
operators. At the same time, with the trend toward the increasing globalization
of business, there has been substantial growth in demand for high-quality voice
and data telecommunications. We perceived a need for a fast, efficient and lower
cost cross-border network
10
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that would carry the traffic of established public telecommunications operators
and other carriers. Since we began operating our Hermes Railtel network in late
1996, the demand for its services has validated our decision to build and
develop such a network.
In 1998, we changed our strategy in response to the economic crisis in
emerging markets and the advent on January 1, 1998 of the deregulation of the
provision of telecommunications services in Western Europe. We also sought to
build on the success of our Hermes Railtel network by developing a plan to
provide telecommunications services, including local access services, directly
to businesses and other customers. In October 1998 we realigned our operations
into five lines of business: GTS Carrier Services, GTS Business Services, GTS
Access Services, GTS Business Services -- CIS and GTS Mobile Services -- CIS.
Our strategy to develop our businesses is to:
- Continue the buildout of the Hermes Railtel network by extending its
coverage and by putting in place a cost-efficient transatlantic link
through our participation in FLAG Atlantic Limited;
- Develop local access infrastructure to facilitate our customers' access
to our network and to exploit what we believe to be an expanding market;
- Capitalize on growth in data/IP traffic by expanding our IP-based
capabilities and product offerings;
- Reinforce and extend market penetration of Hermes Railtel's network by
enhancing the scope, capacity, reliability and efficiency of our
infrastructure, and by providing our own local access; and
- Increase high usage retail customer base and route traffic over our own
network.
As part of our business strategy, we expect to continue to expand through
additional significant acquisitions and by entering into additional joint
ventures and other cooperative business relationships. As part of our business
strategy, we expect to make significant acquisitions in the future. We believe
that additional attractive acquisitions opportunities currently exist in Western
and Central Europe and in the United States and are continually evaluating these
opportunities. Certain of these transactions, if consummated, may be material to
our operations and financial condition. Such acquisitions may not be
successfully integrated or result in projected benefits. We may not be able to
raise the additional capital necessary to fund such acquisitions and may have to
divert resources from other areas. Although we periodically have discussions
with other companies to assess opportunities on an ongoing basis, we do not have
a definitive agreement with respect to any material acquisition or joint
venture.
11
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RESULTS OF OPERATIONS
The following discussion of our results of operations and liquidity and
capital resource requirements reflect the restatement of our financial results
for 1999 and prior periods as a result of the business combination with Esprit
Telecom, which we accounted for as a pooling of interests.
The following table sets forth our statement of operations as a percentage
of revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1999 1998
----- ------
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Telecommunications services................................. 60.0 71.7
Selling, general and administrative......................... 46.0 65.4
Esprit Telecom business combination costs................... 37.3 --
Depreciation and amortization............................... 23.0 20.6
Equity in losses/(earnings) of ventures..................... 2.4 (7.4)
----- ------
Loss from operations........................................ (68.7) (50.3)
Interest, net............................................... (19.0) (29.1)
Foreign currency losses..................................... (4.8) (4.7)
----- ------
Net loss before income taxes, minority interest and
extraordinary loss........................................ (92.5) (84.1)
Income taxes................................................ 2.2 1.2
Net loss before minority interest and extraordinary loss.... (94.7) (85.3)
Minority interest........................................... (0.2) 5.1
----- ------
Net loss before extraordinary loss.......................... (94.9) (80.2)
Extraordinary loss -- debt refinancing...................... 0.0 (27.5)
----- ------
Net loss.................................................... (94.9)% (107.7)%
===== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Revenue. Our consolidated revenue increased to $170.9 million for the three
months ended March 31, 1999 as compared to $46.2 million for the three months
ended March 31, 1998. Significant components of revenue for the three months
ended March 31, 1999 were Business Services -- Western Europe ($83.0 million),
Carrier Services ($57.2 million) and Business Services -- CIS ($20.1 million).
Revenue for the three months ended March 31, 1998 was primarily comprised of
Business Services -- Western Europe ($23.4 million), Business Services -- CIS
($12.9 million) and Carrier Services ($4.7 million). The growth in revenue was
primarily attributable to the increase in our customer base and resulting
traffic in all of our operations. An additional contributor to the revenue
growth in the first quarter of 1999 was that we followed the consolidation
method of accounting for certain business ventures, whereas in the first quarter
of 1998, these business ventures were accounted for following the equity method
of accounting.
Telecommunications Services. Our costs associated with providing
telecommunications services through our five lines of business in 1999 increased
to $102.5 million or 60.0% of revenues as compared to $33.2 million or 71.7% of
revenues for the first quarter of 1998. The decrease in telecommunication
services as a percentage of revenues in 1999 is attributable to the growth in
our customer revenue offset by increased settlement and interconnect costs paid
to third parties and direct network operating and maintenance costs. Although
telecommunications services costs as a percentage of revenue have decreased, we
continue to incur substantial costs related to the implementation of our
business strategy.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 increased to $78.6 million or 46.0% of revenues as compared to
$30.2 million or 65.4% of revenues for 1998. The increase in selling, general
and administrative expenses is attributable to increases in the number of staff
associated with business growth, as well as administrative and marketing costs
required for our increased customer base. We expect to establish sales offices
in additional European cities, which involves incurring substantial additional
12
<PAGE> 13
start-up costs. Accordingly, our consolidated results of operations will
fluctuate depending on the timing of our expansion strategy. During a period of
rapid expansion, selling, general and administrative expenses will be relatively
higher than during more stable periods of growth.
Esprit Telecom Business Combination Costs. In connection with our business
combination with Esprit Telecom, we recognized a $63.7 million, or 37.3% of
revenue, charge to earnings for transaction and integration costs. This charge
included $45.6 million in transaction costs related to the acquisition,
including investment banking, advisory, debt restructuring, legal, accounting,
printing and employee-related expenses. The remaining charges of $18.1 million
were incurred in connection with the elimination or reduction of redundancies in
the GTS and Esprit Telecom networks through cancellation of fiber leases,
write-off of excess equipment and redeployment of switches.
Depreciation and Amortization. Depreciation and amortization increased to
$39.3 million or 23.0% of revenues for the three months ended March 31, 1999 as
compared to $9.5 million or 20.6% of revenues for the three months ended March
31, 1998. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we have experienced an increase in amortization expense associated
with goodwill that has arisen principally from our 1999 acquisition activities
(Plusnet and NetSource).
Losses in Ventures. We recognized losses in our investments in
non-consolidated ventures of $4.1 million for the three months ended March 31,
1999 as compared to income of $3.4 million of the three months ended March 31,
1998. Included in these losses/income was our ownership share of losses of $1.9
million and earnings of $4.5 million for the three months ended March 31, 1999
and 1998, respectively.
Interest, net. Interest increased to approximately ($32.5) million in the
first quarter 1999 from ($13.4) million in the first quarter of 1998. This
significant increase in interest is attributable to the substantial increase in
our outstanding debt obligations since the first quarter of 1998 offset by an
increase in interest earned on the short term investments of equity and debt
proceeds.
Foreign Currency Loss. We recognized foreign currency losses of $8.1
million in the first quarter of 1999 as compared to $2.2 million in the first
quarter of 1998. Our foreign currency losses have been primarily attributable to
our unhedged US$ and DEM$ debt obligations outstanding.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The telecommunications industry is capital intensive. In order for us to
successfully compete, we will require substantial capital to continue to develop
our networks and meet the funding requirements of our operations, including
losses from operations, as well as to provide capital for our acquisition and
business development initiatives. We expect that we will spend over $1.3 billion
in cash over the next three years to meet our capital expenditures, to fund our
operations, and to implement our business plan.
Historically, we have raised capital through a combination of public and
private offerings of equity and debt securities. We have received cash proceeds
of $3.2 million, $370.1 million, $89.8 million and $141.7 million in the first
quarter of 1999 and for the years ended December 31, 1998, 1997 and 1996,
respectively, net of placement costs, associated with the issuance of our common
stock in connection with these offerings, including issuance of warrants and the
exercise of stock options. In addition, the Company received $289.3 million,
$812.0 million, $714.8 million and $60.0 million in gross proceeds in the first
quarter of 1999 and for the years ended December 31, 1998, 1997 and 1996,
respectively, for a total of approximately $1.9 billion under various debt
securities that were issued by Hermes Railtel, Esprit Telecom and ourselves.
We believe that our existing cash balances and cash flow received from
certain operating ventures will be sufficient to fund our currently anticipated
capital needs over at least the next 12 months. However, because we expect
acquisitions will constitute a major part of our business strategy, it is
certainly possible that we will seek additional financing in the future.
Additionally, as our business strategy evolves, we continuously evaluate the
optimal capital structure to ensure that it meets our overall corporate
strategy.
The actual amount and timing of our future capital requirements may differ
materially from our estimates. In particular, the accuracy of our estimates is
subject to changes and fluctuations in our revenues, operating costs and
development expenses, which can be affected by our ability to (1) effectively
and efficiently manage the expansion of the Hermes Railtel network and
operations and the buildout of our local access infrastructure in our targeted
metropolitan markets, (2) effectively and efficiently manage the build-out of
the FLAG Atlantic-1 transatlantic cable, either directly or through our
participation in the FLAG Atlantic joint venture, (3) obtain infrastructure
contracts, rights-of-way, licenses, interconnection agreements and other
regulatory approvals necessary to complete and operate the Hermes Railtel
network, construct our local access infrastructure and offer telecommunications
services to end-users, (4) negotiate favorable contracts with suppliers,
including large volume discounts on purchases of capital equipment and (5)
access markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe. Our revenues and costs are also
dependent upon factors that are not within our control such as political,
economic and regulatory changes, changes in technology, increased competition
and various factors such as strikes, weather, and performance by third parties
in connection with our operations. Due to the uncertainty of these factors,
actual revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect our future capital
requirements. In addition, if we expand our operations at an accelerated rate or
consummate acquisitions, our funding needs will increase, possibly to a
significant degree, and we will expend our capital resources sooner than
currently expected. As a result of the foregoing, or if our capital resources
prove to be insufficient, we will need to raise additional capital to execute
our current business plan and to fund expected operating losses, as well as to
consummate future acquisitions and exploit opportunities to expand and develop
our businesses.
We cannot assure you that we will be able to consummate additional
financing on favorable terms. As a result, we may be subject to additional or
more restrictive financial covenants, our interest obligations may increase
significantly and our existing shareholders may be adversely diluted. Failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require us to delay or abandon some or
all of our anticipated expenditures, to sell assets, or both, either of which
could have a material adverse effect on our operations.
14
<PAGE> 15
HERMES RAILTEL NETWORK
Development of Hermes Railtel's fiber optic network has required and will
continue to require substantial capital. Hermes Railtel raised $265.0 million in
gross proceeds from its offering of senior notes in July 1997 (of which $56.6
million was placed in escrow as an interest reserve). We have spent
approximately $217 million in cash on network capital expenditures through March
31, 1999 and we expect to incur an additional $573 million through 2000 in order
to complete the build-out of the network and enhance its capacity through the
implementation of dense wave division multiplexing and Internet Protocol
technology. In addition, as of March 31, 1999, $308 million has been capitalized
in connection with long-term fiber lease arrangements and an additional $115
million is expected to be capitalized through 2000 in order to complete the
build-out of the network. In January 1999, Hermes Railtel issued $200 million
aggregate principal amount of 10.375% Senior notes due 2009 and E85 million
(approximately $100 million) aggregate principal amount of 10.375% Senior notes
due 2006. These new senior notes have substantially the same terms as the notes
Hermes Railtel issued in 1997. We believe that the net proceeds from the 1997
senior notes and the new senior notes, combined with projected internally
generated funds, should be sufficient to fund expected capital expenditures as
well as payments on the long-term fiber lease arrangements. However, the actual
amount and timing of our future requirements may differ materially from our
estimates. Any failure to obtain necessary financing may require us to delay or
abandon our plans for deploying the remainder of the network.
TRANSOCEANIC SERVICES
We are participating in the construction and operation of the FLAG
Atlantic-1 transoceanic cable through our 50% interest in the Flag Atlantic
Limited joint venture. The terms of the joint venture require that we (1) invest
$100 million for our interest in the venture and (2) purchase capacity on the
cable for $150 million. Although these expenditures are payable over a number of
years, we may be required to cover these payments by posting a fully cash
collateralized letter of credit during the second quarter of 1999. We expect to
fund these cash requirements from existing cash balances. We may also fund or
refinance a portion of these cash requirements through the proceeds of debt or
equity financings that we may execute during 1999.
In addition, the terms of the joint venture contemplate that we will be
responsible in part for constructing the European and U.S. backhaul portion of
the FLAG Atlantic project, that is, the terrestrial portion of the network
connecting the landing points of FLAG Atlantic-1 to Paris, London and New York.
At this time, we estimate that our share of the costs associated with this
portion of the project will be approximately $200 million, of which
approximately $150 million is scheduled to be incurred in 2000. We expect to
meet this cash requirement through a combination of cash on hand and equity or
debt financings. We cannot assure you, however, that we will be able to fund our
expenditures associated with our Transoceanic Services business or that this
business will achieve or sustain profitability or positive cash flow.
ACCESS SERVICES BUILDOUT
We plan to provide local access services in up to 12 major European cities
by the end of 2001. We have announced that we expect to have operating
competitive local exchange carrier networks in Paris, France and Geneva,
Switzerland by the third quarter 1999 and in Berlin, Germany by the fourth
quarter 1999. We plan to develop our infrastructure by constructing, purchasing
or leasing fiber optic networks, developing microwave transmission networks or
through acquisition or partnership. We project that approximately $250 million
will be required through the end of 2000 to implement these networks. We expect
to be able to fund these expenditures through a combination of cash on hand and
equity and debt financings.
We cannot estimate with any degree of certainty the amount and timing of
these future capital requirements or other cash requirements for the
implementation of our Access Services plans. These expenditures will be
dependent on many factors, including the rate at which we roll out our Access
Services networks, the types of services we offer, staffing levels, acquisitions
and customer growth, as well as other factors that are not within our control,
including competitive conditions, regulatory developments and capital costs. We
expect that we will have significant operating and net losses and will record
significant net cash outflow, before financing, in coming years in connection
with our Access Services business. We cannot assure
15
<PAGE> 16
you that we will be able to fund the $250 million in projected expenditures or
any additional expenditures or that our Access Services line of business will
achieve or sustain profitability or positive cash flow in the future.
LIQUIDITY ANALYSIS
We had cash and cash equivalents of $1,125.0 million and $998.5 million as
of March 31, 1999 and December 31, 1998, respectively. We had restricted cash of
$121.0 million and $143.4 million as of March 31, 1999 and December 31, 1998,
respectively, that primarily represent amounts held in escrow for debt interest
payments.
In the quarters ended March 31, 1999 and 1998 we used cash of $101.5
million and $34.1 million respectively, for our operating activities. The
significant increase in cash spending for our operations in the quarter ended
March 31, 1999 as compared to 1998 is attributable to the growth of our business
operations which has resulted in higher operating cash costs and accounts
receivable carrying balances. We also used cash of $14.3 million and $30.8
million for our investing activities in the first quarter of 1999 and 1998,
respectively. We cannot assure you that our operations will achieve or sustain
profitability or positive cash flow in the future. If we cannot achieve and
sustain operating profitability or positive cash flow from operations, we may
not be able to meet our debt service obligations or working capital
requirements.
Substantially all of our operations are outside the United States and
therefore our consolidated financial results are subject to fluctuations in
currency exchange rates. Our operations transact their business in the following
significant currencies: Deutschmark, French Franc, British Pound Sterling,
Belgian Franc, Dutch Guilder, the Russian Ruble, and, effective January 1, 1999,
the Euro. For those operating companies that transact their business in
currencies that are not readily convertible, we attempt to minimize our exposure
by indexing our invoices and collections to the applicable dollar/foreign
currency exchange rate to the extent our costs (including interest expense,
capital expenditures and equity) are incurred in U.S. Dollars. Although we are
attempting to match revenues, costs, borrowing and repayments in terms of their
respective currencies, we have experienced, and may continue to experience,
losses and a resulting negative impact on earnings with respect to holdings
solely as a result of foreign currency exchange rate fluctuations, which include
foreign currency devaluations against the U.S. Dollar. Furthermore, certain of
our operations have notes payable and notes receivable which are denominated in
a currency other than their own functional currency or loans linked to the U.S.
Dollar. We may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.
We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We are currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. Our ability to hedge our exposure is
limited since certain of our operations are located in countries whose
currencies are not easily convertible. Financial hedge instruments for these
countries are nonexistent or limited and also pricing of these instruments is
often volatile and not always efficient. We designed and implemented reporting
processes to monitor the potential exposure on an ongoing basis in 1998. We will
use the output of this process to execute financial hedges to cover foreign
exchange exposure when practical and economically justified.
In April 1998, we consummated a foreign exchange swap transaction to
mitigate the foreign exchange exposure resulting from the issuance of $265
million senior notes issued by Hermes Railtel.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. Use of non-Year 2000 compliant programs
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions and invoices or engage in similar normal
business activities.
16
<PAGE> 17
Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000 issue
in a number of ways. Among other things, the Year 2000 issue might affect our:
(1) computer hardware and software; (2) telecommunications equipment and other
systems with embedded logic (among other things, this includes our fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply); (3) operating partners and organizations upon
which we are dependent; (4) local access connections, upon which we are
dependent; and (5) supply chain.
Our Year 2000 Compliance Program. We have initiated a Year 2000 compliance
program to address the aforementioned risks which the Year 2000 issue poses and
to avoid any material loss or impact to us or our customers due to these risks.
The object of this Year 2000 compliance program is to ensure that neither the
performance nor functionality of our operations are affected by dates, prior to,
during and after 2000. The scope of the Year 2000 compliance program includes
all of the business functions, locations and resources which are essential to
us. The resources which are within the scope of the Year 2000 compliance program
are, among other things, our computer systems, software, vendor supplied
software, telecommunications equipment, third party telecommunications partners
and other network service suppliers, environmental and building control systems,
internal communication systems and other interfaces with third party services.
As explained below, our efforts to assess our systems as well as non-system
areas related to Year 2000 compliance involve (1) a wide-ranging assessment of
the Year 2000 problems that may affect us, (2) the development of remedies to
address the problems discovered in the assessment phase and (3) testing of the
remedies.
Assessment Phase. The assessment phase includes internal and third party
review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
which might be materially impacted by Year 2000 issues. Our observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of our telecommunications equipment and software has been purchased within the
past three years and the majority is already compliant or can be made compliant
with minor upgrades. We completed the assessment phase of our Year 2000
readiness in the fourth quarter of 1998.
Remediation, Prevention and Testing Phases. Based on those resources
identified in the assessment phase, we developed a detailed plan in the fourth
quarter of 1998, that will then be followed by an upgrade, a remediation, a
prevention and a testing phase in early 1999. These phases are expected to be
completed during the second quarter of 1999.
Assessment of Third Party Compliance. As noted above, we have also
undertaken under our Year 2000 compliance program to assess and monitor the
progress of third party vendors in resolving Year 2000 issues. To ensure the
compliance of vendors of hardware and software applications used by us, we are
obtaining confirmations from our primary telecommunication vendors, business
partners and hardware and software vendors as to what plans, if any, are being
developed or are already in place to address their ability to process
transactions in the Year 2000. We intend to continue follow up with any vendors
who indicate any material problems in their replies. We expect to receive
statements of intended compliance by mid-1999.
Our Worst Case Scenario. Our worst case scenario would be the failing of
our telecommunications equipment, power providers and/or interfaces with other
telecommunication vendors and either or both of the following:
- a loss of interconnect capacity from one or more major suppliers of
transmission capacity; and
- our inability to record, track or invoice billable minutes which could
ultimately cause us to temporarily stop carrying traffic.
These cases would create business interruption at some of our operations
and would adversely affect our revenues. For example, the Moscow power
authorities have publicly stated that they do not intend to address Year 2000
issues until problems arise. However, we have operations that are geographically
diversified;
17
<PAGE> 18
therefore, it is not anticipated that the worst case scenario would affect all
operations at the same time. Additionally, if power failures occur, we currently
have diesel generators at certain of our major sites. Based on our assessment
during the third and fourth quarters of 1998, we do not foresee a material loss
due to these conditions and management is hopeful that our remediation and
testing efforts will ensure that we have addressed our Year 2000 readiness.
However, we cannot assure you that Year 2000 non-compliance by our systems or
the systems of vendors, customers, partners or others will not result in a
material adverse effect.
Contingency Plans. We are considering a contingency plan to address our
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel or large generators should power failures occur, the ability to quickly
replace telecommunications equipment and the ability to contract with
alternative telecommunication and maintenance providers at reasonable terms.
Moreover, we are further limited in resources in certain geographical regions
due to the market volatility and weak economies in which we have business
operations.
Costs Related to the Year 2000 Issue. We expect that we will incur between
$10.0 million to $11.5 million in expenses to complete the assessment, detailed
planning, remediation, prevention and testing phases, exclusive of replacement
costs for telecommunications equipment and software, of which approximately $4.9
million had been incurred during 1998. It is estimated that between $5.0 million
to $6.0 million of the total expenditure will be required to complete the
remediation and testing phase, excluding the replacement of telecommunications
equipment and software. We have currently identified that certain
telecommunications equipment and software will need to be replaced and we
anticipate that we will incur approximately $2.0 million to replace the
identified telecommunications equipment and software. Further, we are currently
unable to quantify the total costs that we may incur for the replacement of all
telecommunications equipment and software due to the stage of our Year 2000
readiness review. These costs will be funded from operating cash flows and
expensed as incurred. In addition, the preceding cost estimate does not include
amounts associated with the accelerated acquisition of replacement systems as
none are included in the initial assessment during the third and fourth quarters
of 1998. We do not expect that the costs of addressing our Year 2000 readiness
will have a material effect on our financial condition or results of operations.
However, we cannot assure you that Year 2000 non-compliance by our systems or
the systems of vendors, customers, partners or others will not result in a
material adverse effect for us.
Risks Related to the Year 2000 Issue. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
failure by us to fully implement the planning or remediation phases or the
failure of our major vendors, third party network service providers, and other
material service providers and customers to adequately address their respective
Year 2000 issues in a timely manner would have a material adverse effect on our
business, results of operations, and financial condition. For a comprehensive
discussion of Year 2000 risks.
IMPACT OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union, including Belgium, The Netherlands, Ireland, France, Germany, Italy and
Spain established fixed conversion rate between their existing sovereign
currencies and a new currency called the "Euro." These countries adopted the
Euro as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. Hereafter and until
January 1, 2002, the existing sovereign currencies will remain legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries.
We have significant operations within the European Union including many of
the countries that have adopted the Euro. We are currently evaluating the impact
the Euro will have on our continuing business operations and no assurances can
be given that the Euro will not have material adverse affect on our business,
financial condition and results of operations. However, we do not expect the
Euro to have a material effect on our competitive position as a result of price
transparency within the European Union as we have always operated as a
pan-European business with transparent pricing in ECU for the majority of our
customers.
18
<PAGE> 19
Moreover, we are evaluating our ability to update our information systems to
accommodate the adoption of the Euro but we do not expect to incur material
costs in either the evaluating or the updating of such systems. In addition, we
cannot accurately predict the impact the Euro will have on currency exchange
rates or on our currency exchange risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on long-term
obligations and as a global company, we also face exposure to adverse movements
in foreign currency exchange rates. A portion of the our debt obligations are
denominated in currencies which expose us to risks associated with changes in
foreign exchange rates. We have developed risk management policies that
establish guidelines for managing foreign exchange risk and periodically
evaluates the materiality of foreign exchange exposures and the financial
instruments available to mitigate this exposure.
Our subsidiary, Hermes Railtel, entered into a foreign currency swap
agreement in 1998 in order to mitigate its exposure on US dollar denominated
debt. We also attempt to mitigate this and other exposures from debt obligations
denominated in exposed currencies by maintaining assets in the exposed currency
wherever possible. We find it impractical to hedge all foreign currency exposure
and as a result will continue to experience foreign currency gains and losses.
The introduction of the Euro as a common currency for members of the European
Union occurred on January 1, 1999. We have not determined what impact, if any,
the Euro will have on our foreign exchange exposure.
The following are the significant changes since December 31, 1998:
- -- In January 1999, Hermes Railtel, a subsidiary of the Company, issued $200
million 10.375% senior notes due January 15, 2009 which exposes Hermes
Railtel to interest and foreign exchange rates, and the issuance of Euro 85
million 10.375% senior notes due January 15, 2006 which exposes Hermes
Railtel to changes in interest rates.
- -- In April 1999, we issued $500 million of depositary shares representing a new
series of 7 1/4% cumulative convertible preferred stock in a private
offering. We have filed a registration statement covering these securities
with the Securities and Exchange Commission under the Securities Act of 1933.
The issuance of these equity securities exposes us to changes in interest
rates.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) In April 1999, we issued for cash, pursuant to exemptions from
registration under the Securities Act of 1933 (the 'Securities Act"), 10 million
depositary shares, each representing 1/100 of a new series of cumulative
convertible preferred stock. The underwriters for the sale were Merrill Lynch &
Co.; Donaldson, Lufkin & Jenrette; Bear, Stearns & Co., Inc.; BT Alex. Brown;
Lehman Brothers. Gross proceeds for the sale of the depositary shares were $500
million. The underwriters' discount was $15 million. We received net proceeds,
before other expenses associated with the sale, of $485 million. We sold the
depositary shares pursuant to Rule 144A and, as to non-U.S. persons, pursuant to
Regulation S under the Securities Act. See Note 7 to the Company's unaudited
Condensed, Consolidated Financial Statements included in this report for
additional information concerning the depositary shares and the preferred stock.
d) In January 1999, our subsidiary, Hermes Railtel, issued, through a
private placement, aggregate principal amount $200 million of senior notes due
January 15, 2009 and Euro 85 million (approximately $100 million) of senior
notes due January 15, 2006 (together, the "New Senior Notes"). The New Senior
Notes were subsequently replaced with similar registered securities. The net
proceeds from the New Senior Notes was approximately $289.3 million. Such net
proceeds will be used to finance the cost of network assets, to permit the
network expansion beyond the originally contemplated scope, for the Hermes
Railtel subsidiary. Accordingly, there were no direct or indirect payments to
directors or officers of the Company or the Hermes Railtel subsidiary or to any
persons or entity.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 3, 1999, we held a special meeting of shareholders to approve the
issuance of shares of our common stock in connection with our acquisition of
Esprit Telecom Group plc. This matter was approved by the shareholders by the
following vote: 40,909,851 shares "for," 2,765 shares "against," and 5,545
shares abstaining.
ITEM 5. OTHER INFORMATION
See Note 7 to the Company's unaudited Condensed, Consolidated Financial
Statements included in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
- ----------- -----------
<C> <S>
10 -- Employment agreement between the Company and H.
Brian Thompson
27 -- Financial Data Schedule
</TABLE>
20
<PAGE> 21
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<C> <S>
January 13, 1999 Formation of a 50/50 joint venture with FLAG Telecom
to build and operate a transoceanic fiber optic
link between Europe and the United States to be
known as FLAG Atlantic-1
November 30, 1998, Acquisition of NetSource Europe ASA
Amended on January 20,
1999
</TABLE>
21
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GLOBAL TELESYSTEMS GROUP, INC.
(Registrant)
By: /s/ WILLIAM H. SEIPPEL
----------------------------------
Name: William H. Seippel
Title: Executive Vice President
and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: May 17, 1999
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
10 -- Employment Agreement
27 -- Financial Data Schedule
</TABLE>
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EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated April 1, 1999, and effective March 22, 1999 (the
"Effective Date") is made by and between Global TeleSystems Group, Inc., a
Delaware corporation (the "Company") and H. Brian Thompson (the "Executive").
RECITALS:
A. It is the desire of the Company to assure itself of the services of the
Executive by engaging the Executive as its Chairman and Chief Executive Officer.
B. The Executive desires to commit himself to serve the Company on the
terms herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Certain Definitions.
(a) "Annual Base Salary" shall have the meaning set forth in Section
5(a).
(b) "Base Options" shall have the meaning set forth in Section 5(c).
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Bonus" shall have the meaning set forth in Section 5(b).
(e) The Company shall have "Cause" to terminate the Executive's
employment hereunder upon the Executive's
(i) fraud, embezzlement, or any other illegal act committed
intentionally by the Executive in connection with the Executive's duties
as an executive of the Company or any subsidiary or affiliate of the
Company which causes or may reasonably be expected to cause substantial
economic injury to or substantial injury to the reputation of the
Company or any subsidiary or affiliate of the Company,
(ii) conviction of any felony which causes or may reasonably be
expected to cause substantial economic injury to or substantial injury
to the reputation of the Company or any subsidiary or affiliate of the
Company, or
(iii) willful or grossly negligent commission of any other act or
failure to act which causes or may reasonably be expected (as of the
time of such occurrence) to cause substantial economic injury to or
substantial injury to the reputation of the Company or any subsidiary or
affiliate of the Company,
including, without limitation, any material violation of the Foreign Corrupt
Practices Act, as described herein below.
(f) "Change in Control" shall mean any of the following events:
(i) a report shall be filed with the Securities and Exchange
Commission pursuant to the Exchange Act of 1934 (the "Act), or successor
law or provision, disclosing that any "Person" (within the meaning of
Section 13(d) of the Act), other than the Company or a subsidiary of the
Company, or an employee benefit plan sponsored by the Company or a
subsidiary of the Company is, or becomes the beneficial owner (as such
term is defined in Exchange Act Rule 13d-3), directly or indirectly of,
25% or more of the outstanding voting stock of the Company (or
securities convertible into Company Stock) (calculated as provided in
Exchange Act Rule 13d-3(d) in the case of rights to acquire Company
Stock),
(ii) any such "Person", other than the Company or a subsidiary of
the Company, or a employee benefit plan sponsored by the Company or a
Subsidiary of the Company, shall purchase shares pursuant to a tender
offer or exchange offer to acquire any Company Stock (or securities
<PAGE> 2
convertible into Company Stock) for cash, securities or any other
consideration, provided that after consummation of the offer, the person
in question is the beneficial owner (as such term is defined in Exchange
Act Rule 13d-3), directly or indirectly, of 20% or more of the
outstanding voting stock of the Company (calculated as provided in
Exchange Act Rule 13d-3(d) in the case of rights to acquire Company
Stock),
(iii) the stockholders of the Company shall approve (A) any
consolidation, share exchange or merger of the Company (a "Change of
Control Transaction") (1) in which the stockholders of the Company
immediately prior to such Change of Control Transaction do not own at
least a majority of the voting power of the entity which
survives/results from such Change of Control Transaction (2) in which a
shareholder of the Company immediately before such Change of Control
Transaction, but who does not own a majority of the voting stock of the
Company immediately prior to such Change of Control Transaction, owns a
majority of the Company's voting stock after such Change of Control
Transaction; or (B) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially
all the assets of the Company, including stock held in subsidiary
corporations or interests held in subsidiary ventures, or
(iv) there shall have been a change in a majority of the members of
the Board within a 24-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
24-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such
24-month period; or
(v) the Company shall file a report with the Securities and
Exchange Commission on Form 8-K (or any successor thereto), that a
change in control of or over the Company has occurred.
(g) "Closing Price" shall mean the closing price in United States
Dollars ("$") of a share of Company Stock on the principal exchange on
which such shares are traded on the day in question; if such exchange is in
the United States, as reported in the Wall Street Journal or, if such
exchange is in Europe, as reported in the Financial Times, with such price
converted to $ utilizing the mean of the bid and offered prices for $ in
the local currency for the day in question as reported in the Wall Street
Journal. For purposes of Sections 5(c)(iii)(A), 5(c)(iii)(B) and 7(a)(iii),
references herein to the Closing Price shall be proportionately adjusted by
the Committee as determined in its good faith discretion to be necessary to
reflect increases or decreases in the number of issued shares of Company
Stock resulting from a stock split, reverse stock split, combination,
reclassification, the payment of a stock dividend on Company Stock or other
change to the number of issued shares effected without receipt of
consideration by the Company; provided, however, that the conversion of
convertible securities shall not be deemed to be "effected without receipt
of consideration" so long as the consideration received upon the original
issuance of such convertible securities reflected the fair market value of
the conversion feature of such securities.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(i) "Committee" shall mean either the Compensation Committee or the
Compensation Subcommittee of the Board, as appropriate.
(j) "Company" shall have the meaning set forth in the preamble hereto.
(k) "Company Stock" shall mean the $.10 par value common stock of the
Company.
(l) "Contract Year" shall mean each twelve month period beginning on
the Effective Date or an annual anniversary thereof.
(m) "Date of Termination" shall mean (i) if the Executive's employment
is terminated by his death, the date of his death and (ii) if the
Executive's employment is terminated pursuant to Section 6(a)(ii) -- (vi)
the date specified in the Notice of Termination.
(n) "Deemed Bonus" shall mean 140% of the rate of the Executive's
Annual Base Salary for such year.
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(o) "Disability" shall mean any mental or physical illness, condition,
disability or incapacity which:
(i) prevents the Executive from discharging substantially all of
the essential job responsibilities and employment duties,
(ii) shall be attested to in writing by a physician or a group of
physicians reasonably acceptable to the Company, and
(iii) continues for 180 days in any twelve-month period or for a
period of 180 consecutive days.
A Disability shall be deemed to have occurred on the 180th consecutive day
or the last day of such 180-day period, as applicable, and shall be
determined in accordance with applicable law relating to disability.
(p) "Executive" shall have the meaning set forth in the preamble
hereto.
(q) "Extension Term" shall have the meaning set forth in Section 2.
(r) "Good Reason" shall mean any of the following events which is not
cured by the Company within 15 days after written notice thereof is given
to the Company by the Executive: any failure to pay the Executive's Base
Salary or Bonus when due to the Executive, any other material breach by the
Company of any material term of this Agreement or any material adverse
change in the Executive's job titles, duties, responsibilities, status or
perquisites granted hereunder, or authority without his consent. "Good
Reason" shall cease to exist for an event on the 60th day following the
later of its occurrence or the Executive's knowledge thereof, unless the
Executive has given the Company notice thereof prior to such date.
(s) "Grant Date" shall mean the date on which the Committee acts to
grant to the Executive the Options described herein.
(t) "Incentive Options" shall have the meaning set forth in Section
5(c).
(u) "Initial Term" shall have the meaning set forth in Section 2.
(v) "Notice of Termination" shall have the meaning set forth in
Section 6(b).
(w) "Options" shall have the meaning set forth in Section 5(c).
(x) "Stock Option Plan" shall mean Fourth Amended and Restated 1992
Stock Option Plan of Global TeleSystems Group, Inc.
(y) "Term" shall have the meaning set forth in Section 2.
2. Employment. The Company shall employ the Executive and the Executive
shall enter the employ of the Company, for the period set forth in this Section
2, in the positions set forth in the first sentence of Section 3 and upon the
other terms and conditions herein provided. The initial term of employment under
this Agreement (the "Initial Term") shall be for the period beginning on the
Effective Date and ending on December 31, 2001, unless earlier terminated as
provided in Section 6. The Initial Term shall automatically be extended for a
single additional period expiring March 21, 2005 (the "Extension Term") unless
either party hereto gives written notice of non-extension to the other no later
than September 1, 2001. (The Initial Term and any Extension Term shall be
collectively referred to as the "Term" hereunder).
3. Position and Duties. The Executive shall serve as Chairman and Chief
Executive Officer of the Company, reporting to the Board, with such
responsibilities, duties and authority as are customary for such role. The
Executive shall also be nominated for a seat on the Board. The Executive shall
devote all necessary business time and attention, and employ his reasonable best
efforts, toward the fulfillment and execution of all assigned duties, and the
satisfaction of defined annual and/or longer-term performance criteria.
4. Place of Performance. In connection with his employment during the Term,
the Executive shall be based at the Company's offices in McLean, Virginia,
except for necessary travel on the Company's business.
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5. Compensation and Related Matters.
(a) Annual Base Salary. During the Term the Executive shall receive a
base salary at a rate of $600,000 per annum (the "Annual Base Salary"),
paid in accordance with the Company's general payroll practices for
executives, but no less frequently than monthly. No less frequently than
annually during the Term, the Board and the Committee shall review the rate
of Annual Base Salary payable to the Executive, and may, in their
discretion, increase the rate of Annual Base Salary payable hereunder;
provided, however, that any increased rate shall thereafter be the rate of
"Annual Base Salary" hereunder.
(b) Bonus. Except as otherwise provided for herein, for each calendar
year on which the Executive is employed hereunder on the last day, the
Executive shall be eligible to receive a Bonus. The Executive's Bonus
target shall be 140% of his Annual Base Salary actually paid for such year,
but the actual Bonus shall range from 0 to 280% of his Annual Base Salary
actually paid for such year, as determined pursuant to a "qualified
performance-based compensation" bonus plan that has been approved by the
stockholders of the Company in accordance with the provisions for such
approval under Code Section 162(m) and the regulations promulgated
thereunder (which plan the Company will seek stockholder approval of prior
to the payment of the Bonus), and on the basis of the Executive's or the
Company's attainment of objective financial or other operating criteria
established by the Committee in its sole discretion (after consultation
with the Executive) and in accordance with Code Section 162(m) and the
regulations promulgated thereunder.
(c) Stock Options. Effective as of the Grant Date, the Company shall
grant the Executive an option to purchase 500,000 shares of Company Stock
(the "Base Options") and an option to purchase 1,000,000 shares of Company
Stock (the "Incentive Options" and, collectively, with the Base Options,
the "Options"). On the first day of the Extension Term, if any, the Company
shall grant the Executive additional stock options, in an amount, and on
terms, to be determined by the Committee in its sole discretion (after
consultation with the Executive).
(i) All Options shall
(A) have an exercise price equal to the Closing Price on the
Grant Date (which price is $54.4375 per share);
(B) be granted pursuant to the Stock Option Plan;
(C) upon a Change in Control vest as follows:
(1) upon the date of such Change in Control, unless the
Executive shall then continue to be Chairman and Chief Executive
Officer of the Company or its successor (or of the company that
owns a majority of the voting power of the Company (or its
successor)) any such Options which are then unvested shall become
fully vested, and
(2) If the Executive does continue to be Chairman and Chief
Executive officer (as provided in (C)(1) above), any such Options
which are then unvested shall vest in equal installments on each
December 31 of the remaining Initial Term or Extension Term, as
applicable, so long as the Executive remains employed hereunder
on such December 31 (unless the Executive's employment is
terminated by the Company without Cause or by the Executive for
Good Reason, in which case all Options shall become fully
vested);
(D) upon termination of the Executive's employment by the
Company without Cause or by the Executive for Good Reason, shall, to
the extent then exercisable, remain exercisable until the earlier of
the tenth anniversary of the Grant Date or the second anniversary of
the Date of Termination;
(E) upon termination of the Executive's employment for Cause,
unless the Committee in its good faith discretion determines that the
conduct constituting Cause has resulted in substantial actual harm to
the Company or any subsidiary or affiliate of the Company or to the
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reputation of the Company or any subsidiary or affiliate of the
Company, shall, to the extent then exercisable, remain exercisable
until the expiration of the two week period following the Date of
Termination (which period shall be tolled for any part thereof during
which the Executive is prohibited from exercising Options pursuant to
the terms of Section 13 hereof) (the "Exercise Period"); and in the
event the Committee makes such determination described above, the
Executive may contest such determination through arbitration pursuant
to Section 22 hereof; provided, further, that the Executive's sole
and exclusive remedy shall be the payment of money damages not to
exceed the amount by which the average Closing Price during the
Exercise Period exceeds the aggregate exercise price of such
terminated Options, less all applicable tax withholding; and
(F) be subject to an option agreement containing the above
terms, the terms described in paragraphs (ii) and (iii) below and
other terms substantially similar to the terms generally provided in
the option agreements of the Company's other senior managers (except
as otherwise modified herein).
(ii) Except as otherwise provided for herein, the Base Options
shall become vested no later than the sixth December 31 which follows
the date of grant, so long as the Executive remains employed hereunder
on such December 31.
(iii) Except as otherwise provided for herein, so long as the
Executive remains employed hereunder on the applicable vesting date, the
Incentive Options shall vest as follows:
(A) Incentive Options with respect to one-half of the number of
shares covered thereby shall vest on the first day on or prior to
September 22, 2002, if any, which is the tenth consecutive trading
day on each of which days the Closing Price has been at least
$128.00,
(B) Incentive Options with respect to one-half of the number of
shares covered thereby shall vest on the first day on or prior to
September 22, 2004, if any, which is the tenth consecutive trading
day on each of which days the Closing Price has been at least
$200.00, and
(C) All Incentive Options shall vest no later than the sixth
anniversary of the date of grant.
(d) Stock Purchase.
(i) As soon as practicable following the Effective Date, but in no
event more than 30 days after such date, the Company and the Executive
shall enter into a separate contract upon terms reasonably acceptable to
the Company and the Executive and consistent with the provisions of
Section 5(d)(ii) providing for the Executive to purchase from the
Company shares of Company Stock (the "Purchased Stock") with an
aggregate value of $20 million (utilizing a price per share equal to the
Closing Price on the Grant Date).
(ii) Such contract shall provide that the consideration received by
the Company shall be (A) $10 million in cash and (B) a full recourse
promissory note in the amount of $10 million bearing interest payable
annually at the applicable federal rate set forth in Code Section 1274,
with a term of six years, secured by a first priority, perfected pledge
of the Purchased Stock and containing other reasonable terms customary
in loans to chief executive officers and as approved by the Company's
accountants to avoid any adverse accounting consequences to the Company.
Such contract shall also provide that the Company shall agree to
indemnify and hold the Executive harmless from all costs, charges and
expenses (including reasonable legal fees) of any action, suit,
proceeding or other claim (other than (x) any action or claim to enforce
the provisions of the promissory note or the agreement effectuating the
pledge, each as described in (B) above and (y) the Executive's income or
other tax liability relating to his purchase or sale of the Purchase
Stock) arising in connection with the sale by the Company to the
Executive of the Purchased Stock, except to the extent such indemnity is
prohibited by law.
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(e) Benefits. The Executive shall be entitled to receive such benefits
and to participate in such employee group benefit plans, including life,
health and disability insurance policies, as are generally provided by the
Company to its executives of comparable level and responsibility in
accordance with the plans, practices and programs of the Company. The
Executive shall be provided with financial planning services as per Company
practice for senior executives. In addition, the Company shall pay the
premium on a split dollar life insurance policy covering the Executive with
a death benefit of $5 million.
(f) Expenses. The Company shall reimburse the Executive for all
reasonable and necessary expenses incurred by the Executive in connection
with the performance of the Executive's duties as an employee of the
Company. Such reimbursement is subject to the submission to the Company by
the Executive of appropriate documentation and/or vouchers in accordance
with the customary procedures of the Company for expense reimbursement, as
such procedures may be revised by the Company from time to time hereafter.
In addition, the Company shall reimburse the Executive for first class
airfare for himself (and, to the extent she is traveling with him on
business, his spouse). the Executive shall also be free to use any
apartment owned by the Company in London while he is traveling there on
business.
(g) Vacations. The Executive shall be entitled to paid vacation in
accordance with the Company's vacation policy as in effect from time to
time. However, in no event shall the Executive be entitled to less than one
month vacation per Contract Year. The Executive shall also be entitled to
paid holidays and personal days in accordance with the Company's practice
with respect to same as in effect from time to time.
6. Termination. The Executive's employment hereunder may be terminated by
the Company, on the one hand, or the Executive, on the other hand, as
applicable, without any breach of this Agreement only under the following
circumstances:
(a) Terminations.
(i) Death. The Executive's employment hereunder shall terminate
upon his death.
(ii) Disability. If the Executive has incurred a Disability, the
Company may give the Executive written notice of its intention to
terminate the Executive's employment. In such event, the Executive's
employment with the Company shall terminate effective on the 14th day
after receipt of such notice by the Executive, provided that within the
14 days after such receipt, the Executive shall not have returned to
full-time performance of his duties.
(iii) Cause. The Company may terminate the Executive's employment
hereunder for Cause. Any such termination for Cause may only be effected
by the affirmative vote of a majority of the entire Board of Directors
(other than the Executive and any other director who participated with
the Executive in the alleged conduct), after written notice to the
Executive and an opportunity to appear before the Board (with counsel)
to respond to the allegations which are in such written notice, that the
Executive has engaged in the alleged conduct and that in their good
faith judgment such conduct warrants termination for Cause.
(iv) Good Reason. The Executive may terminate his employment for
Good Reason.
(v) Without Cause. The Company may terminate the Executive's
employment hereunder without Cause.
(vi) Resignation without Good Reason. The Executive may resign his
employment without Good Reason upon 90 days written notice to the
Company.
(b) Notice of Termination. Any termination of the Executive's
employment by the Company or by the Executive under this Section 6 (other
than termination pursuant to paragraph (a)(i)) shall be communicated by a
written notice to the other party hereto indicating the specific
termination provision in this Agreement relied upon, setting forth in
reasonable detail any facts and circumstances claimed to provide a basis
for termination of the Executive's employment under the provision so
indicated, and specifying a Date of Termination which, except in the case
of termination for Cause or Disability, shall be
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at least thirty days following the date of such notice (a "Notice of
Termination"); provided, the Company may pay out such notice period instead
of employing the Executive.
7. Severance Payments.
(a) Termination without Cause or for Good Reason. If the Executive's
employment shall terminate without Cause (pursuant to Section 6(a)(v))
(which for this purpose shall include any termination by reason of the
Company's non-extension or non-renewal of this Agreement beyond the Initial
Term, Extension Term or otherwise), or for Good Reason (pursuant to Section
6(a)(iv)), and subject to the receipt of mutual releases in form reasonably
acceptable to the parties, the Company shall
(i) pay to the Executive, in a lump sum cash payment as soon as
practicable following the Date of Termination, or, in its discretion, in
monthly installments during the applicable term described in Section
(9)(a), the prorated portion of the Bonus to which he would otherwise be
entitled for the year of termination and an amount equal to the sum of
two times (A) his then current rate of Annual Base Salary and (B) the
amount of his Deemed Bonus for the year of termination; provided,
however, that on or after a Change in Control, such amount shall be
three times the sum of his current rate of Annual Base Salary plus
Deemed Bonus,
(ii) except as otherwise provided in Section 5(c)(i)(C), cause to
become vested that number, if any, of his then unvested Base Options as
would have been vested as of the Date of Termination if all of his Base
Options had been subject to vesting in equal installments on the first
three December 31's that follow the date of grant; provided, however,
that if the Date of Termination is on or prior to December 31, 1999,
one-third of the Base Options shall become exercisable,
(iii) if the Closing Price on the day prior to the Date of
Termination represents at least a 27.5% annual compound rate of
appreciation from the Closing Price on the Effective Date, then
(A) cause to become vested that number, if any, of his then
unvested Incentive Options described in Section 5(c)(iii)(A) as would
have been vested as of the Date of Termination if all of such
Incentive Options had been subject to vesting in equal installments
on the first three December 31's that follow the date of grant, and
(B) cause to become vested that number, if any, of his then
unvested Incentive Options described in Section 5(c)(iii)(B) as would
have been vested as of the Date of Termination if all of such
Incentive Options had been subject to vesting in equal installments
on the first five December 31's that follow the date of grant.
(iv) The Company shall also continue to provide the Executive with
all employee benefits and perquisites which he was participating in or
receiving at the time of the Termination of Employment (or if greater,
at the end of the prior year) until the earlier of two years (three
years if after a Change of Control) or his receipt of comparable
benefits from a successor employer. If such benefits cannot be provided
under the Company's programs, such benefits and perquisites will be
provided on an individual basis to the Executive such that his after-tax
costs will be no greater than the costs for such benefits and
perquisites under the Company's programs.
(b) Termination by Reason of Disability or Death. If the Executive's
employment shall terminate by reason of his Disability (pursuant to Section
6(a)(ii)) or death (pursuant to Section 6(a)(i)), and subject to the
receipt of mutual releases in form reasonably acceptable to the parties,
the Company shall cause the Options to vest as they would have under
paragraphs 7(a)(ii) and (iii) above if the words "the December 31 next
following" were inserted in such subsections immediately prior to "the Date
of Termination."
(c) Voluntary Resignation without Good Reason. If the Executive's
employment shall terminate by reason of his voluntary resignation without
Good Reason (pursuant to Section 6(a)(vi), and so long as the Company would
not at such time have had grounds to terminate the Executive's employment
for Cause), the Company shall cause his Base Options to become vested at
the greater of the actual rate of vesting or the rate of equal installments
on the first five December 31's that follow the date of grant.
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(d) Survival. The expiration or termination of the Term shall not
impair the rights or obligations of any party hereto which shall have
accrued hereunder prior to such expiration.
(e) Mitigation of Damages. In the event of any termination of the
Executive's employment by the Company, the Executive shall not be required
to seek other employment to mitigate damages, and any income earned by the
Executive from other employment or self-employment shall not be offset
against any obligations of the Company to the Executive under this
Agreement. Except for any action or claim to enforce the provisions of the
promissory note or the agreement effectuating the pledge, each as described
in Section 5(d)(ii)(B), the Company's obligations hereunder and the
Executive's rights to payment shall not be subject to any right of set-off,
counterclaim or other deduction by the Company not in the nature of
customary withholding, other than in any judicial proceeding or
arbitration.
8. Parachute Payments.
(a) If it is determined (as hereafter provided) that by reason of any
payment or Option vesting occurring pursuant to the terms of this Agreement
(or otherwise under any other agreement, plan or program) upon a Change in
Control (collectively a "Payment") the Executive would be subject to the
excise tax imposed by Code Section 4999 (the "Parachute Tax"), then the
Executive shall be entitled to receive an additional payment or payments (a
"Gross-Up Payment") in an amount such that, after payment by the Executive
of all taxes (including any Parachute Tax) imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to
the Parachute Tax imposed upon the Payment.
(b) Subject to the provisions of Section 8(a) hereof, all
determinations required to be made under this Section 8, including whether
a Parachute Tax is payable by the Executive and the amount of such
Parachute Tax and whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by the nationally recognized firm of
certified public accountants (the "Accounting Firm") used by the Company
prior to the Change in Control (or, if such Accounting Firm declines to
serve, the Accounting Firm shall be a nationally recognized firm of
certified public accountants selected by the Executive). The Accounting
Firm shall be directed by the Company or the Executive to submit its
preliminary determination and detailed supporting calculations to both the
Company and the Executive within 15 calendar days after the determination
date, if applicable, and any other such time or times as may be requested
by the Company or the Executive. If the Accounting Firm determines that any
Parachute Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to, or for the benefit of, the Executive within
five business days after receipt of such determination and calculations. If
the Accounting Firm determines that no Parachute Tax is payable by the
Executive, it shall, at the same time as it makes such determination,
furnish the Executive with an opinion that he has substantial authority not
to report any Parachute Tax on his federal tax return. Any good faith
determination by the Accounting Firm as to the amount of the Gross-Up
Payment shall be binding upon the Company and the Executive absent a
contrary determination by the Internal Revenue Service or a court of
competent jurisdiction; provided, however, that no such determination shall
eliminate or reduce the Company's obligation to provide any Gross-Up
Payments that shall be due as a result of such contrary determination. As a
result of the uncertainty in the application of Code Section 4999 at the
time of any determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments that will not have been made by the Company should
have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts or
fails to pursue its remedies pursuant to Section 8(f) hereof and the
Executive thereafter is required to make a payment of any Parachute Tax,
the Executive shall direct the Accounting Firm to determine the amount of
the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days
after receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may
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be, reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in connection with the preparation and issuance of
the determination contemplated by Section 8(b) hereof.
(d) The federal tax returns filed by the Executive (or any filing made
by a consolidated tax group which includes the Company) shall be prepared
and filed on a basis consistent with the determination of the Accounting
Firm with respect to the Parachute Tax payable by the Executive. The
Executive shall make proper payment of the amount of any Parachute Tax, and
at the request of the Company, provide to the Company true and correct
copies (with any amendments) of his federal income tax return as filed with
the Internal Revenue Service, and such other documents reasonably requested
by the Company, evidencing such payment. If prior to the filing of the
Executive's federal income tax return, the Accounting Firm determines in
good faith that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of
such reduction.
(e) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
Sections 8(b) and (d) hereof shall be borne by the Company. If such fees
and expenses are initially advanced by the Executive, the Company shall
reimburse the Executive the full amount of such fees and expenses within
five business days after receipt from the Executive of a statement therefor
and reasonable evidence of his payment thereof.
(f) In the event that the Internal Revenue Service claims that any
payment or benefit received under this Agreement constitutes an "excess
parachute payment" within the meaning of Code Section 280G(b)(1), the
Executive shall notify the Company in writing of such claim. Such
notification shall be given as soon as practicable but not later than 10
business days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30 day period following the date on which
the Executive gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall (i) give the Company any information reasonably requested
by the Company relating to such claim; (ii) take such action in connection
with contesting such claim as the Company shall reasonably request in
writing from time to time, including without limitation, accepting legal
representation with respect to such claim by an attorney reasonably
selected by the Company and reasonably satisfactory to the Executive; (iii)
cooperate with the Company in good faith in order to effectively contest
such claim; and (iv) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and
pay directly all costs and expenses (including, but not limited to,
additional interest and penalties and related legal, consulting or other
similar fees) incurred in connection with such contest and shall indemnify
and hold the Executive harmless, on an after-tax basis, for and against for
any Parachute Tax or income tax or other tax (including interest and
penalties with respect thereto) imposed as a result of such representation
and payment of costs and expenses.
(g) The Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after tax basis, from any Parachute Tax (or other tax including
interest and penalties with respect thereto) imposed with respect to such
advance or with respect to any imputed income with respect to such advance;
and provided, further, that if the Executive is required to extend the
statue of limitations to enable the Company to contest such claim, the
Executive may limit this extension solely to such contested amount. The
Company's control of the contest shall be limited to issues with respect to
which a corporate deduction would be disallowed pursuant to Code
9
<PAGE> 10
Section 280G and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority. In addition, no position may be taken nor any
final resolution be agreed to by the Company without the Executive's
consent if such position or resolution could reasonably be expected to
adversely affect the Executive unrelated to matters covered hereto.
(h) If, after the receipt by Executive of an amount advanced by the
Company in connection with the contest of the Parachute Tax claim, the
Executive receives any refund with respect to such claim, the Executive
shall promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto);
provided, however, if the amount of that refund exceeds the amount advanced
by the Company the Executive may retain such excess. If, after the receipt
by the Executive of an amount advanced by the Company in connection with a
Parachute Tax claim, a determination is made that the Executive shall not
be entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest the denial of
such refund prior to the expiration of 30 days after such determination
such advance shall be deemed to be in consideration for services rendered
after the Date of Termination.
9. Competition.
(a) The Executive shall not, at any time during the Term, or:
(i) for one year thereafter if
(A) his employment was terminated by the Executive other than
for Good Reason either (1) prior to the first anniversary of the
Effective Date, or (2) following a Change in Control, or
(B) his employment is terminated by the Company without Cause or
by the Executive for Good Reason, or
(ii) for two years thereafter if
(A) if his employment was terminated by the Executive other than
for Good Reason (1) on or following the first anniversary of the
Effective Date, and (2) prior to a Change in Control, or
(B) by the Company for Cause,
(iii) without the prior written consent of the Board, directly or
indirectly through any other person or entity:
(A) own, acquire in any manner any ownership interest in (except
as purely passive investments amounting to no more than five percent
of the voting equity), or serve as a director, officer, employee,
counsel or consultant of any person, firm, partnership, corporation,
consortia, association or other entity that competes with the Company
or any of its affiliates or subsidiaries, in any geographic market in
which the Company either (1) offers or provides telecommunications
(which term hereafter shall be deemed to include voice, data or
internet communications) services to customers; (2) operates or
manages a provider of telecommunications services; (3) has
investments in a provider of telecommunications services; or (4), to
the Executive's knowledge, has plans to either operate a
telecommunications carrier, offer a telecommunications service, or
invest in a telecommunications carrier within the next 12 months,
(B) knowingly solicit, entice, persuade or induce any individual
who currently is, or at any time during the preceding twelve months
shall have been, an officer, director or employee of the Company, or
any of its affiliates, to terminate or refrain from renewing or
extending such person's employment with the Company or such
subsidiary or affiliate, or to become employed by or enter into
contractual relations with or consultant for any other individual or
entity, and the Executive shall not approach any such employee for
any such purpose or authorize or knowingly cooperate with the taking
of any such actions by any other individual or entity, or
10
<PAGE> 11
(C) except in accordance with the Executive's duties on behalf
of the Company, knowingly solicit, entice, persuade, or induce any
individual or entity which currently is, or at any time during the
preceding twelve months shall have been, a customer, consultant,
vendor, supplier, lessor or lessee of the Company, or any of its
subsidiaries or affiliates, to terminate or refrain from renewing or
extending its contractual or other relationship with the Company or
such subsidiary or affiliate, and the Executive shall not approach
any such customer, vendor, supplier, consultant, lessor or lessee for
such purpose or authorize or knowingly cooperate with the taking of
any such actions by any other individual or entity.
(b) The Executive shall not at any time:
(i) other than when required in the ordinary course of business of
the Company, knowingly disclose, directly or indirectly, to any person,
firm, corporation, partnership, association or other entity, any trade
secret, or confidential information concerning the financial condition,
suppliers, vendors, customers, lessors, or lessees, sources or leads
for, and methods of obtaining, new business, or the methods generally of
doing and operating the respective businesses of the Company or its
affiliates and subsidiaries to the degree such secret or information
incorporates information that is proprietary to, or was developed
specifically by or for, the Company, except such information that is a
matter of public knowledge, was provided to the Executive (without
breach of any obligation of confidence owed to the Company) by a third
party which is not an affiliate of the Company, or is required to be
disclosed by law or judicial or administrative process, or
(ii) make any oral or written statement about the Company and/or
its financial status, business, compliance with laws, personnel,
directors, officers, consultants, services, business methods or
otherwise, which is intended or reasonably likely to disparage the
Company or otherwise degrade its reputation in the business or legal
community in which it operates or in the telecommunications industry.
(c) The Executive hereby represents that (i) the Executive is not
restricted in any material way from performing his duties hereunder as the
result of any contract, agreement or law; and (ii) the Executive's due
performance of his duties hereunder does not and will not violate the terms
of any agreement to which the Executive is bound.
(d) In the event any agreement in Section 9(a) shall be determined by
any court of competent jurisdiction to be unenforceable by reason of its
extending for too great a period of time or over too great a geographical
area or by reason of its being too extensive in any other respect, it will
be interpreted to extend only over the maximum period of time for which it
may be enforceable, and/or over the maximum geographical area as to which
it may be enforceable and/or to the maximum extent in all other respects as
to which it may be enforceable, all as determined by such court in such
action.
10. Injunctive Relief. It is recognized and acknowledged by the Executive
that a breach of the covenants contained in Section 9 will cause irreparable
damage to the Company and its goodwill, the exact amount of which will be
difficult or impossible to ascertain, and that the remedies at law for any such
breach will be inadequate. Accordingly, the Executive agrees that in the event
of a breach of any of the covenants contained in Section 9, in addition to any
other remedy which may be available at law or in equity, the Company will be
entitled to specific performance and injunctive relief.
11. Non-Disparagement of the Executive. The Company shall not make any oral
or written statement about the Executive which is intended or reasonably likely
to disparage the Executive or otherwise degrade his reputation in the business
or legal community or in the telecommunications industry.
12. Foreign Corrupt Practices Act. The Executive agrees to comply in all
material respects with the applicable provisions of the U.S. Foreign Corrupt
Practices Act of 1977 ("FCPA"), as amended, which provides generally that: under
no circumstances will foreign officials, representatives, political parties or
holders of public offices be offered, promised or paid any money, remuneration,
things of value, or provided any other benefit, direct or indirect, in
connection with obtaining or maintaining contracts or orders hereunder.
11
<PAGE> 12
When any representative, employee, agent, or other individual or organization
associated with the Executive is required to perform any obligation related to
or in connection with this Agreement, the substance of this section shall be
imposed upon such person and included in any agreement between the Executive and
any such person. Failure by the Executive to comply in all material respects
with the provisions of the FCPA (other than an inadvertent violation on the
basis of advice from the General Counsel of the Company that the conduct in
question is not a violation) shall constitute a material breach of this
Agreement and shall entitle the Company to terminate the Executive's employment
for Cause. Additionally, the Executive hereby acknowledges that as a condition
for the Company to continue this Agreement, the Executive (i) shall execute an
acknowledgment that he has read "An Explanation of the Foreign Corrupt Practices
Act" and "Global TeleSystems Group, Inc. Policy on Foreign Transactions," after
he has been provided copies of such documents, (ii) shall execute the "Addendum
to the Global TeleSystems Group, Inc. Policy on Foreign Transaction," after he
has been provided a copy of same, and (iii) shall be required from time to time
at the request of the Company to execute a certificate of the Executive's
compliance with the aforementioned laws and regulations.
13. Purchases and Sales of the Company's Securities. The Executive agrees
to use his reasonable best efforts to comply in all respects with the Company's
Policy Regarding the Purchase and Sale of the Company's Securities by Employees,
as such Policy may be amended from time to time, after he has been provided a
copy of such Policy to read. Specifically, and without limitation, the Executive
agrees that he shall not purchase or sell stock in the Company at any time (a)
that he possesses material non-public information about the Company or any of
its businesses; and (b) during any "Trading Blackout Period" as may be
determined by the Company as set forth in the Policy from time to time.
14. Indemnification. The Executive shall be entitled to indemnification set
forth in the Company's Certificate of Incorporation to the maximum extent
allowed under the laws of the Commonwealth of Virginia and the State of Delaware
Corporations Act, and he shall be entitled to the protection of any insurance
policies the Company may elect to maintain generally for the benefit of its
directors and officers against all costs, charges and expenses incurred or
sustained by him in connection with any action, suit or proceeding to which he
may be made a party by reason of his being or having been a director, officer or
employee of the Company or any of its subsidiaries or his serving or having
served any other enterprise as a director, officer or employee at the request of
the Company (other than any dispute, claim or controversy arising under or
relating to this Agreement).
15. No Delegation. The Executive shall not delegate his employment
obligations under this Agreement to any other person.
16. Assignment. The Company may not assign any of its obligations hereunder
other than to any entity that acquires (by purchase, merger or otherwise) all or
substantially all of the voting stock or assets of the Company.
17. Notices. Any written notice required by this Agreement will be deemed
provided and delivered to the intended recipient when (a) delivered in person by
hand; or (b) three days after being sent via U.S. certified mail, return receipt
requested; or (c) the day after being sent via by overnight courier, in each
12
<PAGE> 13
case when such notice is properly addressed to the following address and with
all postage and similar fees having been paid in advance:
<TABLE>
<S> <C>
If to the Company: Global TeleSystems Group, Inc.
Attn.: Senior Vice President for Human Resources
1751 Pinnacle Drive
North Tower 12th Floor
McLean, VA 22102 USA
with a copy to:
Jed W. Brickner
Latham & Watkins
885 Third Avenue, Suite 1000
New York, NY 10022
</TABLE>
If to the Executive: to him at the address set forth below under his
signature.
Either party may change the address to which notices, requests, demands and
other communications to such party shall be delivered personally or mailed by
giving written notice to the other party in the manner described above.
18. Legal Fees. The Company shall pay or reimburse the Executive for
reasonable attorneys' fees incurred by him in connection with the negotiation of
this Agreement and his commencement of employment hereunder.
19. Binding Effect. This Agreement shall be for the benefit of and binding
upon the parties hereto and their respective heirs, personal representatives,
legal representatives, successors and, where applicable, assigns.
20. Entire Agreement. This Agreement constitutes the entire agreement
between the listed parties with respect to the subject matter described in this
Agreement and supersedes all prior agreements, understandings and arrangements,
both oral and written, between the parties with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any manner,
except by written instrument signed by both of the parties hereto; provided,
however, that the waiver by either party of a breach or compliance with any
provision of this Agreement shall not operate nor be construed as a waiver of
any subsequent breach or compliance.
21. Severability. In case any one or more of the provisions of this
Agreement shall be held by any court of competent jurisdiction or any arbitrator
selected in accordance with the terms hereof to be illegal, invalid or
unenforceable in any respect, such provision shall have no force and effect, but
such holding shall not affect the legality, validity or enforceability of any
other provision of this Agreement provided that the provisions held illegal,
invalid or unenforceable does not reflect or manifest a fundamental benefit
bargained for by a party hereto.
22. Dispute Resolution and Arbitration. In the event that any dispute
arises between the Company and the Executive regarding or relating to this
Agreement and/or any aspect of the Executive's employment relationship with the
Company, AND IN LIEU OF LITIGATION AND A TRIAL BY JURY, the parties consent to
resolve such dispute through mandatory arbitration under the Commercial Rules of
the American Arbitration Association ("AAA"), before a single arbitrator in
McLean, Virginia. The parties hereby consent to the entry of judgment upon award
rendered by the arbitrator in any court of competent jurisdiction.
Notwithstanding the foregoing, however, should adequate grounds exist for
seeking immediate injunctive or immediate equitable relief, any party may seek
and obtain such relief; provided that, upon obtaining such relief, such
injunctive or equitable action shall be stayed pending the resolution of the
arbitration proceedings called for herein. The parties hereby consent to the
exclusive jurisdiction in the state and Federal courts of or in the Commonwealth
of Virginia for purposes of seeking such injunctive or equitable relief as set
forth above. Any and all out-of-pocket costs and expenses incurred by the
parties in connection with such arbitration (including attorneys' fees) shall be
allocated by the arbitrator in substantial conformance with his or her
13
<PAGE> 14
decision on the merits of the arbitration; provided, however, that in no event
shall the Executive be required to pay attorneys' fees in an amount that exceeds
the amount incurred by the Executive for his attorneys' fees.
23. Choice of Law. The Executive and the Company intend and hereby
acknowledge that jurisdiction over disputes with regard to this Agreement, and
over all aspects of the relationship between the parties hereto, shall be
governed by the laws of the Commonwealth of Virginia without giving effect to
its rules governing conflicts of laws.
24. Section Headings. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any manner the meaning or
interpretation of this Agreement.
25. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
26. Force Majeure. Neither Company nor the Executive shall be liable for
any delay or failure in performance of any part of this Agreement to the extent
that such delay or failure is caused by an event beyond its reasonable control
including, but not be limited to, fire, flood, explosion, war, strike, embargo,
government requirement, acts of civil or military authority, and acts of God not
resulting from the negligence of the claiming party.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ ALAN SLIFKA
----------------------------------
Alan Slifka
H. BRIAN THOMPSON
/s/ H. BRIAN THOMPSON
------------------------------------
H. Brian Thompson
14
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<PERIOD-START> JAN-01-1999
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<RECEIVABLES> 228,822
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0
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