<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-1
TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
ESPRIT TELECOM GROUP PLC
(Name of Subject Company)
GLOBAL TELESYSTEMS GROUP INC.
(Bidders)
ORDINARY SHARES, NOMINAL VALUE OF ONE PENCE PER SHARE,
AND
AMERICAN DEPOSITARY SHARES, EACH REPRESENTING 7 ORDINARY SHARES
(Title of Class of Securities)
29665W104
(American Depositary Shares)
(CUSIP Number of Class of Securities)
GRIER C. RACLIN
1751 PINNACLE DRIVE
NORTH TOWER-12TH FLOOR
MCLEAN, VA 22102
(703) 918-4573
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Bidder)
Copies to:
ALFRED J. ROSS, JR.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 848-7056
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
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TRANSACTION VALUATION AMOUNT OF FILING FEE
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<S> <C>
$574,783,773* $159,791
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</TABLE>
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $137,832
Form or Registration No.: 333-68511
Filing Party: Global TeleSystems Group, Inc.
Date Filed: December 8, 1998
Amount Previously Paid: $21,959
Form or Registration No.: 333-68511
Filing Party: Global TeleSystems Group, Inc.
Date Filed: February 1, 1999
* Note: The proposed maximum aggregate offering price was determined as follows:
(i) the market value per share of the Esprit Telecom Ordinary Shares
(determined as one-seventh of the market value per Esprit Telecom ADS)
multiplied by the maximum number of Esprit Telecom Ordinary Shares which may
be exchanged in the Offer described herein for shares of GTS Common Stock,
plus (ii) the market value per Esprit Telecom ADS, multiplied by the number of
Esprit Telecom ADSs which may be exchanged in the Offer described herein for
shares of GTS Common Stock. Pursuant to Rule 457(c), the market value per
Esprit Telecom ADS is based on the average of the bid and asked price on the
NASDAQ National Market on January 28, 1999. $137,832 of the filing fee was
paid on December 8, 1998. The market value per Esprit Telecom ADS used to
calculate the proposed maximum aggregate offering price for the portion of the
filing fee paid on December 8, 1998 was based on the average of the bid and
asked price on the NASDAQ National Market on December 3, 1998.
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<PAGE> 2
CUSIP NO. 14D-1 PAGE OF PAGES
---------------------- --- ---
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1. Name of Reporting Person
S.S. or I.R.S. Identification No. of Person Above
Global TeleSystems Group, Inc.
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2. Check the appropriate Box if a member of a Group (a)[ ]
(b)[ ]
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3. SEC Use Only
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4. Source of Funds
OO
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5. Check Box if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(e) or 2(f)[ ]
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6. Citizenship or Place of Incorporation
Delaware
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7. Aggregate Amount Beneficially Owned by Each Reporting Person
None
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8. Check Box if the Aggregate Amount in Row (7) Excludes
Certain Shares[ ]
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9. Percent of Class Represented by Amount in Row (7)
None.
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10. Type of Reporting Person
CO.
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<PAGE> 3
This Tender Offer Statement on Schedule 14D-1 (the "Statement") relates to
the offer by Global TeleSystems Group, Inc., a Delaware corporation ("GTS"),
upon the terms and conditions set forth in the Offering Circular/Proxy
Statement/Prospectus dated February 2, 1999 and in the related Form of
Acceptance, Letter of Transmittal and Notice of Guaranteed Delivery (the
"Offering Circular/Proxy Statement/ Prospectus" the "Form of Acceptance,"
"Letter of Transmittal," and "Notice of Guaranteed Delivery" respectively,
together constituting the "Offer"), to exchange (i) each outstanding Ordinary
Share, nominal value of one pence each, of Esprit Telecom (as defined below)
(the "Esprit Telecom Ordinary Shares"), and (ii) each outstanding American
Depository Share of Esprit Telecom representing seven Esprit Telecom Ordinary
Shares, (the "Esprit Telecom ADSs"), for new shares of Common Stock, par value
$0.10 per share, of GTS (the "Common Stock"), based on an exchange ratio of (i)
0.1271 of a share of Common Stock for each Esprit Telecom Ordinary Share, and
(ii) 0.89 of a share of Common Stock for each Esprit Telecom ADS. The Esprit
Telecom Ordinary Shares and the Esprit Telecom ADSs are collectively referred to
herein as the "Esprit Telecom Securities." All capitalized terms used but not
defined herein shall have the meanings ascribed to such terms in the Offering
Circular/Proxy Statement/Prospectus.
ITEM 1. SECURITY AND SUBJECT COMPANY.
(a) The name of the subject company is Esprit Telecom Group plc, a public
limited company incorporated under the laws of England and Wales ("Esprit
Telecom"), which has its principal executive offices at Minerva House, Valpy
Street, Reading RG1 1AR, United Kingdom.
(b) The equity securities being sought are all outstanding (i) Esprit
Telecom Ordinary Shares, and (ii) Esprit Telecom ADSs. As of October 15, 1998,
there were 125,528,528 Esprit Telecom Ordinary Shares outstanding, and
10,797,449 Esprit Telecom ADSs (equivalent to 75,582,143 Esprit Telecom Ordinary
Shares or approximately 60.2% of the total outstanding Esprit Telecom Ordinary
Shares). The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "The Offer -- General" and "-- Terms of
the Offer" is incorporated herein by reference.
(c) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the caption "Comparative Market Price and Dividend
Information" is incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a) - (d) and (g) This Statement is filed by GTS. The information
concerning the name, state or other place of organization, principal business
and address of the principal office of GTS is set forth in the Offering
Circular/Proxy Statement/Prospectus under the caption "Summary -- The
Companies," which is incorporated herein by reference. The information
concerning the name, business address, present principal occupation or
employment and the name, principal business and address of any corporation or
other organization in which such employment or occupation is conducted, material
occupations, positions, offices or employments during the last five years and
citizenship of each of the executive officers and directors of GTS are set forth
in the Offering Circular/Proxy Statement/Prospectus under the caption "Certain
Information Concerning GTS -- Directors and Executive Officers of GTS", which is
incorporated herein by reference.
(e) and (f) During the last five years, none of GTS, or, to the best
knowledge of GTS, none of the persons listed in the Offering Circular/Proxy
Statement/Prospectus has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY.
(a) - (b) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "Background of and Reasons for the
Offer -- Background of the Offer," " -- Purpose of the Offer; Plans for Esprit
Telecom," "The Offer -- Interests of Certain Persons in the Offer," "The Offer
Agreement," "Agreements with Certain Securityholders and Directors" and Annexes
B and E through N is incorporated herein by reference.
<PAGE> 4
ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) - (c) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the caption "The Offer -- General" is incorporated
herein by reference.
ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDERS.
(a) - (e) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "The Offer -- General," " -- Terms of
the Offer," "Background of and Reasons for the Offer -- Purpose of the Offer;
Plans for Esprit Telecom," " -- The Offer Agreement" and "Additional Information
Required Under UK Law -- Management and Employees" is incorporated herein by
reference.
(f) - (g) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the caption "The Offer -- Possible Effects of the
Offer on the Market for Esprit Telecom ADSs" is incorporated herein by
reference.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(a) - (b) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the caption "The Offer -- Certain Information
Concerning GTS" is incorporated herein by reference.
ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO
THE SUBJECT COMPANY'S SECURITIES.
The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "The Offer Agreement," "Agreements with
Certain Securityholders and Directors" and "Additional Information Required
Under UK Law" is incorporated herein by reference.
ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "Background of and Reasons for the
Offer -- Opinion of Lehman Brothers" and " -- Opinion of Bear Stearns" and "The
Offer -- General," and "-- Fees and Expenses of the Offer" is incorporated
herein by reference.
ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS.
The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "Summary Selected Financial
Data -- Selected Unaudited Pro Forma Combined Financial Information,"
"Description of GTS," "Selected Historical Consolidated Financial Data of GTS,"
"Financial Information Concerning GTS" and "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.
ITEM 10. ADDITIONAL INFORMATION.
(a) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "The Offer -- Interests of Certain
Persons in the Offer," "The Offer Agreement" and "Additional Information
Required Under UK Law" is incorporated herein by reference.
(b) - (c) The information set forth in the Offering Circular/Proxy
Statement/Prospectus under the captions "Risk Factors -- Risks Relating to
Regulatory Approvals" and "The Offer -- Certain Regulatory Approval and Legal
Matters" is incorporated herein by reference.
(d) None.
(e) None.
(f) The information set forth in the Offering Circular/Proxy
Statement/Prospectus and the related Form of Acceptance, Letter of Transmittal
and Notice of Guaranteed Delivery is incorporated herein by reference in its
entirety.
<PAGE> 5
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <S>
(a)(1) -- Offering Circular/Proxy Statement/Prospectus.
(a)(2) -- Form of Proxy.
(a)(3) -- Form of Acceptance with respect to Esprit Telecom
Ordinary Shares.
(a)(4) -- Form of Letter of Transmittal with respect to Esprit
Telecom ADSs.
(a)(5) -- Form of Notice of Guaranteed Delivery.
(a)(6) -- Form of Letter from Bear Stearns International Limited
and Bear, Stearns & Co. Inc. to Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees.
(a)(7) -- Form of Letter from Brokers, Dealers, Commercial Banks,
Trust Companies and other Nominees to Clients.
(a)(8) -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
(a)(9) -- Letter to securityholders of Esprit Telecom (included in
Exhibit (a)(1) hereto).
(a)(10) -- Press Announcement issued by GTS and Esprit Telecom on
December 8, 1998.
(a)(11) -- Press Release issued by GTS and Esprit Telecom on
December 8, 1998.
(a)(12) -- Press Release issued by GTS and Esprit Telecom on
December 9, 1998.
(a)(13) -- Summary Advertisement in the Wall Street Journal dated
February 2, 1999.
(a)(14) -- Press Release issued by GTS, dated February 2, 1999,
announcing the mailing of the Offering Circular/Proxy
Statement/Prospectus to GTS stockholders and Esprit
Telecom securityholders.
(b) -- None.
(c)(1) -- Offer Agreement, dated as of December 8, 1998, among GTS
and Esprit Telecom (included in Exhibit (a)(1) hereto as
Annex B).
(d) -- None.
(e) -- Offering Circular/Proxy Statement/Prospectus (included as
Exhibit (a)(1) hereto).
(f) -- None.
</TABLE>
<PAGE> 6
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
February 2, 1999
Global TeleSystems Group, Inc.
By: /s/ GRIER C. RACLIN
----------------------------------
Name: Grier C. Raclin
Title: Senior Vice President and
General Counsel
<PAGE> 7
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(a)(1) -- Offering Circular/Proxy Statement/Prospectus
(a)(2) -- Form of Proxy
(a)(3) -- Form of Acceptance with respect to Esprit Telecom
Ordinary Shares
(a)(4) -- Form of Letter of Transmittal with respect to Esprit
Telecom ADSs
(a)(5) -- Form of Notice of Guaranteed Delivery
(a)(6) -- Form of Letter from Bear Stearns International Limited
and Bear, Stearns & Co. Inc. to Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees
(a)(7) -- Form of Letter from Brokers, Dealers, Commercial Banks,
Trust Companies and other Nominees to Clients
(a)(8) -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9
(a)(9) -- Letter to securityholders of Esprit Telecom (included in
Exhibit (a)(1) hereto)
(a)(10) -- Press Announcement issued by GTS and Esprit Telecom on
December 8, 1998
(a)(11) -- Press Release issued by GTS and Esprit Telecom on
December 8, 1998
(a)(12) -- Press Release issued by GTS and Esprit Telecom on
December 9, 1998
(a)(13) -- Summary Advertisement in the Wall Street Journal dated
February 2, 1999
(a)(14) -- Press Release issued by GTS, dated February 2, 1999,
announcing the mailing of the Offering Circular/Proxy
Statement/Prospectus to GTS stockholders and Esprit
Telecom securityholders
(b) -- None
(c)(1) -- Offer Agreement, dated as of December 8, 1998, among GTS
and Esprit Telecom (included in Exhibit (a)(1) as Annex
B)
(d) -- None
(e) -- Offering Circular/Proxy Statement/Prospectus (included as
Exhibit (a)(1) hereto)
(f) -- None
</TABLE>
<PAGE> 1
EXHIBIT (a)(1)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in
any doubt about the action you should take, you are recommended to seek
financial advice immediately from an appropriately authorized independent
financial advisor or, if you are in the United Kingdom, an independent financial
advisor authorized under the UK Financial Services Act 1986.
OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS
[BEAR STEARNS INTERNATIONAL LIMITED LETTERHEAD]
FEBRUARY 2, 1999
To holders of Esprit Telecom Group plc ordinary shares and ADSs and, for
information only, to participants in the
Esprit Telecom Share Option Schemes:
Bear, Stearns International Limited and Bear, Stearns & Co. Inc. hereby
offer, on behalf of Global TeleSystems Group, Inc., to acquire all the ordinary
shares of 1 pence each (including those represented by ADSs) of Esprit Telecom
Group plc in exchange for new shares of common stock of GTS on the following
basis:
- for each Esprit Telecom ordinary share, 0.1271 of a share of GTS common
stock; and
- for each Esprit Telecom ADS, 0.89 of a share of GTS common stock.
Based on the Nasdaq closing price of $62.63 per share of GTS common stock on
January 29, 1999 (the latest practicable date prior to the publication of this
document) the offer values each Esprit Telecom ordinary share at $7.96 (L4.84),
each Esprit Telecom ADS at $55.74 (L33.87) and the entire issued share capital
of Esprit Telecom, on a fully diluted basis, at approximately $1.136 billion
(L690 million) (based on an exchange rate of L1.00 to $1.6457). This represents
a premium of approximately 84.25% over the middle market price of an Esprit
Telecom ADS on Nasdaq at the close of business on December 7, 1998, the last
business day prior to the announcement of the offer.
The terms and conditions of the offer are contained in this Offering
Circular/Proxy Statement/Prospectus.
TO ACCEPT THE OFFER, THE FORM OF ACCEPTANCE (FOR ESPRIT TELECOM ORDINARY
SHARES) OR THE LETTER OF TRANSMITTAL (FOR ESPRIT TELECOM ADSS) MUST BE COMPLETED
AND RETURNED AS SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE RECEIVED BY NO
LATER THAN 3:00 P.M. (LONDON TIME), 10:00 A.M. (NEW YORK CITY TIME), ON MARCH 4,
1999. THE PROCEDURE FOR ACCEPTANCE OF THE OFFER IS SET OUT ON PAGES 72 TO 79 OF
THIS DOCUMENT AND IN THE ACCOMPANYING FORM OF ACCEPTANCE AND LETTER OF
TRANSMITTAL.
Upon the offer being declared unconditional in all respects, the offer will
be extended for a subsequent offer period of at least 14 calendar days. Holders
of Esprit Telecom ordinary shares and Esprit Telecom ADSs, as the case may be,
will have withdrawal rights prior to the offer being declared unconditional in
all respects but, except in limited circumstances, not during the extended offer
period.
FOR FURTHER INFORMATION REGARDING THE OFFER, PLEASE CAREFULLY READ THIS
DOCUMENT AND, SPECIFICALLY, THE "RISK FACTORS" BEGINNING ON PAGE 17. If you have
more questions about the offer or would like additional copies of this Offering
Circular/Proxy Statement/Prospectus, you should contact: Georgeson & Company,
the information agent for the offer, at (800) 223-2064 (toll-free), in the US,
and (44) 171 335 8600 (collect), outside of the US.
Yours sincerely,
<TABLE>
<S> <C>
/s/ RICHARD STRANG /s/ H. ANDREW DECKER
Richard Strang H. Andrew Decker
Senior Managing Director Senior Managing Director
Bear, Stearns International Limited Bear, Stearns & Co. Inc.
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATOR HAS APPROVED THE SHARES OF
GTS COMMON STOCK TO BE ISSUED UNDER THIS OFFERING CIRCULAR/PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS OFFERING CIRCULAR/PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Offering Circular/Proxy Statement/Prospectus is dated February 2, 1999
and is first being mailed to stockholders on or about February 2, 1999.
<PAGE> 2
IF YOU HAVE SOLD OR OTHERWISE TRANSFERRED all of your Esprit Telecom ordinary
shares or Esprit Telecom ADSs, please send this document, the accompanying Form
of Acceptance or Letter of Transmittal and Notice of Guaranteed Delivery as soon
as possible to the purchaser or transferee or to the stockbroker, bank or other
agent through whom the sale or transfer was effected, for transmission to the
purchaser or transferee. However, such documents should not be forwarded or
transmitted in or into Canada, Japan or Australia.
The offer is not being made, directly or indirectly, in or into, nor is the
offer capable of acceptance from, Canada, Australia or Japan. Accordingly,
neither this document nor the Form of Acceptance or Letter of Transmittal and
Notice of Guaranteed Delivery are to be mailed or otherwise distributed or sent
in or into Canada, Australia or Japan.
Application has been made for the new GTS common stock to be quoted on EASDAQ
and will be made for it to be quoted on Nasdaq, under the symbol "GTSG". It is
expected that the listings will become effective and that dealings, for normal
settlement, will commence on Nasdaq and EASDAQ in the new GTS common stock on
the first trading day following the day on which the offer becomes or is
declared unconditional in all respects (except only, for the quotation of such
shares on Nasdaq and EASDAQ becoming effective).
Bear, Stearns International Limited, which is regulated in the United Kingdom by
The Securities and Futures Authority Limited in the conduct of its investment
business in the United Kingdom, and Bear, Stearns & Co. Inc. are acting
exclusively for GTS and no one else in connection with the offer and will not be
responsible under the regulations of The Securities and Futures Authority
Limited to anyone other than GTS for providing the protections afforded to
customers of either Bear Stearns entity nor for giving advice in relation to the
offer. The provisions of this paragraph are not intended to disclaim any
liability of either Bear Stearns entity under U.S. securities laws.
Lehman Brothers International (Europe), which is regulated in the United Kingdom
by The Securities and Futures Authority Limited in the conduct of its investment
business in the United Kingdom, is acting exclusively for Esprit Telecom and no
one else in connection with the offer and will not be responsible under the
regulations of The Securities and Futures Authority Limited to anyone other than
Esprit Telecom for providing the protections afforded to customers of Lehman
Brothers International (Europe) nor for giving advice in relation to the offer.
The provisions of this paragraph are not intended to disclaim any liability of
Lehman Brothers International (Europe) under U.S. securities laws.
WARNING TO ALL ESPRIT TELECOM SECURITYHOLDERS IN RELATION TO THE BELGIAN LAW
ASPECTS OF THIS OFFER: NUMEROUS ASPECTS OF THIS OFFER ARE BEING CARRIED OUT
PURSUANT TO APPLICABLE US AND UK RULES AND PROCEDURES. THE ATTENTION OF ALL
ESPRIT TELECOM SECURITYHOLDERS IN BELGIUM WISHING TO RESPOND TO THIS OFFER
SHOULD BE DRAWN TO THE FACT THAT THE US AND UK RULES AND PROCEDURES DIFFER IN
VARIOUS WAYS FROM THE PROCEDURES AND RULES PROVIDED FOR IN THE BELGIAN ROYAL
DECREE OF NOVEMBER 8, 1989 ON PUBLIC TAKEOVER BIDS AND CHANGES IN CONTROL OF
COMPANIES.
<PAGE> 3
QUESTIONS AND ANSWERS ABOUT THE OFFER
Q: WHAT ARE THE BENEFITS OF THE TRANSACTION?
A: GTS believes that the businesses of GTS and Esprit Telecom are
complementary and that benefits will result from combining them. GTS
expects the combination will assist the companies in realizing their mutual
goals of becoming the pre-eminent providers of carrier's carrier and
business communications services throughout Europe.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider carefully the information included in this
mailing, please fill out and sign the enclosed form of acceptance (for
Esprit Telecom ordinary shares) or letter of transmittal or notice of
guaranteed delivery (for Esprit Telecom ADSs) and return the relevant
documentation to the appropriate address shown on page 76.
Q: HOW SOON AFTER RECEIVING MY NEW GTS STOCK MAY I SELL SUCH STOCK?
A: All new GTS stock received by Esprit Telecom securityholders will be freely
transferable immediately. However, Esprit Telecom securityholders who may
be deemed to be affiliates of Esprit Telecom prior to the offer may be
subject to restrictions under US securities laws and such persons may be
permitted to resell new GTS stock only in transactions permitted by the
resale provisions of Rule 145 or another available exemption under the
Securities Act.
Q: CAN I WITHDRAW ANY SHARES OR ADSs THAT I HAVE TENDERED?
A: You will have the right to withdraw any tendered Esprit Telecom ordinary
shares or Esprit Telecom ADSs at any time prior to the time the offer
becomes or is declared unconditional in all respects and in certain other
limited circumstances. To review the detailed provisions in respect of your
rights of withdrawal, see page 78.
Q: WHEN DO YOU EXPECT THE TRANSACTION TO BE COMPLETED?
A: GTS is working towards completing the transaction as soon as possible. For
the transaction to occur, it must be approved by the stockholders of GTS
and the other conditions to the offer must be satisfied. If the
stockholders of GTS approve the transaction GTS expects to complete the
transaction promptly after the GTS special meeting, which will be held on
March 3, 1999.
Q: WHAT ARE THE TAX CONSIDERATIONS OF THE TRANSACTION?
A: The transaction generally will be tax-free to Esprit Telecom
securityholders for US Federal income tax purposes. The holders of Esprit
Telecom securities will be entitled to receive "roll-over" treatment for UK
tax purposes.
WHO CAN HELP ANSWER MY OTHER QUESTIONS?
If you have more questions about the transaction, you should contact the
information agent:
LOGO
Wall Street Plaza
New York, New York 10005
Banks and Brokers call: (212) 440-9800 (collect)
All others call: (800) 223-2064 (toll-free)
For holders outside the United States call:
(44) 171 335 8600 (collect)
<PAGE> 4
OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS
FEBRUARY 2, 1999 [GLOBAL TELESYSTEMS GROUP, INC. LETTERHEAD]
To Global TeleSystems Group, Inc. stockholders:
We are pleased to inform you that the Boards of Global TeleSystems Group,
Inc. and Esprit Telecom Group plc have agreed to an offer whereby GTS will
acquire all Esprit Telecom ordinary shares (including those represented by
Esprit Telecom ADSs) in exchange for new shares of common stock of GTS. The
Boards of both companies have unanimously recommended the transaction to their
stockholders. Under the offer, Esprit Telecom securityholders will receive
0.1271 of a share of new GTS stock for each Esprit Telecom ordinary share and
0.89 of a share of new GTS stock for each Esprit Telecom ADS.
GTS believes that the businesses of GTS and Esprit Telecom are
complementary and that benefits will result from combining them. GTS expects
that combination will assist the companies in their mutual goals of becoming the
pre-eminent providers of carrier's carrier and business communications services
throughout Europe.
The terms and conditions of the offer are contained in this Offering
Circular/Proxy Statement/Prospectus.
The transaction is subject to approval by GTS stockholders of resolutions
authorizing the issuance of shares in the offer, the acceptance of the offer by
the holders of 90% of the Esprit Telecom ordinary shares (including those
represented by Esprit Telecom ADSs) outstanding (or at GTS' discretion
acceptance by holders of any percentage not less than 50%) and certain other
customary conditions.
The initial offer period for the offer will expire at 3:00 p.m. (London
time), 10:00 a.m. (New York City time), on March 4, 1999, unless extended. Upon
expiration of the initial offer period, if all of the conditions to the offer
have been satisfied or, where permitted, waived, the offer will be extended for
a subsequent offer period of at least 14 calendar days. Holders of Esprit
Telecom ordinary shares and Esprit Telecom ADSs, as the case may be, will have
withdrawal rights prior to the satisfaction or waiver of all the conditions to
the offer, but not during the extended offer period.
WE URGE YOU TO VOTE IN FAVOR OF THE RESOLUTIONS TO BE PROPOSED IN
CONNECTION WITH THE OFFER. Even if you plan to attend the special meeting in
person, please complete, sign, date and promptly return the enclosed proxy card
in the enclosed postage-prepaid envelope.
FOR FURTHER INFORMATION REGARDING THE OFFER, PLEASE CAREFULLY READ THIS
DOCUMENT AND, SPECIFICALLY, "RISK FACTORS" BEGINNING ON PAGE 17. If you have
more questions about the offer or would like additional copies of the
accompanying Offering Circular/Proxy Statement/Prospectus, you should contact:
Georgeson & Company, GTS' solicitation agent, at (800) 223-2064 (toll-free), in
the US, and (44) 171 335 8600 (collect), outside of the US.
Sincerely,
<TABLE>
<S> <C>
/s/ ALAN B. SLIFKA /s/ GERALD W. THAMES
Alan B. Slifka Gerald W. Thames
Chairman of the Board President and Chief Executive Officer
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATOR HAS APPROVED THE SHARES OF
GTS COMMON STOCK TO BE ISSUED UNDER THIS OFFERING CIRCULAR/PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS OFFERING CIRCULAR/PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Offering Circular/Proxy Statement/Prospectus is dated February 2, 1999
and is first being mailed to stockholders on or about February 2, 1999.
<PAGE> 5
[GLOBAL TELESYSTEMS GROUP, INC. LETTERHEAD]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 3, 1999
To the Stockholders of
Global TeleSystems Group, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Global
TeleSystems Group, Inc., a Delaware corporation, will be held on Wednesday,
March 3, 1999, at the offices of GTS at 1751 Pinnacle Drive, North Tower, 12th
Floor, McLean, VA 22102 commencing at 10:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to issue new common stock to
acquire all the issued Esprit Telecom Group plc ordinary shares and
ADSs.
2. To transact such other business as may properly be brought before the
special meeting or any adjournment or postponement of the special
meeting.
Stockholders of record at the close of business on January 29, 1999 are
entitled to notice of, and to vote at, the special meeting and any adjournment
or postponement of the special meeting. A complete list of stockholders entitled
to vote at the special meeting will be available for inspection by any
stockholder for any purpose germane to the special meeting for ten days prior to
the special meeting during ordinary business hours at the headquarters of GTS
located at 1751 Pinnacle Drive, North Tower -- 12th Floor, McLean, VA 22102.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy card as promptly as possible
in the enclosed postage-prepaid envelope.
By Order of the Board of Directors,
GRIER C. RACLIN
Corporate Secretary
McLean, Virginia
February 2, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. DO
NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE OFFER
Q: WHAT ARE THE BENEFITS OF THE TRANSACTION?
A: GTS believes that the businesses of GTS and Esprit Telecom are
complementary and that benefits will result from combining them. GTS
expects the combination will assist the companies in realizing their mutual
goals of becoming the pre-eminent providers of carrier's carrier and
business communications services throughout Europe.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider carefully the information included in this
mailing, please fill out and sign your proxy card. Then mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the GTS special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. If you abstain or do not
instruct your broker how to vote, this will have the same effect as a vote
against the proposal.
Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY AFTER I HAVE MAILED MY SIGNED PROXY
CARD?
A: You can change your vote at any time before your proxy is voted at the GTS
special meeting. You can do this in one of three ways.
First, you can send a written notice stating that you would like to revoke
your proxy. Second, you can complete and submit a new proxy card. If you
choose either of these methods, you must timely submit your notice of
revocation or your new proxy card to the company and at the address shown
below. Third, you can attend the GTS special meeting and vote in person.
Simply attending a meeting, however, will not revoke your proxy. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
Q: WHEN DO YOU EXPECT THE TRANSACTION TO BE COMPLETED?
A: GTS is working towards completing the transaction as soon as possible. For
the transaction to occur, it must be approved by the stockholders of GTS
and the other conditions to the offer must be satisfied. If the
stockholders of GTS approve the transaction we expect to complete the
transaction promptly after the GTS special meeting, which will be held on
March 3, 1999.
Q: WHAT ARE THE TAX CONSIDERATIONS OF THE TRANSACTION?
A: Because you are not receiving or exchanging any securities, the transaction
should have no effect to you for US federal income tax purposes. To review
the tax considerations of the transaction in greater detail, see pages 89
through 93 and pages 230 through 232.
WHO CAN HELP ANSWER MY OTHER QUESTIONS?
If you have more questions about the transaction, you should contact the
solicitation agent:
LOGO
Wall Street Plaza
New York, New York 10005
Banks and Brokers call: (212) 440-9800 (collect)
All others call: (800) 223-2064 (toll-free)
For holders outside the United states call:
(44) 171 335 8600 (collect)
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.......................................... 1
SUMMARY SELECTED FINANCIAL DATA.................. 8
Selected Historical Financial Information of
GTS.......................................... 8
Supplemental Information -- Summary Historical
Financial Information of GTS -- Combined
Equity Investments........................... 9
Selected Historical Financial Information of
Esprit Telecom............................... 10
Summary Unaudited Pro Forma Combined Financial
Information.................................. 11
Comparative Per Share Information.............. 12
Comparative Market Price and Dividend
Information.................................. 13
CERTAIN UK AND US REGULATORY INFORMATION......... 15
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS..................................... 16
RISK FACTORS..................................... 17
Risks Relating to the Offer and Combined
Operations of the Companies.................. 17
Risks Relating to the Combined Business and the
Industry..................................... 18
Risks Specific to GTS.......................... 19
Risks Specific to Esprit Telecom............... 39
BACKGROUND OF AND REASONS FOR THE OFFER.......... 53
Background of the Offer........................ 53
The Esprit Telecom Board's Reasons for
Recommending the Offer; Recommendation of
Esprit Telecom Board......................... 55
Opinion of Lehman Brothers..................... 56
The GTS Board's Reasons for the Offer;
Recommendation of the GTS Board.............. 61
Opinion of Bear Stearns........................ 62
Purpose of the Offer; Plans for Esprit
Telecom...................................... 67
Possible Effects of the Offer on the Market for
Esprit Telecom ADSs.......................... 67
Change of Control Consent Solicitation......... 67
THE OFFER........................................ 68
General........................................ 68
Conditions to the Offer........................ 68
Terms of the Offer............................. 69
Interests of Certain Persons in the Offer...... 70
Procedures for Accepting the Offer -- All
Holders of Esprit Telecom Securities......... 72
Dividends and Distributions.................... 79
Compulsory Acquisition; Appraisal Rights....... 79
Fees and Expenses of the Offer................. 80
Certain Regulatory Approvals and Legal
Matters...................................... 80
Accounting Treatment........................... 81
U.S. Federal Securities Laws................... 81
New GTS Stock.................................. 81
Certain Information Concerning GTS............. 82
THE GTS SPECIAL MEETING OF STOCKHOLDERS.......... 82
General; Date, Time and Place.................. 82
Purpose of the Special Meeting................. 82
Recommendation of the GTS Board................ 82
Stockholders Entitled to Vote; Vote Required... 82
Proxies........................................ 83
THE OFFER AGREEMENT.............................. 84
AGREEMENTS WITH CERTAIN SECURITYHOLDERS AND
DIRECTORS...................................... 86
TAX CONSEQUENCES OF THE OFFER AND COMPULSORY
ACQUISITION.................................... 89
United States Federal Income Tax
Consequences................................. 89
United Kingdom Tax Consequences................ 91
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS..................................... 94
EXCHANGE RATES................................... 102
DESCRIPTION OF CERTAIN GTS INDEBTEDNESS.......... 102
DESCRIPTION OF GTS CAPITAL STOCK................. 106
COMPARATIVE RIGHTS OF SHAREHOLDERS............... 111
LEGAL MATTERS.................................... 117
EXPERTS.......................................... 118
CERTAIN INFORMATION CONCERNING GTS............... 119
Description of GTS............................. 119
Selected Historical Consolidated Financial Data
of GTS....................................... 169
Supplemental Information -- Selected Historical
Financial Data of GTS -- Combined Equity
Investments.................................. 170
GTS Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 172
Directors and Executive Officers of GTS........ 190
Executive Compensation and Other Information... 197
Certain Related Party Transactions............. 201
Principal GTS Stockholders..................... 204
CERTAIN INFORMATION CONCERNING ESPRIT TELECOM.... 207
Description of Esprit Telecom.................. 207
Selected Historical Financial Data of Esprit Telecom... 208
WHERE YOU CAN FIND MORE INFORMATION.............. 210
ADDITIONAL INFORMATION REQUIRED UNDER UK LAW..... 212
SUPPLEMENTAL INFORMATION REQUIRED BY BELGIAN
REGULATIONS.................................... 229
DEFINITIONS...................................... 234
INDEX TO FINANCIAL INFORMATION CONCERNING GTS.... F-1
INDEX TO FINANCIAL INFORMATION CONCERNING ESPRIT
TELECOM........................................ F-54
ANNEXES.......................................... A-1
Annex A -- Conditions and Further Terms of the Offer
Annex B -- The Offer Agreement
Annex C -- Opinion of Bear Stearns
Annex D -- Opinion of Lehman Brothers
Annex E -- Irrevocable Undertaking by Walter Anderson
Annex F -- Irrevocable Undertaking by Apax Funds
Nominees Limited
Annex G -- Irrevocable Undertaking by Gold & Appel
Transfer S.A.
Annex H -- Irrevocable Undertaking by Warburg, Pincus
Ventures, L.P.
Annex I -- Irrevocable Undertaking by Sir Robin Biggam
Annex J -- Irrevocable Undertaking by John McMonigall
Annex K -- Irrevocable Undertaking by Roy Merritt
Annex L -- Irrevocable Undertaking by David Oertle
Annex M -- Irrevocable Undertaking by Michael Potter
Annex N -- Irrevocable Undertaking by Dominic Shorthouse
Annex O -- Certain Provisions of the Companies Act 1985
of the United Kingdom
</TABLE>
(i)
<PAGE> 8
SUMMARY
This Summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the offer
fully and for a more complete description of the legal terms of the offer, you
should read carefully this entire document and the documents to which we have
referred you. See "Where You Can Find More Information" (page 210). We encourage
you to read this entire document and the documents incorporated by reference in
this document. FOR THE DEFINITIONS OF CAPITALIZED TERMS USED IN THIS OFFERING
CIRCULAR/PROXY STATEMENT/PROSPECTUS, PLEASE SEE "DEFINITIONS" (PAGE 234).
THE COMPANIES (PAGES 119 THROUGH 209)
GLOBAL TELESYSTEMS GROUP, INC.
1751 Pinnacle Drive
North Tower -- 12th Floor
McLean, Virginia 22102
U.S.A.
GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunication service providers and consumers in Western
Europe, the Commonwealth of Independent States and Central Europe. GTS recently
began a restructuring of its operations into five primary lines of business: GTS
Carrier Services, which through Hermes Europe Railtel B.V. ("HER") provides
cross-border transport in Europe to other telecommunications companies; GTS
Access Services, which provides facilities-based access services to businesses
throughout Europe; GTS Business Services -- Western Europe, which offers voice,
data, Internet and other telecommunications services to businesses; GTS Business
Services -- CIS, where GTS is an alternative provider of high quality
telecommunications services in Moscow, Kiev, St. Petersburg and other cities in
Russia and the CIS through its Sovintel, TCM, Sovam and TeleRoss ventures; and
GTS Mobile Services -- CIS, which operates cellular businesses in Russia and the
Ukraine. To date, most of GTS' revenues have been derived from its operations in
Russia and other CIS countries. See "Risk Factors -- Risks Specific to
GTS -- Risks Relating to Operations in Russia and the CIS" (page 27).
Headquartered in the metropolitan Washington DC area, GTS' affiliates have
offices in London, Brussels, Moscow, Budapest, Kiev, Prague and Paris.
ESPRIT TELECOM GROUP plc
Minerva House
Valpy Street
Reading RG1 1AR
United Kingdom
Esprit Telecom is a rapidly growing European telecommunications company,
providing high quality, competitively priced, international and national long
distance telecommunications services to retail customers and other
telecommunication service providers. Esprit Telecom has 31 switches or points of
presence in eight countries in Europe, as well as Washington, D.C. and New York
through arrangements with US carriers. Esprit Telecom has initiated a program to
own and control the key elements of the Esprit Network infrastructure including
building five resilient SDH broadband fiber rings in Europe.
THE ESPRIT TELECOM BOARD'S REASONS FOR RECOMMENDING THE OFFER; RECOMMENDATION OF
THE ESPRIT TELECOM BOARD (PAGES 55 THROUGH 56)
The Esprit Telecom board of directors, which has been advised by Lehman
Brothers, has determined that the terms of the offer are fair and reasonable to,
and in the best interests of, Esprit Telecom and the holders of Esprit Telecom
ordinary shares and ADSs. In making this determination, the Esprit Telecom board
of directors considered a number of factors, including, without limitation, the
following:
- that the respective businesses of each company are complementary and a
range of economic, strategic and operational benefits could arise from
combining them;
- that the offer should enable all holders of Esprit Telecom ordinary
shares and ADSs to realize a substantial premium over the average price
at which the Esprit Telecom ADSs were trading during the past year prior
to the announcement of the offer and
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<PAGE> 9
an opportunity to retain an equity interest in the combined business; and
- the written opinion of Lehman Brothers that, from a financial point of
view the exchange ratio was fair to holders of Esprit Telecom ordinary
shares and ADSs.
THE BOARD OF DIRECTORS OF ESPRIT TELECOM UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF ESPRIT TELECOM ORDINARY SHARES AND ESPRIT TELECOM ADSs ACCEPT THE
OFFER.
THE GTS BOARD'S REASONS FOR THE OFFER; RECOMMENDATION OF THE GTS BOARD (PAGES 61
THROUGH 62)
The GTS board of directors has determined that the terms of the offer are
fair to, and in the best interests of, GTS and its stockholders. In making this
determination, the GTS board of directors considered a number of factors,
including the following:
- its belief that the businesses of GTS and Esprit Telecom are
complementary and that a range of economic, strategic and operational
benefits will result from combining them;
- its view that the combination with Esprit Telecom should strengthen the
combined business position as the most developed pan-European carrier's
carrier;
- the fact that key members of Esprit Telecom will remain through a
transition period or longer;
- the reputation of Esprit Telecom in the markets where it operates; and
- the written opinion of Bear Stearns that the exchange ratio is fair, from
a financial point of view, to the holders of GTS common stock.
THE BOARD OF DIRECTORS OF GTS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF
GTS VOTE IN FAVOR OF THE RESOLUTIONS TO BE PROPOSED AT THE SPECIAL MEETING OF
GTS TO ISSUE GTS COMMON STOCK TO ACQUIRE ALL ISSUED ESPRIT TELECOM ORDINARY
SHARES AND ESPRIT TELECOM ADSs.
THE OFFER
WHAT HOLDERS OF ESPRIT TELECOM ORDINARY SHARES AND ESPRIT TELECOM ADSs WILL
RECEIVE IN THE OFFER (PAGE 68)
Under the offer, holders of Esprit Telecom ordinary shares and ADSs will
receive:
- 0.1271 of a new share of common stock in GTS for every Esprit Telecom
ordinary share; and
- 0.89 of a new share of common stock in GTS for every Esprit Telecom ADS
(one Esprit Telecom ADS equals seven Esprit Telecom ordinary shares).
The exchange ratio was determined as a result of arm's-length negotiations
between Esprit Telecom and GTS. See the section entitled "Background of and
Reasons for the Offer" in this document for a discussion of the matters
considered by, and the negotiations between, the parties.
As of December 7, 1998, the last trading day before the announcement of the
offer, the offer represented a premium of approximately 22.8% over the middle
market price of an Esprit Telecom ADS on Nasdaq at the close of business on such
date. As of January 29, 1999, the last practicable date before the mailing of
this document, the offer represented a premium of approximately 84.25% over the
middle market price of an Esprit Telecom ADS on Nasdaq at the close of business
on December 7, 1998.
As of January 29, 1999, the offer values the entire issued share capital of
Esprit Telecom, on a fully diluted basis, at approximately $1.136 billion (L640
million).
Fractional shares of new GTS common stock will not be issued to holders of
Esprit Telecom ordinary shares and ADSs but will be aggregated and sold in the
market. The proceeds of such sale will be paid to holders of Esprit Telecom
ordinary shares and Esprit Telecom ADSs, except if any person is entitled to
cash in an amount less than $2, such amount will not be paid but will be
retained by GTS.
Esprit Telecom option holders will have the opportunity to roll over their
Esprit Telecom options into GTS stock options substantially on the same terms as
the existing Esprit Telecom
2
<PAGE> 10
options and on the same exchange ratio as the offer.
GTS stockholders will not receive or exchange any securities pursuant to
the offer.
TERMS AND CONDITIONS TO THE OFFER (PAGES 68 THROUGH 70)
GTS' obligation to complete the offer is subject to the satisfaction or
waiver of several conditions. These conditions include:
- the receipt by GTS of valid acceptances representing not less than 90%
(or such lesser percentage above 50% as GTS may decide prior to the offer
being declared unconditional) of Esprit Telecom ordinary shares
(including those represented by ADSs). If GTS agrees that it will accept
a lesser percentage of Esprit Telecom securities as a condition to the
offer, GTS will announce that it will do so at least five US business
days in advance thereof and in any event, no later than five US business
days in advance of the offer being declared unconditional. Holders of
Esprit Telecom ordinary shares and Esprit Telecom ADSs should be prepared
to withdraw their acceptances promptly following such announcement if
they are unwilling to accept such lesser percentage;
- the approval by GTS' stockholders of resolutions authorizing the issuance
of GTS shares in the offer; and
- certain conditions relating to Esprit Telecom, including that there has
been no material adverse change in the business, assets or prospects of
Esprit Telecom.
The offer will be open for acceptance for an initial offer period, during
which time, all conditions to the offer must have been satisfied or waived. Upon
the satisfaction or waiver of the conditions, the offer will be declared
unconditional and the initial offer period will expire. The offer will then be
extended for a subsequent offer period of at least 14 calendar days, as required
by the rules of the UK City Code on Takeovers and Mergers, during which time
holders of Esprit Telecom ordinary shares and ADSs who have not tendered such
securities may do so.
To review the entire set of terms and conditions relating to the offer, see
Annex A.
RIGHTS OF WITHDRAWAL (PAGE 78)
Holders of Esprit Telecom securities will be able to withdraw their
acceptances at any time prior to the expiration of the initial offer period, but
not during the subsequent offer period, except in certain limited circumstances.
In order to withdraw their acceptances, holders of Esprit Telecom securities
must submit a written notice of withdrawal to the receiving agent, for ordinary
shares, and to the US depositary for Esprit Telecom ADSs.
PROCEDURES FOR ACCEPTING THE OFFER (PAGES 72 THROUGH 79)
In order to tender their shares, holders of Esprit Telecom ordinary shares
must complete the Form of Acceptance and return the completed form to the
Receiving Agents, together with the relevant share certificate(s) or other
documents of title. Holders of Esprit Telecom ordinary shares may direct
questions concerning the procedures for accepting the offer to the receiving
agent, 44 181-639-2188 in the UK.
Holders of Esprit Telecom ADSs may accept the offer by doing one of the
following:
- completing the Letter of Transmittal, together with any required
signature guarantees, and sending the completed forms, together with the
Esprit Telecom ADRs evidencing the Esprit Telecom ADSs, to the US
Depositary; or
- tendering the ADRs through a financial institution which is an eligible
institution, by completing a Notice of Guaranteed Delivery and sending
the completed form to the US Depositary or the Belgian Receiving Agent
(where applicable), and then sending the Esprit Telecom ADRs evidencing
the Esprit Telecom ADSs, together with a completed Letter of Transmittal,
to the US Depositary or the Belgian Receiving Agent (where applicable),
to arrive within three Nasdaq trading days of delivery of the Notice of
Guaranteed Delivery.
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<PAGE> 11
Holders of Esprit Telecom ADSs may direct all questions concerning the
procedures for accepting the offer to Georgeson & Company, the information agent
for the offer, at (800) 223-2064 (toll free), in the US, and (44) 171 335 8600
(collect), outside of the US.
Holders of Esprit Telecom ordinary shares and Esprit Telecom ADSs may
direct all other questions concerning the offer to Georgeson & Company at the
telephone numbers listed above.
Holders of Esprit Telecom ordinary shares and ADSs do not need to take any
action in order to reject the offer.
COMPULSORY ACQUISITION (PAGES 79 THROUGH 80)
If, on or before June 2, 1999, GTS acquires Esprit Telecom ordinary shares
and Esprit Telecom ADSs representing in the aggregate at least 90% of the issued
share capital of Esprit Telecom, GTS intends to compel the exchange (and a
holder of any remaining Esprit Telecom ordinary shares or Esprit Telecom ADSs
may compel the exchange) of the remainder of the issued share capital of Esprit
Telecom on the same terms as the offer, in accordance with UK law.
IMPACT OF THE OFFER ON THE ESPRIT ADS MARKET
The Esprit Telecom ADSs are presently listed and traded on Nasdaq and
EASDAQ. Upon completion of the offer and compulsory acquisition, GTS intends, if
it has not already occurred, to seek the delisting of Esprit Telecom ADSs from
Nasdaq and EASDAQ and their deregistration under the Exchange Act. The Esprit
Telecom ordinary shares are not listed on any exchange.
GTS PLANS FOR ESPRIT TELECOM (PAGE 67)
After acquiring all of the outstanding ordinary shares and ADSs of Esprit
Telecom, GTS plans to integrate Esprit Telecom into GTS' overall business and
corporate structure. As part of its integration strategy, GTS may engage in
certain transactions, including contributing assets, such as the recently
acquired NetSource Europe ASA, purchasing assets from Esprit Telecom and
effecting an exchange offer with respect to Esprit Telecom's outstanding bonds.
PURPOSE OF THE GTS SPECIAL MEETING (PAGE 82)
The purpose of the special meeting is to consider and vote upon:
- a proposal to issue new common stock to acquire all issued Esprit Telecom
ordinary shares and Esprit Telecom ADSs not already owned by GTS; and
- such other business as may properly be brought before the special
meeting.
DATE, TIME AND PLACE OF THE GTS SPECIAL MEETING (PAGE 82)
The special meeting will be held on Wednesday, March 3, 1999, at 1751
Pinnacle Drive, North Tower, 12th Floor, McLean, VA 22102, commencing at 10:00
a.m., local time.
STOCKHOLDERS ENTITLED TO VOTE AT THE GTS SPECIAL MEETING; VOTES REQUIRED (PAGE
82)
The close of business on January 29, 1999 is the record date for the
special meeting. Only GTS stockholders on the record date are entitled to notice
of and to vote at the special meeting. On the record date, there were 64,988,680
shares of GTS common stock outstanding. Each share of GTS common stock will be
entitled to one vote on each matter to be acted upon at the special meeting.
A vote by holders of a majority of the shares of GTS common stock
outstanding on the record date is required to adopt the proposal at the special
meeting to issue new common stock in the offer. If a GTS stockholder abstains or
does not instruct his or her broker how to vote, this will have the same effect
as a vote against the proposal.
GTS stockholders may direct all questions concerning the special meeting or
the offer to Georgeson & Company, GTS' solicitation agent, at (800) 223-2064
(toll-free), in the US, and (44) 171 335 8600 (collect), outside of the US.
INTERESTS OF CERTAIN PERSONS/STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
OF ESPRIT TELECOM (PAGES 70 THROUGH 72)
If you are a holder of Esprit Telecom ordinary shares or Esprit Telecom
ADSs, in considering the Esprit Telecom board's recommendation and in
determining whether or not to tender your Esprit Telecom ordinary shares and
Esprit Telecom ADSs, you should be aware that certain officers and directors of
Esprit Telecom
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<PAGE> 12
may have interests in the offer that are different from your and their interests
as holders of Esprit Telecom ordinary shares or Esprit Telecom ADSs. These
include the following:
- - The principal holders of Esprit Telecom ordinary shares or Esprit Telecom ADSs
entered into irrevocable agreements requiring them to accept the offer with
respect to 81,968,270 Esprit Telecom ordinary shares (including those
represented by ADSs) beneficially owned by them, representing 65% of the
issued share capital of Esprit Telecom.
- - The directors of Esprit Telecom irrevocably agreed that to the extent any of
their respective Esprit Telecom options become exercisable and they exercise
such options, they would tender such shares in the offer.
- - For a period of six years after the offer becomes unconditional, GTS will
maintain the level of directors and officers liability coverage currently
provided to directors and officers of Esprit Telecom. GTS may, however,
substitute policies of at least the same coverage and amounts. GTS has also
entered into other indemnification arrangements with directors and officers of
Esprit Telecom.
To review the irrevocable agreements, see Annexes E to N.
ESPRIT TELECOM'S AND GTS' AGREEMENT TO TAKE CERTAIN ACTIONS PRIOR TO AND AFTER
THE CLOSING OF THE OFFER (THE OFFER AGREEMENT) (PAGES 84 THROUGH 85)
GTS and Esprit Telecom entered into an offer agreement whereby each party
agreed to take certain actions in connection with the offer.
Esprit Telecom agreed to, among other things:
- not solicit or (subject to director fiduciary duties) engage in
negotiations with respect to an acquisition by a third party of Esprit
Telecom; and
- refrain from discussing the terms of the offer with any third party
without the consent of GTS.
The boards of each of GTS and Esprit Telecom have recommended (subject to
director fiduciary duties) the offer to their respective stockholders and agreed
to cooperate with each other to facilitate the completion of the offer.
To review the offer agreement, see Annex B.
OPINION OF FINANCIAL ADVISORS (PAGES 56 THROUGH 66)
BEAR STEARNS
In deciding to approve the offer, the board of directors of GTS considered
the opinion of its financial advisor, Bear Stearns, as to the fairness of the
exchange ratio from a financial point of view to the holders of GTS common
stock.
In arriving at their opinion, Bear Stearns reviewed various documents, as
well as had discussions with GTS management regarding, among other things,
certain financial information and other data relating to the business and
financial prospects of GTS and Esprit Telecom; certain estimates of revenue
enhancements, cost savings and other combination benefits or synergies expected
to result from the offer; and certain historical stock prices, trading activity
and valuation parameters of GTS common stock, Esprit Telecom ordinary shares and
Esprit Telecom ADSs. The written opinion of Bear Stearns is not a recommendation
as to how GTS stockholders should vote in regard to the resolutions authorizing
the issuance of GTS common stock in connection with the offer. GTS ENCOURAGES
YOU TO READ THE OPINION OF BEAR STEARNS IN ITS ENTIRETY.
LEHMAN BROTHERS
In deciding to accept and recommend the offer to its securityholders, the
Esprit Telecom board considered the opinion of its financial advisor, Lehman
Brothers, as to the fairness of the exchange ratio from a financial point of
view to the holders of Esprit Telecom ordinary shares and Esprit Telecom ADSs.
In connection with delivering its opinion, Lehman Brothers performed a
variety of financial analyses. These analyses included examining the historical
trading price of Esprit Telecom ADSs and GTS common stock, respectively, and
comparing the trading history of each company with that of other relevant
companies, comparing financial terms of the offer with financial terms of recent
relevant transactions and comparing GTS and Esprit Telecom to other relevant
companies.
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<PAGE> 13
The written opinion of Lehman Brothers is not a recommendation as to whether
holders of Esprit Telecom ordinary shares and Esprit Telecom ADSs should tender
their securities in the offer. ESPRIT TELECOM ENCOURAGES YOU TO READ THE OPINION
OF LEHMAN BROTHERS IN ITS ENTIRETY.
REGULATORY APPROVALS (PAGE 80)
Other than in connection with US securities laws or the UK City Code on
Takeovers and Mergers, GTS and Esprit Telecom do not expect that the offer will
require the approval of any governmental authority which, if not received, would
prevent the completion of the offer.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (PAGES 89 THROUGH 91)
The offer and compulsory acquisition generally will be tax free for US
federal income tax purposes to holders of Esprit Telecom ordinary shares and
Esprit Telecom ADSs. Since GTS stockholders are not receiving or exchanging
securities, the offer should have no effect on such stockholders for US federal
income tax purposes.
THE TAX CONSEQUENCES OF THE OFFER AND COMPULSORY ACQUISITION TO YOU MAY
DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISORS
FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE OFFER TO YOU.
UNITED KINGDOM TAX CONSEQUENCES
(PAGES 91 THROUGH 93)
The acceptance of the offer by, or compulsory acquisition from, any holder
of Esprit Telecom ordinary shares (including those represented by Esprit Telecom
ADSs) will be entitled to receive "roll-over" treatment for UK tax purposes.
ACCOUNTING TREATMENT (PAGE 81)
It is expected that, for accounting and financial reporting purposes, the
transaction will be accounted for as a pooling-of-interests transaction, which
means that the companies will be treated as though they had always been
combined.
RISK FACTORS (PAGES 17 THROUGH 52)
There are risk factors that should be considered by you in evaluating how
to vote at the special meeting, if you are a GTS stockholder, or whether to
tender your shares, if you are a holder of Esprit Telecom ordinary shares
(including those represented by Esprit Telecom ADSs). Such risk factors include
the following:
- a fixed exchange ratio despite potential changes in relative stock
prices;
- risks generally associated with combining the operations of two existing
companies;
- risks inherent in the industry or particular to GTS and Esprit Telecom,
including those related to each company's need for additional capital,
the substantial debt of each company, rollout of the HER and Esprit
Telecom networks, implementation of GTS' European services strategy,
competition, government regulation, operations in emerging markets and
changes in technology; and
- risks relating to the instability of the telecommunications market and
political situation in Russia and the Commonwealth of Independent States
which could adversely affect GTS and the market price of GTS stock.
See "Risk Factors" for a discussion of certain factors that should be
considered by GTS stockholders and holders of Esprit Telecom ordinary shares
(including those represented by Esprit Telecom ADSs).
CHANGE OF CONTROL CONSENT SOLICITATION
(PAGE 67)
There were several pre-conditions that had to be satisfied or waived prior
to GTS making the offer. One pre-condition was that Esprit Telecom obtain the
waiver by the holders of certain Esprit Telecom debt of the rights of such
holders under change of control provisions in the instruments governing such
debt to require Esprit Telecom to repurchase their debt upon the consummation of
the offer. Binding waivers were sought and obtained from holders of a majority
in principal amount of such Esprit Telecom debt. All other pre-conditions to GTS
making the offer have been satisfied.
RECENT DEVELOPMENTS (PAGES 120 THROUGH 121)
On November 30, 1998, GTS completed the acquisition of NetSource Europe ASA
for consideration consisting of both cash and stock. Based
6
<PAGE> 14
on the Company's preliminary purchase accounting analysis, the aggregate initial
purchase price paid by GTS for NetSource was $145.4 million. NetSource is a
pan-European provider of long-distance telecommunications services focusing
primarily on small- to medium-sized businesses, with operations in Norway,
Sweden, Germany and Ireland, as well as in the Netherlands, Belgium and Denmark.
The acquisition of NetSource provides the GTS Business Services -- Western
Europe line of business with a customer and revenue base in several key Western
European countries, a portfolio of licenses and interconnection agreements and
an entrepreneurial management team.
On January 4, 1999, HER issued in a private placement $200 million
principal amount of 10 3/8% Senior Notes due 2009 and Euro 85,000,000 principal
amount of 10 3/8% Senior Notes due 2006. The net proceeds of this offering,
approximately $289.7 million, will be used to finance the cost of HER network
assets, to expand the HER network beyond the originally contemplated scope,
including by adding transatlantic capacity, enhancing the speed of the HER
network and continuing the buildout of the HER network.
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 between Europe and the United States. FLAG Atlantic Limited's
link is designed to carry voice, high-speed data and video traffic at speeds of
1.28 terabits per second, a 25-fold increase over current transatlantic cable
systems. By interconnecting to FLAG Atlantic Limited, GTS Carrier Services and
its subsidiary HER 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. The project is subject to financing, the execution of related
agreements and other conditions.
LISTING OF COMMON STOCK RECEIVED
The new GTS stock that is intended to be issued will be listed on the
Nasdaq and the EASDAQ markets.
APPRAISAL RIGHTS (PAGE 79)
Holders of Esprit Telecom ordinary shares and ADSs do not have appraisal
rights. In the event that GTS acquires Esprit Telecom ordinary shares and Esprit
Telecom ADSs representing in the aggregate at least 90% of the issued share
capital of Esprit Telecom, holders of Esprit Telecom ordinary shares and Esprit
Telecom ADSs whose securities were not exchanged in the offer will be entitled
to certain rights, under the UK Companies Act 1985, including the right to
compel GTS to exchange such securities on the same terms as the offer.
To review your rights under the UK Companies Act 1985, see Annex O.
7
<PAGE> 15
SUMMARY SELECTED FINANCIAL DATA
The summary below sets forth selected historical financial data. You should
read this together with the historical financial statements and notes thereto
contained in the GTS 1997 Annual Report on Form 10-K and the Esprit Telecom 1998
Annual Report on Form 20-F. See "Where You Can Find More Information."
SELECTED HISTORICAL FINANCIAL INFORMATION OF GTS
Selected Historical Financial Data of GTS. The selected historical
financial data of GTS set forth below comes from financial statements of GTS as
they appeared in GTS's Annual Report on Form 10-K filed with the SEC for the
fiscal year ended December 31, 1997 and GTS' Quarterly Report on Form 10-Q filed
with the SEC for the nine month period ending September 30, 1998.
Under US generally accepted accounting principles, a majority of GTS'
ventures are accounted for by the equity method of accounting. Under this
method, the operating results of the ventures are included in its Consolidated
Statement of Operations as a single line item, "Equity in earnings (losses) of
ventures." GTS recognizes 100% of the losses in ventures where GTS bears all of
the financial risk (which includes all of its significant ventures except for
Sovintel and, historically, HER). Also, the assets, liabilities and equity of
GTS' ventures are included in our Consolidated Balance Sheets as a single line
item, "Investments in and advances to ventures." See Note 3 to GTS' audited
Consolidated Financial Statements and "GTS Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview." Financial
information about GTS' equity ventures is included below under "Supplemental
Information -- Summary Historical Financial Information of GTS -- Combined
Equity Investments."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1995 1996 1997(1) 1997 1998
-------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net........................................... $ 8,412 $ 24,117 $ 47,098 $ 30,216 $ 117,299
Gross margin............................................ 16 5,176 4,379 1,864 35,232
Operating expenses...................................... 41,016 52,955 78,410 53,732 94,243
Equity in earnings (losses) of ventures................. (7,871) (10,150) (14,599) (18,234) 4,142
Other income (expense).................................. 11,034 (8,729) (29,551) (16,902) (34,857)
Loss before extraordinary loss.......................... (40,400) (67,991) (116,986) (87,872) (88,131)
Extraordinary loss(2)................................... -- -- -- -- (12,704)
Net loss................................................ (40,400) (67,991) (116,986) (87,872) (100,835)
Loss per share before extraordinary loss................ (1.70) (2.33) (3.26) (2.49) (1.65)
Extraordinary loss per share(2)......................... -- -- -- -- (0.24)
Net loss per share...................................... (1.70) (2.33) (3.26) (2.49) (1.89)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------- AT SEPTEMBER 30,
1995 1996 1997(1) 1998
-------- -------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 9,044 $ 57,874 $318,766 $ 993,928
Property and equipment, net................................. 29,523 35,463 236,897 436,019
Investments in and advances to ventures..................... 56,153 104,459 76,730 61,705
Total assets................................................ 115,621 237,378 780,461 1,814,893
Total debt.................................................. 27,454 85,547 639,359 1,208,533
Minority interest and stock subject to repurchase........... 5,273 6,248 31,255 59,600
Shareholders' equity........................................ 55,322 113,668 26,967 351,409
</TABLE>
- ---------------
(1) As a result of GTS' increase in ownership interest and amendment to the
agreement among HER shareholders that was completed on July 16, 1997, GTS
accounts for its ownership interest in HER under the consolidation method of
accounting. Prior to this date, GTS accounted for HER under the equity
method of accounting.
(2) GTS recognized a $12.7 million extraordinary charge to earnings in the first
quarter of 1998, as a result of GTS' early extinguishment of certain related
party debt obligations. The nature of the charge is comprised of the
write-off of $11.6 million of unamortized debt discount and $1.1 million of
unamortized debt issuance costs that were deferred as financing costs and
were being amortized over the original maturity of the debt.
8
<PAGE> 16
SUPPLEMENTAL INFORMATION -- SUMMARY HISTORICAL
FINANCIAL INFORMATION OF GTS -- COMBINED EQUITY INVESTMENTS
The following unaudited summary historical financial data -- equity
investments for the years ended December 31, 1995, 1996 and 1997, and for the
nine months ended September 30, 1997 and 1998 are derived from financial records
of GTS as they appeared in GTS' Annual Report on Form 10-K filed with the SEC
for fiscal year ended December 31, 1997 and GTS' Quarterly Report on Form 10-Q
filed with the SEC for the nine month period ended September 30, 1998. This
financial data is intended to supplement the summary historical consolidated
financial data, which were derived from GTS' audited Consolidated Financial
Statements.
GTS believes that this information will provide you with additional insight
into GTS' unconsolidated equity method investments. US generally accepted
accounting principles prescribe the inclusion of revenues and expenses for
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) and
cost interests (generally interests of less than 20%). Further, equity
accounting ordinarily results in the same net income as consolidation; however,
the net operating results are reflected on one line within the income statement.
More detailed financial information about our equity investments is included
under "Supplemental Information -- Selected Historical Financial Data of
GTS -- Combined Equity Investments."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net............................................. $54,051 $143,472 $226,160 $159,006 $187,544
Cost of revenues.......................................... 33,011 80,426 127,732 87,694 110,475
Operating expenses........................................ 22,958 55,018 74,845 60,447 40,870
Net (loss) income......................................... (6,380) (5,220) 4,330 (3,680) 13,480
Income (loss) recognized by GTS........................... (7,871) (10,150) (14,599) (18,234) 4,142
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(1):
Revenues, net............................................. (2,270) (15,385) (24,927) (17,049) (25,001)
Cost of revenues.......................................... (2,215) (13,562) (23,250) (15,853) (23,960)
Operating expenses........................................ (6,967) (8,083) (8,357) (11,105) 1,493
</TABLE>
- ---------------
(1) The adjustment amounts represent the effect of inter-affiliate transactions
between our consolidated and equity method ventures. More detailed
information about inter-affiliate transactions is included under "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology."
9
<PAGE> 17
Selected Historical Financial Information of Esprit Telecom. The selected
historical financial data of Esprit Telecom set forth below comes from the
financial statements of Esprit Telecom as they appeared in Esprit Telecom's
Annual Report on Form 20-F filed with the SEC for the fiscal year ended
September 30, 1998, which is incorporated herein by reference, and included
herein. See "Esprit Telecom Consolidated Financial Statements." The Esprit
Telecom Consolidated Financial Statements were prepared in accordance with UK
GAAP, which differs in certain respects with US GAAP. See Note 30 to the Esprit
Telecom Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1995 1996 1997 1998 1998
------- ------- ------- -------- --------
L L L L $(1)
(IN THOUSANDS, EXCEPT PER ORDINARY SHARE AND PER
ADS AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2)
UK GAAP
Revenue, net................................................ 13,950 24,880 45,466 82,588 140,350
Gross margin................................................ 3,310 6,124 7,517 16,759 28,480
Operating expenses.......................................... 5,490 11,015 19,070 47,191 80,196
Operating loss before interest.............................. (2,180) (4,891) (11,553) (30,432) (51,716)
Profit on sale of investment................................ -- -- -- 200 340
Net interest (expense)/income............................... (222) (203) 695 (12,213) (20,755)
Loss on ordinary activities before taxation................. (2,402) (5,094) (10,858) (42,445) (72,131)
Taxation on loss on ordinary activities..................... -- -- (2) (2) (3)
Loss for the financial year................................. (2,402) (5,094) (10,860) (42,447) (72,134)
Loss per Ordinary Share..................................... (0.05) (0.07) (0.10) (0.34) (0.58)
Loss per ADS(3)............................................. (0.35) (0.49) (0.70) (2.38) (4.04)
US GAAP
Net loss.................................................... (2,423) (5,325) (10,852) (42,447) (72,134)
Net loss per Ordinary Share................................. (0.05) (0.08) (0.10) (0.34) (0.58)
Net loss per ADS(3)......................................... (0.35) (0.56) (0.70) (2.38) (4.04)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------------------
1995 1996 1997 1998 1998
------ ------- ------- -------- --------
L L L L $
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
UK GAAP
Bank balances, cash, restricted securities and short term
deposits and investments.................................. 5,615 6,430 24,525 184,749 313,962
Fixed assets, net........................................... 3,514 8,005 17,727 154,100 261,878
Total assets................................................ 13,178 24,101 59,543 394,537 670,476
Creditors: amounts falling due within one year.............. (7,045) (12,122) (25,295) (72,930) (123,937)
Creditors: amounts falling due in more than one year........ (631) (1,968) (2,874) (328,806) (558,773)
Total shareholders' funds................................... 5,502 10,011 31,374 (7,199) (12,234)
US GAAP
Total assets................................................ 13,178 24,101 59,543 394,537 670,476
Long term debt.............................................. (631) (1,968) (2,874) (328,806) (558,773)
Redeemable preference shares................................ 673 673 -- -- --
Shareholders' equity........................................ 4,829 9,338 31,374 (7,199) (12,234)
</TABLE>
- ---------------
(1) Solely for the convenience of the reader, pounds sterling amounts have been
translated into US dollars at the Noon Buying Rate on September 30, 1998 of
$1.6994 per L1.00.
(2) Esprit Telecom's financial information has been restated from that published
prior to December 1997 in order to give effect to a change in UK GAAP
relating to the granting of employee stock options at a discount to the
market price. The financial value of such discounts are now recognized as
employee compensation and charged against net income. As required by UK
GAAP, this accounting change has been effected by restating the results of
previous periods. This change in accounting has no impact on the US GAAP
financials.
(3) Loss per Esprit Telecom ADS and net loss per Esprit Telecom ADS are
calculated by adjusting loss per Esprit Telecom Ordinary Share and net loss
per Esprit Telecom Ordinary Share, respectively, for the ratio of Esprit
Telecom Ordinary Shares per Esprit Telecom ADS.
10
<PAGE> 18
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma financial information presents
financial information of GTS and Esprit Telecom as if the GTS/Esprit Telecom
merger had occurred at the beginning of the periods indicated. The GTS/Esprit
Telecom merger will be treated as a pooling of interests for financial
accounting purposes. You should read this together with the consolidated
financial statements and accompanying notes of GTS and Esprit Telecom included
in the documents described under "Where You Can Find More Information" and the
unaudited pro forma combined financial statements and accompanying discussion
and notes set forth under "Unaudited Pro Forma Combined Financial Information"
included herein. The pro forma amounts in the table below are presented for your
information and do not necessarily indicate what the financial position or the
results of operations of the combined company would have been had the merger
date occurred as of the dates or for the periods presented. The pro forma
amounts also do not necessarily indicate what the financial position or future
results of operations of the combined company will be. No adjustment has been
included in the pro forma amounts for any anticipated cost savings or other
synergies. See "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
GTS/ESPRIT TELECOM PRO FORMA COMBINED
Revenues.................................................... $ 162,248 $ 272,193
Loss from operations........................................ (161,344) (142,610)
Net loss before extraordinary items:
Total............................................. (215,969) (204,919)
Per share......................................... (3.87) (2.80)
Total assets................................................................ 2,636,167
Long-term debt.............................................................. 1,680,032
Shareholders' equity........................................................ 437,909
</TABLE>
11
<PAGE> 19
COMPARATIVE PER SHARE INFORMATION
The following table shows actual ("historical") per share information and
information as if the companies had been combined for the periods shown ("pro
forma combined"), calculated assuming an Exchange Ratio of 0.89 shares of GTS
common stock for every Esprit Telecom ADS and 0.1271 shares of GTS common stock
for every Esprit Telecom ordinary share. The historical data is based on the
historical consolidated financial statements and related notes of each of GTS
and Esprit Telecom. You should read this together with the historical financial
statements of GTS and Esprit Telecom and related notes thereto. The data
presented does not indicate what GTS/Esprit Telecom's future results of
operations will be or the actual results that would have necessarily occurred if
the completion date had occurred at the beginning of the periods indicated. No
adjustment has been included for any anticipated cost savings or other
synergies. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
GTS/ESPRIT
TELECOM
GTS PRO FORMA
HISTORICAL COMBINED(1)
---------- -----------
<S> <C> <C>
Book value per common share:
December 31, 1997......................................... $ 0.72 N/A
September 30, 1998........................................ 5.81 $ 5.44
Net loss per common share before extraordinary loss:
Year ended December 31, 1997.............................. $(3.26) (3.87)
Nine months ended September 30, 1998...................... (1.65) $(2.80)
</TABLE>
<TABLE>
<CAPTION>
ESPRIT
TELECOM
HISTORICAL
----------
<S> <C>
Book value per common share:
September 30, 1997........................................ $ 0.43
September 30, 1998........................................ (0.10)
Net loss per common share
before extraordinary loss:
Year ended September 30, 1997............................. $(0.16)
Year ended September 30, 1998............................. (0.58)
</TABLE>
- ---------------
(1) See "-- Unaudited Pro Forma Combined Financial Information."
12
<PAGE> 20
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICES AND DIVIDENDS
Shares of GTS common stock are traded on Nasdaq and EASDAQ under the symbol
"GTSG." Esprit Telecom ADSs are traded on EASDAQ under the symbol "ESPR" and on
Nasdaq under the symbol "ESPRY." The Nasdaq is the principal trading market for
both the GTS shares and the Esprit Telecom ADSs. The following table sets forth
the high and low closing sales prices per share (rounded to two decimal points)
of such securities as reported on Nasdaq and EASDAQ, as applicable, based on
published financial sources, for the periods indicated. GTS common stock
commenced trading on Nasdaq and EASDAQ on February 5, 1998 and February 6, 1998,
respectively. Esprit Telecom ADSs commenced trading on Nasdaq and EASDAQ on
March 4, 1997. No cash dividends have been paid on the shares of GTS common
stock or the Esprit Telecom ordinary shares or ADSs. The per share information
presented below and elsewhere in this Offering Circular/Proxy
Statement/Prospectus has been adjusted to reflect all stock splits of GTS and
Esprit Telecom.
<TABLE>
<CAPTION>
GTS ESPRIT TELECOM
COMMON STOCK ADSs(3)
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
NASDAQ:
1997:
First Quarter(1)...................................... N/A N/A $12.13 $11.88
Second Quarter........................................ N/A N/A 11.88 5.00
Third Quarter......................................... N/A N/A 8.38 5.63
Fourth Quarter........................................ N/A N/A 11.50 4.75
1998:
First Quarter(2)...................................... $49.13 $25.94 18.13 10.75
Second Quarter........................................ 51.38 35.00 19.06 15.75
Third Quarter......................................... 62.19 27.38 42.38 18.13
Fourth Quarter........................................ 58.88 22.09 49.31 11.75
1999:
First Quarter (through January 29, 1999).............. 66.00 55.13 56.75 46.50
EASDAQ:
1997:
First Quarter(1)...................................... N/A N/A 12.38 12.25
Second Quarter........................................ N/A N/A 12.00 5.25
Third Quarter......................................... N/A N/A 8.00 5.75
Fourth Quarter........................................ N/A N/A 11.63 5.00
1998:
First Quarter......................................... 48.38 25.50 17.98 10.63
Second Quarter........................................ 49.00 35.63 20.25 16.13
Third Quarter(2)...................................... 62.50 26.00 46.00 18.13
Fourth Quarter........................................ 57.38 20.50 47.00 12.50
1999:
First quarter (through January 29, 1999).............. 65.50 54.75 55.25 46.16
</TABLE>
- ---------------
(1) Partial Period data for Esprit Telecom (from March 4, 1997).
(2) Partial Period data for GTS (from February 5, 1998).
(3) Each Telecom ADS represents seven Esprit Telecom ordinary shares.
13
<PAGE> 21
Set forth below are the last reported sale prices (rounded to two decimal
points) on Nasdaq and EASDAQ of shares of GTS common stock and Esprit Telecom
ADSs for the first trading day in each of the six months immediately prior to
the date of this document, December 7, 1998, the last trading day prior to the
announcement of the offer and January 29, 1999, the last practicable trading day
for which information was available prior to the date of this Offering
Circular/Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
ESPRIT
GTS TELECOM
COMMON STOCK ADSs
------------ -------
<S> <C> <C>
NASDAQ:
July 1, 1998................................................ $47.00 $18.63
August 3, 1998.............................................. 53.50 27.75
September 1, 1998........................................... 31.31 18.13
October 1, 1998............................................. 28.56 20.00
November 2, 1998............................................ 40.69 21.88
December 1, 1998............................................ 41.75 26.75
December 7, 1998............................................ 41.75 30.25
January 4, 1999............................................. 56.00 47.25
January 29, 1999............................................ 62.63 54.00
EASDAQ:
July 1, 1998................................................ $49.00 $18.50
August 3, 1998.............................................. 52.00 28.13
September 1, 1998........................................... 31.15 18.13
October 1, 1998............................................. 34.00 21.00
November 3, 1998............................................ 40.38 21.00
December 1, 1998............................................ 42.50 27.25
December 7, 1998............................................ 41.50 29.59
January 4, 1999............................................. 55.50 46.99
January 29, 1999............................................ 58.75 50.25
</TABLE>
The following table presents the high and low trading information for GTS
common stock and Esprit Telecom ADSs on December 7, 1998, the last full trading
day prior to GTS' and Esprit Telecom's announcement of the Offer.
<TABLE>
<CAPTION>
GTS ESPRIT TELECOM
COMMON STOCK ADSs
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
NASDAQ:
December 7, 1998................................... $42.56 $41.38 $31.00 $28.00
EASDAQ:
December 7, 1998................................... $41.62 $41.50 $30.74 $28.00
</TABLE>
GTS stockholders and Esprit Telecom securityholders are urged to obtain
current market information for shares of GTS common stock and Esprit Telecom
ADSs. No assurance can be given as to what the market prices of shares of GTS
common stock or Esprit Telecom ADSs will be at the completion of the offer.
There is no minimum or maximum initial value for the consideration to be
received by Esprit Telecom securityholders. See "Risk Factors -- Risk Relating
to the Offer and Combined Operations of the Companies -- Fixed Exchange Ratio."
14
<PAGE> 22
CERTAIN UK AND US REGULATORY INFORMATION
RULE 8 OF THE CITY CODE
The announcement, dated December 8, 1998, by GTS of its intention to make
an offer for Esprit Telecom commenced an offer period for the purposes of the UK
City Code on Takeovers and Mergers, which is published and administered by the
UK Panel on Takeovers and Mergers. An offer period is deemed to commence at the
time which an announcement is made of a proposed or possible offer, with or
without terms. Both Esprit Telecom and GTS have equity securities traded on
Nasdaq and EASDAQ. The UK Panel on Takeovers and Mergers has requested that
Esprit Telecom and GTS draw to the attention of member firms of Nasdaq and
EASDAQ certain UK dealing disclosure requirements that arise following
announcement of an intention to make an offer.
The disclosure requirements are set out in Rule 8 of the UK City Code on
Takeovers and Mergers. In particular, Rule 8.3 requires public disclosure of any
trading during an offer period by persons who own or control, or who would as a
result of any transaction own or control, directly or indirectly, 1% or more of
any class of relevant securities of GTS or Esprit Telecom. Trading by GTS,
Esprit Telecom or "associates" of GTS or Esprit Telecom (within the meaning of
the UK City Code on Takeovers and Mergers) in any class of securities of GTS or
Esprit Telecom during the initial offer period must also be disclosed. In the
case of the offer for Esprit Telecom, this requirement will apply until the
offer becomes or is declared wholly unconditional or lapses.
Disclosure should be made on an appropriate form before 12 noon (London
time) on the business day following the date of the dealing transaction. These
disclosures should be sent to The London Stock Exchange Limited (Company
Announcements Office), in typed format by fax (fax number: +44(0)-171-588-605)
and into the Panel (fax number: +44(0)-171-256 9383). Copies of appropriate
disclosure forms may be obtained on request by faxing Bear Stearns on
+44(0)-171-516 6933 (Richard Strang).
The Panel requests that member firms advise those of their clients who wish
to deal in the securities of GTS and/or Esprit Telecom, in the US and/or
Belgium, that they may be affected by these requirements. If there is any doubt
as to their application, the Panel should be consulted (telephone number:
+44(0)-171-382 9026, fax number: +44(0)-171- 638 1554).
RULE 10b-13 UNDER THE EXCHANGE ACT
If, on or before June 1, 1999, as a result of the offer, GTS acquires
Esprit Telecom ordinary shares and Esprit Telecom ADSs representing at least 90%
of the Esprit Telecom ordinary shares (including those represented by Esprit
Telecom ADSs) to which the offer relates, then (i) GTS will be entitled and
intends to effect a compulsory acquisition to compel the exchange of the
remainder of the outstanding Esprit Telecom ordinary shares and Esprit Telecom
ADSs on the same terms as the offer in accordance with sections 428 through 430F
of the UK Companies Act 1985; and/or (ii) a holder of Esprit Telecom ordinary
shares and Esprit Telecom ADSs may require GTS to exchange his or her Esprit
Telecom ordinary shares and Esprit Telecom ADSs on the same terms as the offer
in accordance with sections 430A and 430B of the UK Companies Act 1985. GTS has
applied to the staff of the SEC for relief under Rule 10b-13 under the Exchange
Act to allow GTS to acquire any outstanding Esprit Telecom ordinary shares and
Esprit Telecom ADSs in the compulsory acquisition.
OFFER IN AND OUTSIDE THE US
The offer is being made in the US by Bear, Stearns & Co. Inc. and outside
the US by Bear, Stearns International Limited on behalf of GTS. References in
this Offering Circular/Proxy Statement/Prospectus to Bear Stearns should be read
accordingly.
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<PAGE> 23
TENDERS AND ACCEPTANCES
As used in this Offering Circular/Proxy Statement/Prospectus, the term
"acceptance" when used in relation to the offer shall be synonymous with
"tender" and the term "purchase" shall include an acquisition by an exchange of
shares.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this document, we make forward-looking statements that include
assumptions as to how GTS and Esprit Telecom may perform in the future. You will
find many of these statements in the following sections:
- "Risk Factors" beginning on page 17;
- "Certain Information Concerning GTS" beginning on page 119;
- "Certain Information Concerning Esprit Telecom" beginning on page 207;
- "The Offer -- GTS Board's Reasons for the Offer; Recommendation of the
GTS Board" beginning on page 61.
- "Opinion of Lehman Brothers" beginning on page 56;
- "The Offer -- The Esprit Telecom Board's Reasons for Recommending the
Offer; Recommendation of Esprit Telecom Board" beginning on page 55; and
- "Opinion of Bear Stearns" beginning on page 62.
Also, when we use words like "may," "may not," "believes," "does not
believe," "expects," "does not expect," "anticipates," "does not anticipate" and
similar expressions, we are making forward-looking statements. Such statements
should be viewed with caution.
The risk factors described herein and other factors, many of which are
beyond our control, could cause actual results or outcomes to differ materially
from those expected in any forward-looking statements of Esprit Telecom or GTS,
and investors, therefore, should not place undue reliance on any such
forward-looking statements. Any forward-looking statement denotes only GTS
management's good faith projections without representation or warranty
whatsoever that such projections will actually occur and speaks only as of the
date on which such statement is made, and neither Esprit Telecom nor GTS
undertakes any obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors or their effect on such projections. Furthermore, management cannot
assess the impact of each such factor on the business of Esprit Telecom or GTS
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.
In addition, you should consider carefully the forward-looking statements
set forth under the captions "Business," "Legal Proceedings," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Quantitative and Qualitative Disclosures About Market Risk" and "Taxation" in
Esprit Telecom's Annual Report on Form 20-F for the fiscal year ended September
30, 1998, which sections are incorporated by reference herein. Neither GTS nor
Esprit Telecom assumes any obligation to update these forward-looking statements
to reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
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RISK FACTORS
You should consider the following risk factors, in addition to the other
information contained or incorporated by reference in this document, in
determining how to vote at the special meeting, if you are a GTS stockholder, or
whether to tender your Esprit Telecom Ordinary Shares or Esprit Telecom ADSs, if
you are a holder of Esprit Telecom Securities.
RISKS RELATING TO THE OFFER AND COMBINED OPERATIONS OF THE COMPANIES
Fixed Exchange Ratio. At the completion of the offer and the compulsory
acquisition, each Esprit Telecom Ordinary Share tendered will be exchanged for
0.1271 of a new share of GTS Stock and each Esprit Telecom ADS tendered will be
exchanged for 0.89 of a new share of GTS Stock. The exchange ratio is fixed and
will not be adjusted should any increase or decrease occur in the price of any
Esprit Telecom Ordinary Shares, Esprit Telecom ADSs or GTS Stock. The market
value of shares of GTS Stock, Esprit Telecom Ordinary Shares and Esprit Telecom
ADSs may fluctuate significantly throughout the offering period until the
completion of the offer and the compulsory acquisition due to:
- market perception of the synergies and cost savings expected to be
achieved by the offer;
- changes in the business, operations or prospects of GTS or Esprit
Telecom;
- market assessments of the likelihood that the offer will be consummated
and the timing of the consummation of the offer;
- currency fluctuations; and
- general market and economic conditions.
Because the exchange ratio will not be adjusted to reflect changes in the
relative market values of GTS Stock, Esprit Telecom Ordinary Shares and Esprit
Telecom ADSs, the relative market values of shares of GTS Stock issued in the
offer and the Esprit Telecom Ordinary Shares and ADSs tendered in the offer may
be higher or lower than the relative market values of such shares at the time
the offer was negotiated.
Nonrealization of Synergies. The combination of GTS and Esprit Telecom
involves the integration of separate companies that have previously operated
independently. The process of combining the companies may be disruptive to the
businesses and may cause an interruption of, or a loss of momentum in, the
businesses as a result of a number of obstacles such as:
- loss of key employees or customers;
- possible inconsistencies in standards, controls, procedures and policies
among the companies being combined and the need to implement common
company-wide financial, accounting, information, billing and other
systems;
- failure to maintain the quality of customer service that such companies
have historically provided;
- the need to coordinate geographically diverse organizations;
- incompatible equipment;
- limitations under existing Esprit Telecom debt covenants; and
- the resulting diversion of management's attention from the day-to-day
business of GTS and the need to hire management personnel to address such
obstacles.
In addition to issues related to the integration of Esprit Telecom, the
recent acquisition of NetSource in November 1998 may present some of the
obstacles described above. The integration of NetSource is still in its
preliminary phase and GTS is not yet in a position to specify or quantify such
risks. It is possible, however, that issues related to inconsistencies in
standards, controls and procedures and the coordination of geographically
diverse organizations will be presented by the NetSource acquisition. GTS does
not expect there to be significant difficulties with respect to the last three
bullet points described above in connection with the NetSource acquisition. See
"-- Risks Specific to GTS -- Integration of Recent Acquisitions" (page 23).
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<PAGE> 25
GTS may fail to realize the expected cost savings, synergies and revenue
enhancements from such integration and may suffer material adverse short and
long-term effects on its operating results and financial condition.
Even if GTS is able to integrate the operations of the companies
successfully, there can be no assurance that GTS will realize the expected cost
savings, synergies or revenue enhancements from such integration or that GTS
will realize such benefits within the time frame that GTS currently expects.
- Whether GTS achieves expected economies of scale depends, in part, on
negotiations with third party providers of goods and services, the
results of which are difficult to predict. Accordingly, the amount and
timing of the resulting cost savings are inherently difficult to
estimate.
- Any cost savings and other synergies from the transaction will be offset
by costs incurred in integrating the companies.
- The cost savings and other synergies may also be offset by increases in
other expenses, by operating losses or by problems unrelated to the
transaction.
RISKS RELATING TO THE COMBINED BUSINESS AND THE INDUSTRY
ADDITIONAL CAPITAL REQUIREMENTS
The combined business will need substantial capital to:
- implement GTS' European Services Strategy,
- develop and expand the Esprit Telecom and HER networks,
- open new sales offices,
- introduce new telecommunications services,
- fund operating losses and net cash outflows, and
- make future acquisitions and investments in joint ventures.
As part of its business strategy, GTS regularly evaluates potential
acquisitions and joint ventures. GTS believes that additional attractive
acquisition opportunities currently exist in its markets in Western and Central
Europe and the Commonwealth of Independent States. GTS continuously considers a
number of potential transactions, some of which may involve GTS contributing
some of its Russian businesses in exchange for an interest of equal or greater
value in the surviving entity and, if consummated, may be material to its
operations and financial condition. GTS does not have a definitive agreement
with respect to any material acquisition or joint venture, although it
periodically has discussions with other companies to assess opportunities on an
on-going basis. GTS may need to raise additional capital to fund such
acquisitions or joint ventures.
The amount of the combined business' future capital requirements will
depend upon the performance of its business, the rate and manner in which it
expands, develop and increases customer growth, its decision to acquire or
divest business or invest in joint ventures and other factors that are not
within its control, including competitive conditions, regulatory or other
government actions and capital costs. The actual amount and timing of its future
capital needs, however, may differ materially from GTS' estimates as a result of
the following factors:
- The accuracy of its estimates of future capital needs is subject to
changes and fluctuations in its revenues, operating costs and development
expenses. Actual revenues and costs may vary materially from expected
amounts and depend on:
- Esprit Telecom and HER's abilities to effectively and efficiently manage
the expansion of their networks and operations;
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<PAGE> 26
- HER's ability to obtain infrastructure contracts, rights-of-way,
licenses and other regulatory approvals that it needs to complete and
operate its network;
- the combined business' ability to purchase equipment for building
networks which support products and services and to negotiate favorable
contracts with suppliers, including large volume discounts on its
purchases of capital equipment;
- the combined business' ability to access targeted customers and markets,
attract sufficient numbers of customers and provide and develop services
for which customers will subscribe; and
- factors outside the combined business' control, such as political and
economic developments and trends, regulatory changes, changes in
technology, increased competition, strikes, weather, performance by
third parties and other factors in connection with its operations.
- If the combined business expands its operations at an accelerated rate
or acquires any businesses, its funding needs may increase, possibly to
a significant degree, and the combined business may spend its cash
balances sooner than currently expected.
- As a result of acquiring a majority interest in Ebone on June 24, 1998,
HER may need to fund Ebone if Ebone is not able to self-fund in
accordance with its business plan.
- As a result of acquiring a majority interest in NetSource on November
30, 1998, the combined company may need to fund NetSource if NetSource
is not able to self-fund its business plan.
GTS cannot estimate with any degree of certainty the amount and timing of
its future capital requirements to implement such strategy. GTS anticipates that
the amount of capital it needs to continue to implement its European Services
Strategy will depend on several factors including, among others, the demand for
its services, the markets in which it builds or buys networks and regulatory,
technological and competitive developments. As a result of the foregoing, in the
event that the combined business' plans or assumptions change or that its
capital resources prove to be insufficient to fund growth and operations in the
manner and at the rate it currently anticipates, the combined business may be
required to raise additional capital. If the combined business decides to raise
additional funds by incurring debt, it may become subject to additional or even
more restrictive financial covenants (as a result of the assumption of Esprit
Telecom's outstanding debt securities) and its cash interest expense obligations
may increase. If the combined business decides to raise additional funds by
issuing equity, your ownership of the combined business' stock may be diluted.
GTS cannot assure you that additional financing will be available to it on
favorable terms or at all. If the combined business fails to generate sufficient
funds in the future, whether from operations or by raising additional debt or
equity capital, it may have to delay or abandon some or all of its development,
expansion and acquisition plans, or it may have to sell assets. As a result, it
may not have the ability to develop the necessary geographic reach, networks,
offer products, services and compete as effectively as contemplated. These
outcomes could have a material adverse effect on GTS' operations and on the
market price of its stock. See "-- Government Regulation" (page 32),
"-- Competition" (page 33), "-- Changes in Technology" (page 36), "-- HER
Network Roll-out" (page 21), "GTS Management's Discussion and Analysis of
Financial Condition and Results of Operations" (page 172), "Description of
GTS -- Western Europe -- HER" (page 123), and "--Risks Specific to Esprit
Telecom -- Need for Additional Financing" (page 41).
RISKS SPECIFIC TO GTS
SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS; RESTRICTIONS IN
DEBT AGREEMENTS ON GTS' OPERATIONS
GTS is, and will continue to be, highly leveraged as a result of the
substantial indebtedness it has incurred and intends to incur to implement its
business plans. GTS had approximately $1.2 billion of debt outstanding at
September 30, 1998. Upon consummation of the offer, GTS will assume Esprit
Telecom's debt, which was $554.9 million at September 30, 1998. GTS' debt
instruments permit GTS and its subsidiaries to incur certain additional
indebtedness to fund expansion of its businesses and for other permitted
purposes. In addition, GTS contemplates that it will raise additional debt
financing to implement its European Services Strategy. On
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January 4, 1999, HER issued in a private placement US$200 million aggregate
principal amount of 10 3/8% Senior Notes due 2009 and Euro 85 million aggregate
principal amount of 10 3/8% Senior Notes due 2006. GTS, however, has not yet
decided on the size and timing of any additional financing. Esprit Telecom's
debt instruments permit Esprit Telecom, and upon consummation of the offer, will
permit GTS, to incur certain additional indebtedness, including indebtedness
incurred to finance the expansion of Esprit Telecom's network.
The high level of GTS's indebtedness could have important consequences on
its operations, including that it:
- will need significant cash to service its debt, thereby reducing funds
available for operations, future business opportunities and investments
in new or developing technologies and making GTS more vulnerable to
adverse economic conditions;
- may have difficulty refinancing GTS' existing debt or may be restricted
from obtaining additional financing to fund future working capital,
capital expenditures, debt service requirements, acquisitions or other
general corporate requirements;
- may have less flexibility in planning for, or reacting to, changes in
GTS' business and in the telecommunications industry;
- may have less flexibility in responding to changes which affect how GTS
implements its financing, construction or operating plans;
- will be more highly leveraged than some of GTS' competitors, which may
place it at a competitive disadvantage with respect to such competitors;
and
- will limit GTS' ability to withstand adverse economic conditions or take
advantage of significant business opportunities that may arise.
In addition, GTS will be required to comply with certain financial
covenants and other restrictions contained in GTS's existing debt agreements.
Certain of the covenants included in Esprit Telecom's debt agreements are more
restrictive than those in GTS' existing debt agreements. Upon consummation of
the offer, GTS will assume Esprit Telecom's debt, and any GTS businesses
contributed to Esprit Telecom will become subject to these more restrictive
covenants. Among other things, the GTS financial covenants limit GTS' ability
to:
- incur additional indebtedness,
- make capital expenditures,
- pay dividends, make distributions on GTS Stock or make certain other
restricted payments,
- create certain liens upon assets,
- dispose of certain assets, or
- enter into certain transactions with affiliates.
GTS cannot assure you that such covenants will not materially and adversely
affect its ability to finance its future operations or capital needs or to
engage in other business activities which it deems to be in its interest.
GTS will need to substantially increase net cash flow in order to pay the
principal of and interest on its debt, including debt assumed as a result of the
Esprit Telecom acquisition, and GTS cannot assure you that it will be able to
meet such obligations. If GTS is unable to generate sufficient cash flow or to
otherwise obtain the funds necessary to make required payments, or if it
otherwise fails to comply with the various covenants under the debt, it would be
in default under the terms of such debt. A default under such debt may permit
the holders thereof to accelerate the maturity of such debt, which in turn could
cause defaults under GTS, other indebtedness. GTS cannot assure you that under
these circumstances it would have sufficient funds or other resources to satisfy
all such obligations, on a timely basis or otherwise. Such default or
acceleration would also be likely to adversely affect the market price of GTS
Stock.
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HISTORY OF OPERATING LOSSES
GTS has historically sustained substantial operating and net losses. For
the following periods, GTS' reported net losses of:
<TABLE>
<CAPTION>
PERIOD NET LOSS
------ --------
<S> <C>
Year ended December 31, 1995................................ $ 40.4 million
Year ended December 31, 1996................................ $ 68.0 million
Year ended December 31, 1997................................ $117.0 million
Nine months ended September 30, 1998........................ $100.8 million
Inception through September 30, 1998........................ $343.7 million
</TABLE>
GTS' net losses in the first three quarters of 1998 exceeded those in the
comparable prior period in 1997. GTS expects to suffer losses in the fourth
quarter of 1998. On a pro forma basis giving effect to the consummation of the
offer for the shares of Esprit Telecom as if such consummation had occurred on
January 1, 1997 and January 1, 1998, respectively, GTS' net losses for the year
ended December 31, 1997 and the nine months ended September 30, 1998 would have
been $216.0 million and $204.9 million, respectively. Further development of its
business, including its European end-user services business, will require
significant additional expenditures, and GTS expects that it will have
significant operating and net losses and will record significant net cash
outflow, before financing, in coming years. GTS cannot assure you that its
operations, including its European end-user services business, will achieve or
sustain profitability or positive cash flow in the future. If GTS cannot achieve
and sustain operating profitability or positive cash flow from operations, it
may not be able to meet its debt service obligations or working capital
requirements, which would have a material adverse effect on its operations, and
would adversely affect the market price of GTS Stock. See "GTS Management's
Discussion and Analysis of Financial Condition and Results of Operations" (page
172).
HER NETWORK ROLL-OUT
Risks Relating to Completing HER Network
HER's ability to achieve its strategic objective will depend in large part
on the successful, timely and cost-effective completion of the HER network. HER
currently operates commercially over a portion of the network linking Brussels,
Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich,
Geneva, Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen and Stockholm.
However, various factors, uncertainties and contingencies may delay or adversely
affect the development of the remainder of the network. Many of these factors,
such as strikes, natural disasters and other casualties, are beyond HER's
control. In addition, HER will need to negotiate and conclude additional
agreements with various parties regarding, among other things, rights-of-way and
development and maintenance of the network infrastructure and equipment. GTS
cannot assure you that HER will conclude necessary agreements. Any delays in
concluding such agreements would materially and adversely affect the speed or
successful completion of the network. The successful and timely completion of
the network will also depend on, among other things, (i) third parties
performing their contractual obligations to engineer, design and construct
portions of the network on a timely basis and (ii) HER's ability to obtain and
maintain applicable governmental approvals.
HER is operating its network in Belgium, The Netherlands, the UK, France,
Germany, Switzerland, Italy, Denmark and Sweden, and HER expects that the 25,000
kilometer network will be operational by the end of the year 2000. HER believes
that its cost estimates and the build-out schedule are reasonable. However, the
actual construction costs or time required to complete the network build-out
could substantially exceed current estimates. Any significant delay or increase
in the costs to develop the HER network could have a material adverse effect on
HER and GTS' operations.
Development of the HER network is capital intensive. HER expects that
approximately $835 million in additional capital expenditures, including capital
lease obligations, will be incurred through the end of the year 2000 in
connection with the buildout of the HER network. HER believes that the net
proceeds from the issuance of the New HER Notes and its current indebtedness,
combined with HER's projected internally generated funds, should be sufficient
to fund HER's expected capital expenditures. However, the accrual
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amount and timing of HER's future capital requirements may differ materially
from management's estimates. Thus, additional financing may be needed to
construct the HER network, and GTS cannot assure you that such additional
financing will be available on terms acceptable to HER or at all. Failure to
obtain necessary financing may require HER to delay or abandon its plans for
deploying the remainder of the HER network, which may have a material adverse
effect on HER and GTS. However, the actual amount and timing of HER's future
capital requirements may differ materially from GTS' estimates. HER may need
additional financing to construct the HER network. GTS cannot assure you that
such additional financing will be available to HER on favorable terms or at all.
If HER fails to obtain necessary financing, HER might have to delay or abandon
its plans for deploying the remainder of the network, which would adversely
affect the viability of HER. HER's failure to obtain financing might also
require GTS to make additional capital contributions to HER at the expense of
its other operations. Either of these two outcomes could have a material adverse
effect on its operations and would adversely affect the value of GTS Stock.
Risks Relating to HER's Operations
HER's revenues and the cost of deploying its network and operating its
business will depend upon a variety of factors including:
- HER's ability to effectively and efficiently manage the expansion of its
network and operations;
- HER's ability to negotiate favorable contracts with suppliers;
- HER's ability to obtain additional licenses, regulatory approvals,
rights-of-way and infrastructure contracts to complete and operate the
network;
- HER's ability to access markets and attract sufficient customers;
- HER's ability to provide and develop services for which customers will
subscribe; and
- strikes, weather, performance by third parties and other factors that are
outside of HER's control.
Due to the uncertainty of these factors, actual costs and revenues may vary
from expected amounts, possibly to a material degree, and such variations would
likely affect HER's future capital requirements. See "GTS Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" (page 184).
HER must obtain additional agreements for the long-term lease of dark
fiber, rights-of-way and other permits to install fiber optic cable from
railroads, utilities and governmental authorities (known as infrastructure
providers) to build out the network. GTS cannot assure you that HER will be able
to maintain all of its existing agreements, rights and permits. Nor can GTS
assure you that HER will be able to obtain and maintain the additional
agreements, rights and permits it needs to implement its business plan on
acceptable terms. If HER lost substantial agreements, rights and permits or
failed to enter into and maintain required arrangements for the HER networks,
such events would have a material adverse effect on HER's business. In addition,
HER depends on third parties for leases of dark fiber for substantial portions
of its network. If HER is unable to enter into or maintain such leases, this
could have a material adverse effect on HER's business, as well as on GTS'
operations and the market price of GTS Stock.
GTS cannot assure you that the HER network will achieve the technical
specifications for which it was designed. HER also may be unable to upgrade the
network as technological improvements are introduced.
Falling Prices/Depressed Gross Margins
Prices in the European long distance industry have declined over the past
few years. GTS expects that prices will continue to decline as competition
increases and that continuing price cuts in certain retail markets will affect
the gross margins of certain of its customers. This, in turn, could affect HER's
gross margins, if not offset by increases in volume and reductions in costs.
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Risks Relating to Regulatory Approvals
To construct and operate the network in accordance with current plans, HER
must obtain the necessary regulatory approvals. Licenses, authorizations or
registrations have been obtained in Belgium, Denmark, France, Germany, Italy,
The Netherlands, Spain, Sweden, Switzerland, the UK and the United States. HER
intends to file applications in other countries (including Austria, Croatia,
Czech Republic, Hungary, Poland, Portugal, Slovakia and Russia) in anticipation
of service launch in accordance with the roll-out plan. With the exception of
Austria and Portugal, which are members of the European Union and whose laws
must comply with European Commission directives, these other countries have not
generally liberalized their telecommunications sectors. There can be no
assurance that they will do so in a timely manner or at all.
In addition, the terms and conditions of the licenses, authorizations or
registrations granted to HER may limit or otherwise affect HER's scope of
operations. There can be no assurances that HER will be able to obtain, maintain
or renew licenses, authorizations or registrations to provide the services it
currently provides and plans to provide, that such licenses, authorizations or
registrations will be issued or renewed on terms or with fees that are
commercially viable or that the licenses, authorizations or registrations
required in the future can be obtained by HER. The loss of, or failure to
obtain, these licenses, authorizations or registrations or a substantial
limitation upon the terms of these licenses, authorizations or registrations
could have a material adverse effect on HER and could adversely affect the
market price of GTS Stock. See "Description of GTS -- Western Europe
- -- HER -- Licenses and Regulatory Issues" (page 132).
INTEGRATION OF RECENT ACQUISITIONS
GTS acquired NetSource in November 1998 and, upon the consummation of the
offer, will acquire Esprit Telecom, which in turn acquired Plusnet in May 1998
and three other telecommunications businesses in 1997. In order to integrate
these businesses, GTS must continue to develop its financial and management
controls and information systems. The integration of these acquisitions has
required and will continue to require additional expenditures. Although GTS
expects these acquisitions to result in operating synergies, it cannot assure
you that these acquisitions will achieve the expected benefits or that such
benefits will be realized within the time frames that it contemplates. See
"-- Risks Relating to the Offer and Combined Operations of the
Companies -- Nonrealization of Synergies" (page 17).
RISKS RELATING TO EUROPEAN SERVICES STRATEGY
Early Stage of European Services Strategy. Although GTS has recently
completed the acquisition of NetSource, hired certain key personnel and filed
certain licensing applications, GTS is still in the early stages of implementing
its European Services Strategy. GTS' decision to proceed with the European
Services Strategy will depend on its ability to assess potential markets, obtain
required governmental authorizations, franchises and permits, identify
appropriate additional acquisition candidates, implement efficient information
processing systems for billing and customer service and develop a sufficient
customer base. If GTS fails to achieve any of the foregoing, it may need to
modify, delay or abandon some or all of its European Services Strategy. GTS
cannot estimate with certainty the amount and timing of its future capital
requirements to implement such strategy. See "-- Additional Capital
Requirements" (page 18), "GTS Management's Discussion and Analysis of Financial
Condition and Results of Operations" (page 172), and "Description of
GTS -- Western Europe -- European Services Strategy" (page 121).
Regulatory. Because GTS plans to provide, through GTS Business
Services -- Western Europe and GTS Access Services, an expanded array of
telecommunications services in Europe, it will become subject to significant
additional regulation at the European Union, national and local levels. GTS has
applied for licenses to operate as a competitive local exchange carrier in seven
cities in Germany and has submitted a draft application to the French regulatory
authorities, pursuant to which informal discussions have been conducted
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with respect to the greater Paris metropolitan area. Delays in receiving
regulatory approvals, or the enactment of adverse regulations or regulatory
requirements, may have the following adverse consequences:
- delay or prevent GTS from offering its end-user services in certain
European markets;
- restrict the types of end-user services GTS can offer;
- restrict GTS from deploying its local networks; and
- otherwise adversely affect GTS' operations.
GTS cannot assure you that it will be able to obtain the necessary
regulatory approvals on a timely basis or that it will not otherwise be affected
by regulatory developments, any of which may have a material adverse effect.
Competition. The business of providing telecommunications services in
Europe is extremely competitive. GTS' success will depend upon its ability to
compete with a variety of telecommunications providers in each of its markets.
Competitors will include large established national carriers, alliances among
telecommunications companies (such as Global One, an alliance among Sprint,
Deutsche Telekom AG and France Telecom SA, and KPN/Qwest, an alliance between
KPN N.V. and Qwest Communications International, Inc.), facilities-based
competitors (including MCI WorldCom, Inc., Viatel, Inc., Econophone, Inc.,
Primus Telecommunications Group, Incorporated and Cable & Wireless, plc),
resellers, data providers, Internet service providers and other providers of
bundled services. GTS may also face competition in one or more of its markets
from competitors using new or alternative technologies or new applications of
existing technologies. These competitors include cable television companies,
wireless telephone companies, microwave carriers and satellite companies. Many
competitors will have established customer bases and extensive brand name
recognition. Many competitors will have greater financial, management and other
resources.
GTS will compete primarily on the basis of price and, to a lesser extent,
on the type and quality of services offered. Many potential competitors are able
to use their substantial financial resources to cause severe price competition
in the markets in which GTS plans to operate, which would force GTS to lower its
prices to remain competitive. GTS also expects to lose a significant number of
customers as a result of the highly competitive nature of the markets. It may be
difficult for GTS to attract and retain a sufficient number of customers to
sustain its business. GTS cannot assure you that it will be able to effectively
market its expanded service offerings or that competitive pressures will not
have a material adverse effect.
Entering New Markets. GTS will have to make additional significant
operating and capital investments to implement the European Services Strategy.
GTS will need to develop new products and services and to establish direct
and/or indirect sales channels to market its offerings. Sophisticated
information and processing systems will be vital to its success, and it will
need to implement and integrate the necessary provisioning, billing and
collection systems for its services. Prior to its acquisition of NetSource, GTS
had no prior experience in offering expanded services in Europe or in targeting
European business and government customers. GTS may also rely on third party
vendors and contractors for network buildouts and information systems upgrades
and will need to obtain rights-of-way and other consents to develop its
networks. It cannot assure you that it will be able to implement the European
Services Strategy on a timely basis or at all. Any delays in establishing its
business in one or more of its targeted markets may have a material adverse
effect.
Reliance on Other Telecommunications Service Providers. To implement the
European Services Strategy, GTS will need to enter into interconnection
agreements with large established national carriers and other local service
providers operating in its target markets. GTS may also need to enter into
collocation agreements with, and lease trunking capacity from, such third
parties. GTS cannot assure you that it will be able to enter into these
interconnection and other agreements on terms that are satisfactory.
With respect to long distance and international services, GTS will need to
enter into resale agreements with long distance and international carriers.
These agreements often contain minimum volume commitments. GTS may be obligated
to pay underutilization charges if it overestimates its need for transmission
capacity. If GTS underestimates its need for transmission capacity, it may need
to pay more for the extra capacity needed.
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Acquisition-Related Risks. GTS may enter its targeted markets through
additional acquisitions following the NetSource and Esprit Telecom acquisitions.
Buying businesses will subject it to certain risks, including, among others:
- acquired operations and personnel may be difficult to integrate into its
operations;
- GTS' ongoing operations may be disrupted;
- integrating the acquired business may divert resources and management
time from running GTS' ongoing business; and
- changes in management may impair relationships with employees and
customers.
In addition, GTS' high level of debt (which, upon consummation of the
offer, will include the assumed debt of Esprit Telecom) and the terms of its
outstanding debt agreements may limit its ability to consummate additional
acquisitions. GTS cannot assure you that it will close any such acquisitions or
that it will be able to obtain any additional financing needed to finance such
acquisitions. Nor can GTS assure you that if GTS closes any acquisitions, the
acquired business will be successfully integrated into its operations or will
perform as expected.
Potential Adverse Impact on HER. Many of the services GTS plans to offer in
its European end-user services business will compete with the services offered
by the customers HER targets as an independent carriers' carrier. If GTS
Business Services -- Western Europe and GTS Access Services contract with HER
for capacity, GTS expects that they will enter into such arrangements on an
arms-length basis. However, the European Services Strategy could affect the
perception of HER as an independent operator and could negatively impact HER's
ability to attract and retain customers, which could, in turn, have a material
adverse effect on HER's operations.
RISKS RELATING TO REORGANIZATION OF RUSSIAN TELECOMMUNICATIONS INDUSTRY
The Russian government established Svyazinvest in 1994 to hold the
government's interest in 88 regional telecommunication companies. In April 1997,
President Yeltsin approved the transfer of additional government-owned
telecommunications assets to Svyazinvest. This transfer included the
government's 51% stake in Rostelecom (the government controlled international
and long distance operator). On July 30, 1997, Mustcom Ltd., a Cyprus-based
company that represents the interests of a consortium which includes ICFI
Cyprus, Renaissance International Ltd., Deutsche Morgan Grenfell, Morgan
Stanley, and certain entities affiliated with an affiliate of George Soros,
purchased a 25% stake in Svyazinvest for $1.87 billion. The President had also
authorized the sale of another 24% of Svyazinvest at a future date. This sale
was scheduled to occur in the second half of 1998. However, in view of the
deterioration of the Russian economy and political instability, the sale was
first cancelled and then rescheduled to take place by July 1999. See "-- Risks
Relating to Operations in Russia and the CIS -- Political" (page 27) and
"-- Economic" (page 28).
As a result of the government's actions, a single entity, Svyazinvest, now
owns a majority interest in most of GTS' principal venture partners and other
telecommunication service providers in Russia. These companies together provide
a range of international and domestic long distance and local telecommunications
services throughout Russia. The consolidation of many of its partners under
Svyazinvest and the possible sale of a significant interest in Svyazinvest to
foreign and/or Russian investors is likely to make Svyazinvest a stronger
competitor, and may lead to material adverse changes in the business
relationships between GTS and its Russian partners. The continuing privatization
of Svyazinvest and the evolution of Russia's government policy regarding
Svyazinvest and Rostelecom may have a material adverse effect on GTS and its
Russian ventures.
MANAGING RAPID GROWTH
GTS continues to construct segments of the HER network, expand its existing
operations and expand into additional geographic and service markets when
business and regulatory conditions warrant. GTS cannot assure you that it will
be able to construct and operate the entire HER network as currently planned,
that it will be able to expand with the markets in which its ventures are
currently operating or into additional markets
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at the rate it presently plans or that any existing regulatory barriers to such
expansion will be reduced or eliminated.
As a result of past and expected continued growth and expansion,
significant demands have been placed on GTS' management, operational and
financial resources and on its systems and controls. In order to manage GTS'
growth effectively, including growth resulting from acquisitions, GTS must
continue to implement and improve its operational and financial systems and
controls, purchase and utilize additional telecommunications facilities and
expand, train and manage the employee base. Inaccuracies in GTS' forecasts of
market demand could result in insufficient or excessive telecommunications
facilities and disproportionate fixed expenses for certain of its operations. As
GTS proceeds with its development and expansion, there will be additional
demands on its customer support, sales and marketing and administrative
resources and network infrastructure. GTS cannot assure you that GTS and its
ventures' operating and financial control systems and infrastructure will be
adequate to maintain and effectively manage future growth. If GTS fails to
continue to upgrade its administrative, operating and financial control systems
or unexpected expansion difficulties arise, there could be a material adverse
effect on its business, results of operations and financial condition.
RISKS RELATING TO OPERATIONS IN EMERGING MARKETS
GTS derives substantial revenues from its operations in emerging markets.
Emerging markets subject GTS to numerous risks, including the following:
- underdeveloped and unstable banking systems;
- corruption;
- unexpected changes in regulatory requirements, tariffs, customs and
duties and other trade barriers;
- difficulties in staffing and managing foreign operations;
- foreign exchange controls, which may restrict or prohibit funds from
being exchanged into US dollars and/or transferred abroad;
- potential adverse tax consequences from operating in multiple
jurisdictions with different tax laws;
- problems in collecting accounts receivable and devaluation of accounts
receivable in an inflationary economy;
- political risks and expropriation;
- technology export and import restrictions and prohibitions;
- delays from customs brokers or government agencies;
- seasonal reductions in business activity; and
- fluctuations in currency exchange rates.
The emerging market risks described above could have a material adverse
effect on business, results of operations and financial condition of GTS.
The political systems of many of the emerging market countries in which GTS
operates or plans to operate are slowly emerging from an extended period of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance and investment. Expropriation of private
businesses in such jurisdictions remains a possibility. Seizures of businesses
or assets may take the form of an outright taking, a ban on the exercise of
foreclosure rights, a confiscatory tax, refusal to renew licenses or other
policies. Such factors or actions to expropriate or seize its operations could
have a material adverse effect on GTS or its operations or frustrate or deny the
exercise of its rights. GTS cannot assure you that free market reforms
undertaken in certain of the emerging market countries in which it operates will
continue to proceed, let alone succeed, and signs of economic instability,
retrenchment and
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scapegoating are evident. These factors may reduce and delay business activity,
economic development and foreign investment.
Judicial officials operating in legal systems in emerging market countries
frequently have little or no experience with commercial transactions between
private parties. The extent to which GTS' contracts and other obligations owed
to GTS will be honored and enforced in emerging market countries is uncertain.
GTS may not be able to protect and enforce its rights in emerging market
countries, which could have a material adverse effect upon its operations.
Additionally, its businesses operate in uncertain regulatory environments. The
laws and regulations applicable to its activities in emerging market countries
are in general new and subject to change and, in some cases, inconsistent and
incomplete. GTS cannot assure you that local laws and regulations will become
stable in the future. Changes to such laws and regulations could materially
adversely affect operations and GTS' ability to pay its debts. Such changes
could adversely affect the value of GTS Stock. See "Description of GTS" (page
119).
RISKS RELATING TO OPERATIONS IN RUSSIA AND THE CIS
To date, GTS has earned substantially all of its revenue from operations in
Russia and the CIS. Foreign companies conducting operations in the former Soviet
Union face significant political, economic, and legal risks. GTS continuously
evaluates a number of potential transactions, some of which may involve the
contribution of certain of its Russian businesses in exchange for an interest of
equal or greater value in the surviving entity. The completion of any such
transaction could be material to operations and financial condition and could
increase GTS' exposure to such risks.
Political. The political systems of Russia and the other independent
countries of the CIS are in a stage of transition. These systems have been and
may become more unstable due to political gridlock, as well as the populace's
dissatisfaction with reform, social and ethnic unrest, economic difficulties and
changes in government policies. Such instability could lead to events that could
have a material adverse effect on operations in these countries.
In recent years, Russia has been undergoing a substantial political
transformation. During this transformation, the Russian parliament enacted
legislation to protect private property against expropriation and
nationalization. However, due to the lack of experience in enforcing these
provisions during the period they have been in effect and due to potential
political changes in the future, GTS cannot assure you that such protections
would be enforced. Expropriation or nationalization of all or a portion of its
business or its assets, whether by an outright taking, a ban on the exercise of
foreclosure rights or by confiscatory tax or other policies potentially without
adequate compensation, would have a material adverse effect on operations and
the market price of GTS Stock.
The various government institutions in Russia and the other independent
countries of the CIS and the relations between them, as well as the government's
policies and the political leaders who formulate and implement them, are subject
to rapid and potentially violent change. Any major changes in, or rejection of,
previous policies favoring political and economic reform by the President may
have a material adverse effect.
In March 1998, President Yeltsin dismissed his entire cabinet, including
Prime Minister Victor Chernomyrdin, citing, among other things, a need for more
dynamism and initiative in the Russian government. At that time, President
Yeltsin directed the formation of a new government led by Sergei Kireyenko, the
young Prime Minister committed to continuing political and economic reforms.
Since March 1998, dramatic political changes have occurred in Russia. In August
1998, Yeltsin dismissed the Kireyenko government and engaged in a struggle with
Parliament over leadership of the new government. Ultimately, under pressure
from Parliament, Yeltsin withdrew his nomination of Victor Chernomyrdin and
accepted Yevgeny Primakov as a compromise candidate. Primakov rapidly received
approval from the Duma.
Primakov has formed his government and is seeking to develop and implement
policies to address Russia's current economic crisis. Primakov is not expected
to follow the pro-market reform policies of his predecessors. His appointments
and policy pronouncements to date are mixed, suggesting that he favors lower
value-added and profit taxes, greater government intervention in the economy,
deficit spending and stricter
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currency controls. It is too soon to determine what impact Prime Minister
Primakov's policies will have on GTS' business in Russia. The political
situation remains very unsettled, especially in view of President Yeltsin's
deteriorating health and erratic stewardship of the country. In addition, it is
uncertain whether the resolution of these and other issues could have a material
adverse effect on the operations of GTS.
Furthermore, the political and economic changes in Russia have resulted in
significant dislocations of authority. As a result of the turmoil at the federal
government level and the continuing absence of a strong central government, the
regions of Russia are exercising more independence in both political and
economic policies. Significant organized criminal activity and high levels of
corruption among government officials exist where GTS operates. While GTS does
not believe it has been adversely affected by these factors to date, organized
or other crime could in the future have a material adverse effect.
Economic. Russia's serious economic crisis places at risk the economic
reforms the Russian government has enacted. In particular, the government has
suffered serious setbacks in reducing inflation and stabilizing the currency.
These reforms were designed to create the conditions for a more market-oriented
economy. For some time, Russia has experienced generally rising unemployment and
underemployment, high government debt relative to gross domestic product and
high levels of corporate insolvency. Russia continues to experience chronic
problems in its tax collection policies. Low tax receipts, coupled with the
recent downturn in commodity prices on world markets, have created a serious
liquidity problem. According to the International Finance Corporation, the
Russian stock market lost approximately 87% of its value in 1998 over concerns
about Russia's economy and political instability. Under these circumstances, GTS
cannot assure you that (i) reform policies will continue to be implemented and,
if implemented, will be successful, (ii) Russia will remain receptive to foreign
trade and investment or (iii) the economy will not suffer additional substantial
setbacks. If the Russian economy does not improve, it is likely this will have a
material adverse effect on the demand for GTS' services offered in Russia.
In response to these economic problems, in May and early June 1998, the
Russian Central Bank and other Russian governmental authorities adopted a number
of measures, including increasing the inter-bank lending rate charged by the
Russian Central Bank and the rate offered on sovereign debt obligations, in
order to maintain the value of the ruble and reduce the risk of the flight of
foreign capital from the Russian economy. On July 13, 1998, the International
Monetary Fund, the World Bank and the Japanese government announced a plan to
lend Russia $22.6 billion by the end of 1999. Since its disbursement of a first
tranche of $4.8 billion at the end of July 1998, the International Monetary Fund
has refused to release additional funds until the Russian government implements
a number of economic reforms, including measures to enhance tax collections and
narrow the budget deficit. The World Bank and the Japanese government appear to
be following the International Monetary Fund's lead with respect to their
remaining commitments under the $22.6 billion loan. The measures taken in May,
June and July 1998 failed to stabilize the economy and to provide adequate
liquidity.
On August 17, 1998, the Russian government and the Central Bank of Russia
announced emergency steps to improve liquidity (the "August 17 Decision").
Pursuant to this decision, the ruble's value was allowed to float between 6.0
and 9.5 rubles to the US Dollar. Also, a 90-day moratorium was placed on the
payment of foreign exchange to meet certain obligations of Russian entities.
Finally, the Russian government announced that it intended to restructure the
payment terms of certain treasury bills. Since the August 17 Decision, the
ruble's value has declined substantially below the 9.5 ruble/US Dollar floor set
in the August 17 Decision. As a result, GTS' financial performance has been
negatively affected. GTS recorded a $13.1 million pre-tax charge for the quarter
ended September 30, 1998, which consisted primarily of foreign currency exchange
losses for ruble-denominated net monetary assets. The remainder of the charge
consists of estimates for uncollectible accounts receivable and unrecoverable
cash deposits in certain Russian banks.
In addition, the Russian government has defaulted on payments, and proposed
a restructuring, of certain commercial and sovereign debt obligations which has
been criticized by Western holders of such obligations. As a result, it is
likely that the Russian government and Russian businesses will have difficulty
accessing Western financial markets for the foreseeable future.
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Although the 90-day moratorium has not been extended, the consequences of
the August 17 Decision and its aftermath remain unclear. GTS cannot assure you
that these emergency measures, coupled with the policies of Russia's new
government, will be sufficient to stabilize the currency, enhance liquidity,
avoid hyperinflation, improve the collections, narrow the budget or prevent
further economic dislocation. In particular, there is a risk that there could be
a further significant and sudden decline in the value of the ruble resulting in
additional exchange-related losses for GTS and increased loss of investor
confidence in the Russian economy. Such consequences could have a material
adverse effect on GTS and its financial condition and results of operations and
the Russian economy generally. See "-- Risks of Conducting Business in Foreign
Currencies" (pages 34 through 35).
The International Monetary Fund and the G-7 have thus far refused to
advance emergency funds to Russia to address the recent liquidity crisis. In
addition, the International Monetary Fund has decided not to disburse the
remaining portions of the $22.6 billion loan referenced above, and in
considering the disbursement of a $1 billion to $1.5 billion loan, subject to
the adoption of an appropriate budget for 1999, among other conditions of such
loan. This underscores the extent to which Russia, the CIS and other emerging
countries in which GTS operates are dependent upon substantial financial
assistance from several foreign governments and international organizations. If
any of this financial assistance is reduced or eliminated, economic development
in Russia and such other countries of the CIS may be adversely affected.
Russian and CIS businesses have a limited operating history in
market-oriented conditions. The relative infancy of the business culture is
reflected in the Russian banking system's under-capitalization and lack of
liquidity. Many Russian banks continue to have cash shortages. The Russian
Central Bank has reduced banks' reserve requirements in order to inject more
liquidity into the Russian financial system, but has stressed that it will not
bail out the weaker banks. Many of these banks are expected to disappear over
the next several years as a result of bank failure and anticipated consolidation
in the industry. A general Russian banking crisis could have a material adverse
effect on GTS' financial performance and the viability of GTS' receivables, GTS'
ability to recover funds deposited in Russian banks and on GTS' operations. The
banking crisis could also adversely affect the value of GTS Stock.
Regulation of the Telecommunications Industry. The Russian
telecommunications system is currently regulated largely through the issuance of
licenses. There is currently no comprehensive legal framework with respect to
the provision of telecommunications services in Russia, although a number of
laws, decrees and regulations govern or affect the telecommunications sector. As
a result, ministry officials have a fairly high degree of discretion to regulate
the industry. Although telecommunication licenses may not be transferred under
Russian law, Goskomsvyaz, the successor of the Russian Ministry of
Communications, has adopted the position that licensees may enter into
agreements with third parties to provide services under the licensee's license.
However, Goskomsvyaz does not generally review agreements entered into by
licensees. Current or future regulation of the Russian telecommunications
industry could have a material adverse effect.
Current Russian legislation governing foreign investment activities does
not prohibit or restrict foreign investment in the telecommunications industry.
However, press reports from Russia reveal that certain factions of the Russian
government are considering nationalizing certain strategic industries and
imposing foreign ownership restrictions as a result of the August 17 Decision
and its aftermath. Nationalization of industries or future regulation of foreign
investment in the telecommunications industry could have a material adverse
effect.
In addition, members of the Russian government cannot agree on the manner
and scope of government control over the telecommunications industry. Because
the telecommunications industry is widely viewed as strategically important to
Russia, GTS cannot assure you that government policies liberalizing control over
the telecommunications industry will continue. Any change in or reversal of such
governmental policies could have a material adverse effect. See "Description of
GTS -- Russia and the CIS -- Licenses and Regulatory Issues" (page 163).
Legal Risks. The Russian and CIS governments have made an effort to
transform their economies into more market-oriented economies. In particular,
they have rapidly introduced laws, regulations and legal structures intended to
give participants in the economy a greater degree of confidence in the legal
validity and
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enforceability of their obligations. Risks associated with the legal systems of
Russia and the other independent republics of the CIS include:
- the untested nature of the independence of the judiciary and its immunity
from economic, political or nationalistic influence;
- the relative inexperience of judges and courts in commercial dispute
resolutions and legal interpretation;
- inconsistencies among laws, presidential edicts, government decrees and
ministerial orders;
- the lack of legislative, judicial or administrative guidance on
interpreting the applicable rules;
- a high degree of discretion on the part of government authorities and
arbitrary decision making which increases, among other things, the risk
of property expropriation; and
- problems in enforcing judicial and administrative decisions.
The result has been considerable legal confusion, particularly in areas
such as company law, commercial and contract law, securities and antitrust law,
foreign trade and investment law and tax law. Accordingly, GTS cannot assure you
that it will be able to enforce its rights in any disputes with its joint
venture partners or other parties in Russia or the other independent republics
of the CIS. In addition, GTS cannot assure you that its ventures will be able to
enforce their respective rights in any disputes with partners, customers,
suppliers, regulatory agencies or other parties in these jurisdictions or that
it will be found to be in compliance with all applicable laws, rules and
regulations.
Taxes. Generally, taxes payable by Russian companies are substantial. In
addition, taxes payable by Russian companies are numerous and include taxes on
profits, revenue, assets and payroll as well as sales and value-added tax. In
addition, statutory tax returns of Russian companies are not consolidated and
therefore, each company must pay its own Russian taxes. Because there is no
consolidation provision, dividends are subject to Russian taxes at each level
that they are paid. Currently, dividends are taxed at 15% and the payor is
required to withhold the tax when paying the dividend, except with respect to
dividends to foreign entities that qualify for an exemption under treaties on
the avoidance of double taxation. To date, the system of tax collection has been
relatively ineffective, resulting in the continual imposition of new taxes in an
attempt to raise government revenues. This history, plus the existence of large
government budget deficits, raises the risk of a sudden imposition of arbitrary
or onerous taxes, which could adversely affect GTS.
Because of uncertainties associated with the laws and regulations of the
Russian tax system and the increasingly aggressive interpretation, enforcement
and collection activities of the Russian tax authorities, GTS' Russian taxes may
be in excess of the estimated amount expensed to date and accrued on GTS'
balance sheets. It is the opinion of GTS that the ultimate resolution of GTS'
Russian tax liability, to the extent not previously provided for, will not have
a material adverse effect on its Russian shareholding and financial condition.
However, depending on the amount and timing of an unfavorable resolution of this
contingency, it is possible that its future results of operations or cash flows
could be materially affected in a particular period.
In various foreign jurisdictions, GTS is obligated to pay value-added tax
on the purchase or importation of assets, and for certain other transactions. In
many instances, value-added tax liabilities can be offset against value-added
tax which GTS collects and otherwise would remit to the tax authorities, or may
be refundable. Because the law in some jurisdictions is unclear, the local tax
authorities could assert that GTS is obligated to pay additional amounts of
value-added tax. In the opinion of GTS, any additional value-added tax which GTS
may be obligated to pay would not be material.
ADEQUACY OF MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN EMERGING MARKETS
Many of the emerging market countries in which GTS operates, including
Russia and the other independent republics of the CIS, are deficient in
management and financial reporting concepts and practices, and lack modern
banking, computer and other control systems. GTS has also historically had
difficulty hiring
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and retaining a sufficient number of qualified employees to work in these
markets. As a result, GTS has had difficulty:
- establishing management, legal and financial controls;
- collecting financial data;
- preparing financial statements, books of account and corporate records;
and
- instituting business practices that meet Western standards.
GTS has a policy worldwide of complying with all applicable laws and
ensuring that all of its employees understand and comply with such laws. The
application of the laws of any particular country, however, is not always clear
or consistent. Emerging market countries often have commercial practices and
less developed legal and regulatory frameworks that differ significantly from
practices in the United States and other Western countries. In addition, some
practices, such as the payment of fees for the purpose of obtaining expedited
customs clearance and other commercial benefits that may be common methods of
doing business in these markets, might be unlawful under the laws of the United
States and other western countries. As a result of the difficulty GTS has
experienced in emerging markets in instituting business practices that meet
Western reporting and control standards, it has been unable to ascertain whether
certain practices by its ventures, which were not in accordance with GTS policy,
were in compliance with applicable US and foreign laws. If it were to be
determined that GTS or any of its ventures were involved in unlawful practices
and were the factual and legal issues relating thereto to be resolved adversely,
GTS or its ventures could be exposed, among other things, to significant fines,
risk of prosecution and loss of its licenses. See "-- Risks Relating to
Operations in Emerging Markets" (page 26) and "-- Government Regulation" (page
32).
In light of these circumstances, in the second half of 1996 GTS increased
its efforts to improve its management and financial controls and business
practices. GTS recruited a more experienced financial and legal team, including
a new Chief Financial Officer of GTS, a senior finance officer overseeing all of
the regions in which GTS operates, a senior finance officer for the CIS region,
and a senior legal officer for the CIS region. GTS also established a treasury
group and adopted a more rigorous Foreign Corrupt Practices Act compliance
program. GTS has developed and implemented a training program for employees
regarding US legal and foreign local law compliance. GTS also appointed a
Compliance Officer responsible for monitoring compliance with such laws and
training GTS personnel around the world. In connection with these developments,
GTS expanded its corporate business practices policy to include, in addition to
compliance with US laws such as the Foreign Corrupt Practices Act, compliance
with applicable local laws such as the conflict of interest rules under the 1996
Russian Joint Stock GTS Law, currency regulations and applicable tax laws.
In addition, in early 1997, GTS retained special outside counsel to conduct
a thorough review of certain of its business practices in the emerging markets
in which GTS operates to determine whether deficiencies existed that needed to
be remedied. As a result of this review, GTS replaced certain senior employees
in Russia and instituted additional and more stringent management and financial
controls. The review did not identify any violations of law that GTS believes
would have a material adverse effect on its financial condition. However, if GTS
were found by government authorities to have violated any law, depending on the
penalties assessed and the timing of any unfavorable resolution, future results
of operations and cash flows could be materially adversely affected in a
particular period.
Although GTS believes that the special counsel review was properly
conducted and was sufficient in scope, it cannot assure you that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated will be effective. GTS believes, however, that the actions
taken since the review to strengthen GTS' management, financial controls and
legal compliance will be adequate to address any possible deficiencies. In
addition, the Audit Committee of the GTS Board recently reviewed the legal
compliance procedures. The implementation of their recommendations and their
continued oversight of the compliance process in the future will help to ensure
that any problems in such procedures are addressed.
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DEPENDENCE ON CERTAIN LOCAL PARTIES; ABSENCE OF CONTROL
GTS developed many of its operations, including joint ventures under GTS
Business Services -- CIS, such as Sovintel, TeleRoss and GTS Cellular, in
cooperation or partnership with key local parties, such as regional telephone
companies. GTS is substantially dependent on its local partners to provide it
with marketing expertise and knowledge of the local regulatory environment. This
local knowledge helps facilitate the acquisition of necessary licenses and
permits. GTS' failure to form or maintain alliances with local partners, or the
preemption or disruption of such alliances by its competitors or otherwise,
could adversely affect its ability to penetrate and compete successfully in the
emerging markets in which it operates or plans to enter. In addition, in the
uncertain legal environments in which GTS operates, certain of its businesses
may be vulnerable to local government agencies or other parties who wish to
renegotiate the terms and conditions of, or terminate, their agreements or other
understandings with GTS.
Under the terms of various joint venture agreements, GTS has the right to
nominate key employees, direct the operations and determine the strategies of
such joint ventures' governance. However, its partners in some ventures have the
ability to frustrate the exercise of such rights. Significant actions by most
ventures, such as approving budgets and business plans, declaring and paying
dividends, and entering into significant corporate transactions effectively
require the approval of its local partners. Further, GTS would be unlikely as a
practical matter to want to take significant actions without the approval of its
joint venture partners. Accordingly, GTS' inability to unilaterally control the
operations of its joint ventures could have a material adverse effect on its
operations and on the market price of GTS Stock.
In addition, GTS frequently competes with venture partners in the same
markets. For example, Rostelecom, GTS' partner in Sovintel, is the dominant
international and domestic long distance carrier in Russia. Similarly, many of
GTS' regional telephone company partners in the TeleRoss Ventures offer cellular
services in direct competition with certain of the operations of GTS Cellular.
Such competition may lead to conflicts of interest for GTS or its partners in
the operations of these ventures. GTS cannot assure you that any such conflicts
will be resolved in its favor. See " -- Risks Relating to Reorganization of
Russian Telecommunications Industry" (page 25).
GOVERNMENT REGULATION
As a multinational telecommunications company, GTS is subject to varying
degrees of regulation in each of the jurisdictions in which its ventures provide
services. Local laws and regulations, and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which it operates.
Future regulatory, judicial and legislative changes could have a material
adverse effect. In addition, regulators or third parties may raise material
issues with regard to its compliance or noncompliance with applicable
regulations.
Many of GTS' ventures require telecommunications licenses, most of which
were granted for periods of 1 1/2 to 10 years. The terms and conditions of these
licenses may limit or otherwise affect the ventures' scope of operations. GTS
has had favorable experience obtaining, maintaining and renewing licenses in the
past. However, it cannot assure you that it will be able to obtain, maintain or
renew licenses to provide the services it currently provides and plans to
provide or that such licenses will be issued or renewed on terms or with fees
that are commercially viable. In addition, GTS cannot assure you that it can
obtain licenses required by future ventures. The loss of or a substantial
limitation upon the terms of these telecommunications licenses could have a
material adverse effect. See each section under "Description of GTS" entitled
"Licenses and Regulatory Issues" (pages 119 through 168).
A substantial portion of HER's strategy is based upon the timely
implementation of regulatory liberalization of the European Union
telecommunications market. This liberalization is occurring in accordance with
existing European Community directives. Although European Union member states
had a legal obligation to liberalize their markets in accordance with these
directives by January 1, 1998, further measures may be required to make markets
fully competitive. In addition, the European Commission granted Ireland,
Portugal, Spain, Luxembourg and Greece extensions from the January 1, 1998
deadline. Ireland and Spain, subsequently, liberalized on December 1, 1998.
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In order to give effect to European Community directives in each member
state, national governments must pass legislation implementing the directives.
Some European Union member states have yet to implement existing European
Community directives fully and similar delays may occur in the implementation of
any future directives. This could limit, constrain or otherwise adversely affect
HER's ability to provide certain services. Even if a European Union member state
adopts liberalization measures in a timely way, there may be significant
resistance to the implementation of such measures from established national or
regional telecommunications operators, regulators, trade unions and other
sources. Further, HER's provision of services in Europe may be materially
adversely affected if any European Union member state imposes greater
restrictions on international services between the European Union and other
countries than on international services within the European Union. These and
other potential obstacles to liberalization could have a material adverse effect
on HER's operations by preventing HER from establishing its network as currently
intended. These obstacles could also have a material adverse effect.
GTS cannot assure you that each European Union member state will proceed
with the expected liberalization on schedule, or at all, or that the trend
toward liberalization will not be stopped or reversed in any of the countries.
Accordingly, HER faces the risk that it will establish the HER network and make
capital expenditures in a given country in anticipation of regulatory
liberalization which may not occur.
COMPETITION
GTS faces significant competition in all of its existing telecommunications
businesses and for acquisition and development opportunities in both emerging
and Western European markets.
GTS' competitors in these markets include the following:
- established national or regional telecommunications operators,
- multinational telecommunications carriers,
- other telecommunications developers,
- certain niche telecommunications providers and
- joint venture partners.
In addition, as a result of the recent combination under Svyazinvest of the
Russian government's majority interest in Rostelecom and 85 of the regional
telephone companies, GTS may be subject to more coordinated competition from its
partners in the Russian telecommunications market in the future. Although GTS
believes it has a favorable and cooperative relationship with its joint venture
partners, GTS cannot assure you that these partners will continue to cooperate
with it in the future or that they will not increase competitive pressures. Any
measures taken by the partners that reduce their level of cooperation with GTS
could jeopardize its ability to participate in the management and operation of
its joint ventures and could have a material adverse effect.
The European and international telecommunications industries are
competitive. Various telecommunications companies, including MCI WorldCom, Inc.,
Viatel, Inc., KPN N.V., Qwest Communications International, Inc., Deutsche
Telekom AG and France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc, have announced plans to construct, have begun to
construct or are operating fiber optic networks across various European
countries.
HER "point-to-point" transborder service offering also competes with
circuits currently provided by large established national carriers through
international private leased circuits. The liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets. GTS cannot assure you
that HER will compete effectively against its current or future competitors.
Many of GTS' competitors have substantially greater technical, financial,
marketing and other resources. GTS cannot assure you that it will be able to
successfully overcome the competitive pressures to which it is
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subject in its present and future operating markets. See each section under
"Description of GTS" entitled "Competition" (pages 119 through 168).
Many of GTS' current and potential competitors are not subject to, or
constrained by the prohibitions of, the Foreign Corrupt Practices Act, including
the prohibition against making payments to government officials in order to
obtain commercial benefits. GTS is subject to, and seeks to comply with, the
limitations and prohibitions of such law, and accordingly may be subject to
competitive disadvantages to the extent that its competitors are able to secure
business, licenses or other preferential treatment through the making of such
payments. Accordingly, GTS cannot assure you that it will be able to compete
effectively against companies free from such limitations in the emerging markets
where such commercial practices are commonplace. See "-- Adequacy of Management,
Legal and Financial Controls in Emerging Markets" (page 30).
CERTAIN STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS
At December 31, 1998, the Soros Associates beneficially owned approximately
12.5% of GTS Stock (and 9.8%, assuming the Offer is consummated) and Alan B.
Slifka and certain of his affiliates beneficially owned 5.8% of GTS Stock (and
4.6%, assuming the Offer is consummated). In addition, two persons who are
affiliated with the Soros Associates serve on the GTS Board. As a result, either
of these two stockholder groups may significantly influence decisions which
stockholders must approve, such as the election of directors and other decisions
relating to the management of business.
RISKS OF CONDUCTING BUSINESS IN FOREIGN CURRENCIES
GTS conducts all of its operations outside the United States. As a result,
a substantial portion of its revenues (as well as the majority of its operating
expenses) are in foreign currencies, which will subject it to significant
foreign exchange risks. In particular, because GTS does business in certain
countries that have "soft currencies", it may accumulate cash in currencies that
are not readily convertible into hard currency, significantly limiting its
ability to repatriate its profits from those countries. These factors may
adversely affect GTS' operations, as well as limit its ability to reinvest
earnings from ventures in one country to fund the capital needs of its ventures
in other countries.
GTS has earned most of its revenue to date in Russia. The value of the
ruble against the US Dollar has steadily declined. As a result of the August 17
Decision and its aftermath, the value of the ruble against the US Dollar has
fallen even more significantly, negatively affecting GTS' financial performance.
During the quarter ended September 30, 1998, GTS recorded a $13.1 million
pre-tax charge. The largest portion of the charge consisted of foreign currency
exchange losses on its net monetary assets that are denominated in rubles. The
remainder of the charge reflects its estimate on its ability to collect accounts
receivable and the potential loss of cash deposits in Russian banks.
The tariffs GTS sets for its customers in Russia are generally denominated
in US Dollars, whereas GTS invoices and collects its charges in rubles. GTS'
major capital expenditures are generally denominated and payable in various
foreign currencies. When these capital expenditures involve importing equipment
and the like, current law permits it to convert its ruble revenues into foreign
currency to make such payments. However, as a result of the August 17 Decision
and its aftermath, it may become more difficult for GTS to convert rubles to US
Dollars or other "hard" currencies.
The ruble is generally non-convertible outside Russia, although, in late
April 1998, the Chicago Mercantile Exchange announced that the ruble is a
currency that will be available for futures and options trading. Within Russia,
the market for converting rubles into other currencies is limited and is subject
to rules that restrict the purposes for which conversion and payment are
allowed. This market may become even more restricted as a result of policies the
new Russian government may implement. The limited availability of other
currencies may tend to inflate their values relative to the ruble. It is
uncertain whether such a market in Russia will continue to exist.
The banking system in Russia is in crisis as a result of the August 17
Decision and its aftermath. Considerable delays may occur in the transfer of
funds within, and the remittance of funds out of, Russia. The
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90-day moratorium that the August 17 Decision imposed on certain foreign
exchange payments delayed transfers of funds. Although the 90-day moratorium has
expired, it could be renewed or established in another form if the Russian
government and Central Bank anticipate further liquidity crises. Any delay in
converting rubles into foreign currency to make a payment or delay in the
transfer of such foreign currency could have a material adverse effect.
When the Russian government announced the August 17 Decision, it abandoned
its policy since November 1997 of pegging the ruble/US Dollar exchange rate to
fluctuate within a certain narrow range. Since the August 17 Decision, the
Russian authorities have been unable to maintain a stable exchange rate. Thus,
an additional significant and sudden decline in the value of the ruble might
occur. A significant and sudden devaluation of the ruble could have a material
adverse effect on GTS and its results of operations.
GTS historically has not used hedging transactions to limit its exposure to
risks from doing business in foreign currencies. GTS has developed risk
management policies that establish guidelines for managing foreign exchange
risk. As part of these policies, GTS has designed a reporting process to monitor
the potential exposure on an ongoing basis. GTS uses the output of this process
to determine the materiality of foreign currency exposure and determine whether
it is practical and/or economically justified to execute financial hedges.
For those operating companies that transact their business in currencies
that are not readily convertible, GTS' ability to hedge exposure is limited
because financial hedge instruments for these countries are nonexistent or
limited and also pricing of these instruments is often volatile and not always
efficient. GTS attempts to minimize its exposure by indexing its invoices and
collections to the applicable dollar/foreign currency exchange rate to the
extent its costs (including interest expense, capital expenditures and equity)
are incurred in US dollars. Although GTS is attempting to match revenues, costs,
borrowing and repayments in terms of their respective currencies, GTS has
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 US dollar. In April 1998, HER entered into a currency swap contract
to limit its exposure to currency risks from the $265 million of 11.5% senior
notes that HER issued in August 1997.
EXCHANGE CONTROLS AND RISKS OF NOT BEING ABLE TO REPATRIATE PROCEEDS FROM
RUSSIAN INVESTMENTS
Russia has recently tightened currency and capital transfer regulations to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital from both the Russian Central Bank
and the Russian government. The incurrence and repayment of debt and the payment
of capital contributions in foreign currency to Russian entities are subject to
these regulations. GTS is resolving licensing issues with respect to certain
intercompany loans and capital contributions with the applicable government
agencies. GTS does not believe that the issues raised by these agencies
concerning its licenses will have a material adverse effect on its financial
condition or results of operations. It is possible, however, that the Russian
authorities could take an unexpected adverse position on these issues that could
materially affect its business.
GTS cannot assure you that Russian foreign investment and currency
legislation will continue to permit it to repatriate the proceeds from its
investments. GTS also cannot be sure whether the Russian authorities will impose
more restrictions on the conversion of ruble earnings into foreign currency to
pay dividends or repatriate profits. If further restrictions were imposed, they
would have a material adverse effect on its interests in Russia.
DEPENDENCE ON KEY PERSONNEL
GTS believes that its growth and future success will depend in large part
upon a small number of key executive officers, as well as on its ability to
attract and retain highly skilled personnel to work in the emerging markets in
which it operates. The competition for qualified personnel in the
telecommunications industry is intense, particularly in the emerging markets
where it operates. GTS cannot assure you that it will be able to hire and retain
qualified personnel. Despite changes of personnel in Russia and the CIS, GTS
believes it has
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maintained a strong management team. However, GTS cannot assure you as to what
effect such personnel changes will have on its operations in Russia and the CIS.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
GTS must record and process massive amounts of data quickly and accurately.
While GTS believes its ventures' management information systems are currently
adequate, these systems will have to grow as the businesses expand. GTS believes
that the successful expansion of its information systems and administrative
support will be important to its continued growth, as well as to its ability to
monitor and control costs, to bill customers accurately and on time and to
achieve operating efficiencies. GTS may, however, encounter delays or
cost-overruns or suffer adverse consequences in implementing these systems. Any
such delay or other malfunction of its management information systems could have
a material adverse effect on GTS' business, financial condition and results of
operations.
TAXES; NET OPERATING LOSS CARRYFORWARDS MAY NOT BE USABLE
The tax rules and regimes which exist in certain emerging markets in which
GTS operates or plans to operate are, in many cases, new and rapidly changing.
If GTS repatriates profits from those countries, it may incur additional taxes.
Also, other taxes, such as value added tax, excise taxes and import duties are
changing at an unpredictable pace and could have an adverse effect on its
operations.
GTS relies on certain tax benefits in the countries in which it operates as
well as in the United States. GTS' ability to use these tax benefits is subject
to changes in the rules relating to tax holidays and in the provisions of tax
treaties with the United States. Some of its ventures in the CIS and Hungary
benefit from tax holidays granted by local governments. These tax holidays range
from five to several years, and go into effect once GTS' operations achieve
profitability under local tax regulations. In addition to those tax holidays,
certain of GTS' foreign ventures have accumulated foreign tax loss carryforwards
in excess of $60.0 million.
As of December 31, 1997, GTS had net operating loss carryforwards for US
federal tax purposes of approximately $110 million expiring in 2003 through
2012. Because of the "change in ownership" provisions of the Tax Reform Act of
1986, GTS' ability to use the tax benefits from its net operating loss
carryforwards is \subject to an annual limit as a result of the initial public
offering and the follow on stock offering and convertible senior subordinated
debenture due 2010 offering carried out in July 1998.
GTS' financial statements do not reflect any provision for the tax benefits
from the US and non-US loss carryforwards. GTS cannot assure you that local tax
authorities will allow it to apply these loss carryforwards, in part or full, to
reduce taxes on its future income.
CHANGES IN TECHNOLOGY
The telecommunications industry has experienced rapid changes in
technology. These technological advances may reduce the effectiveness of
existing technology and equipment. The cost to implement emerging and future
technologies could be significant. Also, GTS buys or uses telecommunications
equipment from a number of vendors. GTS depends on these vendors to adapt this
equipment to meet varying local telecommunications standards. GTS may be unable
to maintain competitive services or obtain new technology on a timely basis or
on satisfactory terms. If it fails to maintain competitive services, or obtain
new technologies, that could have a material adverse effect on business,
financial condition and results of operations.
Developing and operating the HER network also poses certain technological
risks. The network is designed to use SDH technology. While SDH is an advanced
new transmission technology, HER may need to upgrade its technology from the SDH
platform to be able to offer its services at a cheaper price than its
competitors. GTS cannot assure you that the HER network will achieve the
technical specifications for which it was designed. HER also may be unable to
upgrade the network as technological improvements are introduced. These factors
could materially and adversely affect the viability of the HER network, the
prospects of GTS, its operations and the market price of GTS Stock.
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RISKS ASSOCIATED WITH POTENTIAL FAILURE OF GTS' SYSTEMS TO RECOGNIZE YEAR 2000
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. This 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,
send invoices, or engage in similar normal business activities.
GTS is undertaking a comprehensive program to address the Year 2000 issue
with respect to the following:
- GTS' information technology systems;
- GTS' non-information technology systems;
- GTS' business partners;
- The systems of GTS' telecommunications, hardware and software vendors;
and
- GTS' customers.
GTS' Year 2000 program involves four phases: (1) a wide ranging assessment
of Year 2000 problems that might affect GTS; (2) the development and
implementation of remedies to address discovered problems; (3) preventing future
Year 2000 problems from arising; and (4) the testing of GTS' system. GTS
completed phase 1 at the end of the fourth quarter of 1998. GTS began phases 2,
3 and 4 of this program during the first quarter of 1999. These phases are
expected to be completed during the second quarter of 1999. Both GTS and Esprit
Telecom have identified to each other individuals at each respective company who
will work together to assess and remedy Year 2000 problems that might affect the
combined business.
The proper functioning of GTS' systems also depends on the proper
functioning of systems of third parties, such as GTS' telecommunications,
hardware and software vendors and GTS' customers. In addition to currently
identifying GTS' own applications that will not be Year 2000 compliant, GTS is
taking steps to determine whether third parties are doing the same. The failure
of third parties to remedy their own Year 2000 problems may cause business
interruptions or shutdown, financial loss, regulatory actions, reputational harm
and/or legal liability. GTS cannot assure you that GTS' Year 2000 program or the
programs of third parties who do business with GTS will be effective or that
GTS' estimates about the timing and cost of completing GTS' program will be
accurate. See "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance." (page 187)
DIFFICULTY IN OBTAINING RELIABLE MARKET INFORMATION
GTS operates in markets in which it is difficult to obtain reliable market
information. GTS has based its business planning on certain assumptions
concerning total revenue, business and consumer breakdown revenue, revenue from
various products and services, pricing, competition, operating expenses and
capital expenditures and its own investigation of market size and conditions and
its experience in other markets. GTS cannot assure you that either its
assumptions or data provided by outside sources are accurate or that they are
indicative of actual market conditions.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE FROM SALES OF GTS STOCK
As of December 31, 1998, 64,744,221 shares of GTS Stock were outstanding
excluding (v) 9,639,506 shares for which outstanding warrants and options are
exercisable, (w) 5,880,050 shares into which the Convertible Bonds are
convertible, (x) the 8,481,417 shares into which the Debentures are convertible
and (y) shares issued in connection with the Offer.
Of the 64,744,221 outstanding shares of GTS Stock, the 12,765,000 shares
registered in the IPO and the 14,506,900 shares registered in the July 1998
Stock Offering will be freely tradable without restriction under the Securities
Act. However such shares held by "affiliates" may generally be resold only in
compliance with applicable provisions of Rule 144 under the Securities Act, as
described below. Of the remainder, approximately 20,000,000 additional shares
have been resold or may be resold under Rule 144 without restriction under the
Securities Act. An additional approximately 12,762,000 shares have been resold
or may
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be resold under Rule 144 subject to volume and manner limitations. In addition,
the 8,481,417 shares into which the Debentures are convertible will be freely
tradable without restriction under the Securities Act.
In addition, GTS has filed and the SEC has declared effective three
registration statements. One registration statement covers the resale of the
Convertible Bonds and the shares of GTS Stock into which the Convertible Bonds
are convertible. Two registration statements on Form S-8 cover the resale of
shares of GTS Stock issued to employees, officers and directors under our
employee benefit plans.
Furthermore, on January 20, 1999, GTS filed with the SEC a shelf
registration statement (the "Shelf Registration Statement") covering all of the
shares of GTS Stock (and securities convertible into or exercisable for shares
of GTS Stock) owned by Alan B. Slifka and his affiliates and the Soros
Associates that were not sold in the July 1998 Stock Offering (the "Affiliate
Shares"). As of the date hereof, the SEC has not declared effective this
registration statement. GTS agreed to file the Shelf Registration Statement in
exchange for these shareholders agreeing to certain restrictions on their
ability to resell such Affiliate Shares. These restrictions apply for specified
periods after closing of the July 1998 Offerings. Under these restrictions,
holders of Affiliate Shares cannot, subject to certain exceptions, sell any such
shares during the first six months after the closing date of the July 1998
Offerings. They may, however, sell 50% of such shares six months after the
closing date of the July 1998 Offerings; 75% of such shares nine months after
the closing date of the July 1998 Offerings; and 100% of such shares twelve
months after the closing date of the July 1998 Offerings. The Shelf Registration
Statement was filed on January 20, 1999. The Soros Affiliates have expressed to
GTS their view that, because the Shelf Registration Statement is not yet
effective, the above contractual restrictions may no longer apply and that they
are free to enter into transactions in respect of their Affiliate Shares subject
to applicable provisions of U.S. securities law. GTS has expressed to the Soros
Affiliates its view that such restrictions may continue to apply.
Certain limited partners of partnerships affiliated with Alan B. Slifka and
currently in dissolution may, upon giving GTS advance notice, withdraw some or
all of their shares of GTS Stock from registration under the Shelf Registration
Statement. By withdrawing their shares, those persons would no longer be bound
by the restrictions on sale. The number of shares of GTS Stock that such persons
may withdraw is capped at 726,953 shares of GTS Stock minus the number of shares
such persons sold in the July 1998 Stock Offering.
On January 21, 1999, GTS also filed a shelf registration statement covering
4,037,500 shares of GTS Stock that may be issued to holders of NetSource stock
in connection with the acquisition of NetSource. As of the date hereof, the SEC
has not declared effective this registration statement.
GTS cannot predict what effect, if any, that future sales of GTS Stock or
the availability of GTS Stock for sale would have on the market price for GTS
Stock. Sales of large numbers of shares of GTS Stock in the public market
pursuant to Rule 144 or pursuant to an effective registration statement under
the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for GTS Stock.
NO DIVIDEND PAYMENTS ARE EXPECTED
GTS does not intend to pay any cash dividends in the foreseeable future.
Also, its ability to pay dividends is prohibited under the terms of an existing
debt agreement. If GTS raises any capital in the future, it may be restricted
from paying dividends under the terms of such financings. In addition, the
August 17 Decision and other actions that the Russian government may take in the
future may restrict the ability of the ventures in Russia to declare and pay
dividends.
ANTI-TAKEOVER PROVISIONS
Certain anti-takeover provisions could delay or prevent a third party from
gaining control of GTS in a transaction that the GTS Board had not negotiated
and approved, even if such change in control would be beneficial to
stockholders. These anti-takeover provisions include:
- Section 203 of the Delaware General Corporations Law, which prohibits a
"business combination" between a corporation and an "interested
stockholder" within three years of the stockholder becoming an
"interested stockholder" except in certain limited circumstances.
- Certain provisions of GTS' charter and by-laws, including:
- a classified GTS Board serving staggered three-year terms;
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- restrictions on who may call a special meeting of stockholders;
- a prohibition on stockholder action by written consent;
- restrictions on the removal of directors;
- supermajority voting requirements with respect to certain amendments to
the Charter; and
- the authority to issue shares of preferred stock and to determine the
rights without stockholder approval.
- A shareholders' rights plan.
See "Description of GTS Capital Stock -- Certain Charter and By-law
Provisions" (page 108).
US JUDGMENTS MAY NOT BE ENFORCEABLE ABROAD
Substantially all of GTS' assets (including all of the assets of its
operating ventures) are located outside the United States. As a result, it will
be necessary to comply with foreign laws in order to enforce judgments obtained
in a US court (including those with respect to federal securities law claims)
against the assets of GTS' operating ventures. GTS cannot assure you that any US
judgments would be enforced under any such foreign laws.
STOCK PRICE MAY BE VOLATILE
The market price for GTS Stock could fluctuate due to various factors.
These factors include:
- political and economic development in emerging markets (including Russia
and the CIS);
- announcements by GTS or its competitors of new contracts, technological
innovations or new products;
- other announcements concerning GTS or its competitors;
- changes in government regulations;
- fluctuations in GTS' quarterly and annual operating results; and
- general market conditions.
In addition, the stock markets have, in recent years, experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, have adversely affected,
and may continue to adversely affect, the market price of GTS Stock.
RISKS SPECIFIC TO ESPRIT TELECOM
Set out below is a description of certain risk factors that may affect
Esprit Telecom's business and results of operations from time to time as an
independent company. Should the Offer be completed, these risk factors could
change in certain significant respects. In addition, the Offer could impact the
business of Esprit Telecom in a variety of respects the effects of which are not
yet known to Esprit Telecom, but which could ultimately have adverse effects on
Esprit Telecom. In particular, should the Offer not be completed, the business
of Esprit Telecom may be materially adversely affected.
LIMITED OPERATING HISTORY; HISTORICAL AND ANTICIPATED FUTURE OPERATING
LOSSES;NEGATIVE EBITDA; NET LOSSES
Esprit Telecom commenced operations in June 1992 with limited business in
Spain and has since further expanded its operations to cover the UK, Germany,
The Netherlands, France, Belgium, Ireland and Italy. As a result of its recent
development, Esprit Telecom has generated limited revenue in markets other than
the UK, Germany and The Netherlands. Esprit Telecom, its customer base and the
Esprit Network have grown significantly in the last three years as investments
from its principal shareholders and proceeds from financings have allowed Esprit
Telecom to expand into key European markets. In addition, Esprit Telecom intends
to enter new European markets and offer new telecommunications services.
Accordingly, Esprit Telecom can offer no assurance that Esprit Telecom's future
operations will generate operating or net income, and Esprit
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Telecom's prospects must therefore be considered in light of the risks, costs
and time constraints inherent in establishing operations and introducing new
telecommunications services in newly liberalizing markets.
Esprit Telecom has incurred and expects to continue to incur operating
losses, negative cash flow from operating activities and negative EBITDA while
it develops and expands the Esprit Network, integrates the Plusnet business into
its current operations, opens new sales offices and introduces new
telecommunications services. Esprit Telecom could continue to generate net
losses even after Esprit Telecom begins to generate positive EBITDA. Although
Esprit Telecom has experienced net revenue growth in each of the last four
years, such growth should not be considered to be indicative of future net
revenue growth, if any. For the years ended September 30, 1997 and September 30,
1998, Esprit Telecom sustained, on a UK GAAP basis, net losses of approximately
L10.9 million and L42.4 million, respectively, and negative EBITDA of L8.7
million and L18.3 million, respectively. Furthermore, Esprit Telecom expects
that operations in new markets will sustain negative cash flows until an
adequate customer base and the related revenue stream have been established. In
addition, prices in the long distance industry in Europe have declined in recent
years and, as competition continues to increase, Esprit Telecom expects that
prices will continue to decline. Although Esprit Telecom believes that such
decreases in price will be at least partially offset by increased traffic volume
and decreases in the cost of providing telecommunication services, Esprit
Telecom can offer no assurance that it will achieve or, if achieved, will
sustain profitability or positive cash flow from operating activities in the
future. If Esprit Telecom cannot achieve and sustain operating profitability or
positive cash flow, Esprit Telecom may not be able to meet its debt service
obligations or working capital requirements without additional financing.
Esprit Telecom expects that due to continuing price cuts in certain retail
markets, its gross margins will be affected until such time as such price cuts
are offset by anticipated network cost savings arising from increased capacity
on the Esprit Network on certain key routes and Esprit Telecom derives the
benefits from expected reductions in interconnection charges. Price cuts from
PTOs have been and may continue to be significant in nature and network cost
reductions may take time to be brought into effect. For example, in Germany,
Deutsche Telekom has recently gained regulatory approval to implement
significant reductions in its national tariffs from January 1999, which Esprit
Telecom expects may have an adverse impact upon its national long distance
revenues and gross margins. In addition, Esprit Telecom intends to substantially
increase the capacity and reach of the Esprit Network and expects that the
resulting additional leased line costs operating and maintenance will depress
gross margins until additional traffic volume increases network utilization.
As a result of its limited revenue and significant expenses associated with
the expansion and development of the Esprit Network, the opening of new sales
offices and the introduction of new telecommunications services and the
variations in international and national long distance traffic in certain
periods of the year, Telecom anticipates that its operating results could vary
significantly from quarter to quarter.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
Esprit Telecom has substantial indebtedness. At September 30, 1998, under
UK GAAP, Esprit Telecom's total indebtedness was approximately L401.7 million,
its shareholders' funds were a deficit of approximately L7.2 million and its
total assets were approximately L394.5 million, of which approximately L99.0
million would have been intangible assets. For the years ended September 30,
1997 and September 30, 1998, under UK GAAP, Esprit Telecom's consolidated EBITDA
was negative L8.7 million and negative L18.3 million, respectively, and its
earnings would have been insufficient to cover fixed charges by L10.9 million
and L42.4 million, respectively. In addition, Esprit Telecom and its
subsidiaries may incur additional indebtedness in the future, subject to
limitations imposed by their debt instruments, including, without limitation,
the indentures governing the Esprit Telecom Bonds. The Esprit Telecom Bond
Indentures do not limit the amount of indebtedness that may be incurred to
finance the cost of the expansion of the Esprit Network.
Esprit Telecom's net interest expense for the year ended September 30, 1998
was L12.2 million. Esprit Telecom will need to improve substantially its cash
flow from operating activities in order for Esprit Telecom to meet its debt
service obligations, including its obligations under the Esprit Telecom Bonds.
Esprit
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Telecom's ability to improve its operating performance and financial results
will depend not only on its ability to successfully implement its business plan,
but also upon economic, financial, competitive, regulatory and other factors
beyond its control, including fluctuations in exchange rates and general
economic conditions in Europe. Esprit Telecom can offer no assurance that it
will generate sufficient positive cash flow from operating activities in the
future to service its debt and to allow it to make necessary capital
expenditures. If Esprit Telecom is unable to generate sufficient positive cash
flow in the future, it may be required to refinance all or a portion of its
debt, including Esprit Telecom Bonds, to sell assets or to obtain additional
financing. Esprit Telecom can offer no assurance that any such refinancing would
be possible or that any such sales of assets or additional financing could be
achieved.
The high level of Esprit Telecom's indebtedness and the terms of such
indebtedness could have several important consequences in the future on Esprit
Telecom's operations, including the following:
- Esprit Telecom will have significant cash requirements to service
debt, thereby reducing funds available for operations and future
business opportunities and increasing the vulnerability of Esprit
Telecom to adverse general economic and industry conditions;
- Esprit Telecom may be restricted in the future from obtaining any
necessary financing for working capital, capital expenditure, debt
service requirements, acquisitions or other purposes;
- Esprit Telecom's flexibility in planning for, or reacting to, changes
in its business may be impeded;
- Esprit Telecom is more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage; and
- Esprit Telecom will be required to comply with certain financial
covenants and other restrictions contained in its debt instruments,
including the Esprit Telecom Bond Indentures.
If Esprit Telecom failed to meet its debt service obligations or to comply
with any of the covenants contained in any of its debt instruments Esprit
Telecom could trigger a default under those agreements, permitting the
acceleration of the maturity of the indebtedness under such agreements. Any
default or acceleration under such agreement could also result in other debt of
Esprit Telecom and its subsidiaries becoming immediately payable. Under any of
these circumstances, Esprit Telecom can offer no assurance that Esprit Telecom
and its subsidiaries would have sufficient funds or other resources to satisfy
all of such obligations on a timely basis or otherwise.
NEED FOR ADDITIONAL FINANCING
The development and expansion of the Esprit Network, the opening of new
sales offices and the introduction of new telecommunications services, future
acquisitions, as well as the funding of operating losses and net cash outflows,
will require substantial capital. During the years ended September 30, 1998,
1997 and 1996, Esprit Telecom made fixed asset investments of approximately
L41.2 million, L10.1 million and L6.0 million, respectively. Esprit Telecom has
historically been funded by equity contributions from the Principal
Securityholders, financing from banks, vendors and other third parties and net
proceeds from financings. None of the Principal Securityholders has any
obligation to make additional investments in Esprit Telecom. Esprit Telecom does
not currently maintain lines of credit or similar facilities with commercial
banks, but has obtained credit through vendor financing and credit secured by
Esprit Telecom's receivables. Other future sources of capital for Esprit Telecom
could include additional public and private debt and equity financings. Esprit
Telecom can offer no assurance that such sources of financing would be available
to Esprit Telecom in the future or, if available, that they could be obtained on
terms acceptable to Esprit Telecom.
Esprit Telecom's future requirements will depend upon many factors. Some of
these factors include the performance of Esprit Telecom's business, the rate and
manner in which it expands the Esprit Network and opens new sales offices, makes
future acquisitions and increases staffing levels and customer growth, as well
as other factors that are not within Esprit Telecom's control, including
competitive conditions, regulatory or other government actions and capital
costs. In the event that Esprit Telecom's plans or assumptions change or prove
to be inaccurate or the funds from financings, internally generated funds,
working capital and financings by
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vendors prove to be insufficient to fund Esprit Telecom's growth and operations
in the manner and at the rate currently anticipated, then some or all of Esprit
Telecom's development and expansion plans could be delayed or abandoned, or
Esprit Telecom may be required to seek additional funds earlier than currently
anticipated, including from additional debt and/or equity financings.
NETWORK DEVELOPMENT AND EXPANSION RISKS
Esprit Telecom's continued expansion and development of the Esprit Network
will depend on, among other things, Esprit Telecom's ability to enter new
markets, access transmission backbone network routes, install service and sales
facilities, acquire rights-of-way and building access, obtain required
governmental licenses, authorizations and permits and interconnect with the
networks of the incumbent PTOs or other infrastructure providers, all in a
timely manner, at reasonable costs and on terms and conditions acceptable to
Esprit Telecom. The successful implementation of Esprit Telecom's expansion
strategy will be subject to a variety of risks, including operating and
technical problems, regulatory uncertainties, possible delays in the full
implementation of the EU Directives regarding telecommunications liberalization,
competition and the availability of capital.
Esprit Telecom's ability to achieve its strategic objective is in large
part dependent on the successful, timely and cost-effective expansion of the
Esprit Network. The Esprit Network currently consists of leased fiber optic
lines, dark fiber, with associated SDH and WDM equipment, digital microwave
transmission facilities and MIUs and IRUs on undersea cables. The expansion and
development of the Esprit Network will focus on capacity that is owned or
controlled by Esprit Telecom. Such expansion and development may be delayed or
adversely affected by a variety of factors, uncertainties and contingencies many
of which, such as technical difficulties in an environment of multiple local
technical standards, are beyond Esprit Telecom's control. In addition, Esprit
Telecom may need to engage in time consuming negotiations for low cost access to
networks which may place Esprit Telecom at a disadvantage with respect to
competitors who have already entered into such agreements. Esprit Telecom can
offer no assurance that the Esprit Network will grow and develop as planned or,
if developed, that such growth or development will be completed on schedule, at
a commercially reasonable cost or within Esprit Telecom's specifications.
Although Esprit Telecom believes that its cost estimates and the build-out
schedule are reasonable, Esprit Telecom can offer no assurance that the actual
construction or acquisition costs or time required to complete the network
build-out will not substantially exceed current estimates. Any significant delay
or increase in the costs associated with the expansion and development of the
Esprit Network could have a material adverse impact on Esprit Telecom, including
its ability to make payments on Esprit Telecom Bonds, and on Esprit Telecom's
business, results of operations and financial condition generally.
RISKS ASSOCIATED WITH THE OPERATION OF THE ESPRIT NETWORK
Esprit Telecom's success is dependent on the seamless technical operation
of the Esprit Network and on the management of traffic volumes and route
preferences over the same. Furthermore, as Esprit Telecom is continuously
expanding the Esprit Network to increase both its capacity and reach, and as
traffic volume continues to increase in accordance with anticipated growth,
Esprit Telecom will face increasing demands and challenges in running and
managing the network functions, including its circuit capacity and traffic
management systems. The Esprit Network is subject to several risks which are
outside of Esprit Telecom's control, such as the risk of damage to software and
hardware resulting from fire, power loss, natural disasters and general
transmission failures caused by a number of additional factors. Any failure of
the Esprit Network or other systems or hardware that causes significant
interruptions to Esprit Telecom's operations could have a material impact on
Esprit Telecom's business, financial condition or results of operations. Esprit
Telecom's operations are also dependent on its ability to successfully integrate
new and emerging technologies and equipment, in particular the technology and
equipment of the Plusnet Business, and the SDH and WDM equipment associated with
Esprit Telecom's broadband fiber network, into the Esprit Network, which could
increase the risk of system failure and result in further strains upon the
Esprit Network. Esprit Telecom attempts to minimize customer inconvenience in
the event of a system disruption by routing traffic to other circuits and
switches which may be controlled by other carriers. However, prolonged or
significant system
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failures, or difficulties for customers in accessing, and maintaining connection
with, the Esprit Network could threaten Esprit Telecom's relationship with its
clients, and would seriously damage the reputation of Esprit Telecom and result
in customer attrition and financial losses. Additionally, any damage to Esprit
Telecom's Network Management Center and major switching centers could have a
material negative impact on Esprit Telecom's ability to monitor and manage the
network operations and generate accurate call detail reports from which billing
information is derived.
The expansion and development of the Esprit Network will entail significant
expenditure and resources for projecting growth in traffic volume and routing
preferences, and determining the most cost-effective means of growing the Esprit
Network (i.e., through variable or fixed lease arrangements, the purchase of
transmission rights on fiber optic lines or digital microwave equipment, or the
construction of transmission infrastructure). If Esprit Telecom fails to project
traffic volume and route preferences correctly or to determine the optimal means
of expanding the Esprit Network resulting in less than optimal utilization of
the Esprit Network, Esprit Telecom's business, results of operations and
financial condition could be materially adversely affected.
DEPENDENCE ON FACILITIES PROVIDERS AND INTERCONNECT ARRANGEMENTS
At the present time, Esprit Telecom has completed a relatively small part
of its planned telecommunications transmission infrastructure and leases the
remainder under a variety of arrangements with facilities-based long distance
carriers. As a result, Esprit Telecom depends upon facilities-based carriers
such as the PTOs and other alternative telecommunications networks in each of
the countries in which Esprit Telecom operates. Some of these carriers are or
may become competitors of Esprit Telecom. In addition, Esprit Telecom's ability
to connect its retail customers to the Esprit Network is dependent on Esprit
Telecom securing interconnection agreements with the local PTOs in the markets
where Esprit Telecom operates. Esprit Telecom has entered into interconnection
agreements in the United Kingdom, Germany, The Netherlands, France and Belgium,
and expects to secure additional agreements covering some of its remaining
markets as the EU telecommunications market continues to benefit from the
liberalization which took legal effect in January 1998. Esprit Telecom can offer
no assurance that it will be successful in securing such arrangements at
attractive rates. Esprit Telecom historically has not experienced material
difficulties with the quality of the services provided by facilities-based
carriers and, except for initial difficulties in Spain, has generally not
experienced material difficulties in accessing such carriers' transmission
infrastructure. Based on its experience in a number of other countries, Esprit
Telecom believes that facilities-based carriers often try to limit access to
their facilities by new competitors. Esprit Telecom's profitability depends in
part on its ability to obtain and utilize leased capacity arrangements on a
cost-effective basis and secure interconnection arrangements on a timely basis
and at favorable rates.
Esprit Telecom currently leases a substantial portion of its network
transmission capacity pursuant to agreements which generally have twelve-month
or longer fixed terms. These lease arrangements present Esprit Telecom with high
fixed costs, while the revenues generated by the utilization of such leases will
vary with traffic volumes and prices. Accordingly, if Esprit Telecom does not
generate the requisite traffic volume over the particular route or is unable to
charge an appropriate price for such traffic, Esprit Telecom could fail to
generate revenue sufficient to meet the lease costs, and may incur operating
losses on the particular route or routes. In addition, most of Esprit Telecom's
off-network transmission is obtained under a variety of volume-based
arrangements with facilities-based carriers including PTOs. Under these
arrangements, Esprit Telecom is subject to the risk of unanticipated price
fluctuations and service restrictions or cancellations.
Esprit Telecom believes that its arrangements and relationships with
carriers generally are satisfactory. However, the deterioration or termination
of Esprit Telecom's arrangements and relationships, or Esprit Telecom's
inability to enter into new arrangements and relationships with one or more
carriers could have a material adverse effect upon Esprit Telecom's cost
structure, service quality, network coverage, results of operations and
financial condition.
DEPENDENCE ON EFFECTIVE BILLING AND MANAGEMENT INFORMATION SYSTEMS
Esprit Telecom must record and process millions of call detail records
quickly and accurately in order to efficiently produce customer bills in a
timely and flexible manner. While Esprit Telecom's existing billing
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system is sufficient for its current operations, Esprit Telecom has selected a
new billing system which it believes will provide the capability and flexibility
to support Esprit Telecom's anticipated growth. The introduction of this system
will be accompanied by additional systems designed to support the critical
service activation, customer care and service assurance processes, and is
expected to enable Esprit Telecom to bring most of its billing processes in
house. Esprit Telecom is also planning to introduce new management information
systems which it believes will allow Esprit Telecom to continuously monitor its
operations, thus enabling Esprit Telecom to achieve additional network and
operating efficiencies and to improve management control. Esprit Telecom expects
that a number of new systems will be implemented by mid-1999, and that such
systems will require continuous enhancements and ongoing investments, especially
as traffic volume increases and as Esprit Telecom continues to improve its
systems to minimize problems common to the telecommunications industry, such as
call record losses, and to ensure the timely production of bills. While the
Plusnet Business and IMS continue to use their own billing systems, Esprit
Telecom expects that these systems will be integrated into Esprit Telecom's new
billing process by mid-1999. Esprit Telecom can offer no assurance that Esprit
Telecom will not encounter difficulties in implementing and enhancing the new
billing and management information systems and in integrating new technology
into such systems. If Esprit Telecom were to be unable to implement the new
systems or any required system enhancement, to acquire new systems or to
integrate new technology in a timely and cost-effective manner, its business,
results of operations and financial condition could be materially adversely
affected.
YEAR 2000 TECHNOLOGY RISKS
A significant percentage of the software running on most of the computers
worldwide relies on two-digit date codes to perform a number of computation and
decision making functions. The date change from 1999 to 2000 may impair the
ability of these programs to interpret date codes properly, which could result
in system failures, miscalculations or errors, causing disruptions of operations
or other business problems, including the inability to process transactions,
send invoices or engage in similar normal business activities.
Esprit Telecom is undertaking a comprehensive program to address the Year
2000 issue with respect to:
- its transmission, switching, billing and management information
systems;
- its non-information technology systems (including buildings, plant,
equipment and other infrastructure that may contain embedded
technology); and
- systems of its primary traffic carriers and vendors.
Esprit Telecom is also trying to raise awareness of Year 2000 issues in its
customers' systems.
This program involves four phased steps:
- identifying and assessing potential Year 2000 problems which may
impact Esprit Telecom;
- developing remedial strategies and actions to address those problems;
- implementing those remedial strategies and actions; and
- testing the foregoing solutions.
The program also involves analyzing Esprit Telecom's most reasonably likely
worst-case Year 2000 scenario. Esprit Telecom expects that this would involve
either or both of the following:
- a loss of interconnect capacity from one or more major suppliers of
transmission capacity; and/or
- Esprit Telecom's inability to record, track or invoice billable
minutes which could ultimately cause it to temporarily stop carrying
traffic.
Either scenario would adversely affect Esprit Telecom's revenue and, if not
quickly remedied, would have a material adverse effect on its business, results
of operations and financial condition.
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Assessment
Esprit Telecom is currently in the process of auditing and testing its
systems to determine if they will suffer problems associated with the transition
to the Year 2000. Since a complete analysis of Esprit Telecom's systems would
require an interruption of service, Esprit Telecom is selectively testing
various elements of such systems. Esprit Telecom has an active in-house
assessment program, with a staff of six persons assigned to Year 2000 compliance
issues. Despite devoting these resources to addressing Year 2000 compliance,
Esprit Telecom has not delayed the implementation of any projects related to
management information systems. Esprit Telecom's Year 2000 compliance team is in
the process of reviewing each of Esprit Telecom's switching sites and other
network points to identify equipment, hardware and software that is unlikely to
function through the Year 2000 transition. Esprit Telecom is also in the process
of having its Year 2000 program audited by an outside consulting firm.
In addition, Esprit Telecom actively cooperates with other carriers in a
global Year 2000 program through ITU-T Year 2000 Taskforce, and the UK Year 2000
Operators forum. As part of the latter forum Esprit Telecom is participating in
a voluntary and independent health check review of its Year 2000 program
(conducted by another operator).
Remedial Strategies and Actions
Following its assessment, Esprit Telecom expects to replace, rather than
upgrade, the majority of the problem equipment within its own network systems,
which includes information technology and non-information technology systems.
Esprit Telecom already requires that any systems being replaced or upgraded be
warranted as Year 2000 compliant by the vendors or suppliers of these systems.
Esprit Telecom is currently in the process of replacing its billing and
management information systems, which Esprit Telecom expects will be implemented
by mid-1999. Esprit Telecom also intends to provide back up power and other
equipment at switch sites, as well as alternative routing around switch sites
which experience problems despite these remedial actions.
To address its worst case scenarios, Esprit Telecom has also determined to
obtain supplemental interconnect and transmission capacity in the event that one
or more of its primary carriers experience system failures. Esprit Telecom has
undertaken joint Year 2000 compliance reviews through industry forums and with
several of its major carriers. Ultimately, however, Esprit Telecom has no
control of the Year 2000 readiness of any of its suppliers or customers, and
will be exposed to risks associated with their failure to assess and address
Year 2000 problems. Esprit Telecom cannot control many Year 2000 issues that
could affect it, and like most telecommunications service providers. Esprit
Telecom believes it is inappropriate to provide specific guarantees that service
will not be affected by the transition to the new millennium.
Implementation
Esprit Telecom is in the process of securing supplemental interconnect and
transmission capacity from several carriers in addition to its current primary
carriers. Esprit Telecom has spent approximately $4.0 million for Year 2000
compliance on its own systems through September 30, 1998, and expects to spend
approximately an additional $4.0 million through the end of calendar year 1999.
Out of this total of $8.0 million in expenditures, Esprit Telecom expects to
spend a total of $1.0 million on repairing existing systems and the remainder on
testing and replacement.
Testing
Esprit Telecom expects to test numerous elements of its systems for Year
2000 compliance, as well as its ability to interconnect with and utilize back-up
carriers, throughout 1999. In particular, Esprit Telecom expects to test its new
billing and management information systems when the same become operational in
mid-1999. As noted above, however, Esprit Telecom will be unable to test its
network systems in their entirety since to do so would involve shutting down its
network for a period of time.
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RISKS ASSOCIATED WITH A RAPIDLY CHANGING INDUSTRY; TECHNOLOGY; DEPENDENCE
ON EQUIPMENT AND TECHNOLOGY SUPPLIERS
The European telecommunications industry is changing rapidly due to, among
other factors, liberalization, privatization of PTOs, technological
improvements, expansion of telecommunications infrastructure and the
globalization of the world's economies and free trade. Such changes may happen
at any time and can significantly affect Esprit Telecom's operations from period
to period. Esprit Telecom can offer no assurance that one or more of these
factors will not have unforeseen effects, which could have a material adverse
effect on Esprit Telecom. Even if these factors turn out as anticipated, Esprit
Telecom can offer no assurance that it will be able to implement its strategy or
that its strategy will be accepted in this rapidly evolving market.
Much of Esprit Telecom's planned growth is predicated upon the
liberalization of telecommunications markets, and further, upon the
implementation and enforcement of existing EU directives. Esprit Telecom can
offer no assurance that such liberalization will occur as anticipated, or that
the effects of such liberalization will not be different than expected.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new products and services, and
increased availability of transmission capacity, as well as the increasing
utilization of the Internet for voice and data transmission. Esprit Telecom's
success will depend substantially on its ability to predict which of the many
possible current and future networks, products and services will be important to
establish and maintain and which expenditures will be required to develop and
provide such networks, products and services. In particular, as Esprit Telecom
undertakes to further expand and develop the Esprit Network, it will become
increasingly exposed to the risks associated with the relative effectiveness of
its technology and equipment. The cost of implementation of emerging and future
technologies could be significant, and Esprit Telecom can offer no assurance
that it will maintain competitive services or that it will obtain appropriate
new technology on a timely basis, or on satisfactory terms. If Esprit Telecom
failed to maintain competitive services or obtain new technologies Esprit
Telecom's business, financial condition and results of operations could be
materially adversely affected. The current operational network has performed at
or above design specifications. However, as traffic continues to grow and the
Esprit Network is further expanded, Esprit Telecom can offer no assurance that
the Esprit Network will continue to achieve its technical specifications. If
Esprit Telecom failed to achieve such technical specifications the viability of
the Esprit Network and Esprit Telecom's business, financial condition and
results of operations could be materially adversely affected.
Esprit Telecom purchases its international and local equipment from
telecommunications equipment manufacturers that may provide vendor financing
for, and maintenance of, this equipment. Esprit Telecom's main suppliers are
Nortel, Ericsson and Siemens. Esprit Telecom could obtain equipment of
comparable quality from several alternative suppliers. However, if Esprit
Telecom failed to acquire switches that are compatible from an alternative
source, or acquire additional equipment (regardless of the vendor) on a timely
and cost-efficient basis, Esprit Telecom could face delays, operational problems
and increased expenses.
The Esprit Network is significantly dependent on the technology and
products which Esprit Telecom acquires from its main suppliers. In addition,
Esprit Telecom occasionally enters into turn-key contracts with specific
suppliers as a means of reducing its costs and development risks. If any of
Esprit Telecom's technologies and products became obsolete or incompatible with
industry standards, or if any of Esprit Telecom's turn-key contracts failed to
provide the expected benefits, Esprit Telecom's business, results of operations
and financial condition could be materially adversely affected.
CERTAIN RISKS OF THE WHOLESALE AND RESELLER BUSINESS
Wholesale customers connect with Esprit Telecom to carry their traffic to
destinations where Esprit Telecom's rates are competitive. Esprit Telecom's
contracts with these wholesale customers generally do not include minimum or
maximum usage levels, and such customers generally maintain relationships with a
number of telecommunications providers. As a result, wholesale customers
typically change their routing to take advantage of the lowest cost alternative,
resulting in potentially greater fluctuations in revenue generated by these
customers than for other categories of customers. Esprit Telecom's contracts
with its wholesale
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customers require Esprit Telecom to carry their traffic at a contractually fixed
price per minute for a designated time period. Esprit Telecom contracts at
prices which it believes are competitive and which provide it with a projected
acceptable margin over the anticipated cost of carrying such traffic. However,
Esprit Telecom, due to capacity and quality constraints on its least-cost
routes, has on occasion been forced to carry traffic over a higher-cost route.
In response to such constraints, Esprit Telecom decided to reduce the volume of
wholesale traffic on the Esprit Network until the third quarter of the 1998
financial year when sufficient spare capacity became available for the provision
of such services to be profitable. Esprit Telecom expects that in the medium
term, revenue from wholesale services will increase as network capacity is
increased in connection with the expansion of the Esprit Network. Certain
resellers who are connected to multiple providers may also change routing to
take advantage of lower costs, which results in greater fluctuations in Esprit
Telecom's revenue derived from such resellers. Esprit Telecom's credit exposure
to such resellers may also be greater since, unlike wholesale customers,
resellers do not typically furnish any services to Esprit Telecom.
RISK OF FRAUD AND BAD DEBT
Esprit Telecom has experienced problems relating to the fraudulent use of
its access codes and the failure of certain of its customers to make full
payment for services rendered. However, Esprit Telecom does not believe that its
experiences with such problems are substantially different from what is
generally experienced in the telecommunications industry. Esprit Telecom may
have to make provisions for non-payment if it believes that it will not be able
to collect. Esprit Telecom expects that the credit risk characteristic of its
customer base may increase as the share of Esprit Telecom's revenue deriving
from SMEs increases. In addition, the revenue derived from its service
provider/reseller business has increased during the 1998 financial year. In
general, service provider/reseller customers, owing to the significant size of
their bills relative to their asset base, may present a different or greater
risk of non-payment than retail or wholesale customers. Any significant increase
in the levels of fraud and bad debt could have a material adverse impact on
Esprit Telecom's financial condition and results of operations.
ABILITY TO MANAGE GROWTH AND EXPANSION
Esprit Telecom's future performance will depend, in part, upon its ability
to manage its growth effectively. Esprit Telecom's rapid growth has placed, and
in the future will continue to place, a significant strain on its
administrative, operational and financial resources. Esprit Telecom's ability to
continue to manage its growth successfully will require Esprit Telecom to
further enhance its operational, management, financial and information systems
and controls and to expand, train and manage its employee base. As Esprit
Telecom evolves to a more mature phase of growth, increases its service
offerings and expands its targeted markets, there will be increasing demands on
Esprit Telecom's management, customer support, sales and marketing and
administrative resources and network infrastructure. In addition, Esprit Telecom
continues to examine opportunities to expand into other related
telecommunications services, such as Internet access and switched data services.
If Esprit Telecom expanded into such telecommunications services, it would face
certain additional risks in connection with such expansion, including
operational, financial, technological compatibility, legal and regulatory risks
and possible adverse reaction by some of its current customers.
INCREASING DEMAND FOR QUALIFIED PERSONNEL; NEW SENIOR MANAGEMENT AND
DEPENDENCE ON KEY PERSONNEL
Esprit Telecom competes with other telecommunications service providers for
qualified managerial, sales, marketing, administrative, operating and technical
personnel. Esprit Telecom's success will depend substantially upon its ability
to hire and retain such personnel. Competition for qualified employees and
personnel in the telecommunications industry in Europe is intense, and there are
generally a limited number of persons with the requisite knowledge and
experience in the particular sectors where Esprit Telecom operates. Esprit
Telecom can offer no assurance that it will be able to attract, recruit and
retain sufficient qualified personnel as Esprit Telecom grows and expands its
current operations and enters into new markets. In the past 20 months, Esprit
Telecom has hired a number of new senior managers, including a new Chief
Executive Officer, a new Chief Operations Officer and a new Managing
Director -- Sales and Marketing, to fill certain existing and
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newly created positions. Esprit Telecom's senior management team therefore
includes a number of key people who have been with Esprit Telecom for a
relatively short period of time. Esprit Telecom has also retained the managers
of the businesses it has recently acquired to assist it in integrating such
businesses and in further developing certain lines of business within Esprit
Telecom. Although Esprit Telecom does not foresee any difficulties in
integrating such new managers into its senior management team, any problems in
integrating such managers could have a material adverse impact on Esprit
Telecom's business, its prospects and certain plans for expansion and its
results of operations. If Esprit Telecom failed to identify, attract and retain
the requisite personnel, Esprit Telecom's business, results of operations and
financial condition could be materially adversely affected. Further, Esprit
Telecom's business is currently managed by a small number of key management and
operating personnel, some of whom are only bound by six-month or other
short-term service agreements. If Esprit Telecom lost certain of these people,
Esprit Telecom's business, results of operations and financial condition could
be materially adversely affected.
ACQUISITION STRATEGY
The expansion of Esprit Telecom's business may involve investments,
acquisitions and strategic alliances which, if made, could divert the resources
and management time of Esprit Telecom and could require integration with Esprit
Telecom's operations. Esprit Telecom can offer no assurance that any desired
investment, acquisition or strategic alliance could be made in a timely manner
on terms and conditions acceptable to Esprit Telecom or that they could be
successfully integrated into Esprit Telecom's operations. Esprit Telecom can
offer no assurance that it will be successful in identifying attractive
acquisition candidates, completing and financing additional acquisitions on
favorable terms, or integrating the acquired businesses or assets, if any, into
its existing operations. Esprit Telecom's ability to make acquisitions may
depend on the availability of additional financing on acceptable terms and will
be subject to compliance with the covenants contained in its debt instruments.
In July 1998 Esprit Telecom completed the acquisition of the Plusnet Business,
and paid a consideration of approximately L103.8 million (or approximately
DM 307 million), (based on the exchange rates ruling as at the date of the
acquisition), net of costs. Pursuant to the sale and purchase agreement between
Esprit Telecom and Thyssen, this consideration has since been recalculated at
approximately L90.0 million (or approximately DM 267 million based upon the
exchange rates ruling as at the date of the acquisition), based upon a final
determination of the revenues of the Plusnet Business for the year ended
September 30, 1998. As part of the integration of the business, systems and
culture of the Plusnet Business, among other things, Esprit Telecom will be
required to continue to develop its financial and management controls and
information systems and retrain existing personnel, all of which could place a
strain on the management resources of Esprit Telecom and require additional
expenditures. In addition, Esprit Telecom acquired three other
telecommunications businesses in 1997 for a minimum aggregate consideration
payable of approximately L9.4 million over the next two years. This amount could
increase to L13.9 million if these businesses achieve certain financial and
performance targets. Esprit Telecom has brought the senior managers of each of
the acquired businesses into its management team and is relying on such
individuals to assist Esprit Telecom in integrating such acquired businesses.
However, Esprit Telecom can offer no guarantee that Esprit Telecom will be able
to attract and retain managers from any additional acquired businesses or be
successful in integrating any such new managers and businesses. Although
management expects to realize operating synergies as a result of these
acquisitions, Esprit Telecom can offer no assurance that Esprit Telecom will
achieve the benefits that management expects to realize or that such benefits
will be realized within the time frames currently contemplated. In addition,
Esprit Telecom expects that the realization of certain acquisition-related
benefits may be dependent upon Esprit Telecom taking certain actions which will
result in one-time charges or expenses.
REGULATION
Esprit Telecom is subject to varying degrees of regulation in each of the
EU Member States where it currently operates or intends to operate. Esprit
Telecom's ability to penetrate several European markets, and its ability to
deploy and expand the Esprit Network and to universally provide certain services
such as indirect access to its retail customers, as well as the timing and cost
of providing such services, depends to a significant degree on the
implementation of liberalization initiatives in each such country. The European
Commission set
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January 1, 1998 as the deadline for mandatory liberalization of public network
infrastructure and of the provision of voice telephony services throughout the
EU. However, the following EU Member States have been granted a delay in
implementing this liberalization directive: Greece (until December 31, 2000),
Ireland (until January 1, 2000), Luxembourg (until July 1, 1998), Portugal
(until January 1, 2000) and Spain (until November 30, 1998). Subject to the
foregoing each EU Member State must enact its own laws to implement the EU's
liberalization and harmonization directives for telecommunications such as the
Full Competition Directive and Licensing Directive. Esprit Telecom's ability to
purchase ownership rights in transmission lines or to build its own transmission
lines depends upon the timely implementation by EU Member States of the EU
Directives. Each EU Member State's implementation and enforceability of the EU
Directives is dependent on the action taken by each EU Member State and may be
subject to delays and variances in specific countries. If the implementation or
enforceability of EU directives is challenged or delayed in any of the markets
in which Esprit Telecom currently operates or in such other markets in which
Esprit Telecom may establish operations, Esprit Telecom's business, results of
operations and financial condition could be materially adversely affected. In
addition, the terms and conditions of interconnection to the PTOs' networks will
have a material effect on the competitive position of Esprit Telecom. Although
the EU has issued a directive governing the terms of such interconnection,
Esprit Telecom can offer no assurance that such directive will be implemented in
a timely and consistent manner or that it will provide Esprit Telecom with
economical access to and termination on the PTOs' networks. Accordingly,
customers' ability to access competitive telecommunications providers such as
Esprit Telecom may be restricted in some EU countries.
Esprit Telecom can offer no assurance that each EU Member State will
implement the EU directives within the time frame set by the European
Commission, or at all, or that the enforcement thereof will comply with the
intent and spirit of the EU directives. In fact, in November 1997, the European
Commission initiated infringement proceedings against seven EU Member States,
including Belgium, Italy and Germany for failure to fully implement the EU's
directives. The EU previously initiated a proceeding against Spain and has
announced plans to take action against certain other Member States for failure
to implement properly more recent directives. Because implementation of the
various EU directives will vary from country to country, Esprit Telecom's
ability to provide a full range of telecommunications services may be affected
with respect to both timing and cost. Also, Esprit Telecom can offer no
assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on Esprit Telecom. Similarly, national or
international regulators or third parties may raise material issues with regard
to Esprit Telecom's compliance or noncompliance with applicable regulations,
which may have a material adverse effect on Esprit Telecom.
Esprit Telecom may also be permitted by the FCC to use leased private lines
between the United States and a country that is a party to the WTO's Basic
Telecommunications Services Agreement if it satisfies a "benchmark" test that
became effective on January 1, 1998. Under the benchmark test, use of
international private lines will be permitted by the FCC if at least half of the
settled traffic on a route in question to a WTO member is being settled at rates
that are at or below a benchmark set by the FCC. The FCC has established the
following benchmark rates: 15 cents per minute for upper income countries; 19
cents per minute for middle income countries; and 23 cents per minute for lower
income countries. The FCC has made an "equivalency" determination or held that
the settlement "benchmark" has been reached, and accordingly sanctioned the use
of interconnected leased private lines, from the United States to the United
Kingdom, Canada, New Zealand, Australia, Sweden, The Netherlands, France,
Germany, Belgium, Denmark, Norway, and Luxembourg. However, with respect to
other countries to which Esprit Telecom would like to route traffic from the
United States, Esprit Telecom can offer no assurance that the FCC will find that
"equivalent" opportunities for international private line resale exist in these
other countries, or that the FCC will find that its settlement benchmark test
has been satisfied. Esprit Telecom can offer no assurance that the FCC will make
similar "equivalency" or settlement rate compliance determinations for other
international routes, and the failure to make such findings may limit the
ability of Esprit Telecom to route traffic through the United States in
connection with the provision of its Indirect Access services outside the United
Kingdom. However, more generally, the application of these lower benchmarks for
international settlement rates will likely reduce traffic termination costs for
calls originated in or routed through the United States, but may also
substantially decrease profit margins on the routes.
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Esprit Telecom's operations are dependent on licenses which it acquires
from governmental authorities in each jurisdiction in which it operates.
Currently, Esprit Telecom has network operator or international facilities
licenses or otherwise has authority which allow it to purchase ownership rights
in transmission lines or construct its own international facilities in the
United Kingdom, Germany, The Netherlands, France, Belgium, Spain and the United
States. Esprit Telecom also holds licenses or otherwise has authority to provide
public voice telephony services in the United Kingdom, Germany, The Netherlands,
France, Belgium and Spain as well as authorizations to provide value added
services in Spain, Italy and Ireland. These licenses and authorizations
generally contain clauses pursuant to which Esprit Telecom may be fined or its
license may be revoked. In such an event, authorities may revoke such licenses
on short or no notice. If government authorities revoked such licenses or levied
fines, Esprit Telecom's business, results of operations and financial condition
could be materially adversely affected.
COMPETITION
Until recently, the telecommunications market in each EU Member State has
been dominated by the national PTO. Since the implementation of a series of EU
directives beginning in 1990, the EU Member States have begun to liberalize
their respective telecommunications markets, thus permitting alternative
telecommunications companies to provide telecommunications services.
Liberalization has coincided with technological innovation to create an
increasingly competitive market, characterized by still-dominant PTOs as well as
an increasing number of new market entrants. In addition, since the
implementation of the Full Competition Directive in 1998, the European
telecommunications market has become increasingly competitive. Nonetheless,
customers in most of these markets are not accustomed to alternative service
providers, and may be reluctant to switch from the dominant PTOs to competitors
such as Esprit Telecom. In particular, certain of Esprit Telecom's target
customers, which include medium-to-large-sized businesses and governmental
agencies and organizations, may be reluctant to entrust their telecommunications
needs to what they perceive to be a group of relatively new and unproven
operators.
Competition in the European long distance telecommunications industry is
based upon price, customer service, type and quality of services and customer
relationships. Esprit Telecom's strategy is predicated on its ability to price
its services at a discount to the prices charged by the PTOs or dominant
carriers in each of its markets, and to offer high-quality products and
telecommunications services. However, prices for international long distance
calls have decreased substantially over the last few years in most of the
markets in which Esprit Telecom currently maintains operations or in which it
expects to establish operations. Some of Esprit Telecom's larger competitors may
be able to use their greater financial resources to cause severe price
competition in the countries in which Esprit Telecom operates. Esprit Telecom
expects that prices for its services will continue to decrease for the
foreseeable future and that PTOs and other providers will continue to improve
their product offerings. Any price competition could have a material adverse
effect on Esprit Telecom's business, results of operations and financial
condition. The improvement in product offerings and service provision by the
PTOs, and indeed the liberalization of voice telephony and infrastructure in
1998, could similarly have a material adverse effect on Esprit Telecom's
competitiveness to the extent that Esprit Telecom is unable to provide similar
levels of offerings and service.
In each of its current markets, Esprit Telecom competes primarily with the
national PTOs and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than those of Esprit Telecom. Additionally, such carriers own and
operate infrastructure which provides them with certain significant cost
advantages. Since Esprit Telecom utilizes such networks to provide its services,
if it failed to gain economical access to such networks, its business, results
of operations and financial condition could be materially adversely affected.
Such competitors include PTOs such as British Telecom (United Kingdom), KPN (The
Netherlands), Telefonica de Espana (Spain), Deutsche Telekom (Germany), France
Telecom (France), Belgacom (Belgium), Telecom Italia (Italy) and Telecom Eireann
(Ireland). Esprit Telecom believes that competition for telecommunications
services in Europe will continue to increase as a result of continuing
liberalization. Esprit Telecom also believes that other competitors in the
European markets include multinational consortia such as Unisource, Concert and
Global One, as well as resellers, microwave and satellite carriers, mobile
wireless telecommunications providers, cable
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television companies, utilities and other competitive local telecommunications
providers. In addition, the development of new technologies could give rise to
significant new competitors to Esprit Telecom. Many of Esprit Telecom's
competitors may have significantly greater financial, managerial and operational
resources and more experience than Esprit Telecom.
Esprit Telecom has not achieved and does not expect to achieve a
significant market share for its services in any of its markets. The PTOs
generally have certain competitive advantages that Esprit Telecom and its other
competitors do not have due to their control over the intra-national
transmission lines and connection to such lines. Esprit Telecom relies on the
PTOs for timely access to their public networks and the provision of leased
lines, and if the PTOs fail to provide such access, Esprit Telecom's business,
results of operations and financial condition could be materially adversely
affected. The reluctance of some national regulators to accept liberalizing
policies, grant regulatory approvals and to enforce access to PTO networks may
have a material adverse effect on Esprit Telecom's competitive position. Esprit
Telecom can offer no assurance that it will be able to compete effectively in
any of its markets.
Esprit Telecom expects that prices for its services will continue to
decrease for the foreseeable future. In addition, certain of Esprit Telecom's
customers, in particular wholesale carriers, may sometimes use more than one
service provider and may reduce their use of Esprit Telecom's services and
switch to other providers. In order to be competitive, Esprit Telecom believes
that it must, among other things, be able to offer additional services required
by its customers, reduce its prices and offer other incentives in order to meet
price reductions and incentives offered by its competitors.
INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE RATE RISKS
Esprit Telecom's operations are or may become subject to many of the risks
inherent in international business activities. Some of these risks include, in
particular, difficulties in staffing and managing foreign operations, general
economic conditions in each such country, burdens of complying with a variety of
regulatory regimes, subjection to multiple taxation regimes, longer accounts
receivables payment cycles in certain countries, receivable collection
difficulties, burdens of varying pricing restrictions, political risks, foreign
exchange controls which restrict or prohibit repatriation of funds, technology
export and import restrictions and prohibitions and delays from customers,
brokers or other government agencies, any of which could have a material adverse
effect on Esprit Telecom's business, financial condition and results of
operations. Currently, none of the markets where Esprit Telecom operates has
applicable foreign exchange restrictions.
Esprit Telecom is exposed, and as it expands into additional countries in
Europe may be increasingly exposed, to fluctuations in foreign currencies as its
revenue, and certain of its costs, assets and liabilities are denominated in
multiple local currencies, although these currencies will be reduced in number
upon the adoption of the Euro in certain countries. Esprit Telecom's proceeds
from its major financings were denominated and have been maintained in US
dollars and Deutschmarks, and Esprit Telecom expects to incur many of its
expenses in the expansion of the Esprit Network and the opening of new sales
offices in the local European currency of the country in which it is expanding
(which, in many cases, will be the Euro) and in pounds sterling. The
DM-denominated Esprit Telecom Bonds will be effectively redenominated in Euros.
A change in the currency exchange rates that reduces the amount obtained in
pounds sterling (or other non-Euro European currencies) upon conversion of the
US dollar and Deutschmark proceeds from its major financings could have a
material adverse effect on Esprit Telecom and its ability to make the planned
capital expenditures. Currently, the revenues of Esprit Telecom are largely
denominated in pounds sterling and Euro countries' currencies, but principal and
interest on the US dollar-denominated Esprit Telecom Bonds and the
DM-denominated Esprit Telecom Bonds will be payable in US dollars and DM (or
Euro), respectively. Therefore, the ability of Esprit Telecom to pay interest
and principal on the US dollar-denominated Esprit Telecom Bonds and the
DM-denominated Esprit Telecom Bonds when due is dependent on the then current
exchange rates between US dollars and DM (or Euro), on the one hand, and pounds
sterling (or other non-Euro European currencies), on the other hand, which rates
are and will be subject to fluctuation. Approximately 52.3% of revenue during
the year ended September 30, 1998 was denominated in the currencies of Euro
countries. Esprit Telecom expects that its share of revenue in such currencies
will continue
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to increase in future periods. Esprit Telecom does not currently use financial
hedging instruments, although in the future Esprit Telecom may elect to manage
the exchange rate exposure presented by the US dollar Esprit Telecom Bonds and
the DM Esprit Telecom Bonds by entering into certain hedging transactions.
Esprit Telecom can offer no assurance however, that exchange rate fluctuations
will not have a material adverse effect on Esprit Telecom's ability to make
principal and interest payments when due.
Stage III of the European Economic and Monetary Union commenced on January
1, 1999, in the following Member States of the EU: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and
Spain. Part of Stage III is the locking of exchange rates and the introduction
of a single currency, the Euro, which is intended to replace the national
currencies of the EU Member States participating in Stage III, and the transfer
of authority for conducting monetary policy for such EU Member States to the
European Central Bank. Esprit Telecom can offer no assurance that the Euro will
maintain its value relative to other currencies.
CONTROL BY PRINCIPAL SHAREHOLDERS
The Principal Securityholders currently own 65% of the outstanding shares
of capital stock of Esprit Telecom. As a result, the Principal Securityholders
are in a position to significantly influence Esprit Telecom through their
ability to determine the outcome of votes of the shareholders of Esprit Telecom
regarding, among other things, election and dismissal of the members of Esprit
Telecom's Board of Directors, amendment of the Articles of Association and other
actions requiring the vote or consent of the shareholders of Esprit Telecom
under English law and the Articles of Association. The concentration of share
ownership could have the effect of delaying or preventing a change of control of
Esprit Telecom or the removal of existing management and may discourage attempts
to do so.
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BACKGROUND OF AND REASONS FOR THE OFFER
BACKGROUND OF THE OFFER
A principal GTS goal for the past several years has been to become the
preeminent alternative telecommunications provider in the Eurasian market. This
strategy was further articulated when GTS announced to the investment community
in June of 1998 the initiation of a plan to enter the end-user market in Western
Europe through the development of competitive local exchange carriers in certain
metropolitan markets and through the development of reseller activities through
a combination of building or acquiring existing systems. In connection with this
plan, GTS began to consider the possibility of a significant acquisition in
Western Europe.
On August 5, 1998, GTS President and Chief Executive Officer, Gerald
Thames, contacted David Oertle, Esprit Telecom's Chief Executive Officer, by
telephone, to suggest a meeting to discuss mutual synergies between the
respective companies. Mr. Thames, Mr. Oertle, and Michael Potter, met informally
for breakfast on August 20 to discuss these synergies and agreed to have further
discussions. After further discussions at a meeting on September 1, 1998, Mr.
Oertle advised Mr. Thames that he would raise the issue of GTS' interest in
acquiring Esprit Telecom with other Esprit Telecom Directors.
At a meeting of a subcommittee of the Esprit Telecom Board on September 3,
Mr. Oertle briefed the subcommittee, which included representatives of the
Institutional Securityholders, concerning his contacts with GTS. After
discussion, they agreed that Esprit Telecom should not pursue further
discussions with GTS at that time. Although GTS had not indicated any definitive
value for Esprit Telecom, the subcommittee believed, based upon its knowledge of
GTS at the time, that a potential acquisition of Esprit Telecom by GTS was not
necessarily in the best interests of Esprit Telecom or the holders of its
securities. Mr. Oertle shared this information with Walt Anderson, the then
Chairman of Esprit Telecom, who agreed that GTS should be notified of Esprit
Telecom's lack of interest in pursuing further discussions at that time. Mr.
Oertle notified Mr. Thames of Esprit Telecom's view later that day.
In late September, Mr. Thames spoke with Mr. Anderson by telephone to
discuss GTS' strategy in Western Europe and the compatibility of that strategy
with what appeared to be Esprit Telecom's strategy in the same market. At an
Esprit Telecom Board meeting on October 5, Walt Anderson advised the Esprit
Telecom Board that he had been contacted by GTS. Following his removal as
Chairman of the Esprit Telecom Board of Directors at the same meeting, Mr.
Anderson stated that any further contacts that he might have with GTS would be
solely in his capacity as a holder of Esprit Telecom Securities.
On October 13, Mr. Thames again contacted Mr. Oertle and advised him that
GTS remained very serious about pursuing further discussions with Esprit Telecom
and that he desired to provide further information to the Esprit Telecom Board
about GTS' strategy in Western Europe. On behalf of Esprit Telecom, Mr. Oertle
agreed to meet to discuss matters further. This conversation and a suggested
timetable for further discussions was confirmed in a letter from GTS to Esprit
Telecom on October 14. In order to facilitate further discussions, GTS and
Esprit Telecom entered into a confidentiality agreement on October 15, 1998 to
facilitate the exchange of information between the two companies.
During the period from October 15 to October 29, representatives of Esprit
Telecom and GTS gathered and exchanged information concerning their respective
operations, most of which was already in the public domain. On October 19, Mr.
Thames and GTS' General Counsel, Grier Raclin, made a presentation to Esprit
Telecom management regarding the GTS business. GTS made a similar presentation
to the Institutional Securityholders on October 20 and on October 23, GTS made a
presentation to representatives of Gold & Appel. The GTS Board was informed of
the status of discussions with Esprit at a regularly scheduled meeting on
October 22. On October 28, Esprit Telecom made a corresponding presentation to
GTS management.
On October 29, both companies and their advisors met to discuss a proposed
timetable, due diligence process and certain key issues relating to the proposed
transaction. At that meeting, it was agreed that GTS would continue to evaluate
Esprit Telecom with a view to providing an indicative price range later the
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following week and Esprit Telecom would continue to evaluate GTS with a view to
determining whether a potential combination was in the best interests of the
Esprit Telecom Securityholders.
Following the October 28 presentation by Esprit Telecom and the October 29
meeting GTS undertook an analysis of the business and financial aspects of a
proposed combination. On November 3, the information was presented to the
executive committee of the GTS Board, which authorized further discussions
between the parties.
On November 6, 1998, certain designated members of the GTS Board spoke with
representatives of its financial advisors to discuss potential valuations of
Esprit Telecom. On November 7, GTS' financial advisors made an indicative
proposal for a valuation range, expressed as an exchange ratio, to Esprit
Telecom's financial advisors. They also indicated that any transaction would be
solely for GTS Stock with no cash being paid to Esprit Telecom Securityholders,
and would be conditional upon receipt of firm irrevocable undertakings from a
majority of the holders of Esprit Telcom's Securities, satisfactory arrangements
having been reached with Esprit Telecom's public note holders and assurances
with respect to "pooling of interests" treatment for financial accounting
purposes. In such discussions, Esprit Telecom's financial advisors expressed the
view that the indicative proposal for a valuation range was unacceptable.
Following meetings with GTS management on November 8, GTS' financial advisors
proposed an indicative valuation range of .80 to .88 of a share of GTS Stock for
each Esprit Telecom ADS to Esprit Telecom's financial advisors on November 9.
Both companies continued to conduct due diligence during the weeks of November 8
and 15.
On November 11, the Esprit Telecom Board met to consider the indicative
proposal and determined that the upper end of the range suggested by GTS might
be acceptable depending upon other factors and formed a committee to facilitate
further discussions with GTS. On November 12, representatives of the two
companies and their respective financial and legal advisors met to continue
discussions with respect to the proposed transaction, including the timetable,
due diligence process and public debt issues. During the week of November 15,
representatives of the Institutional Securityholders participated in discussions
on these matters, as well as on the terms of the irrevocable undertakings.
Following the Extraordinary General Meeting of the holders of Esprit Telecom's
Securities on November 23, representatives of the Institutional Securityholders
and members of Esprit Telecom's Board met and determined that they would only
continue discussions if GTS was prepared to consider an exchange ratio at the
upper end of their indicative valuation range. On the same day, GTS management
made a presentation to Apax Partners & Co. Ventures Limited, as manager of the
custodian of its investments, Apax Funds Nominees Limited.
On November 25, 1998, the executive committee of the GTS Board met to
discuss prospective terms of the proposed offer to acquire Esprit Telecom and to
authorize management to continue discussions assuming the same range of exchange
ratios previously proposed by GTS management. On the same day, representatives
of Esprit Telecom and the Principal Securityholders met to discuss various
issues with respect to the proposed transaction, including the exchange ratio,
the possibility of floors, caps or collars thereon and proposals with respect to
Esprit Telecom's public debt. On November 26, GTS' financial advisors proposed
to Esprit Telecom's financial advisors, an exchange ratio of .80 of a share of
GTS Stock for each Esprit Telecom ADS, and representatives of the Esprit Telecom
Board advised them that such ratio would not provide a basis for further
discussions.
At a telephonic meeting on November 27 the GTS Board discussed the
outstanding issues that had arisen in negotiations with Esprit Telecom and GTS'
financial advisors presented various valuation analyses of Esprit Telecom that
had been conducted and the GTS Board authorized further discussions using the
range of exchange ratios previously approved by the executive committee.
At a meeting of the Esprit Telecom Board on November 30, the directors
discussed the alternatives available to Esprit Telecom and concluded that an
exchange ratio in excess of .88 of a share of GTS Stock for each Esprit Telecom
ADS would be likely to receive the support of Esprit Telecom's Principal
Securityholders and the Esprit Telecom Board. The Esprit Telecom Board also
considered the possibility of providing floors, caps or collars on the exchange
ratio but determined that to do so would not be in the best interests of Esprit
Telecom or the holders of Esprit Telecom Securities. Representatives of the two
companies, the four Principal
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Securityholders and their respective financial and legal advisers negotiated the
terms of the proposed offer throughout the week of November 29.
On December 5, the GTS Board met by telephone to approve the making of an
offer to Esprit Telecom incorporating the Exchange Ratio of 0.89 of a share of
GTS Stock for each Esprit Telecom ADS at which meeting Bear Stearns gave its
opinion orally that the proposed Exchange Ratio was fair from a financial point
of view to GTS stockholders. At the meeting, the GTS Board unanimously
determined that the proposed Exchange Ratio was in the best interests of GTS
stockholders and approved the proposed Offer, subject to satisfactory resolution
of the outstanding issues, including those related to the Esprit Telecom public
debt and "pooling of interests" accounting treatment. See "-- The GTS Board's
Reasons for the Offer; Recommendation of the GTS Board" (page 61).
On the afternoon of December 6, the Esprit Telecom Board met, and, after
discussion, concluded that Esprit Telecom's and GTS' respective businesses were
complementary and that a range of economic, strategic and operational benefits
could arise from combining them. See "-- The Esprit Telecom Board's Reasons for
Recommending the Offer; Recommendation of Esprit Telecom Board" (page 55). At
the meeting, Lehman Brothers gave its opinion, orally, that the proposed
Exchange Ratio was fair to the Esprit Telecom Securityholders from a financial
point of view. In the same meeting, the Esprit Telecom Board unanimously
approved the terms of the proposed Offer, subject to a satisfactory settlement
of various outstanding issues, including the negotiation by the Principal
Securityholders of the terms and conditions upon which they would sign
irrevocable undertakings. These issues were negotiated on December 6, 7 and the
morning of December 8. At that time, a committee of the Esprit Telecom Board met
to review and approve the final documentation and Lehman Brothers confirmed its
opinion as to the fairness of the Exchange Ratio to the Esprit Telecom
Securityholders from a financial point of view.
On the morning of December 8, GTS and Esprit Telecom signed the Offer
Agreement, the Principal Securityholders each signed a Securityholder
Irrevocable, the directors of Esprit Telecom each signed a Director Irrevocable,
and the Institutional Securityholders and GTS signed the Registration Rights
Agreement following which GTS and Esprit Telecom publicly announced the terms of
the Offer.
THE ESPRIT TELECOM BOARD'S REASONS FOR RECOMMENDING THE OFFER; RECOMMENDATION OF
ESPRIT TELECOM BOARD
The Esprit Telecom Board, which has been advised by Lehman Brothers, has
determined that the terms of the Offer are fair and reasonable to, and in the
best interests of, Esprit Telecom and the holders of Esprit Telecom Securities.
Accordingly, the Esprit Telecom Board has unanimously authorized and approved
the Offer and unanimously recommends that the holders of Esprit Telecom
Securities accept the Offer and tender their Esprit Telecom Securities.
In making this determination, the Esprit Telecom Board consulted with
Esprit Telecom's management, as well as its financial advisors and legal
counsel, and considered a number of factors, including, without limitation, the
following:
- The Esprit Telecom Board's belief that Esprit Telecom's and GTS'
respective businesses are complementary and that a range of economic,
strategic and operational benefits could arise from combining them. The
Esprit Telecom Board also believes that the combination of Esprit Telecom
and GTS would assist both companies in their mutual goal of becoming the
pre-eminent providers of carrier's carrier and business communication
services throughout Europe. As a result of the combination, Esprit
Telecom and GTS would have the largest independent cross-border carrier's
carrier network in Europe. Esprit Telecom and GTS also would have an
extensive sales force in 11 Western European countries.
- The likelihood of consummation of the Offer, as well as the unconditional
and irrevocable agreement of the Principal Securityholders, as the
holders of approximately 65% of Esprit Telecom's issued share capital, to
tender their Esprit Telecom Securities in the Offer and to take such
other actions as are set forth in the Securityholders Irrevocables.
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- The opinion given by Lehman Brothers on December 6, and December 8, 1998
as confirmed in the written opinion of Lehman Brothers dated January 28,
1999, see "-- Opinion of Lehman Brothers" (page 56) which Esprit Telecom
Securityholders are urged to read in its entirety, that, as of the date
of its opinion, and based upon and subject to various qualifications and
assumptions described therein, from a financial point of view, the
Exchange Ratio was fair to Esprit Telecom Securityholders.
- The terms of the Offer, including the Exchange Ratio and the terms of the
Offer Agreement and related documents.
- The Esprit Telecom Board's knowledge of the business, operations,
properties, assets, earnings and prospects of Esprit Telecom.
- Recent and historical trading prices for Esprit Telecom ADSs and GTS
Stock. The Esprit Telecom Board recognized that the proposed Offer should
enable all holders of Esprit Telecom Securities to realize a substantial
premium over the average price at which Esprit Telecom ADSs were trading
during the past year prior to the December 8, 1998 announcement and an
opportunity to retain an equity interest in the combined entity. For the
range of prices of the Esprit Telecom ADSs from March 4, 1997 through a
recent date, see "Comparative Market Price and Dividend Information"
(page 13). The Esprit Telecom Board also considered the historically thin
trading volume in Esprit Telecom's ADSs.
- GTS' historical financial statements and GTS' pro forma financial
statements for the year ended December 31, 1997 and the nine months ended
September 30, 1998, giving pro forma effect to the consummation of the
Offer as of January 1, 1997 and January 1, 1998, respectively.
In view of the wide variety of factors considered in connection with its
evaluation of the Offer, the Esprit Telecom Board did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to
specific factors considered in its decision. Furthermore, the Esprit Telecom
Board did not articulate how each factor specifically supported its ultimate
decision, except that substantial weight was placed on (i) the opinion of Lehman
Brothers that, as of the date of its opinion, and based upon and subject to
various qualifications and assumptions described therein, from a financial point
of view the Exchange Ratio was fair to Esprit Telecom Securityholders and (ii)
the fact that the Principal Securityholders, as the owners of approximately 65%
of the outstanding Esprit Telecom Securities, will receive the same amount of
consideration as other holders of Esprit Telecom Securities and that they were
in favor of and executed the Securityholder Irrevocables to tender their Esprit
Telecom Securities in the Offer.
OPINION OF LEHMAN BROTHERS
Esprit Telecom engaged Lehman Brothers to act as its financial advisor in
connection with the Offer. Esprit Telecom instructed Lehman Brothers, in its
role as a financial advisor, to evaluate the fairness, from a financial point of
view, to the shareholders of Esprit Telecom of the Exchange Ratio, and to
conduct such investigations as Lehman Brothers deemed appropriate for such
purposes. On December 6, 1998, Lehman Brothers delivered its opinion, in
writing, to the Esprit Telecom Board to the effect that as of such date and
based upon and subject to certain matters stated therein, from a financial point
of view, the Exchange Ratio was fair to the shareholders of Esprit Telecom.
Lehman Brothers confirmed its opinion orally as to the fairness of the Exchange
Ratio from a financial point of view in connection with the meeting of the
committee of the Esprit Telecom Board on December 8, 1998. On January 28, 1999,
Lehman Brothers again delivered its opinion, in writing, to the Esprit Telecom
Board to the effect that as of such date and based upon and subject to matters
stated therein, from a financial point of view, the Exchange Ratio was fair to
Esprit Telecom Securityholders.
THE FULL TEXT OF LEHMAN BROTHERS' WRITTEN OPINION DATED JANUARY 28, 1999 IS
ATTACHED AT ANNEX D TO THIS OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS (THE
"LEHMAN OPINION") AND IS INCORPORATED HEREIN BY REFERENCE. ESPRIT TELECOM
SECURITYHOLDERS MAY READ THE LEHMAN OPINION FOR A DISCUSSION OF ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY LEHMAN
BROTHERS IN RENDERING THE LEHMAN OPINION. THE SUMMARY OF THE LEHMAN OPINION SET
FORTH IN THIS OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH LEHMAN OPINION.
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No limitations were imposed by Esprit Telecom on the scope of Lehman
Brothers' investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion except that Esprit Telecom did not authorize Lehman
Brothers to solicit, and Lehman Brothers did not solicit, any indications of
interest from any third party with respect to a purchase of all or part of the
business of Esprit Telecom. The form and amount of the consideration to be paid
by GTS in the Offer was determined through arm's-length negotiations between the
parties. Lehman Brothers' opinion is for the use and benefit of the Esprit
Telecom Board and was rendered to the Esprit Telecom Board in connection with
its consideration of the Offer. Lehman Brothers' opinion does not constitute a
recommendation to any holder of Esprit Telecom Securities as to whether such
holder should accept the offer made to them in the Offer. Lehman Brothers was
not requested to opine as to, and its opinion does not address, Esprit Telecom's
underlying business decision to proceed with or effect the Offer.
In arriving at its opinion, Lehman Brothers reviewed and analyzed, inter
alia:
- the specific terms of the Offer;
- publicly available information concerning Esprit Telecom and GTS that
Lehman Brothers believed to be relevant to its analysis;
- financial and operating information with respect to the business,
operations and prospects of Esprit Telecom furnished to Lehman
Brothers by Esprit Telecom;
- a trading history of the Esprit Telecom ADSs from January 2, 1998 to
December 6, 1998 and a comparison of that trading history with those
of other companies that Lehman Brothers deemed relevant;
- a trading history of GTS Stock from February 6, 1998 to December 6,
1998 and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant;
- a comparison of the financial terms of the Offer with the financial
terms of certain other recent transactions that Lehman Brothers deemed
relevant;
- a comparison of the financial and operating information of Esprit
Telecom and GTS with those of other companies that Lehman Brothers
deemed relevant; and
- the expected relative contributions of Esprit Telecom and GTS to the
revenues and cash flows of the combined company following completion
of the Offer.
In addition, Lehman Brothers had discussions with the management of Esprit
Telecom and GTS concerning their business, operations, assets, financial
condition and prospects, and undertook such other studies, analyses and
investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information, and Lehman Brothers further relied upon the assurances of the
management of Esprit Telecom that they were not aware of any facts or
circumstances that would make such information inaccurate or misleading. With
respect to the financial projections of Esprit Telecom, upon the advice of
Esprit Telecom, Lehman Brothers assumed that such projections had been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Esprit Telecom as to its future financial
performance, and that it will perform substantially in accordance with such
projections. In arriving at its opinion, Lehman Brothers did not conduct a
physical inspection of the properties and facilities of Esprit Telecom or GTS
and did not make or obtain any evaluations or appraisals of the assets or
liabilities of Esprit Telecom or GTS. In addition, Esprit Telecom did not
authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit, any
indications of interest from any third party with respect to the purchase of all
or a part of the business of Esprit Telecom. Lehman Brothers opinion was
necessarily based upon market, economic and other conditions as they existed on,
and could be evaluated as of, the date of the delivery of the opinion. In
rendering its opinion, Lehman Brothers did not express any opinion as to the
future performance of GTS or its share price.
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In connection with rendering its opinion, Lehman Brothers performed certain
financial, comparative and other analyses as described below. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and, therefore, such an
opinion is not readily susceptible to summary description. Furthermore, in
arriving at its fairness opinion, Lehman Brothers did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Lehman Brothers believes that its analyses must be
considered as a whole and that considering any portion of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the opinion. In
its analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Esprit Telecom or GTS. Any estimates contained
in the analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
as set forth therein. In addition, analyses relating to the value of businesses
do not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
VALUATION ANALYSES OF ESPRIT TELECOM
Lehman Brothers prepared a valuation of Esprit Telecom before considering
the pro forma impact of any cost savings, operating synergies or strategic
benefits resulting from the completion of the Offer. In determining its
valuation, Lehman Brothers used various methodologies, including the following:
discounted cash flow analysis, comparable transactions analysis, and comparable
company trading analysis. Each of these methodologies was used to generate a
reference enterprise value range for Esprit Telecom. The enterprise value range
was adjusted for appropriate on and off balance sheet assets and liabilities to
arrive at a common equity value range (in aggregate dollars and dollars per
Esprit Telecom ADS). The per Esprit Telecom ADS equity value ranges were then
used to evaluate the Exchange Ratio. These various valuation analyses are
summarized below.
Discounted Cash Flow Analysis
Lehman Brothers prepared a 10 year discounted cash flow model for Esprit
Telecom based on information and projections provided by Esprit Telecom. With
respect to the Esprit Telecom discounted cash flow analysis, Lehman Brothers
discounted after-tax cash flows on a stand-alone basis, i.e. excluding any
projected benefits resulting from the Offer, by applying a weighted average cost
of capital range of 10.1% to 11.1%, based on several assumptions including
interest rates, capitalization ratios and systematic risk measures. Lehman
Brothers calculated a terminal value by applying to projected 2008 free cash
flow a range of perpetual free cash flow growth rates of 0.0% to 2.0%. The
growth rates in the terminal year cash flow were selected based on assumptions
regarding long-run growth rates in cash flow after capital expenditures for
companies in the telecommunications industry. The discounted cash flow analysis
(discounting all cash flows as at January 1, 1999) resulted in a per share
equity value range of $36.95 to $56.85.
Because of the particular characteristics of Esprit Telecom and the market
in which it operates, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the results of the discounted cash flow
analysis. Based on Lehman Brothers' prior experience in valuing companies within
the emerging telecommunications sector, the values achieved by such companies in
negotiated transactions have fallen at the lower end of the discounted cash flow
analysis range. Notwithstanding the foregoing, the Exchange Ratio, based on the
closing price on December 5, 1998 (being the last date practicable prior to the
delivery by Lehman Brothers of its December 6 opinion) was within the range
implied by the discounted cash flow analysis performed by Lehman Brothers on
Esprit Telecom.
Comparable Transactions Analysis
Lehman Brothers reviewed certain publicly available information on selected
transactions which were announced or took place from May 1995 to October 1998,
including acquisitions of both European and North American telecommunications
operators. For each transaction, relevant financial terms were analysed
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including (i) relevant transaction multiples including the implied enterprise
value (equity purchase price plus assumed obligations) divided by latest quarter
actual revenue and projected revenues; and (ii) the premiums paid over the
closing mid-market prices one day and one month prior to the announcement of the
transactions.
The transactions considered by Lehman Brothers comprised Qwest
Communications International Inc./LCI International, Inc., IXC Communications,
Inc./Network Long Distance Inc., Teleport Communications Group/ACC Corp.,
WorldCom, Inc./MCI Communications Corp., LCI International, Inc./USLD
Communications Corp., EXCEL Communications, Inc./Telco Communications Group,
Inc., and Esprit Telecom plc/Plusnet. The range of multiples of enterprise value
to one year forward projected revenues at the acquisition dates of the
transactions considered was 1.2x to 2.4x. This range compared to an implied
transaction multiple of 2.2x for the Offer at an implied equity value per share
of $37.16, assuming the Exchange Ratio.
Lehman Brothers also analysed the premiums paid in 24 acquisitions of
telecommunications businesses, including, but not limited to, the above
mentioned transactions. The premiums relative to the stock prices of the
respective target companies one day and one week prior to the announcement of
the transactions ranged from -5.8% to 74.9% and -7.9% to 63.5%, respectively. At
an implied equity value per share of $37.16 for the Offer, assuming the Exchange
Ratio, these ranges compared to premiums of approximately 23% and 35%,
respectively, over Esprit Telecom's closing share prices one day and one week
prior to announcement of the Offer.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analysed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
Esprit Telecom and the acquired businesses analyzed, Lehman Brothers believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis and, accordingly, also made qualitative
judgments concerning differences between the characteristics of these
transactions and the Offer.
Comparable Company Trading Analysis
With respect to Esprit Telecom, Lehman Brothers reviewed the public stock
market trading multiples for selected European emerging telecom operators, US
based international long-distance telecom companies and US domestic
long-distance companies. Using publicly available information, Lehman Brothers
calculated and analyzed the enterprise value multiples based on certain
historical and projected financial criteria, such as latest quarter annualized
revenues and, projected 1999 revenues.
The comparable companies considered consisted of IDT Corp., Mobilcom AG,
Omnicom SA, Pacific Gateway Exchange, Inc., Primus Telecommunications Group,
Inc., RSL Communications, Startec Global Communications Corporation, Star
Telecommunications, Inc., Telegroup, Inc., Telscape International, Inc. and
Viatel, Inc. The range of multiples of enterprise value to latest quarter
annualized revenues prior to the acquisition (quarter ended September 30, 1998)
was 0.4x to 4.6x and the range of multiples of enterprise value to 1999
projected revenues was 0.3x to 2.3x. These ranges compare to implied transaction
multiples of 4.4x and 2.2x, respectively, for the Offer at an implied equity
value per share of $37.16, assuming the Exchange Ratio. The ratios of the
comparable companies are based on closing stock prices as of December 2, 1998
and the latest financial statements and most recent equity research reports
containing revenue projections available to Lehman Brothers on December 2, 1998.
Because of the inherent differences between the businesses, operations and
prospects of Esprit Telecom and the businesses, operations and prospects of the
companies included in the comparable company groups, Lehman Brothers believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis and, accordingly, also made qualitative
judgments concerning differences between the financial and operating
characteristics of Esprit Telecom and companies in the comparable company groups
that would affect the public trading values of Esprit Telecom and such
comparable companies.
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ANALYSES OF GTS
Lehman Brothers prepared a valuation of GTS before considering the pro
forma impact of any cost savings, operating synergies or strategic benefits
resulting from the Offer. In determining the valuation, Lehman Brothers used
both a comparable company trading analysis for GTS as a whole and a sum of the
parts analysis of GTS's operating entities. The following methodologies were
utilized for the sum of the parts analysis: discounted cash flow analysis,
comparable company trading analysis, and actual prices paid in recent prior
acquisitions. These methodologies were used in combination to generate a
reference enterprise value range for GTS. The enterprise value range was
adjusted for appropriate on and off balance sheet assets and liabilities to
arrive at a common equity value range (in aggregate dollars and dollars per
share of common stock). The valuation resulted in a valuation range of $38.20 to
$57.75 per share of GTS common stock. The implied valuation range supported the
conclusion that the Esprit Telecom Securityholders would receive securities the
value of which could be reasonably supported by valuations of the businesses and
assets underlying such securities.
Relative Analyses of GTS and Esprit Telecom
Lehman Brothers reviewed the daily historical closing prices of Esprit
Telecom ADSs and GTS Stock and the ratio between them for the period from the
date of the GTS IPO to December 6, 1998. During this period, the ratio between
the common stock price of GTS and the Esprit Telecom ADS price ranged from 0.33
to 0.89. This compares to the Exchange Ratio of 0.89 shares of GTS Stock for
each outstanding Esprit Telecom ADS.
Contribution Analysis
Lehman Brothers analyzed the estimated relative income statement
contributions of Esprit Telecom and GTS to the enlarged GTS based on projected
revenues and EBITDA and assuming no cost savings or operating synergies. These
contributions were then compared to the proportion of the equity and enterprise
value of the enlarged GTS which Esprit Telecom securityholders would receive
under the terms of the proposed offer. This analysis resulted in a contribution
by Esprit Telecom of approximately 22% to the projected 2000 EBITDA of the
enlarged GTS. This compares to a relative contribution received by Esprit
Telecom's shareholders of approximately 23% of the fully diluted enterprise
value of the enlarged GTS.
In connection with its opinion dated January 28, 1999, Lehman Brothers
confirmed the appropriateness of its reliance on the analyses used to render its
opinions on December 6 and December 8, 1998 by performing certain procedures to
update certain of such analyses and by reviewing the assumptions on which such
analyses were based and the factors considered in connection therewith.
Lehman Brothers considered that the results of these analyses also
supported the conclusion that from a financial point of view the Exchange Ratio
was fair to the Esprit Telecom Securityholders.
LEHMAN BROTHERS' ENGAGEMENT
Lehman Brothers is an internationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. The Esprit
Telecom Board selected Lehman Brothers because of its expertise, reputation and
familiarity with Esprit Telecom and because its investment banking professionals
are experienced in advising on transactions comparable to the Offer.
Lehman Brothers has previously rendered certain financial advisory and
investment banking services to Esprit Telecom, for which it has received
customary compensation. Esprit Telecom has paid Lehman Brothers and its
affiliates approximately $11.7 million in compensation for services rendered
over the past two years. Pursuant to the terms of an engagement letter
agreement, dated December 2, 1998, between Lehman Brothers and Esprit Telecom,
Esprit Telecom has agreed to pay Lehman Brothers (i) a transaction fee of 0.75%
of the total consideration to be paid in the transaction (based on GTS's closing
Common Stock price on the day prior to the announcement of the Offer) and (ii)
$1.0 million for services rendered by Lehman Brothers with
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respect to the proposed consent solicitation in relation to the Esprit Telecom
Bonds. The foregoing payments are payable upon successful completion of the
Offer. In addition, in the event that the Offer lapses or terminates for any
reason Esprit Telecom has agreed to pay Lehman Brothers an amount equal to
$35,000 a month (or pro-rata for any part of a month) for the period commencing
December 2, 1998 and ending on such lapse or termination of the Offer. In
addition, Esprit Telecom has agreed to reimburse Lehman Brothers for its
reasonable expenses (up to a maximum of $50,000) incurred in connection with its
engagement, and to indemnify Lehman Brothers and certain related persons against
certain liabilities in connection with its engagement, including certain
liabilities which may arise under US federal securities laws.
In the ordinary course of its business, Lehman Brothers actively trades in
the debt and equity securities of Esprit Telecom and GTS for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
THE GTS BOARD'S REASONS FOR THE OFFER; RECOMMENDATION OF THE GTS BOARD
The GTS Board believes that the terms of the Offer are fair to, and in the
best interests of, GTS and its stockholders and unanimously recommends that the
stockholders of GTS vote FOR approval of the resolutions to be proposed in
connection with the Offer.
The GTS Board believes their businesses are complementary and that a range
of economic, strategic and operational benefits will arise from combining them.
The combination of GTS and Esprit Telecom will assist both companies in their
mutual goals of becoming the pre-eminent providers of carriers' carrier and
business communications services throughout Europe.
In arriving at its determination, the GTS Board considered a number of
factors, including, without limitation, the following:
- The GTS Board's view that the combination with Esprit Telecom should
strengthen the combined company's position as the most developed
pan-European carriers' carrier. In this regard the GTS Board noted the
fact that the combined business will have (i) presence in 19 countries
throughout Europe; (ii) increased network capacity and resilience; (iii)
a 500 person sales force, one of the largest among independent
telecommunications companies in Europe; (iv) the ability and licenses to
provide a wide array of service offerings; (v) increased management
depth; and (vi) an established and growing customer list.
- The GTS Board's view that the combination of GTS and Esprit Telecom
could, subject to adjustment, reduce capital outlay and expenses for the
two groups by approximately $30 million for 1999 and in excess of $100
million by 2004. GTS expects to benefit from reduced network operations
costs, reduced administrative costs, and capital expenditure savings.
- David Oertle, CEO of Esprit Telecom, will remain with Esprit Telecom
through the transition. He will continue to work with Esprit Telecom
towards its successful integration within the GTS Group and assist Mr.
Thames with various strategic matters. In addition, certain key members
of the Esprit Telecom management team will continue in their current
roles within Esprit Telecom.
- The reputation of Esprit Telecom in the markets where it operates.
- The analyses conducted by Bear Stearns, and the opinion of Bear Stearns
that the Exchange Ratio is fair to the stockholders of GTS from a
financial point of view.
- The GTS Board's view and expectation that the Offer will be accounted for
as a "pooling of interests" for financial reporting purposes.
- The GTS Board's knowledge of the business, operations, properties,
assets, earnings and prospects of GTS, including a review of its
historical financial statements and pro forma financial statements for
the year ended December 31, 1997 and the nine months ended September 30,
1998, giving pro forma effect to the consummation of the Offer as of
January 1, 1997 and January 1, 1998, respectively.
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- The terms and conditions of the Offer. In particular, the GTS Board noted
that certain Esprit Telecom Securityholders had agreed to enter into
irrevocable undertakings to accept the Offer in respect of 65% of the
issued share capital of Esprit Telecom. These Securityholder Irrevocables
will continue to be binding even if a competing offer is made. The
Securityholder Irrevocables will lapse if there are certain material
adverse changes in the value of the GTS or in the event that specified
deadlines in the Offer timetable are not met.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Offer, the GTS Board did not find it practicable to,
and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination. Different GTS Board
members may have assigned different weights to different factors. In reaching
its determination, the GTS Board took the various factors into account
collectively. The GTS Board did not perform factor-by-factor analysis, but
rather its determination was made in consideration of all of the factors as a
whole.
OPINION OF BEAR STEARNS
GTS retained Bear Stearns to act as its financial advisor in connection
with the Offer Agreement and Acquisition. Bear Stearns delivered its written
opinion, dated December 5, 1998, to the GTS Board of Directors to the effect
that, and based upon and subject to the assumptions, limitations and
qualifications set forth therein, collectively, the Exchange Ratio was fair,
from a financial point of view, to the holders of GTS Stock (the "Bear Stearns
Opinion").
THE FULL TEXT OF THE BEAR STEARNS FAIRNESS OPINION, WHICH SETS FORTH A
DESCRIPTION OF THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS SET OUT IN ANNEX C.
Holders of GTS Stock are urged to read the Bear Stearns Opinion carefully in its
entirety, especially with regard to the assumptions made and matters considered
by Bear Stearns, as well as the limitations on the information considered and
analysis presented. The summary of the Bear Stearns Opinion set forth in this
document is qualified in its entirety by reference to the full text of such
opinion.
The Bear Stearns Opinion, intended for the benefit and use of the GTS
Board, did not constitute a recommendation to the GTS Board in connection with
the Offer Agreement or the Offer and does not constitute a recommendation to any
holder of GTS Stock as to how to vote shares in connection with the Offer
Agreement and the Offer. Bear Stearns is not expressing any opinion as to the
price or range of prices at which GTS Stock may trade subsequent to the
consummation of the Offer. The Bear Stearns Opinion is necessarily based upon
economic, monetary, market and other conditions, and the information made
available to it, as of the date of such opinion.
The Exchange Ratio and the form of consideration were determined by
arm's-length negotiations between GTS and Esprit Telecom and were not based on
any recommendation by Bear Stearns. Except as noted below, no limitations were
imposed by GTS on Bear Stearns with respect to the investigations made or the
procedures followed by Bear Stearns in rendering the Bear Stearns Opinion.
In arriving at the Bear Stearns Opinion, Bear Stearns, among other things:
- reviewed the Press Announcement, Securityholder Irrevocables, Director
Irrevocables, Offer Agreement and Registration Rights Agreement;
- reviewed certain publicly available business and financial information
relating to GTS and Esprit Telecom;
- reviewed, and discussed with GTS management, certain internal
financial information and other data relating to the business and
financial prospects of GTS, including estimates and financial
forecasts prepared by the management of GTS and which are not publicly
available;
- reviewed, and discussed with GTS management, certain financial
information and other data relating to the business and financial
prospects of Esprit Telecom, including estimates and
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financial forecasts relating to Esprit Telecom prepared by the
management of GTS and which are not publicly available;
- reviewed, and discussed with GTS management, certain estimates of
revenue enhancements, cost savings and other combination benefits or
synergies expected to result from the Offer, prepared by the
management of GTS and which are not publicly available;
- attended certain discussions between members of the management of GTS
and Esprit Telecom respecting certain financial, business and market
information;
- reviewed certain historical stock prices, trading activity and
valuation parameters of GTS Stock, Esprit Telecom Ordinary Shares and
Esprit Telecom ADSs;
- considered the pro forma financial impacts of the Offer on GTS;
- reviewed certain publicly available financial data, stock market data
and valuation parameters of companies which in Bear Stearns' judgment
were deemed generally comparable to GTS or Esprit Telecom or otherwise
generally relevant;
- reviewed the financial terms, to the extent publicly available, of
certain precedent merger and acquisition transactions which in Bear
Stearns' judgment were deemed generally relevant; and
- conducted such other studies, analyses and investigation as was deemed
appropriate, but none of which was individually material.
In connection with its review, and with the consent of GTS, Bear Stearns
did not assume any responsibility for, and did not undertake any independent
verification of, any of the information reviewed by or provided to it and relied
on its being complete and accurate in all material respects. In addition, Bear
Stearns did not make or receive any independent evaluation or appraisal of any
of the assets or liabilities (contingent or otherwise) of GTS or Esprit Telecom,
nor was Bear Stearns furnished with any such evaluation or appraisal.
With respect to the financial forecasts, estimates, projections, pro forma
financial effects, contemplated tax and accounting impacts, and calculations of
revenue enhancements, cost savings or synergies, relied upon or provided to Bear
Stearns, it assumed, at the direction of GTS, that they had been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of GTS as to the future performance of GTS and
Esprit Telecom and that they will be achieved in the amounts and at the times
specified therein. Therefore, Bear Stearns did not make any independent
assessment of the assumptions contained therein. Bear Stearns was not provided
with, nor was it asked to obtain, any financial forecasts, estimates,
projections, pro forma financial effects, contemplated tax and accounting
impacts and calculations of revenue enhancements, cost savings or synergies
prepared by the management of Esprit Telecom. With respect to the business and
financial information relating to Esprit Telecom, at GTS' direction, Bear
Stearns did not hold any independent discussions with Esprit Telecom's
management as to any specific aspect of the information relating to Esprit
Telecom provided to Bear Stearns by GTS. At the direction of GTS, in rendering
the Bear Stearns Fairness Opinion, Bear Stearns relied upon specific
projections, revenue enhancements, cost savings and other synergies for Esprit
Telecom prepared by GTS management and provided to Bear Stearns (the "Base Case
with Synergies Projections"). Bear Stearns also assumed, with GTS' consent,
that: (i) Esprit Telecom and GTS will comply with all the material terms and
conditions of the Transaction Documentation and all applicable laws and
regulations; (ii) the Offer becomes effective in accordance with the terms of
the Press Announcement and that the Offer is accepted in such a manner that GTS
acquires 100% of the outstanding Esprit Telecom Ordinary Shares and Esprit
Telecom ADSs; and (iii) the Offer will be afforded pooling-of-interests
treatment under generally accepted accounting principles in the United States.
Bear Stearns has also relied upon the representations of GTS respecting the tax
treatment of the Offer. Other than as described herein, GTS did not place any
limitations upon Bear Stearns regarding the procedures to be followed and the
factors to be considered in rendering the Bear Stearns Fairness Opinion.
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In arriving at the Bear Stearns Fairness Opinion, Bear Stearns did not
assign any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments based upon its experience in providing such
opinions and on then existing economic, monetary, market and other conditions as
to the significance of each analysis and factor. Bear Stearns believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all of the analyses and
factors, could create a misleading or incomplete view of the processes
underlying the Bear Stearns Fairness Opinion. In its analyses, Bear Stearns, at
GTS' direction and with GTS' consent, made numerous assumptions with respect to
industry performance, general business conditions and other matters, many of
which are beyond the control of GTS, Esprit Telecom, or Bear Stearns. Any
assumed estimates implicitly contained in the Bear Stearns Fairness Opinion or
relied upon by it in rendering the Bear Stearns Fairness Opinion, are not
necessarily reflective of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. Any estimates relating to the value of a business or securities do not
purport to be appraisals or necessarily reflect the prices at which companies or
securities may actually be sold.
Bear Stearns is an internationally recognized investment banking firm
which, as part of its investment banking business, regularly engages in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The GTS Board selected Bear
Stearns on the basis of its experience and independence. In the past, Bear
Stearns and its affiliates have provided investment banking services to GTS and
have received customary compensation for such services. GTS has paid Bear
Stearns and its affiliates approximately $3.4 million in compensation for
services rendered over the past two years. In the ordinary course of business,
Bear Stearns and its affiliates may actively trade or hold the equity securities
of GTS or Esprit Telecom for their own account or the accounts of their
customers and, accordingly, may at any time (subject to applicable laws,
including the City Code) take a long or short position in such securities.
Pursuant to the original engagement letter between GTS and Bear Stearns
dated July 14, 1998, GTS agreed to pay Bear Stearns: (i) an initial cash fee of
$200,000; (ii) a quarterly retainer fee of $100,000 until termination of the
engagement letter; (iii) a success fee equal to a percentage (ranging from 1.00%
where the transaction consideration is less than $100 million to 0.40% where the
transaction consideration is in excess of $1.3 billion) of the aggregate
transaction consideration, payable upon the consummation of any such transaction
and (iv) upon the earlier of (a) the execution by GTS and Esprit Telecom of a
letter of intent or agreement in principle or (b) the rendering by Bear Stearns
of a fairness opinion, from a financial point of view, of the consideration for
the Offer, a cash fee equal to 25% of the success fee. Any amounts paid in
respect of the initial cash fee, quarterly retainer fee, opinion fee and dealer
manager fee will be credited against the success fee. GTS has also agreed to
reimburse Bear Stearns for its reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel, and to indemnify Bear Stearns and
certain related persons against certain liabilities in connection with the
engagement of Bear Stearns, including certain liabilities under federal
securities law. In addition, Bear Stearns has acted as solicitation agent with
respect to the solicitation of waivers of certain change of control provisions
applicable to the Esprit Telecom Bonds. Bear Stearns is acting as dealer manager
with respect to the Offer and is an initial purchaser in the New HER Notes
Offering.
The following is a summary of the material valuation, financial and
comparative analyses performed by Bear Stearns in arriving at the Bear Stearns
Fairness Opinion dated December 5, 1998.
Discounted Cash Flow Analysis of Esprit Telecom. Bear Stearns performed a
discounted cash flow analysis on the after-tax cash flows of Esprit Telecom
based on the Base Case with Synergies Projections provided to Bear Stearns by
GTS. After-tax cash flows for the six-year period beginning January 1, 1999 and
ending on December 31, 2004 were calculated as after-tax earnings before
interest, depreciation and amortization less changes in working capital and
capital expenditures, including certain payments on capital leases. Bear Stearns
calculated a terminal value for Esprit Telecom by applying to projected 2004
EBITDA a range of multiples of 7.0x to 9.0x. Bear Stearns' determination of the
appropriate range of multiples was based on a comparison of multiples for
certain selected publicly-traded telecommunications companies with growth rates
generally similar to Esprit Telecom's projected growth rates at the end of the
projection period. In
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addition, Bear Stearns compared the expected perpetual growth rates in after-tax
cash flow with those implied by the selected multiples. Discount rates of 15.0%
to 18.0% were chosen based on several assumptions regarding factors such as the
inflation rate, interest rates, the inherent business risk in Esprit Telecom's
business and the assumed cost of capital to Esprit Telecom. Because of Esprit
Telecom's current status as a non-tax payer, Bear Stearns discounted Esprit
Telecom's terminal values at discount rates of 13.0% to 16.0% to reflect the
anticipated tax shield attributable to interest expense. The discounted cash
flow analysis (discounting all cash flows to January 1, 1999) of the Base Case
with Synergies Projections generated a per share equity value range of $47.68 to
$75.12 as compared to the equity value implied by the Exchange Ratio of $37.16
per Esprit Telecom ADS based on the closing price of GTS Stock of $41.75 on
December 1, 1998.
Discounted Cash Flow Analysis of GTS and Relative Contribution. Bear
Stearns performed a discounted cash flow analysis on the after-tax cash flows of
GTS based on projections provided to Bear Stearns by GTS. After-tax cash flows
for the five-year period beginning January 1, 1999 and ending on December 31,
2003 were calculated as after-tax earnings before interest, depreciation and
amortization less changes in working capital and capital expenditures, including
certain payments on capital leases. Bear Stearns segregated GTS into its
businesses in Western Europe (the "Western Europe Businesses") and the CIS (the
"CIS Businesses"). Bear Stearns calculated a terminal value for the Western
Europe Businesses by applying to projected 2003 EBITDA a range of multiples of
7.0x to 9.0x. Bear Stearns' determination of the appropriate range of multiples
was based on a comparison of multiples for certain selected publicly-traded
telecommunications companies with growth rates generally similar to GTS'
projected growth rates at the end of the projection period. In addition, Bear
Stearns compared the expected perpetual growth rates in after-tax cash flow with
those implied by the selected multiples. Discount rates of 13.0% to 16.0% were
chosen based on several assumptions regarding factors such as the inflation
rate, interest rates, the inherent business risk in the Western Europe
Businesses and the assumed cost of capital for the Western Europe Businesses.
For the CIS Businesses, Bear Stearns calculated a terminal value by applying to
projected 2003 EBITDA a range of multiples of 2.0x to 5.0x. Bear Stearns'
determination of the appropriate range of multiples was based on a comparison of
multiples for certain telecommunications companies in other emerging markets.
Discount rates of 25.0% to 55.0% were chosen based on several assumptions
regarding factors such as the inflation rate, interest rates, and the inherent
business risk in the CIS Businesses and the assumed cost of capital for the CIS
Businesses. Bear Stearns performed discounted cash flow analyses on both the CIS
Businesses and the Western Europe Businesses (discounting all cash flows to
January 1, 1999) and generated a per share equity value range for GTS by
combining the resulting enterprise values and adjusting for net debt and
minority ownership positions. The discounted cash flow analysis of the GTS
projections generated a per share equity value range of $42.55 to $63.36.
Bear Stearns then analyzed the relative contribution to equity value of GTS
and Esprit Telecom based upon the Base Case with Synergies Projections and the
financial projections of GTS. The equity value of the new GTS was assumed to be
the sum of the discounted cash flow equity values of GTS and Esprit Telecom. At
the Exchange Ratio and the approximate midpoint of the discounted cash flow
valuation ranges, GTS and Esprit Telecom contributed 76% and 24% of the
discounted cash flow equity value to new GTS, respectively. Based on the closing
price of GTS Stock as of December 1, 1998 and the Exchange Ratio, Esprit Telecom
Securityholders would own approximately 19% of the new GTS.
Analysis of Selected Publicly Traded Comparable Companies. Using publicly
available information, Bear Stearns compared the financial performance and stock
market valuation of GTS, IDT Corporation, Pacific Gateway Exchange, Inc., Primus
Telecommunications Group, Inc., RSL Communications, Ltd., Star
Telecommunications, Inc., Teleglobe Inc., and Viatel, Inc. (collectively, the
"Generally Comparable Companies") with Esprit Telecom. The Generally Comparable
Companies were selected based on general business, operating and financial
characteristics representative of emerging international carriers. The range of
multiples for the Generally Comparable Companies of enterprise value (defined as
the market value of equity plus minority interest plus the market value of debt
and preferred stock, net of cash) to estimated 1999 revenues was 0.57x to 3.78x.
This range compared to a transaction multiple of 1.94x for the Offer at an
implied acquisition price of $37.16, assuming the Exchange Ratio for each Esprit
Telecom ADS. The ratios for the Generally Comparable Companies are based on
closing stock prices on December 1, 1998 and the latest public
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financial statements and the most recent public equity research reports that
contained projections for revenue available to Bear Stearns on December 1, 1998.
The multiple for Esprit Telecom using the implied acquisition price was
within the range of multiples for the Generally Comparable Companies. However,
Bear Stearns believed that this benchmark was of limited use in evaluating the
Offer due to the inherent differences between the businesses, operations, and
prospects of Esprit Telecom and the businesses, operations and prospects of the
Generally Comparable Companies and the lack of meaningful EBITDA or net income
projected for Esprit Telecom in the near term. Bear Stearns believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly also made qualitative judgments concerning
differences between the characteristics of Esprit Telecom and the Generally
Comparable Companies that would affect the public trading values of Esprit
Telecom and the Generally Comparable Companies.
Summary of Precedent Merger and Acquisition Transactions. Using publicly
available information, Bear Stearns reviewed certain terms and financial
characteristics of certain U.S. long distance company merger and acquisition
transactions, which Bear Stearns deemed to be generally comparable for the
purposes of this analysis. The transactions considered by Bear Stearns in its
analysis consisted of: Teleglobe Inc./Excel Communications, Inc.; Qwest
Communications International Inc./LCI International, Inc.; IXC Communications,
Inc./Network Long Distance; LCI International, Inc./USLD Communications Corp.;
Teleport Communications Group Inc./ACC Corp.; WorldCom/MCI Communications Corp.;
and Excel Communications, Inc./Telco Communications Group, Inc. (the "Generally
Comparable Transactions"). The range of multiples of enterprise value to
revenues (projected for the following fiscal year) at the time and price of the
respective Generally Comparable Transactions was 1.21x to 2.45x. This range
compared to a transaction multiple of 1.94x for the Offer at an implied
acquisition price of $37.16, assuming the Exchange Ratio for each Esprit Telecom
ADS at December 1, 1998. The ratios for the Generally Comparable Transactions
are based on public financial statements, closing stock prices and public equity
research reports available to Bear Stearns at the time of the respective
transactions.
The multiple for Esprit Telecom using the implied Offer price was within
the range of multiples for the Generally Comparable Transactions. However, Bear
Stearns believed that this benchmark was of limited use in evaluating the Offer
due to the lack of comparable transactions involving public European companies,
the limited comparability with US transactions due to differing development
stages of the US and European telecommunications markets and the lack of
meaningful EBITDA or net income projected for Esprit Telecom in the near term.
Bear Stearns believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the analysis, and accordingly also made
qualitative judgments concerning differences between the characteristics of
these transactions and the Offer that would affect the acquisition value of
Esprit Telecom and such acquired companies.
No company, transaction or business used in the analysis described under
"-- Analysis of Selected Publicly Traded Comparable Companies" or "-- Summary of
Precedent Merger and Acquisition Transactions" above is identical to GTS, Esprit
Telecom or the combined company. Accordingly, an analysis of the results thereof
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics, market maturity and conditions and
other factors that could affect the transaction or the public trading or other
values of the company or companies to which they are being compared.
Mathematical analysis (such as determining the average or median) is not in
itself a meaningful method of using generally comparable acquisition or company
data.
Analysis of Pro Forma Accretion/Dilution. Bear Stearns also noted that
using the Exchange Ratio, the completion of the Offer results in pro forma net
cash flow per share dilution in the near term and accretion in the medium term
(net cash flow is defined as net income plus depreciation and amortization).
However, Bear Stearns believes that dilution analysis does not account for the
different risks and consequent discounts which should be applied to net cash
flows from different component businesses within GTS and Esprit Telecom. In
addition, Esprit Telecom's network is at an earlier stage in its development
than GTS' network.
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PURPOSE OF THE OFFER; PLANS FOR ESPRIT TELECOM
GTS intends to acquire, in the Offer and the Compulsory Acquisition, all of
the issued and outstanding Esprit Telecom Securities. If for any reason the
Offer and the Compulsory Acquisition is not consummated, GTS will evaluate its
other alternatives. Such alternatives could include purchasing additional Esprit
Telecom Securities in the open market, in privately negotiated transactions, in
another tender or exchange offer or otherwise, or taking no further action to
acquire Esprit Telecom Ordinary Shares and Esprit Telecom ADSs.
GTS is in the process of developing its business plan and strategy for
Esprit Telecom, including the manner in which Esprit Telecom will be integrated
into the overall GTS business and corporate structure. GTS may elect to
contribute one or more GTS businesses to Esprit Telecom as part of its strategy,
including the recently acquired NetSource Europe ASA. GTS also may have one or
more other GTS entities purchase assets from Esprit Telecom as part of its
strategy. Any such transaction will be effected in accordance with the
applicable covenants in the indentures governing the Esprit Telecom Bonds. GTS
may also decide in the future to effect a tender or exchange offer or consent
solicitations with respect to the Esprit Telecom Bonds, if it were advisable to
better integrate Esprit Telecom into the overall GTS corporate structure.
POSSIBLE EFFECTS OF THE OFFER ON THE MARKET FOR ESPRIT TELECOM ADSs
Upon consummation of the Offer, it is expected that there will be a limited
market, if any, for the Esprit Telecom Securities. There can be no assurance
that there will be any public market for the Esprit Telecom Securities upon
consummation of the Offer, or, if such market exists, there can be no assurance
as to the extent to which Esprit Telecom Securities may be sold or the price at
which such shares may be sold.
The Esprit Telecom ADSs are listed on Nasdaq and EASDAQ and are registered
under the Exchange Act. Depending upon the number of Esprit Telecom ADSs
purchased pursuant to the Offer and the number of Esprit Telecom ADSs
accumulated by the other parties, the Esprit Telecom ADSs may be delisted either
by the unilateral action of either such exchange or at the request of Esprit
Telecom. In addition, the Esprit Telecom ADSs may be eligible for deregistration
under the Exchange Act following consummation of the Offer. GTS intends to seek
the delisting of Esprit Telecom ADSs from Nasdaq and EASDAQ and the
deregistration of the Esprit Telecom ADSs under the Exchange Act as soon as
possible following the Compulsory Acquisition. Delisting and/or deregistration
of Esprit Telecom ADSs could materially adversely affect the liquidity and the
market price of Esprit Telecom ADSs.
CHANGE OF CONTROL CONSENT SOLICITATION
Before GTS makes the Offer, certain pre-conditions must be satisfied or
waived. These pre-conditions included that GTS obtain waivers on or prior to
January 29, 1999 from the holders of the Esprit Telecom Bonds issued under the
Indentures dated as of June 24, 1998 and December 18, 1997, each between Esprit
Telecom and The Bank of New York (the "Change of Control Consent Solicitation"),
of their right to require Esprit Telecom to repurchase their Esprit Telecom
Bonds at 101% of the principal amount of such bonds in connection with the
change of control of Esprit Telecom resulting from the consummation of the
Offer.
The pre-conditions were satisfied prior to the mailing of this document. As
a result of the Change of Control Consent Solicitation, holders of a majority in
principal amount of each series of Esprit Telecom Bonds outstanding under the
Indentures waived the application of the change of control provisions under the
Indentures to the Offer. Under these change of control provisions, holders of
the Esprit Telecom Bonds would have been entitled, as a result of the
consummation of the Offer, to require Esprit Telecom to repurchase their notes
at 101% of the principal amount thereof plus accrued and unpaid interest
thereon. The waivers obtained in the Change of Control Consent Solicitation are
binding on all holders of the Esprit Telecom Bonds.
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THE OFFER
GENERAL
On behalf of GTS, Bear Stearns is offering to purchase on the terms and
subject to the Conditions set out in this Offering Circular/Proxy
Statement/Prospectus and in the accompanying Acceptance Form (including, if the
Offer is revised, varied, extended or renewed, the terms and conditions of any
such revision, variation, extension or renewal), all issued and to be issued
Esprit Telecom Ordinary Shares (including those represented by Esprit Telecom
ADSs) on the following basis:
- for each Esprit Telecom Ordinary Share, 0.1271 of a share of GTS Stock;
and
- for each Esprit Telecom ADS, 0.89 of a share of GTS Stock.
Based on the Nasdaq closing price of $41.75 per share of GTS Stock on
December 7, 1998, the Offer values each Esprit Telecom Ordinary Share at $5.31
(L3.21), each Esprit Telecom ADS at $37.16 (L22.48) and the entire issued share
capital of Esprit Telecom, on a fully diluted basis, at approximately $757.3
million (L458.2 million). This represents a premium of approximately 22.8% over
the middle market price of an Esprit Telecom ADS on Nasdaq at the close of
business on December 7, 1998, being the last trading day before the announcement
of the Offer (based on an exchange rate of L1 = $1.6530 being the Noon Buying
Rate on December 7, 1998).
Based on the Nasdaq closing price of $62.63 per share of GTS Stock on
January 29, 1999 (the latest practicable date prior to the publication of this
document) the Offer values each Esprit Telecom Ordinary Share at $7.96 (L4.84),
each Esprit Telecom ADS at $55.74 (L33.87) and the entire issued share capital
of Esprit Telecom on a fully diluted basis, at approximately $1.14 billion (L690
million) based on an exchange rate of L1.00 = $1.6457 being the Noon Buying Rate
on January 29, 1999. This represents a premium of approximately 84.25% over the
middle market price of an Esprit Telecom ADS on Nasdaq at the close of business
on December 7, 1998, the last business day prior to the announcement of the
offer. For additional information regarding the financial effects of the Offer,
please see "Additional Information Required Under UK Law -- Financial Effects of
Acceptance of the Offer" on page 227.
The Esprit Telecom Securities which are the subject of the Offer will be
acquired fully paid and free from all liens, charges, equitable interests,
encumbrances, rights of pre-emption and other third party rights or interests of
any nature whatsoever and together with all rights now or hereafter attached
thereto, including the right to receive and retain all dividends and other
distributions declared, made or paid after December 8, 1998.
CONDITIONS TO THE OFFER
The Conditions to the Offer are set out in Part A of Annex A to this
Offering Circular/Proxy Statement/ Prospectus. The following summary of certain
of the Conditions to the Offer is subject to and qualified in its entirety by
reference to Annex A.
The Offer is conditional on valid acceptances being received (and not,
where permitted, withdrawn) by the time of expiration of the Initial Offer
Period at 3:00 p.m. (London time) and 10:00 a.m. (New York City time) on March
4, 1999 (or such later date as GTS may, in accordance with the provisions of the
City Code and subject to certain restrictions in the Offer Agreement, decide) in
respect of not less than 90% of the Esprit Telecom Securities to which the Offer
relates, or such lesser percentage as GTS may decide, provided that such
Acceptance Condition shall not be satisfied unless GTS shall have acquired or
agreed to acquire, whether pursuant to the Offer or otherwise, Esprit Telecom
Securities carrying in the aggregate more than 50% of the voting rights then
generally exercisable at general meetings of Esprit Telecom and provided further
that the Acceptance Condition shall be capable of being satisfied only at a time
when all other Conditions have been satisfied, fulfilled or, to the extent
permitted, waived. If the 90% threshold is satisfied before the Offer becomes or
is declared unconditional in all respects, this Acceptance Condition (subject to
any permitted reduction in the acceptance threshold) must continue to be
satisfied on the actual date the Offer becomes or is declared unconditional in
all respects, by reference to the facts then subsisting.
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GTS MAY REDUCE THE PERCENTAGE OF ESPRIT TELECOM SECURITIES REQUIRED TO
SATISFY THE ACCEPTANCE CONDITION AT ANY TIME PRIOR TO THE OFFER BEING DECLARED
UNCONDITIONAL. AT LEAST FIVE US BUSINESS DAYS PRIOR TO ANY SUCH REDUCTION, GTS
WILL ANNOUNCE THAT IT HAS REDUCED THE ACCEPTANCE LEVEL UNDER THE ACCEPTANCE
CONDITION. GTS WILL NOT MAKE SUCH AN ANNOUNCEMENT UNLESS IT BELIEVES THERE IS A
SIGNIFICANT POSSIBILITY THAT SUFFICIENT ACCEPTANCES OF THE OFFER WILL BE
RECEIVED TO PERMIT THE ACCEPTANCE CONDITION TO BE SATISFIED AT SUCH REDUCED
LEVEL. HOLDERS OF ESPRIT TELECOM SECURITIES WHO ARE NOT WILLING TO ACCEPT THE
OFFER IF THE ACCEPTANCE CONDITION IS REDUCED BELOW THE 90% LEVEL SHOULD EITHER
NOT ACCEPT THE OFFER UNTIL THE OFFER BECOMES OR IS DECLARED UNCONDITIONAL IN ALL
RESPECTS OR BE PREPARED TO WITHDRAW THEIR ACCEPTANCES PROMPTLY FOLLOWING AN
ANNOUNCEMENT BY GTS OF ITS RESERVATION OF THE RIGHT TO REDUCE THE ACCEPTANCE
LEVEL UNDER THE ACCEPTANCE CONDITION.
The Offer is also conditional, among other things, on the following:
- the holders of a majority of GTS Stock approving resolutions relating to
the issuance of New GTS Stock for purposes of acquiring Esprit Telecom
Securities in the Offer;
- the New GTS Stock being approved for listing on Nasdaq and EASDAQ subject
to official notice of issuance;
- no stop order suspending the effectiveness of the registration statement
(of which this Offering Circular/Proxy Statement/Prospectus is a part)
being issued or threatened by the SEC;
- no governmental regulatory or other relevant authority instituting,
implementing or threatening any action which affects the Offer, including
any action that would make the Offer illegal or would require GTS or
Esprit to sell all or any material portion of its assets;
- all authorizations necessary or appropriate for the Offer being obtained
from all appropriate governmental and regulatory authorities;
- Esprit Telecom not engaging in certain activities which are out of the
ordinary course of its business, including Esprit Telecom and its
subsidiaries not issuing additional shares or shares of its subsidiaries,
paying dividends, merging with any other person, disposing of its assets,
increasing its indebtedness, or entering into contracts or arrangements
which are likely to restrict the business of GTS or Esprit Telecom;
- there not being any material adverse change in the business, assets,
financial or trading position or profits or prospects of Esprit Telecom;
- there not being instituted or continued any litigation the effect of
which is or is likely to be material to Esprit Telecom; and
- GTS not having discovered that any information concerning Esprit Telecom
publicly disclosed at any time that is misleading in any material
respect, contains a material misrepresentation of fact or omits to state
a fact necessary to make the information contained therein not materially
misleading, or having discovered that Esprit Telecom has not complied
with all applicable legislation which has a material impact on Esprit
Telecom.
TERMS OF THE OFFER
The further terms of the Offer are set out in Part B of the Annex A to this
Offering Circular/Proxy Statement/Prospectus. The following summary of certain
of the terms of the Offer is subject to and qualified in its entirety by
reference to Annex A.
At the conclusion of the Initial Offer Period (other than as a result of
the Offer lapsing), in accordance with the rules of the City Code, the Offer
will be extended for a Subsequent Offer Period of at least 14 calendar days. The
principal difference between the Initial Offer Period and the Subsequent Offer
Period is that holders of Esprit Telecom Securities will have the right to
withdraw their acceptances of the Offer during the Initial Offer Period, but not
during the Subsequent Offer Period, except in certain limited circumstances. See
"-- Rights of Withdrawal" (page 78). GTS reserves the right (but will not be
obliged) at any time to extend the time and date for fulfillment of the
Acceptance Condition, provided that GTS may not extend the Initial Offer Period
beyond April 2, 1999 without the consent of the Panel and any extension may be
subject to
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certain restrictions in the Offer Agreement. GTS reserves the right, if
appropriate, to seek the Panel's approval to extend the final date for
expiration of the Acceptance Condition to April 23, 1999, or such later date as
the Panel may agree. GTS acknowledges that Rule 14e-1(d) under the Exchange Act
provides that an extension must be accompanied by a public announcement, which
shall include disclosure of the approximate number of securities deposited to
date, issued by 2:00 p.m. (London time) and 9:00 a.m. (New York City time) on
the next US Business Day after the scheduled expiration date of the Offer. If
GTS makes an announcement that the Offer will remain open until further notice,
GTS will make an announcement not less than 14 calendar days before closing the
Offer.
If all the Conditions are satisfied, fulfilled or, where permitted, waived
within the time permitted, payment for Esprit Telecom Securities which have been
tendered in the Offer will be made as provided under "-- Settlement" on page 78.
If the Offer becomes or is declared unconditional in all respects and GTS
acquires or contracts to acquire, pursuant to the Offer or otherwise, at least
90% of the Esprit Telecom Securities to which the Offer relates, GTS will be
entitled to and intends to acquire the remaining Esprit Telecom Securities on
the same terms as the Offer pursuant to and subject to sections 428 through 430F
of the Companies Act. See "-- Compulsory Acquisition; Appraisal Rights" (page
79).
Fractions of New GTS Stock will not be issued to holders of Esprit Telecom
Securities who accept the Offer but will be aggregated and sold in the market
and the net proceeds of sale will be paid to such Esprit Telecom Securityholders
entitled thereto. However, if any person is entitled to cash in an amount less
than $2, such amount will not be paid but will be retained for the benefit of
GTS.
INTERESTS OF CERTAIN PERSONS IN THE OFFER
In considering the recommendations by the Esprit Telecom Board with respect
to the Offer, Esprit Telecom Securityholders should be aware that certain
members of the Esprit Telecom Board, as well as certain other members of Esprit
Telecom's management, may have certain interests that are different from, or in
addition to, the interests of Esprit Telecom Securityholders as such. The Esprit
Telecom Board recognized such interests and determined that such interests
neither supported nor detracted from the fairness of the Offer to Esprit Telecom
Securityholders.
IRREVOCABLE UNDERTAKINGS
The Principal Securityholders have entered into the Securityholder
Irrevocables requiring them to accept the Offer for their Esprit Telecom
Securities, which represent, in aggregate, 81,968,270 Esprit Telecom Ordinary
Shares (including those represented by Esprit Telecom ADSs) beneficially owned
or controlled by them, and represents 65% of the issued share capital of Esprit
Telecom. The Securityholder Irrevocables will continue to be binding even if a
competing offer is made. If there are certain material adverse changes in the
value of the GTS Group or in the event that specified deadlines in the Offer
timetable are not met, the Securityholder Irrevocables may lapse. See
"Agreements with Certain Securityholders and Directors -- Principal
Securityholders" (page 86).
Pursuant to the Director Irrevocables, each Esprit Telecom Director agreed,
subject to his fiduciary duties, to recommend the Offer to holders of Esprit
Telecom Securities. As part of their respective Director Irrevocable, Messrs.
Roy Merritt, David Oertle and Michael Potter also agreed that to the extent they
exercised any Esprit Telecom Options, they would tender such Esprit Securities
in the Offer. See "Agreements with Certain Securityholders and
Directors -- Directors" (page 87).
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement between GTS and certain
Institutional Securityholders, GTS is required to file a registration statement
with the SEC that includes a prospectus which provides for resales by such
Institutional Securityholders of the New GTS Stock received by them in the
Offer. GTS has also agreed to keep such registration statement effective until
the earliest of the date on which (i) such Institutional Securityholders are
able to sell such New GTS Stock immediately without restriction pursuant to Rule
144(k) or Rule 145(d) (if applicable) under the Securities Act, or otherwise or,
if Rule 144(k) or
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Rule 145 (d) (if applicable) is amended to provide a shorter restricted period,
such shorter period, (ii) GTS obtains written confirmation from the Division of
Corporate Finance of the SEC recommending that no action be taken by the SEC in
connection with the resale of New GTS Stock by such Institutional
Securityholders without regard to volume or other restrictions under the
Securities Act upon resale or (iii) all of the New GTS Stock is resold pursuant
to the registration statement, subject to certain provisions. GTS has also
agreed, at the request of Institutional Securityholders, to make members of its
senior management available for limited "road show" type presentations for a
certain period and one on one meetings with potential investors in connection
with any underwritten offerings of such Institutional Securityholders' New GTS
Stock. All expenses related to such underwritten offerings by the Institutional
Securityholders will be borne by them. In the event that the Institutional
Securityholders request such underwritten offering, GTS has the right to delay
such offering by not more than 45 days for certain reasons. GTS shall have the
right to choose the underwriter in an underwritten offering of the Institutional
Securityholders' GTS Stock. The Registration Rights Agreement contains customary
indemnification provisions.
Pursuant to the Registration Rights Agreement and in order to allow the
acquisition of Esprit Telecom to be accounted for as a "pooling of interests"
transaction, the Institutional Securityholders agreed not to (i) sell, transfer
or otherwise dispose of, or execute any cashless exercise of stock options or
warrants for any nor (ii) enter into any arrangement to reduce such
Institutional Securityholder's risk relating to such Institutional
Securityholder's Esprit Telecom Securities or any GTS Stock to be received by
such Institutional Securityholder in connection with the Offer, for a period
commencing 30 days before the date that the acquisition of Esprit Telecom is
deemed consummated in connection with determining whether such acquisition will
receive "pooling of interests" accounting treatment and ending on the date GTS
has prepared, published and otherwise publicly disclosed financial reports of
GTS, which include a period of at least 30 days of combined operations of GTS
and Esprit Telecom.
AFFILIATE TRANSFER RESTRICTIONS
In order to allow the acquisition of Esprit Telecom to be accounted for as
a "pooling of interests" transaction, each director, executive officer and other
person who has been identified as a possible "affiliate" of Esprit Telecom, as
that term is used in and for the purposes of Accounting Series Releases 130 and
135, as amended, of the SEC, will be required to sign an undertaking not to
transfer their Esprit Telecom Securities to the same extent as the Institutional
Securityholders agreed to do in the Registration Rights Agreement. The
undertaking also includes a covenant on the part of such possible affiliate not
to transfer New GTS Stock received in the Offer in violation of US securities
laws.
INDEMNIFICATION AND INSURANCE
Pursuant to the Offer Agreement, for a period of six years after the Offer
becomes wholly unconditional, GTS will maintain the level of directors' and
officers' liability coverage currently provided to the directors and officers of
Esprit Telecom, provided that GTS may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which afford
substantially the same coverage to the insured as the insurance currently
maintained by Esprit Telecom and such level of coverage for the directors and
officers of Esprit Telecom shall be maintained (in the form of liability
insurance or otherwise) notwithstanding any of the directors or officers of
Esprit Telecom ceasing to be a director or officer.
GTS also entered into an indemnity agreement for the benefit of the
directors of Esprit Telecom and Esprit Telecom's General Counsel whereby from
the time the Offer becomes wholly unconditional, GTS will indemnify and hold
harmless in all respects such indemnified persons from any loss, cost or damage
incurred in connection with any claims made by a former director of Esprit
Telecom and certain of his affiliates.
ESPRIT TELECOM SHARE OPTION SCHEMES
The Offer will extend to any Esprit Telecom Securities unconditionally
issued while the Offer remains open for acceptance pursuant to the exercise of
options issued under the Esprit Telecom Share Option Schemes or otherwise. As
part of the Rollover Offer, GTS will offer Esprit Telecom Option holders the
opportunity to roll over their Esprit Telecom Options into options for New GTS
Stock substantially on (and in accordance with) the terms of the existing Esprit
Telecom Share Option Schemes and on the same Exchange
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Ratio as the Offer. As part of the Director Irrevocables, each Esprit Telecom
Director confirmed that it was his current intention to accept the Rollover
Offer, subject to the receipt of satisfactory tax advice. Esprit Telecom has
agreed that it will not make any amendments to the Esprit Telecom Share Option
Schemes. Detailed proposals regarding the Rollover Offer will be mailed to
Esprit Telecom Option holders as soon as practicable after the posting of this
document.
PROCEDURES FOR ACCEPTING THE OFFER -- ALL HOLDERS OF ESPRIT TELECOM SECURITIES
This section should be read together with the notes on the relevant
Acceptance Form.
ACCEPTANCE FORMS
All holders of Esprit Telecom Ordinary Shares, including persons in the US
who hold Esprit Telecom Ordinary Shares, have been sent a Form of Acceptance,
which they must use to tender their Esprit Telecom Ordinary Shares and accept
the Offer. All Esprit Telecom ADS holders have been sent a Letter of Transmittal
and a Notice of Guaranteed Delivery. To tender their Esprit Telecom ADSs and
accept the Offer, holders of Esprit Telecom ADSs must either use the Letter of
Transmittal or use the Notice of Guaranteed Delivery and comply with the
Guaranteed Delivery Procedures described in this paragraph. Should any holder of
Esprit Telecom Ordinary Shares and Esprit Telecom ADSs receive an incorrect form
with which to accept the Offer or require any additional forms, that person
should contact the Receiving Agents or the US Depositary, as appropriate, at the
relevant addresses set out below, who will provide the appropriate forms.
HOLDERS OF ESPRIT TELECOM ORDINARY SHARES
General. If you are a holder of Esprit Telecom Ordinary Shares, you will
have received a Form of Acceptance for use in connection with the Offer. This
section should be read together with the instructions on the Form of Acceptance.
The provisions of this section shall form a part of the Form of Acceptance. The
Form of Acceptance shall be deemed to form part of the terms of the Offer.
Completion of Form of Acceptance. To accept the Offer any holder of Esprit
Telecom Ordinary Shares must complete Boxes 1 and 3 and if appropriate Box 4 and
Box 5. In all cases you must sign Box 2 of the Form of Acceptance IN THE
PRESENCE OF A WITNESS, WHO SHOULD ALSO SIGN IN ACCORDANCE WITH THE INSTRUCTIONS
PRINTED THEREON.
IF YOU HAVE ANY QUESTIONS AS TO HOW TO COMPLETE THE FORM OF ACCEPTANCE,
PLEASE TELEPHONE THE UK RECEIVING AGENT ON 44 181-639-2188.
Return of Form of Acceptance. Completed Forms of Acceptance should be
returned to the Receiving Agents, together with the relevant share
certificate(s) and/or other document(s) of title as soon as possible, but in any
event so as to arrive no later than 3:00 p.m. (London time), 10:00 a.m. (New
York City time) on March 4, 1999. No acknowledgment of receipt of documents will
be given by or on behalf of GTS. The instructions printed on the Form of
Acceptance are deemed to form part of the terms of the Offer.
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<PAGE> 80
The Form of Acceptance may be transmitted to the UK Receiving Agent at one
of the following addresses:
IRG plc
By Post or By Hand (During Normal Business Hours):
New Issues Department
P.O. Box No 166
Bourne House
34 Beckenham Road
Beckenham
Kent BR3 4TH
United Kingdom
or
By Hand (Only During Normal Business Hours):
23 Ironmonger Lane
London EC2
United Kingdom
Belgian holders of Esprit Telecom Ordinary Shares may transmit the Form of
Acceptance to the Belgian Receiving Agent at the following address:
The Bank of New York-Brussels
Client Services Group
Attn: Alain Vanden Eede
Avenue des Arts 35 Kunstlaan
1040 Brussels
Belgium
Any Form of Acceptance received in an envelope postmarked in Canada,
Australia or Japan or otherwise appearing to GTS or its agents to have been sent
from Canada, Australia or Japan may be rejected as an invalid acceptance to the
Offer.
Delivery of the Form of Acceptance and certificates representing Esprit
Telecom Ordinary Shares and/or other documents of title to the US Depositary
will not constitute delivery of them to the Receiving Agents for the purposes of
this section and Part C of Annex A.
Documents of title. A completed and signed Form of Acceptance should be
accompanied by the relevant share certificate(s) and/or other document(s) of
title. If for any reason the relevant Esprit Telecom Ordinary Share
certificate(s) and/or the other document(s) of title is/are lost or not readily
available, you should nevertheless complete, sign and lodge the Form of
Acceptance as stated above so as to be received no later than 3:00 p.m. (London
time), 10:00 a.m. (New York City time), on March 4, 1999. You should send with
the Form of Acceptance any Esprit Telecom Ordinary Share certificate(s) and/or
other document(s) of title which you may have available and a letter stating
that the remaining documents will follow as soon as possible. No acknowledgment
of receipt of documents will be given. If you have lost your Esprit Telecom
Ordinary Share certificate(s) and/or other document(s) of title, you should
contact David Reibel, General Counsel of Esprit Telecom (telephone (44 118) 951
4000) or Susan Fadil, Company Secretary of Esprit Telecom (telephone (44 171)
248 4282), for a letter of indemnity for lost share certificate(s) and/or other
documents of title which, when completed in accordance with the instructions
given, should be returned by mail to the Receiving Agents as above.
Validity of acceptance. Notwithstanding Parts B and C of Annex A of this
document, GTS reserves the right to treat as valid in whole or in part any
acceptance of the Offer which is not entirely in order or which is not
accompanied by the relevant Esprit Telecom Ordinary Share certificate(s) and/or
other document(s) of
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<PAGE> 81
title. In that event, no issue of New GTS Stock under the Offer will be made
until after the relevant Esprit Telecom Ordinary Share certificate(s) and/or
other document(s) of title or indemnities satisfactory to GTS have been
received.
Notes 4 to 6 to Rule 10 of the City Code contain detailed provisions for
verifying which acceptances and purchases may be counted towards fulfilling the
Acceptance Condition or in determining whether the Acceptance Condition has been
fulfilled and are principally concerned to ensure that the acceptor is the
registered owner of the securities which he is tendering. The principal
requirements of Notes 4 to 6 to Rule 10 are that any Form of Acceptance must be
completed to a suitable standard (that is, it must constitute a transfer or a
valid and irrevocable appointment of GTS or some person on its behalf as agent
or attorney for the purpose of executing a transfer) and it must be accompanied
by the appropriate share certificate(s) or other document(s) of title and, in
all cases, any relevant supporting documentation (such as powers of attorney).
Immediately prior to the satisfaction of the Acceptance Condition the UK
Receiving Agent will issue a certificate to GTS stating the number of Esprit
Telecom Ordinary Shares tendered and not validly withdrawn pursuant to the
Offer. Copies of such certificates will be sent to the Panel as soon as possible
after they are issued.
HOLDERS OF ESPRIT TELECOM ADSS
General. If you are a holder of Esprit Telecom ADSs evidenced by Esprit
Telecom ADRs, you will have received a Letter of Transmittal and Notice of
Guaranteed Delivery for use in connection with the Offer. This section should be
read together with the instructions on the Letter of Transmittal. The provisions
of this section shall form a part of the relevant Letter of Transmittal. The
Letter of Transmittal shall be deemed to form part of the terms of the Offer.
Completion of Letter of Transmittal. For a holder of Esprit Telecom ADSs
evidenced by Esprit Telecom ADRs to tender such Esprit Telecom ADSs validly
pursuant to the Offer, either:
(i) a properly completed and duly executed Letter of Transmittal,
together with any required signature guarantees (or Agent's Message (as
defined below) in the case of book-entry transfers) and any other required
documents, must be received by the US Depositary or may be received by the
Belgian Receiving Agent (in the case of Belgian holders of Esprit Telecom
ADSs only) at one of its addresses set out below and the Esprit Telecom
ADRs evidencing such Esprit Telecom ADSs must be either received by the US
Depositary or may be received by the Belgian Receiving Agent (in the case
of Belgian holders of Esprit Telecom ADSs only) at one of such addresses or
delivered pursuant to the procedures for book-entry transfers set out below
(and a confirmation of receipt of such transfer received by the US
Depositary); or
(ii) such holder must comply with the "Guaranteed Delivery Procedures"
(as set out below).
The Offer in respect of Esprit Telecom ADSs evidenced by Esprit Telecom
ADRs will be validly accepted by delivery of a Letter of Transmittal, together
with any required signature guarantees (or Agent's Message in case of book-entry
transfers), the relevant Esprit Telecom ADRs evidencing Esprit Telecom ADSs and
other required documents to the US Depositary or Belgian Receiving Agent (as
applicable) by holders of Esprit Telecom ADSs (without any further action by the
US Depositary or Belgian Receiving Agent (as applicable)), subject to the terms
and conditions set out in this Offering Circular/Proxy Statement/Prospectus and
the Letter of Transmittal. The acceptance of the Offer by a tendering holder of
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs pursuant to the procedures
described above, subject to the withdrawal rights described below, will
constitute a binding agreement between such tendering holder of Esprit Telecom
ADSs and GTS upon the terms and subject to the conditions of the Offer. IF AN
ESPRIT TELECOM ADR EVIDENCING AN ESPRIT TELECOM ADS HAS BEEN TENDERED BY A
HOLDER OF ESPRIT TELECOM ADSs, THE ESPRIT TELECOM ORDINARY SHARES REPRESENTED BY
SUCH ESPRIT TELECOM ADSs MAY NOT BE TENDERED INDEPENDENTLY.
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<PAGE> 82
A LETTER OF TRANSMITTAL AND OTHER REQUIRED DOCUMENTS CONTAINED IN AN
ENVELOPE POSTMARKED IN CANADA, JAPAN OR AUSTRALIA OR OTHERWISE APPEARING TO GTS
OR ITS AGENTS TO HAVE BEEN SENT FROM CANADA, JAPAN OR AUSTRALIA MAY BE REJECTED
AS INVALID.
Book-entry transfer. The US Depositary will establish an account at The
Depositary Trust Company with respect to interests in Esprit Telecom ADSs
evidenced by Esprit Telecom ADRs held in book-entry form for the purposes of the
Offer within two US Business Days from the date of this Offering Circular/Proxy
Statement/Prospectus. Any financial institution that is a participant in any of
The Depositary Trust Company's systems may make book-entry delivery of interests
in Esprit Telecom ADSs by causing The Depositary Trust Company's systems to
transfer such interests in Esprit Telecom ADSs into the US Depositary's account
at The Depositary Trust Company in accordance with The Depository Trust
Company's procedure for such transfer. Although delivery of interests in Esprit
Telecom ADSs evidenced by Esprit Telecom ADRs may be effected through book entry
transfer into the US Depositary's account at The Depositary Trust Company,
either:
(i) the Letter of Transmittal, properly completed and duly executed,
together with any required signature guarantees; or
(ii) an Agent's Message (as defined below);
and, in either case, any other required documents must be transmitted to, and
received by, the US Depositary or Belgian Receiving Agent (as applicable) at one
of its addresses set out below before Esprit Telecom ADSs evidenced by Esprit
Telecom ADRs will be either counted as a valid acceptance or purchased, or such
holder must comply with the Guaranteed Delivery Procedures described below. The
term "Agent's Message" means a message transmitted by The Depository Trust
Company to, and received by, the US Depositary and forming part of a Book-Entry
Confirmation that states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering the interests in Esprit Telecom ADSs that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that GTS may enforce such agreement against the participant. The confirmation of
a book entry transfer of Esprit Telecom ADSs into the US Depositary's account at
The Depository Trust Company as described above is referred to herein as a "Book
Entry Confirmation." Delivery of documents to The Depositary Trust Company does
not constitute delivery to the US Depositary.
Method of delivery. The method of delivery of Esprit Telecom ADRs, the
Letters of Transmittal and all other required documents is at the option and
risk of the tendering holder of Esprit Telecom ADSs. Esprit Telecom ADSs will be
deemed delivered only when the Esprit Telecom ADRs representing such Esprit
Telecom ADSs are actually received by the US Depositary or Belgian Receiving
Agent (as applicable) (including in the case of a book-entry transfer, by
Book-Entry Confirmation). If delivery is by mail, registered mail and with
return receipt requested, properly insured, is recommended. In all cases,
sufficient time should be allowed to ensure timely delivery. No acknowledgment
of receipt of any Letter of Transmittal or other required documents will be
given by, or on behalf of, GTS.
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<PAGE> 83
Documents may be transmitted to the US Depositary at one of the following
addresses:
<TABLE>
<S> <C>
THE BANK OF NEW YORK
By Mail: By Hand or Overnight Courier:
Tender & Exchange Department Tender & Exchange Department
P.O. Box 11248 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
Belgian holders of Esprit Telecom ADSs may transmit documents to the
Belgian Receiving Agent at the following address:
THE BANK OF NEW YORK -- BRUSSELS
Client Services Group
Attn: Alain Vanden Eede
Avenue des Arts 35 Kunstlaan
1040 Brussels
Belgium
Signature guarantees. No signature guarantee is required on the Letter of
Transmittal if:
(i) the Letter of Transmittal is signed by the registered holder of
the Esprit Telecom ADSs tendered therewith and such registered holder has
not completed the box entitled "Special Delivery Instructions" or the box
entitled "Special Instructions Regarding New GTS Stock" on the Letter of
Transmittal; or
(ii) such Esprit Telecom ADSs are tendered for the account of an
Eligible Institution.
IN ALL OTHER CASES ALL SIGNATURES ON LETTERS OF TRANSMITTAL MUST BE GUARANTEED
BY AN ELIGIBLE INSTITUTION. SEE INSTRUCTION 1 ON THE LETTER OF TRANSMITTAL.
Esprit Telecom ADSs and ADRs. If the Esprit Telecom ADSs are registered in
the name of a person other than the person who signs the Letter of Transmittal,
or if New GTS Stock are to be issued to a person other than the registered owner
of the Esprit Telecom ADSs surrendered, then the tendered Esprit Telecom ADRs
must be endorsed or accompanied by appropriate stock powers, signed exactly as
the name or names of the registered owner or owners appear on the Esprit Telecom
ADRs, with the signatures on the Esprit Telecom ADRs or stock powers guaranteed
as described above. See Instruction 5 on the Letter of Transmittal.
Partial acceptances. If fewer than all of the Esprit Telecom ADSs evidenced
by any Esprit Telecom ADRs are to be tendered, the holder thereof should
indicate in the Letter of Transmittal by filling in the number of Esprit Telecom
ADSs which are to be tendered in the box entitled "Number of Esprit Telecom ADSs
Tendered". In such case, a new Esprit Telecom ADR for the remainder of the
Esprit Telecom ADSs represented by the former Esprit Telecom ADR will be sent to
the person(s) signing such Letter of Transmittal (or delivered as such person
properly indicates thereon) as promptly as practicable following the date the
tendered Esprit Telecom ADSs are purchased. All Esprit Telecom ADSs delivered to
the US Depositary or Belgian Receiving Agent (as applicable) will be deemed to
have been tendered unless otherwise indicated. See Instruction 4 on the Letter
of Transmittal. In the case of partial tenders, Esprit Telecom ADSs not tendered
will not be reissued to a person other than the registered holder.
Guaranteed Delivery Procedures.
(i) If a holder of Esprit Telecom ADSs evidenced by Esprit Telecom
ADRs desires to tender Esprit Telecom ADSs pursuant to the Offer and the
Esprit Telecom ADRs evidencing such Esprit Telecom ADSs are not immediately
available or the procedures for book-entry transfer cannot be completed on
a timely basis, or if time will not permit all required documents to reach
the US Depositary or Belgian Receiving Agent (as applicable) prior to the
expiration of the Initial Offer Period or the Subsequent
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Offer Period, as the case may be, such holder's tender of Esprit Telecom
ADSs may be effected if all the following conditions are met (the
"Guaranteed Delivery Procedures"):
(a) such tender is made by or through a financial institution which
is an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by GTS is received by the US
Depositary, as provided below, prior to the expiration of the Initial
Offer Period or the Subsequent Offer Period, as the case may be; and
(c) the Esprit Telecom ADRs evidencing all tendered Esprit Telecom
ADSs (or, in the case of interests in Esprit Telecom ADSs held in
book-entry form, timely Book-Entry Confirmation with respect to such
Esprit Telecom ADSs as described above), together with a properly
completed and duly executed Letter of Transmittal with any required
signature guarantees (or, in the case of a book-entry transfer, an
Agent's Message) and any other required documents, are received by the
US Depositary or Belgian Receiving Agent (as applicable) within three
Nasdaq trading days after the date of execution of such Notice of
Guaranteed Delivery.
(ii) The Notice of Guaranteed Delivery may be delivered by hand or
mailed to the US Depositary or Belgian Receiving Agent (as applicable) and
must include a guarantee by an Eligible Institution in the form set out in
such Notice of Guaranteed Delivery.
(iii) Receipt of a Notice of Guaranteed Delivery will not be treated
as a valid acceptance for the purpose of satisfying the Acceptance
Condition. To be counted towards satisfaction of this requirement, Esprit
Telecom ADRs evidencing Esprit Telecom ADSs referred to in the Notice of
Guaranteed Delivery must, prior to the expiration of the Initial Offer
Period, be received by the US Depositary (or, in the case of interests in
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs held in book-entry
form, timely Book-Entry Confirmation with respect to such Esprit Telecom
ADSs as described above), together with a duly executed Letter of
Transmittal with any required signature guarantees (or, in the case of a
book-entry transfer, an Agent's Message) and any other required documents.
Other Requirements.
By executing the Letter of Transmittal or complying with the Guaranteed
Delivery Procedures as set out above, the tendering holder of Esprit Telecom
ADSs evidenced by Esprit Telecom ADRs will agree that effective from and after
the date the Offer becomes or is declared unconditional in all respects:
(i) GTS or its agents shall be entitled to direct the exercise of any
votes and any or all other rights and privileges (including the right to
requisition the convening of a general meeting of Esprit Telecom or of any
class of its shareholders) attaching to the Esprit Telecom Ordinary Shares
represented by any Esprit Telecom ADSs, in respect of which the Offer has
been accepted or is deemed to have been accepted and not validly withdrawn;
and
(ii) the execution of the Letter of Transmittal and its delivery to
the US Depositary or Belgian Receiving Agent (as applicable) (or delivery
of an Agent's Message to the US Depositary or Belgian Receiving Agent (as
applicable)) or compliance with the Guaranteed Delivery Procedures will
constitute:
(a) an authority to Esprit Telecom from the tendering holder of
Esprit Telecom ADSs to send any notice, circular, warrant, document or
other communication which may be required to be sent to him as a holder
of Esprit Telecom ADSs to GTS at its registered office;
(b) an authority to GTS or any director of GTS to sign any consent
to short notice of a general or separate class meeting on behalf of the
tendering holder of Esprit Telecom ADSs and/or to execute a form of
proxy in respect of such Esprit Telecom ADSs appointing any person
nominated by GTS to attend general and separate class meetings of Esprit
Telecom (or any adjournments thereof) and to exercise the votes
attaching to such Esprit Telecom ADSs on the holder's behalf; and
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(c) the agreement of the tendering holder of Esprit Telecom ADSs
not to exercise any of such rights without the consent of GTS and the
irrevocable undertaking of the tendering holder of Esprit Telecom ADSs
not to appoint a proxy for or to attend any such general meeting or
separate class meeting.
Overseas holders. The attention of holders of Esprit Telecom Securities who
are citizens or residents of jurisdictions outside the UK or the US is drawn to
paragraph 7 Part B of Annex A of this Offering Circular/ Proxy
Statement/Prospectus, and to the relevant provisions of the Acceptance Form.
IF YOU ARE IN ANY DOUBT AS TO THE PROCEDURE FOR ACCEPTANCE OF THE OFFER
WITH RESPECT TO ESPRIT TELECOM ORDINARY SHARES, PLEASE CONTACT THE UK RECEIVING
AGENT BY TELEPHONE ON (44) 181-639-2188 OR AT THE ADDRESS(ES) ABOVE. IF YOU ARE
A HOLDER OF ESPRIT TELECOM ADSS AND ARE IN ANY DOUBT ABOUT THE PROCEDURE FOR
ACCEPTANCE, PLEASE TELEPHONE THE INFORMATION AGENT, GEORGESON & COMPANY, AT
(800) 223-2064 (TOLL-FREE), IN THE US, AND (44) 171-335-8600.
Any questions or requests for assistance or additional copies of the
Offering Circular/Proxy Statement/ Prospectus, the Form of Acceptance, the
Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to
the Information Agent identified below at the address and telephone number
listed below, or to the US Depositary at the respective addresses and telephone
numbers mentioned above.
The Information Agent for the Offer is: Georgeson & Company Inc., Wall
Street Plaza, New York, New York 10005, telephone: Banks and Brokers call (212)
440-9800 (collect). All others call (800) 223-2064. For holders outside the
United States, call: (44) 171-335-8600.
Rights of Withdrawal
With certain exceptions pursuant to SEC exemptive relief, the Offer is
subject to the US tender offer rules applicable to securities registered under
the Exchange Act, as well as the City Code. This has necessitated a number of
changes from the procedures which normally apply to offers for UK companies,
including those applicable to the rights of holders of Esprit Telecom Securities
to withdraw their acceptances of an offer.
Under the Offer, holders of Esprit Telecom Securities will be able to
withdraw their acceptances at any time prior to the expiration of the Initial
Offer Period, but not during the Subsequent Offer Period, except in certain
limited circumstances. The Offer will be deemed not to have been validly
accepted in respect of any Esprit Telecom Securities which have been withdrawn.
However, the Offer may be accepted again in respect of the withdrawn Esprit
Telecom Securities by following one of the procedures for accepting the Offer
described above at any time prior to the expiration or lapse of the Offer.
Further details of these rights of withdrawal and the procedure for
effecting withdrawals are set out in paragraph 3 of Part B of Annex A.
SETTLEMENT
Subject to the Offer becoming or being declared unconditional in all
respects (except as provided in Part B of Annex A in the case of certain
overseas holders of Esprit Telecom Securities), settlement of the consideration
to which any holder of Esprit Telecom Securities is entitled under the Offer
will be effected (i) in the case of acceptances received, complete in all
respects, by the date on which the Offer becomes or is declared unconditional in
all respects, as promptly as practicable after such date in light of the
complexities of a US-UK exchange offer of this type, but in no event later than
14 days after such date, or (ii) in the case of acceptances of the Offer
received, complete in all respects, after the date on which the Offer becomes or
is declared unconditional in all respects but while it remains open for
acceptance, as promptly as practicable after such receipt in light of the
complexities of a US-UK exchange offer of this type, but in no event later than
14 days of such receipt.
In all cases, exchange for Esprit Telecom Securities accepted for exchange
pursuant to the Offer will be made only after timely receipt by the Receiving
Agents or the US Depositary of certificates evidencing such
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Esprit Telecom Securities (or, in the case of ADSs held in book-entry form,
timely confirmation of a book-entry transfer of such ADSs into the US
Depositary's account at The Depositary Trust Company), a properly completed and
duly executed Acceptance Form (or, in the case of a book-entry transfer, an
Agent's Message) and any other documents required by the Acceptance Form.
GTS will make a public announcement on Friday, March 5, 1999 and on the
business day following each date on which the Initial Offer Period is scheduled
to expire as to whether or not the Conditions have been satisfied or, where
permitted, waived and give oral or written notice thereof to the US Depositary
and the Receiving Agents. Delivery of New GTS Stock in exchange for Esprit
Telecom Securities will be made by the US Depositary and the UK Receiving Agent,
as the case may be, by first-class mail. The US Depositary and the UK Receiving
Agent, as the case may be, will act as agents for tendering Esprit Telecom
Securityholders for the purpose of receiving New GTS Stock and transmitting such
New GTS Stock to Esprit Telecom Securityholders.
GTS acknowledges that Rule 14e-1(c) under the Exchange Act provides that an
offeror must pay the consideration offered or return the securities deposited
by, or on behalf of, securityholders promptly after the termination or
withdrawal of the offer. If the Offer does not become or is not declared
unconditional in all respects or tendered Esprit Telecom Securities are not
purchased because of an invalid acceptance (i) share or ADR certificate(s)
and/or other document(s) of title will be returned by mail (or such other method
as may be approved by the Panel), as promptly as practicable after the Offer
lapsing in light of the complexities of a US-UK exchange offer of this type, but
in no event later than 14 days of the Offer lapsing, to the person or agent
whose name and address (outside Canada, Australia or Japan) is set out on the
Acceptance Form or, if none is set out, to the first named holder at his
registered address (outside Canada, Australia and Japan), and (ii) in respect of
Esprit Telecom ADRs in book-entry form, the US Depositary will return such
Esprit Telecom ADRs to the tendering holders unless otherwise instructed by such
holder. All documents and remittances sent by, to or from holders of Esprit
Telecom Ordinary Shares and Esprit Telecom ADSs or their appointed agents will
be sent at their own risk.
ACTION TO BE TAKEN
THE FORM OF ACCEPTANCE AND LETTER OF TRANSMITTAL SHOULD BE RETURNED AS SOON
AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE RECEIVED BY MAIL OR BY HAND BY THE
RECEIVING AGENTS OR THE US DEPOSITARY, AS APPLICABLE, AT THEIR RESPECTIVE
ADDRESSES SET OUT ON PAGES 73 AND 76 RESPECTIVELY NO LATER THAN 3:00 P.M.
(LONDON TIME), OR 10:00 A.M. (NEW YORK CITY TIME) ON MARCH 4, 1999.
DIVIDENDS AND DISTRIBUTIONS
If, on or after the date hereof, Esprit Telecom should split, combine or
otherwise change any Esprit Telecom Ordinary Shares and Esprit Telecom ADSs or
its capitalization, or disclose that it has taken any such action, then GTS may
make such adjustments to the exchange ratio and other terms of the Offer as it
deems appropriate to reflect such split, combination or other change.
COMPULSORY ACQUISITION; APPRAISAL RIGHTS
If, (i) on or before June 2, 1999, as a result of the Offer, GTS acquires
Esprit Telecom Securities representing at least 90% of the Esprit Telecom
Securities to which the Offer relates, then GTS will be entitled and intends to
effect a Compulsory Acquisition to compel the exchange of the remainder of the
outstanding Esprit Telecom Securities on the same terms as the Offer in
accordance with sections 428 through 430F of the Companies Act; and/or (ii) at
any time after the Offer has become unconditional GTS acquires Esprit Telecom
Securities representing at least 90% of the Esprit Telecom Securities to which
the Offer relates, a holder of Esprit Telecom Securities may require GTS to
exchange his or her Esprit Telecom Securities on the same terms as the Offer in
accordance with sections 430A and 430B of the Companies Act.
Esprit Telecom Securityholders do not have appraisal rights as a result of
the Offer. In the event that the Compulsory Acquisition can be effected by GTS,
however, Esprit Telecom Securityholders whose Esprit Telecom Securities have not
been exchanged pursuant to the Offer will be entitled to certain rights under
the
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Companies Act, including the right to compel GTS to exchange such Esprit Telecom
Securities on the same terms as the Offer. See Annex O.
FEES AND EXPENSES OF THE OFFER
Bear Stearns is acting as GTS' financial advisor and as Dealer Manager for
the Offer. In connection with the services rendered by Bear Stearns, GTS has
agreed to pay Bear Stearns the fees and expenses and indemnify Bear Stearns
against certain liabilities as described in "-- Opinion of Bear Stearns" on Page
62.
GTS has retained Georgeson & Company, Inc. to act as the Information Agent,
The Bank of New York to act as the US Depositary, IRG plc to act as the UK
Receiving Agent and The Bank of New York-Brussels to act as the Belgian
Receiving Agent in connection with the Offer. The Information Agent may contact
Esprit Telecom Securityholders by mail, telephone, telex, telegraph and personal
interviews and may request brokers, dealers and other nominee shareholders to
forward materials relating to the Offer to beneficial owners. The Information
Agent, the US Depositary and the Receiving Agents each will receive reasonable
and customary compensation for their respective services, will be reimbursed for
certain reasonable out-of-pocket expenses and will be indemnified against
certain liabilities in connection therewith, including certain liabilities under
the federal securities laws. None of the Information Agent, the US Depositary or
the Receiving Agents has been retained to make solicitations or recommendations
in their respective roles as Information Agent, the US Depositary or the
Receiving Agents.
GTS will not pay any fees or commissions to any broker or dealer or any
other person (other than the Dealer Manager) for soliciting tenders of Esprit
Telecom Securities pursuant to the Offer. Brokers, dealers, commercial banks and
trust companies will, upon request, be reimbursed by GTS for reasonable and
necessary costs and expenses incurred by them in forwarding materials to their
customers.
CERTAIN REGULATORY APPROVALS AND LEGAL MATTERS
Except as set out herein and other than in compliance with the Panel's
requirements in relation to the City Code and with US securities laws, neither
GTS nor Esprit Telecom is aware of (i) any license or regulatory permit that
appears to be material to the business of the Esprit Telecom Group taken as a
whole which might be adversely affected by GTS' acquisition of Esprit Telecom as
contemplated herein or (ii) any approval or other action by any domestic or
foreign governmental, administrative or regulatory agency or authority that
appears to be material to Esprit Telecom and its subsidiaries, taken as a whole,
and required for the acquisition or ownership of Esprit Telecom Securities by
GTS as contemplated herein. Should any such approval or other action be
required, GTS currently contemplates that such approval or other action will be
sought. There can be no assurance that any such approval or other action, if
needed, would be obtained or would be obtained without substantial conditions
attached thereto or that failure to obtain any such approval or other action
might not result in consequence adverse to Esprit Telecom's business.
Esprit Telecom has no assets or operations in the US and accordingly GTS is
not required to file a notification under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976. The Offer does not fall within the scope of the EC
Merger Control Regulation (Regulation 4064/89/EC), as the relevant turnover
threshold conditions are not met. The legal obligation to notify the Offer to
the relevant national merger control authorities does, however, arise under
Irish and Dutch merger control law, as the relevant turnover thresholds are
exceeded.
Pursuant to the relevant Irish merger control law (the Mergers and
Takeovers (Control) Acts 1978 - 1996, as amended), the acquisition must not be
completed until the Irish Minister has confirmed that he does not propose to
prohibit the transaction or that he will permit it subject to conditions. The
Minister has a maximum of three months from the date of notification (or the
date of receipt of such further information as the Minister may require) to
investigate the transaction. The Offer was notified to the Minister on December
31, 1998.
Pursuant to the relevant Dutch merger control law (the Mededingingswet),
the acquisition may not be completed within four weeks of notification to the
Dutch merger control authorities (the Nederlandre
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Mededingingsautoriteit). This prohibition may be extended to cover the duration
of a second-stage investigation which may last a further 13 weeks. The Offer was
notified to the Dutch merger control authorities on January 4, 1999.
The Offer is not being made to (nor will tenders of Esprit Telecom
Securities be accepted from or on behalf of) holders of Esprit Telecom
Securities in any jurisdiction in which the making of the Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction. In any jurisdiction (other than Canada, Australia or Japan) the
securities laws or blue sky laws of which require the Offer to be made by a
licenced broker or dealer, the Offer is being made on behalf of GTS by the
Dealer Managers or one or more registered brokers or dealers that are licenced
under the laws of such jurisdiction.
ACCOUNTING TREATMENT
The acquisition of Esprit Telecom Securities in the Offer is intended to
qualify as a pooling of interests transaction, which means the recorded assets
and liabilities of Esprit Telecom will be carried forward to the combined
business at their recorded amounts. The historical revenues and expenses of
Esprit Telecom, for all periods, will be combined with those of GTS, whose
financial statements will then be restated.
Although not a condition to the Offer, GTS expects that, upon consummation
of the Offer (i) GTS shall have received a letter from Ernst & Young LLP,
independent auditors for GTS, dated as of the date on which the transactions
contemplated by the Offer are consummated, regarding such firm's concurrence
with the conclusions of GTS' management that the Offer will qualify for pooling
of interests accounting treatment under Accounting Principles Board Opinion No.
16 and (ii) Esprit Telecom shall have received a letter from
PricewaterhouseCoopers, independent auditors for Esprit Telecom, regarding such
firm's concurrence with the conclusions of Esprit Telecom's management that no
conditions exist related to Esprit Telecom that would preclude GTS' accounting
for the Offer as a "pooling of interests," under Accounting Principles Board
Opinion No. 16.
U.S. FEDERAL SECURITIES LAWS
All New GTS Stock received by holders of Esprit Telecom Securities in the
Offer will be freely transferable, except that New GTS Stock received by persons
who may be deemed to be affiliates of Esprit Telecom prior to the Offer may be
subject to restrictions under US securities laws and such persons may be
permitted to resell such securities only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144
promulgated under the Securities Act in the case of such persons who become
affiliates of GTS) or otherwise in compliance with (or pursuant to an exemption
from) the registration requirements of the Securities Act. Persons deemed to be
affiliates of Esprit Telecom are those individuals or entities that control, are
controlled by, or are under common control with, Esprit Telecom and generally
include executive officers and directors of Esprit Telecom as well as certain
Principal Securityholders of Esprit Telecom.
NEW GTS STOCK
The New GTS Stock will be credited as fully paid and will rank pari passu
in all respects with the existing GTS Stock including the right to receive all
dividends and distributions declared with a record date after the date of
issuance of such stock.
Application has been made for the New GTS Stock to be quoted on EASDAQ and
will be made for it to be quoted on Nasdaq. It is expected the listings will
become effective and that dealings, for normal settlement, will commence on
Nasdaq and EASDAQ in the New GTS Stock on the first trading day following the
day on which the Offer becomes or is declared unconditional in all respects
(save only for the quotation of such shares on Nasdaq and EASDAQ becoming
effective).
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CERTAIN INFORMATION CONCERNING GTS
Except as otherwise stated in this Offering Circular/Proxy
Statement/Prospectus (i) there have not been any contracts, transactions or
negotiations between GTS, any of its subsidiaries or, to the best knowledge of
GTS, any of the directors or executive officers of GTS with Esprit Telecom or
any of its directors, officers or affiliates concerning a merger, consolidation,
or acquisition, a tender offer or other acquisition of securities; an election
of directors or a sale or other transfer of a material amount of assets, (ii)
there are no current or proposed material contracts, arrangements,
understandings or relationships between GTS, its controlling persons or
subsidiaries or, to the best knowledge of GTS, any of the persons listed as
"Principal GTS Stockholders" on page 204 with respect to any Esprit Telecom
Securities. See "-- Background of and Reasons for the Offer -- Background of the
Offer" (page 53), "-- Background of and Reasons for the Offer -- Purpose of the
Offer; Plans for Esprit Telecom" (page 67) and "-- Background of and Reasons for
the Offer -- Change of Control Consent Solicitation" (page 67).
Neither GTS nor any of its controlling persons or subsidiaries or, to the
best knowledge of GTS, any of the persons listed as "Principal GTS Stockholders"
on page 204 owns of record any Esprit Telecom Securities, except for (i)
Fidelity Management and Research Corporation who disclosed in a Schedule 13F-E
filed with the SEC on November 6, 1998 for fiscal quarter ended September 30,
1998, ownership of 7,145,670 shares of GTS Stock representing 11.0% of the total
outstanding shares of GTS Stock and 1,858,500 Esprit Telecom Securities,
representing 1.48% of the total outstanding Esprit Telecom Securities each as of
such date and (ii) Fidelity International Limited, who disclosed in a Schedule
13F-E filed with the SEC on November 3, 1998 for fiscal quarter ended September
30, 1998, ownership of 23,640 shares of GTS Stock representing less than 1% of
the total outstanding shares of GTS Stock and 8,982,050 Esprit Telecom
Securities, representing 7.16% of the total outstanding Esprit Telecom
Securities as of such date.
THE GTS SPECIAL MEETING OF STOCKHOLDERS
GENERAL; DATE, TIME AND PLACE
This Offering Circular/Proxy Statement/Prospectus is being furnished by the
GTS Board to holders of common stock, par value $.10 per share, of GTS in
connection with the solicitation of proxies by the GTS Board for use at the
special meeting of GTS stockholders (the "Special Meeting") to be held on
Wednesday, March 3, 1999, at the offices of GTS at 1751 Pinnacle Drive, North
Tower, 12th floor, McLean, Virginia 22102, commencing at 10:00 a.m., local time,
and at any adjournment or postponement thereof.
This Offering Circular/Proxy Statement/Prospectus and the accompanying form
of proxy are first being mailed to stockholders of GTS on Tuesday, February 2,
1999.
PURPOSE OF THE SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (i) a
proposal to issue New GTS Stock in connection with the acquisition, in the
Offer, of all issued Esprit Telecom Securities and (ii) such other business as
may properly be brought before the Special Meeting.
RECOMMENDATION OF THE GTS BOARD
The GTS Board has unanimously approved the terms of the Offer and the
transactions contemplated thereby, including the Offer, and recommends that
holders of GTS Stock vote FOR approval and adoption of the proposal to issue New
GTS Stock to acquire, in the Offer, all issued Esprit Telecom Securities. See
"-- Background of and Reasons for the Offer -- GTS Board's Reasons for the
Offer; Recommendation of the GTS Board" (page 61).
STOCKHOLDERS ENTITLED TO VOTE; VOTE REQUIRED
The GTS Board has fixed the close of business on January 29, 1999 as the
record date for the determination of the holders of shares of GTS Stock entitled
to notice of and to vote at the Special Meeting
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(the "Record Date"). Accordingly, only holders of record of GTS Stock on the
Record Date will be entitled to notice of, and to vote at, the Special Meeting.
As of the Record Date, there were outstanding and entitled to vote 64,988,680
shares of GTS Stock (constituting all of the voting stock of GTS), which shares
were held by approximately 487 holders of record. Each holder of record of
shares of GTS Stock on the Record Date is entitled to one vote per share, which
may be cast either in person or by properly executed proxy, at the Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding GTS Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting.
The approval and the adoption of a proposal to issue New GTS Stock to
acquire, in the Offer, all issued Esprit Telecom Ordinary Shares and Esprit
Telecom ADSs will require the affirmative vote of the holders of a majority of
the GTS Stock outstanding on the Record Date.
A majority of the outstanding shares constitutes a quorum. Shares which
abstain from voting, and shares held by a broker nominee "street name" which
indicates on a proxy that it does not have discretionary authority to vote as to
a particular matter, will be treated as shares that are present and entitled to
vote at the Special Meeting for purposes of determining whether a quorum exists.
Because the proposal to issue New GTS Stock in connection with the Offer must be
approved by the holders of a majority of the shares of GTS Stock outstanding on
the Record Date, abstentions and broker non-votes will have the same effect as a
vote against such proposal.
Directors and executive officers of GTS who, as of December 31, 1998,
personally held 6,169,306 shares of GTS Stock, or approximately 9.53% of the GTS
Stock then outstanding of which 1,213,550 shares of GTS Stock were held in a
fiduciary capacity have not indicated how they intend to vote or direct the vote
of any or all of their respective shares of GTS Stock over which they have
voting control either in favor of or against the adoption of the proposal to
issue New GTS Stock to acquire, in the Offer, all issued Esprit Telecom
Securities.
PROXIES
This Offering Circular/Proxy Statement/Prospectus is being furnished to GTS
stockholders in connection with the solicitation of proxies by, and on behalf
of, the GTS Board for use at the Special Meeting, and is accompanied by a form
of proxy.
All shares of GTS Stock which are entitled to vote and are represented at
the Special Meeting by properly executed proxies received prior to or at the
Special Meeting, and not revoked, will be voted at such Special Meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated (other than in the case of broker non-votes), such proxies will be
voted for approval and adoption of the proposal to issue shares of GTS Stock in
connection with the Offer.
If any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn such Special Meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the Offer), the persons
named in the enclosed forms of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of GTS, at or before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later dated proxy relating to the same shares and
delivering it to GTS before the taking of the vote at the Special Meeting or
(iii) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute a revocation of the
proxy). Any written notice of revocation or subsequent proxy should be sent to
GTS, 1751 Pinnacle Drive, North Tower-12th Floor, McLean, VA 22102, Attention:
Secretary, or hand delivered to the Secretary of GTS at or before the taking of
the vote at the Special Meeting.
All expenses of GTS' solicitation of proxies will be borne by GTS, and the
costs of preparing and mailing this Offering Circular/Proxy Statement/Prospectus
to GTS stockholders will be paid by GTS. In addition to
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solicitation by use of the mails, proxies may be solicited from GTS stockholders
by directors, officers and employees of GTS in person or by telephone, telegram
or other means of communication. Such directors, officers and employees will not
be additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. GTS has retained Georgeson &
Company Inc., a proxy solicitation firm, for assistance in connection with the
solicitation of proxies for the Special Meeting at a cost of approximately
$10,000, plus reimbursement of reasonable out-of-pocket expenses. Arrangements
will also be made with brokerage houses, custodians, nominees and fiduciaries
for forwarding of proxy solicitation materials to beneficial owners of shares
held of record by such brokerage houses, custodians, nominees and fiduciaries,
and GTS will reimburse such brokerage houses, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection therewith.
GTS STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
THE OFFER AGREEMENT
GTS and Esprit Telecom entered into an Offer Agreement dated December 8,
1998, containing covenants to one another and giving one another their
irrevocable consent to the issuance of the Press Announcement and the mailing of
this Offering Circular/Proxy Statement/Prospectus.
In the Offer Agreement, Esprit Telecom agreed:
- that until the Offer lapses or is withdrawn it shall refrain from
knowingly taking any action or making any statement which is or may be
prejudicial to the success of the Offer, including, without limitation:
- soliciting, procuring, initiating or (subject to the fiduciary duties
of the Esprit Telecom Directors) engaging in discussions or
negotiations in relation to any transaction involving an offer by any
third party for the acquisition of all or any part of the issued share
capital or material assets of Esprit Telecom or any member of the
Esprit Telecom Group;
- (except as required by Rule 20.2 of the City Code) providing any
information or facilitating or cooperating with any such transaction;
or
- subject to certain limited exceptions, communicating or discussing the
terms of the Offer or related matters with any third party without the
prior, written consent of GTS;
- to refrain from discussing the terms of the Offer with any third party
without the prior consent of GTS subject to the fiduciary duties of the
Esprit Telecom Directors and certain limitations;
- to provide, subject to the fiduciary duties of the Esprit Telecom
Directors, such information as GTS or its advisors reasonably request in
relation to the Esprit Telecom Group as to its business, finances and
affairs, excluding commercially sensitive information which may prejudice
Esprit Telecom and, if GTS reasonably believes that circumstances exist
which would lead to any of the conditions to the Offer not being
satisfied, to provide such information regarding the Esprit Telecom as
GTS may reasonably require to establish whether or not the relevant
condition has been satisfied;
- to refrain from taking any action which would require shareholder
approval under Rule 21 of the City Code without the prior consent of GTS;
and
- to deliver a letter identifying all persons that may be "affiliates" of
Esprit Telecom under the Securities Act or the requirements to qualify
the Offer for pooling of interests accounting treatment under Accounting
Principles Board Opinion No. 16 and applicable SEC rules and regulations.
Further, Esprit Telecom agreed to use its best efforts to cause each such
persons (with the exception of those persons that have concurrently
entered into the Registration Rights Agreement) to deliver to GTS by the
close of the Offer a written undertaking in customary form.
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In the Offer Agreement, GTS agreed:
- subject to its fiduciary duties, that the GTS Board would recommend the
Offer to the GTS stockholders and recommend that they vote in favor of
the issuance of the New GTS Stock;
- to maintain for six years after the Offer becomes wholly unconditional,
the level of directors' and officers' liability coverage currently
provided to Esprit Telecom's directors and officers under existing or
substitute policies of at least the same coverage and amounts;
- not to amend the Esprit Telecom Memorandum or Esprit Telecom Articles in
a manner adverse to Esprit Telecom's directors and officers and to
maintain the same level of indemnification of all such directors and
officers in the event their employment is transferred to any member of
the wider GTS Group or substantially all of Esprit Telecom's assets are
transferred;
- to make, on behalf of Esprit Telecom, the Change of Control Consent
Solicitation; and
- for the purposes of qualifying the Offer for pooling of interests
accounting treatment under Accounting Principles Board Opinion No. 16 and
the applicable SEC rules and regulations, to use its best efforts to
cause its "affiliates" to comply with applicable holding periods.
In the Offer Agreement both parties undertook with each other:
- to use all reasonable efforts to satisfy the conditions set out in Annex
A, to consummate the transactions contemplated by the Offer and, in
particular, to make members of management available to facilitate the
completion of the Offer and to provide all reasonable assistance to
satisfy the conditions to the Offer;
- that participants in the Esprit Telecom Share Option Schemes will have
the opportunity to roll over their options into options to acquire GTS
Stock on substantially the same terms as the existing Esprit Telecom
Share Option Schemes and on the same Exchange Ratio as the Offer and that
no further amendments will be made to the Esprit Telecom Share Option
Schemes which would cause the options to be exercised at a date earlier
than the date on which they would otherwise become exercisable; and
- to avoid taking any action, and to use their reasonable best efforts to
remedy any event or circumstance, that would prevent the transactions
contemplated by the Offer receiving a pooling of interests treatment for
financial accounting purposes.
The covenants in the Offer Agreement will automatically lapse if the Offer
is not declared wholly unconditional on or before the 60th day after this
Offering Circular/Proxy Statement/Prospectus is mailed (except as extended in
certain limited circumstances). The Offer Agreement is governed by English law.
For further details of the Offer Agreement refer to Annex B.
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AGREEMENTS WITH CERTAIN SECURITYHOLDERS AND DIRECTORS
PRINCIPAL SECURITYHOLDERS
Certain holders of Esprit Telecom Securities have entered into irrevocable
undertakings dated December 8, 1998 to accept the Offer in respect of an
aggregate of 47,736,275 Esprit Telecom Ordinary Shares and 4,890,285 Esprit
Telecom ADSs. Together these represent a total of 81,968,270 Esprit Telecom
Ordinary Shares (including those represented by Esprit Telecom ADSs),
representing 65% of the issued share capital of Esprit Telecom as set forth in
the table below.
<TABLE>
<CAPTION>
BENEFICIAL HOLDINGS OF
ESPRIT TELECOM
NAME BENEFICIAL HOLDING OF ESPRIT TELECOM ADSs SHARES
- ---- ------------------------------------------- ----------------------
<S> <C> <C>
Gold & Appel Transfer
S.A....................... 4,662,555 16
(equal to 32,637,885 Esprit Telecom
Ordinary Shares)
Walter Anderson............. 47,230 9
(equal to 330,610 Esprit Telecom Ordinary
Shares)
Apax Funds Nominees Ltd..... 180,500 32,294,100
(equal to 1,263,500 Esprit Telecom Ordinary
Shares)
Warburg, Pincus Ventures
L.P....................... -- 15,442,150
</TABLE>
The holders of Esprit Telecom Securities who entered the agreements gave
their irrevocable consent to the issuance of the Press Announcement and the
mailing of the Offering Circular/Proxy Statement/ Prospectus and gave to GTS
certain covenants, undertakings and warranties in which, among other things,
they agreed:
- to accept the Offer in respect of all Esprit Telecom Securities held by
them;
- not to conditionally or unconditionally, sell, transfer, charge, pledge
or grant any option over or otherwise dispose or permit the disposition
of any or all of the Esprit Telecom Securities to which the irrevocable
undertaking relates prior to the lapsing or withdrawal of the Offer, with
the exception that a transfer or other disposition may be made if certain
conditions are satisfied including that:
- the respective independent auditors of Esprit Telecom and GTS will
have advised the companies that they concur with management's
conclusion that such transfer or disposition would not prevent the
transaction contemplated by the Offer from receiving pooling of
interests treatment for financial accounting purposes;
- such transfer or disposition would not delay the Offer becoming wholly
unconditional beyond certain periods;
- before any transfer or disposition, the transferee executes an
irrevocable undertaking for no consideration, in a form substantially
similar to the relevant Securityholder's Irrevocable, and delivers
certain documents;
- such transferee has been advised by Esprit Telecom's financial
advisors that the transfer or disposition would not be in breach of
the City Code;
- such transferee is not listed in a schedule to the Securityholders
Irrevocable and does not own more than 1% of the outstanding GTS
Stock; and
- prior to the Offer lapsing or being withdrawn, without the prior written
consent of GTS, not to purchase or otherwise acquire any Esprit Telecom
Securities or any interest therein or agree to do so;
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- unless and until the Offer lapses or is withdrawn, to ensure that no
other agreement or arrangement is entered into (other than with GTS)
which could result in the disposal of or creation of any encumbrance on,
all or any of the Esprit Telecom Securities to which the irrevocable
undertaking relates or any interest therein or which might in any way
restrict their disposal and no other offer is accepted in respect of any
of the Esprit Telecom Securities to which the irrevocable undertaking
relates;
- that until the Offer lapses or is withdrawn they shall refrain from
knowingly taking any action or making any statement which is or may be
prejudicial to the success of the Offer, including, without limitation:
- soliciting, procuring, initiating or engaging in discussions or
negotiations in relation to any transaction involving an offer by any
third party for the acquisition of all or any part of the issued share
capital or material assets of Esprit Telecom or any member of the
Esprit Telecom Group;
- (except as required by Rule 20.2 of the City Code) providing any
information or facilitating or cooperating with any such transaction;
or
- subject to certain limited exceptions, communicating or discussing the
terms of the Offer or related matters with any third party without the
prior, written consent of GTS;
- to inform GTS (and provide reasonable details) immediately upon:
- being approached by a third party with respect to any transaction
involving an offer by any third party or acquisition of all or any
part of the issued share capital or assets of Esprit Telecom or any
member of the Esprit Telecom Group;
- being asked to provide information to any person with a view to any
person investigating or entering into such a transaction; or
- becoming aware of any material breach of the irrevocable undertaking;
- prior to the date the Offer becomes wholly unconditional or lapses or is
withdrawn not to deal in any way in any GTS shares or securities or any
interest therein;
- that until the Offer closes, lapses or is withdrawn, they will vote as
instructed by GTS on any resolution to enable the Offer to become
unconditional if it were passed or rejected at a general or separate
class meeting of Esprit Telecom.
The Securityholder Irrevocables above continue to be binding in the event
of a competing higher offer. However, they will lapse if there is a material
adverse change in the value of the GTS Group or if the Offer is not declared
wholly unconditional by the 60th day after posting (as extended in certain
limited circumstances). The irrevocable undertakings given by the Principal
Securityholders are governed by English law.
For further details of the irrevocable undertakings given by certain
holders of Esprit Telecom Securities refer to Annexes E to H.
DIRECTORS
The directors of Esprit Telecom entered into agreements with GTS dated
December 8, 1998 whereby they irrevocably consented to the issuance of the Press
Announcement and the mailing of this Offering Circular/Proxy
Statement/Prospectus.
In the Director Irrevocables, the Esprit Telecom Directors agreed among
other things:
- to recommend the Offer to holders of Esprit Telecom Securities subject to
their fiduciary duties and obligations under the City Code;
- to accept the Offer in respect of all Esprit Telecom Ordinary Shares
resulting under the exercise of their Esprit Telecom Options;
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- that until the Offer lapses or is withdrawn they shall refrain from
knowingly taking any action or making any statement which is or may be
prejudicial to the success of the Offer, including, without limitation:
- soliciting, procuring, initiating or (subject to the fiduciary
duties of the Esprit Telecom Directors) engaging in discussions or
negotiations in relation to any transaction involving an offer by
any third party for the acquisition of all or any part of the issued
share capital or material assets of Esprit Telecom or any member of
the Esprit Telecom Group;
- (except as required by Rule 20.2 of the City Code) providing any
information or facilitating or cooperating with any such
transaction; or
- subject to certain limited exceptions, communicating or discussing
the terms of the Offer or related matters with any third party
without the prior, written consent of GTS;
- not to dispose or permit the disposition of their Esprit Telecom Options
or any interest therein, nor to enter any agreement or arrangement which
could result in the disposal of any Option or interest therein, or which
might restrict the disposal of their Esprit Telecom Options;
- prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS, otherwise than pursuant to the exercise of their Esprit
Telecom Options, not to acquire any Esprit Telecom Securities or any
interest therein;
- upon the Offer becoming unconditional, and subject to their fiduciary
duties, to appoint any person nominated by GTS to the Esprit Telecom
Board;
- prior to the date the Offer becomes wholly unconditional or lapses or is
withdrawn, not to deal in any GTS Stock, securities or interest therein;
and
- that subject to the receipt of satisfactory tax advice, it was their
current intention to accept the Rollover Offer in respect of their Esprit
Telecom Options.
The Director Irrevocables will automatically lapse if the Offer is not
declared wholly unconditional on or before the 60th day after this Offering
Circular/Proxy Statement/Prospectus is mailed (except as extended in certain
limited circumstances) or, in respect of any individual Director, in the event
that such Director ceases to be a Director of Esprit Telecom. The Director
Irrevocables are governed by English law.
For further details of the agreements with Director Irrevocables see
Annexes I to N.
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TAX CONSEQUENCES OF THE OFFER AND COMPULSORY ACQUISITION
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences of the Offer and the Compulsory Acquisition to Esprit
Telecom and holders of Esprit Telecom Securities. The discussion is based on the
Internal Revenue Code of 1986, as amended, and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
possibly on a retroactive basis. Any such change could affect the continuing
validity of this discussion. The discussion does not address aspects of United
States federal taxation other than income taxation, nor does it address all
aspects of United States federal income taxation, including, without limitation,
aspects of United States federal income taxation that may be applicable to
particular shareholders (including banks and insurance companies, dealers in
securities, and holders of securities held as part of a "straddle," "hedge," or
"conversion transaction," those who acquired their Esprit Telecom Securities in
a compensation transaction or those holders that actually or constructively own
ten percent or more of the total combined voting power of Esprit Telecom). The
discussion also does not address the United States federal income tax
consequences of the Offer and the Compulsory Acquisition to any holders of
options or warrants to purchase Esprit Telecom Securities. In addition, it does
not address the state, local or foreign tax consequences of the Offer and the
Compulsory Acquisition, if any.
No ruling has been or will be obtained from the Internal Revenue Service
with respect to the Offer and the Compulsory Acquisition and no assurance can be
given that the Internal Revenue Service would not be able to successfully
challenge the United States federal income tax consequences set forth below.
HOLDERS OF ESPRIT TELECOM SECURITIES ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE OFFER AND THE COMPULSORY ACQUISITION.
US HOLDERS
Provided that in connection with the Offer and Compulsory Acquisition, GTS
acquires at least 80% of the Esprit Telecom Securities, the material United
States federal income tax consequences of the Offer and the Compulsory
Acquisition to Esprit Telecom and US Holders of Esprit Telecom Securities will
be as follows: (i) the Offer and the Compulsory Acquisition will qualify as a
tax-free "reorganization" within the meaning of Section 368 of the Code; (ii) no
gain or loss will be recognized by Esprit Telecom in the Offer and the
Compulsory Acquisition; (iii) no gain or loss will be recognized by holders of
Esprit Telecom Securities upon their receipt of New GTS Stock in exchange for
their Esprit Telecom Securities, except that holders of Esprit Telecom
Securities who receive cash proceeds in lieu of fractional shares of New GTS
Stock will recognize gain or loss equal to the difference, if any, between such
proceeds and the tax basis of Esprit Telecom Securities allocated to their
fractional share interests; (iv) such gain or loss, if any, will constitute
capital gain or loss if the fractional share interests exchanged are held as
capital assets at the time of the Offer and the Compulsory Acquisition; (v) such
capital gain or loss will be long-term capital gain or loss if the holding
period for the fractional share interests (including the holding period of
Esprit Telecom Securities attributed thereto as described below) exceeds one
year; (vi) the tax basis of New GTS Stock received by holders of Esprit Telecom
Securities will be the same as the tax basis of the Esprit Telecom Securities
exchanged therefor less the tax basis, if any, allocated to fractional share
interests; and (vii) the holding period of New GTS Stock in the hands of holders
of Esprit Telecom Securities will include the holding period of their Esprit
Telecom Securities exchanged therefor, provided that such Esprit Telecom
Securities are held as a capital asset at the time of the Offer and the
Compulsory Acquisition. If GTS acquires less than 80% of the Esprit Telecom
Securities in connection with the Offer, the Offer will not qualify as a
tax-free "reorganization" and US Holders will recognize gain or loss equal to
the difference between the fair market value of the New GTS Stock received over
their tax basis of Esprit Telecom Securities surrendered. Such gain or loss
would be taxed in the manner set forth in (iv) and (v) of the preceding
sentence.
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<PAGE> 97
NON-US HOLDERS
OFFER AND COMPULSORY ACQUISITION
Generally, Non-US Holders of Esprit Telecom Securities will not be subject
to United States federal income tax upon their receipt of New GTS Stock in
exchange for their Esprit Telecom Securities regardless of whether such exchange
qualifies as a tax-free reorganization. However, if a Non-US Holder of Esprit
Telecom Securities recognizes gain or loss under the rules discussed above under
"US Holders" such gain or loss will be subject to United States federal income
tax if (i) such gain or loss is effectively connected with such holder's conduct
of a trade or business in the United States or, if a tax treaty applies, such
gain or loss is attributable to a permanent establishment in the United States
("United States trade or business income"), (ii) the Non-US Holder is an
individual who is present in the United States for 183 or more days in the
taxable year of the Offer and Compulsory Acquisition and who meets certain other
requirements, or (iii) the Non-US Holder is subject to tax pursuant to the
provisions of United States tax law applicable to certain United States
expatriates.
DIVIDENDS ON NEW GTS STOCK
In general, dividends paid to a Non-US Holder of GTS Stock will be subject
to withholding of United States federal income tax at a 30% rate unless such
rate is reduced by an applicable income tax treaty. However, dividends that are
United States trade or business income generally are subject to United States
federal income tax on a net income basis at applicable graduated individual or
corporate tax rates and are not generally subject to withholding if the Non-US
Holder files the appropriate certification with GTS (or its paying agent). Any
United States trade or business income received by a Non-US Holder that is a
corporation under certain circumstances, may also, be subject to an additional
"branch profits tax" at a 30% rate, or lower rate as may be applicable under an
income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding discussed above, and under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under United States Treasury
regulations (generally effective January 1, 2000), however, a Non-US Holder of
New GTS Stock who wishes to claim the benefit of an applicable treaty rate would
be required to satisfy applicable certification and other requirements, which
would include the requirement that the Non-US Holder file a form which contains
the holder's name and address and may require the Non-US Holder to provide
certain documentary evidence used by foreign governmental authorities as proof
of residence in a foreign country.
A Non-US Holder of New GTS Stock that is eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts currently withheld by filing an appropriate claim
for a refund with the Internal Revenue Service.
DISPOSITION OF NEW GTS STOCK
Except as described below and subject to the discussion concerning backup
withholding, a Non-US Holder generally will not be subject to United States
federal income tax in respect of gain recognized on a disposition of New GTS
Stock unless (i) the gain is United States trade or business income; (ii) the
Non-US Holder is an individual who is present in the United States for 183 or
more days in the taxable year of the disposition and certain other requirements
are satisfied; (iii) the Non-US Holder is subject to tax pursuant to the
provisions of United States tax law applicable to certain United States
expatriates; or (iv) GTS has been or does become a "United States real property
holding corporation" for United States federal income tax purposes. GTS believes
that it has not been and is not likely to become a United States real property
holding corporation. However, no assurance can be given that GTS will not be a
United States real property holding corporation when a Non-US Holder sells its
New GTS Stock. If GTS were to become a United States real property holding
corporation, gains realized by a Non-US Holder which did not directly or
indirectly own more than 5% of the New GTS Stock during a five-year testing
period generally would not be subject to
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<PAGE> 98
United States federal income tax, provided that the New GTS Stock have been
regularly traded on an established securities market.
BACKUP WITHHOLDING AND INFORMATIONAL REPORTING
US HOLDERS
Payments in respect of Esprit Telecom Securities may be subject to
informational reporting to the Internal Revenue Service and to a 31% backup
withholding tax. Backup withholding will not apply, however, to such payments
made to a US Holder if such holder completes and signs the substitute Form W-9
included as part of the Letter of Transmittal or otherwise certifies, under
penalties of perjury, to GTS or the US Depositary that it is exempt from backup
withholding.
NON-US HOLDERS
Backup withholding will not apply to payments in respect of Esprit Telecom
Securities made to a Non-US Holder if such holder certifies as to its foreign
status under penalties of perjury or otherwise establishes an exemption.
GTS must report annually to the Internal Revenue Service and to each Non-US
Holder the amount of dividends paid to, and the United States federal income tax
withheld with respect to, each Non-US Holder. These reporting requirements apply
even if withholding was reduced or eliminated by an applicable tax treaty.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the Non-US Holder resides. Under existing United States
Treasury regulations, the United States backup withholding tax will generally
not apply to dividends paid on the New GTS Stock to a Non-US Holder at an
address outside the United States. Under United States Treasury regulations,
generally effective January 1, 2000, a Non-US Holder could be subject to backup
withholding unless they provide certification of foreign status.
Non-US Holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of New
GTS Stock effected by a foreign office of a foreign broker, provided however
that if the broker is a United States person or a "United States related
person," information reporting (but not backup holding) would apply unless the
broker receives a statement from the owner, signed under penalties of perjury,
certifying its foreign status or otherwise establishing an exemption or the
broker has documentary evidence in its files as to the Non-US Holder's foreign
status and the broker has no actual knowledge to the contrary. For this purpose,
a "United States related person" is a foreign person with one or more of certain
enumerated relationships with the United States.
Non-US Holders will be subject to information reporting and backup
withholding at a rate of 31% with respect to the payment of proceeds from the
disposition of New GTS Stock effected by, to or through the United States office
of a broker, United States or foreign, unless the Non-US Holder certifies as to
its foreign status under penalties of perjury or otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-US Holder will be allowed as a credit against such Non-US Holder's United
States federal income tax, and any amounts withheld in excess of such Non-US
Holder's United States federal income tax liability will be refunded, provided
that the required information is furnished to the Internal Revenue Service.
UNITED KINGDOM TAX CONSEQUENCES
The following paragraphs, which are intended as a general guide only, are
based on current legislation and Inland Revenue practice. They summarize the
material UK tax consequences of acceptance of the Offer by holders of Esprit
Telecom Securities who are resident or ordinarily resident in the UK for
taxation purposes and hold their Esprit Telecom Securities beneficially as an
investment but do not purport to be a complete analysis or listing of all the
potential UK tax consequences. If you are in any doubt as to your taxation
position or if you are subject to taxation in any jurisdiction other than the
UK, you should consult an appropriate professional advisor immediately.
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<PAGE> 99
TAX ON CHARGEABLE GAINS
Liability to tax on chargeable gains will depend on the individual
circumstances of holders of Esprit Telecom Securities and on the form of
consideration received. The position will generally be described below.
ACQUISITION OF NEW GTS STOCK
A holder of Esprit Telecom Securities who, either alone or together with
persons connected with him, does not hold more than 5% of any class of shares in
or debentures of Esprit Telecom will not be treated as having made a disposal of
his Esprit Telecom Securities for the purposes of tax on chargeable gains to the
extent that he receives New GTS Stock in exchange for his Esprit Telecom
Securities under the Offer. Any gain or loss which would otherwise have arisen
on a disposal of his Esprit Telecom Securities will be "rolled-over" into the
New GTS Stock and the New GTS Stock will be treated as the same asset as his
Esprit Telecom Securities acquired at the same time and for the same
consideration as he acquired his Esprit Telecom Securities.
Any holder of Esprit Telecom Securities who, either alone or together with
persons connected with him, holds more than 5% of any class of shares in or
debentures of Esprit Telecom is advised that the Inland Revenue has granted a
clearance under Section 138 of the Taxation of Chargeable Gains Act 1992 in
respect of the Offer. This means that any such holder will also be treated in
the manner described in the preceding paragraph.
DISPOSAL OF NEW GTS STOCK
A subsequent disposal of New GTS Stock may, depending on individual
circumstances, give rise to a liability to tax on chargeable gains. Any
chargeable gain or allowable loss on disposal of the New GTS Stock should be
calculated taking into account the allowable original cost to the holder of
acquiring the relevant Esprit Telecom Securities, and (when calculating a
chargeable gain but not an allowable loss) indexation allowance on the cost
(save that, except in the case of taxpayers liable to corporation tax, no
indexation will be allowable in respect of periods after April 1998 although
tapering relief may be available). In broad terms the allowable original cost of
the relevant Esprit Telecom Securities will be apportioned to the New GTS Stock
and cash received according to the market value of the GTS Stock at the time of
the exchange.
A holder of Esprit Telecom Securities who is neither resident nor
ordinarily resident in the UK for UK taxation purposes will not be liable for UK
tax on capital gains on his disposal of Esprit Telecom Securities pursuant to
the Offer or on any disposal or deemed disposal of his New GTS Stock unless such
securities are held in connection with a trade, profession or vocation carried
on by such holder in the UK through a branch or agency and those securities are
or have been used, held or acquired for the purposes of such trade, profession
or vocation.
TAX ON DIVIDENDS ON NEW GTS STOCK
A UK resident shareholder may, depending on his or its circumstances,
suffer a charge under UK taxation on dividends received from GTS.
A UK resident shareholder not otherwise exempt from tax on such dividends
will be liable for income tax or corporation tax, as appropriate, on the amount
of the gross dividend paid but will normally be entitled to a credit for any US
withholding tax charged on the dividend at the appropriate rate.
If dividends are paid through a paying or collecting agent in the UK, such
agent may be required to withhold an amount on account of UK income tax at a
lower rate (currently 20%) unless either a declaration in the required form has
been made to the paying or collecting agent in respect of such payment or the
Inland Revenue has given notice that it considers that tax should not be
deducted.
Both paying agents and collecting agents in the UK may, under current
Inland Revenue practice, give credit for any US withholding tax known to have
been levied in respect of the dividend. At current US and UK tax rates, this
would normally allow such an agent to withhold on account of UK income tax at a
reduced
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<PAGE> 100
rate of 5% of the gross dividend because, in normal circumstances, a US
withholding tax of 15% will have been deducted by GTS.
OTHER TAX MATTERS
Special tax provisions may apply to holders of Esprit Telecom Ordinary
Shares who have acquired or who acquire their Esprit Telecom Ordinary Shares by
exercising options under the Esprit Telecom Share Option Schemes, including
provisions imposing a charge to income tax.
STAMP DUTY AND STAMP DUTY RESERVE TAX ("SDRT")
No stamp duty or SDRT will be payable by holders of Esprit Telecom
Securities as a result of accepting the Offer.
A transfer of GTS Stock which is executed in, or relates to any matter or
thing to be done in the UK (e.g., if such stock is registered on a register of
GTS Stock maintained in the UK or is transferred in return for the issue of
shares in a UK company), will, in general, be subject to UK stamp duty at the
rate of 50 pence per L100 of the consideration paid. An agreement for the
transfer of GTS Stock will be outside the scope of stamp duty reserve tax
provided that the stock to be transferred is not registered on a register of
such stock maintained in the UK.
INHERITANCE TAX
GTS Stock will be within the scope of UK inheritance tax on the death of,
or a gift of such GTS Stock by, a shareholder who is domiciled or deemed to be
domiciled in the UK for tax purposes or in certain circumstances if such stock
is registered on a register of GTS Stock maintained in the UK.
HOLDERS OF ESPRIT TELECOM SECURITIES ARE URGED TO CONSULT WITH THEIR OWN
TAX ADVISORS REGARDING THE FEDERAL INCOME AND OTHER TAX CONSEQUENCES OF THE
OFFER TO THEM.
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<PAGE> 101
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been
prepared from GTS' historical consolidated financial statements included in this
Offering Circular/Proxy Statement/Prospectus and Esprit Telecom's historical
consolidated financial statements included in this Offering Circular/Proxy
Statement/Prospectus. The accompanying unaudited pro forma combined statement of
operations presents the historical results of operations of GTS and Esprit
Telecom giving effect to the combination as if it had occurred at the beginning
of the earliest period presented in accordance with US GAAP under the "pooling
of interests" method of accounting.
The pro forma combined statement of operations combines the results of GTS
for each of the three years in the period ended December 31, 1997 and for the
nine months ended September 30, 1998 with the results of Esprit Telecom for each
of the three years in the period ended September 30, 1998 and for the nine
months ended September 30, 1998. The unaudited pro forma combined income
statement gives effect to the combination as if it had occurred on January 1,
1997. The unaudited pro forma combined balance sheet gives effect to the
combination as if it had occurred on September 30, 1998, combining the balance
sheets of GTS and Esprit Telecom at September 30, 1998.
The unaudited pro forma combined financial statements have been prepared in
accordance with US GAAP. The financial statements of Esprit Telecom have been
converted from UK GAAP to US GAAP and translated into US dollars for purposes of
this presentation. UK GAAP differs in certain significant respects from US GAAP.
A reconciliation of Esprit Telecom's net loss and stockholders' equity from UK
GAAP to US GAAP is presented in Esprit Telecom's historical consolidated
financial statements.
As described in this Offering Circular/Proxy Statement/Prospectus, the
exchange ratios are: (i) each outstanding Esprit Telecom Ordinary Share will be
converted into 0.1271 of a share of New GTS Stock and (ii) each outstanding
Esprit Telecom ADR will be converted into 0.89 of a share of New GTS Stock.
These exchange ratios were used in the accompanying unaudited pro forma combined
financial statements.
The unaudited pro forma combined financial statements are presented for
comparative purposes only and are not intended to be indicative of what the
actual results would have been if the combination occurred as of the dates
indicated above nor do they purport to be indicative of the results which may be
attained in the future. These unaudited pro forma combined financial statements
should be read in conjunction with the historical consolidated financial
statements of GTS and Esprit Telecom and the related notes thereto. See "Where
You Can Find More Information."
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<PAGE> 102
GLOBAL TELESYSTEMS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED (ESPRIT
NETSOURCE PRO FORMA (GTS & ESPRIT PRO FORMA TELECOM &
GTS(2) EUROPE(3) ADJUSTMENTS(4) NETSOURCE) TELECOM(2) PLUSNET(6) ADJUSTMENTS(7) PLUSNET)
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES, NET:
Telecommunication and
other services..... $ 111,195 $ 29,364 $ 140,559 $ 115,309 $ 12,456 $ (475) $ 127,290
Equipment sales...... 6,104 -- 6,104 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
117,299 29,364 146,663 115,309 12,456 (475) 127,290
--------- --------- --------- --------- --------- --------- --------- ---------
OPERATING COSTS AND
EXPENSES
Cost of revenues:
Telecommunication
and other
services......... 77,525 31,089 108,614 91,131 8,559 (475) 99,215
Equipment sales.... 4,542 -- 4,542 -- -- --
Selling, general and
administrative..... 75,150 27,741 102,891 49,464 4,601 54,065
Depreciation and
amortization....... 13,953 3,077 7,295 24,325 17,758 1,613 3,771 23,142
Non-income taxes..... 5,140 -- 5,140 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
176,310 61,907 7,295 245,512 158,353 14,773 3,296 176,422
Equity in (earnings)
losses of
ventures........... (4,142) -- (4,142) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
LOSS FROM
OPERATIONS........... (54,869) (32,543) (7,295) (94,707) (43,044) (2,317) (3,771) (49,132)
OTHER
INCOME /(EXPENSE):
Interest income...... 28,110 675 28,785 -- 246 246
Interest expense..... (52,603) (1,319) (53,922) (19,872) -- (8,774) (28,646)
Foreign currency
losses............. (10,364) (10,364) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
(34,857) (644) -- (35,501) (19,872) 246 (8,774) (28,400)
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss before income
taxes, minority
interest and
extraordinary loss... (89,726) (33,187) (7,295) (130,208) (62,916) (2,071) (12,545) (77,532)
Income taxes.......... 2,151 -- 2,151 3 -- 3
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss before
minority interest and
extraordinary loss... (91,877) (33,187) (7,295) (132,359) (62,919) (2,071) (12,545) (77,535)
Minority interest..... 3,746 -- 3,746 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss before
extraordinary loss... $ (88,131) $ (33,187) $ (7,295) $(128,613) $ (62,919) $ (2,071) $ (12,545) $ (77,535)
Loss per share before
extraordinary loss...
Weighted average
common shares
outstanding..........
<CAPTION>
PRO FORMA
COMBINED
(GTS &
PRO FORMA ESPRIT
ADJUSTMENTS(8) TELECOM)
--------- ---------
<S> <C> <C>
REVENUES, NET:
Telecommunication and
other services..... $ (1,760) $ 266,089
Equipment sales...... 6,104
--------- ---------
(1,760) 272,193
--------- ---------
OPERATING COSTS AND
EXPENSES
Cost of revenues:
Telecommunication
and other
services......... (2,989) 204,840
Equipment sales.... 4,542
Selling, general and
administrative..... 156,956
Depreciation and
amortization....... 47,467
Non-income taxes..... 5,140
--------- ---------
(2,989) 418,945
Equity in (earnings)
losses of
ventures........... (4,142)
--------- ---------
LOSS FROM
OPERATIONS........... 1,229 (142,610)
OTHER
INCOME /(EXPENSE):
Interest income...... 29,031
Interest expense..... (82,568)
Foreign currency
losses............. (10,364)
--------- ---------
-- (63,901)
--------- ---------
Net loss before income
taxes, minority
interest and
extraordinary loss... 1,229 (206,511)
Income taxes.......... 2,154
--------- ---------
Net loss before
minority interest and
extraordinary loss... 1,229 (208,665)
Minority interest..... 3,746
--------- ---------
Net loss before
extraordinary loss... $ 1,229 $(204,919)
Loss per share before
extraordinary loss... $ (2.80)
=========
Weighted average
common shares
outstanding.......... 73,192
=========
</TABLE>
See accompanying notes.
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<PAGE> 103
GLOBAL TELESYSTEMS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ESPRIT COMBINED
COMBINED TELECOM (ESPRIT
NETSOURCE PRO FORMA (GTS & YEAR ENDED PRO FORMA TELECOM &
GTS(2) EUROPE(3) ADJUSTMENTS(4) NETSOURCE) 9/30/97(2) PLUSNET(6) ADJUSTMENTS(7) PLUSNET)
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES, NET:
Telecommunication and other
services................. $ 41,300 $ 14,102 $ 55,402 $ 74,596 $ 27,072 $ (510) $ 101,158
Equipment sales............ 5,798 5,798 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
47,098 14,102 -- 61,200 74,596 27,072 (510) 101,158
--------- --------- --------- --------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and
other services......... 37,206 13,593 50,799 62,263 28,799 (510) 90,552
Equipment sales.......... 5,513 -- 5,513 -- -- -- --
Selling, general and
administrative........... 68,425 12,250 80,675 26,622 10,451 -- 37,073
Depreciation and
amortization............. 6,227 2,120 9,726 18,073 4,653 6,017 11,990 22,660
Non-income taxes........... 2,085 -- 2,085 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
119,456 27,963 9,726 157,145 93,538 45,267 11,480 150,285
Write-off of
venture-related assets... 1,673 -- 1,673 -- -- -- --
Equity in losses of
ventures................. 14,599 -- 14,599 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
LOSS FROM OPERATIONS........ (88,630) (13,861) (9,726) (112,217) (18,942) (18,195) (11,990) (49,127)
OTHER INCOME /(EXPENSE):
Interest income............ 11,361 -- 11,361 1,890 -- -- 1,890
Interest expense........... (39,086) (538) (39,624) (750) -- (26,880) (27,630)
Foreign currency losses.... (1,826) (1,826) -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
(29,551) (538) -- (30,089) 1,140 -- (26,880) (25,740)
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss before income taxes
and minority interest...... (118,181) (14,399) (9,726) (142,306) (17,802) (18,195) (38,870) (74,867)
Income taxes................ 2,482 (12) 2,470 3 -- -- 3
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss before minority
interest................... (120,663) (14,387) (9,726) (144,776) (17,805) (18,195) (38,870) (74,870)
Minority interest........... 3,677 -- 3,677 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
NET LOSS.................... $(116,986) $ (14,387) $ (9,726) $(141,099) $ (17,805) $ (18,195) (38,870) $ (74,870)
========= ========= ========= ========= ========= ========= ========= =========
Net loss per share..........
Weighted average common
shares outstanding.........
<CAPTION>
PRO FORMA
COMBINED
(GTS &
PRO FORMA ESPRIT
ADJUSTMENTS(8) TELECOM)
--------- ---------
<S> <C> <C>
REVENUES, NET:
Telecommunication and other
services................. (110) $ 156,450
Equipment sales............ 5,798
--------- ---------
(110) 162,248
--------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and
other services......... (110) 141,241
Equipment sales.......... 5,513
Selling, general and
administrative........... 117,748
Depreciation and
amortization............. 40,733
Non-income taxes........... 2,085
--------- ---------
(110) 307,320
Write-off of
venture-related assets... 1,673
Equity in losses of
ventures................. 14,599
--------- ---------
LOSS FROM OPERATIONS........ (161,344)
OTHER INCOME /(EXPENSE):
Interest income............ 13,251
Interest expense........... (67,254)
Foreign currency losses.... (1,826)
--------- ---------
(55,829)
--------- ---------
Net loss before income taxes
and minority interest...... (217,173)
Income taxes................ 2,473
--------- ---------
Net loss before minority
interest................... (219,646)
Minority interest........... 3,677
--------- ---------
NET LOSS.................... -- $(215,969)
========= =========
Net loss per share.......... $ (3.87)
=========
Weighted average common
shares outstanding......... 55,772
=========
</TABLE>
See accompanying notes.
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<PAGE> 104
GLOBAL TELESYSTEMS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ESPRIT PRO FORMA
TELECOM COMBINED
YEAR ENDED (GTS & ESPRIT
GTS(2) 9/30/96(2) TELECOM)
-------- ---------- --------------
<S> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services.................. $ 19,210 $38,402 $ 57,612
Equipment sales....................................... 4,907 -- 4,907
-------- ------- --------
24,117 38,402 62,519
-------- ------- --------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services............... 14,741 28,950 43,691
Equipment sales.................................... 4,200 -- 4,200
Selling, general and administrative................... 47,940 11,590 59,530
Stock compensation costs.............................. 3,498 3,498
Depreciation and amortization......................... 4,165 2,270 6,435
Non-income taxes...................................... 850 -- 850
-------- ------- --------
71,896 46,308 118,204
Equity in losses of ventures.......................... 10,150 -- 10,150
-------- ------- --------
LOSS FROM OPERATIONS.................................... (57,929) (7,906) (65,835)
OTHER INCOME/(EXPENSE):
Interest income....................................... 3,569 219 3,788
Interest expense...................................... (11,122) (533) (11,655)
Foreign currency losses............................... (1,176) -- (1,176)
-------- ------- --------
(8,729) (314) (9,043)
-------- ------- --------
Net loss before income taxes and minority interest...... (66,658) (8,220) (74,878)
Income taxes............................................ 1,360 -- 1,360
-------- ------- --------
Net loss before minority interest....................... (68,018) (8,220) (76,238)
-------- ------- --------
Minority interest....................................... 27 -- 27
NET LOSS................................................ $(67,991) $(8,220) $(76,211)
======== ======= ========
Net loss per share...................................... $ (1.69)
========
Weighted average common shares outstanding.............. 45,130
========
</TABLE>
See accompanying notes.
97
<PAGE> 105
GLOBAL TELESYSTEMS GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ESPRIT PRO FORMA
TELECOM COMBINED
YEAR ENDED GTS & ESPRIT
GTS(2) 9/30/95(2) TELECOM
-------- ----------- ------------
<S> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services.................... $ 5,979 $22,167 $ 28,146
Equipment sales......................................... 2,433 -- 2,433
-------- ------- --------
8,412 22,167 30,579
-------- ------- --------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services................. 8,150 16,907 25,057
Equipment sales...................................... 246 -- 246
Selling, general and administrative..................... 37,291 6,534 43,825
Depreciation and amortization........................... 3,491 968 4,459
Non-income taxes........................................ 234 1,255 1,489
-------- ------- --------
49,412 25,664 75,076
Equity in losses of ventures............................ 7,871 -- 7,871
-------- ------- --------
LOSS FROM OPERATIONS...................................... (48,871) (3,497) (52,368)
OTHER INCOME/(EXPENSE):
Other non-operating income.............................. 10,270 41 10,311
Interest income......................................... 2,177 (394) 1,783
Interest expense........................................ (728) -- (728)
Foreign currency losses................................. (685) -- (685)
-------- ------- --------
11,034 (353) 10,681
-------- ------- --------
Net loss before income taxes and minority interest........ (37,837) (3,850) (41,687)
Income taxes.............................................. 2,565 -- 2,565
-------- ------- --------
Net loss before minority interest......................... (40,402) (3,850) (44,252)
Minority interest......................................... 2 -- 2
-------- ------- --------
NET LOSS.................................................. $(40,400) $(3,850) $(44,250)
======== ======= ========
Net loss per share........................................ $ (1.12)
========
Weighted average common shares outstanding................ 39,680
========
</TABLE>
See accompanying notes.
98
<PAGE> 106
GLOBAL TELESYSTEMS GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET(1)
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED (GTS &
NETSOURCE PRO FORMA (GTS & ESPRIT PRO FORMA ESPRIT
GTS(2) EUROPE(3) ADJUSTMENTS(5) NETSOURCE TELECOM(2) ADJUSTMENTS(8) TELECOM
---------- --------- -------------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents..... $ 993,928 $ 3,049 $(46,099) $ 950,878 $ 230,745 $1,181,623
Accounts receivable, net...... 59,822 13,602 73,424 50,037 123,461
Restricted cash............... 42,047 -- 42,047 83,218 125,265
Prepaid expenses.............. 22,122 3,255 25,377 -- 25,377
Other assets.................. 12,539 3,602 16,141 44,599 60,740
---------- -------- -------- ---------- --------- ----- ----------
TOTAL CURRENT ASSETS.... 1,130,458 23,508 (46,099) 1,107,867 408,599 1,516,466
Property and equipment, net..... 436,019 4,329 440,348 93,587 876 534,811
Investments in and advances to
ventures...................... 61,705 -- 61,705 -- 61,705
Goodwill and intangible assets,
net........................... 161,893 22,068 145,894 329,855 168,290 498,145
Restricted cash and other
noncurrent assets............. 24,818 222 25,040 -- 25,040
---------- -------- -------- ---------- --------- ----- ----------
TOTAL ASSETS............ $1,814,893 $ 50,127 $ 99,795 $1,964,815 $ 670,476 $ 876 $2,636,167
========== ======== ======== ========== ========= ===== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses.................... $ 135,565 $ 27,296 $ 2,000 $ 164,861 $ 123,937 $ 288,798
Debt maturing within one
year........................ 23,741 13,302 37,043 -- 37,043
Current portion of capital
lease obligations........... 31,130 -- 31,130 -- 31,130
Related party debt maturing
within one year............. 8,333 8,333 -- 8,333
Other current liabilities..... 32,408 -- 32,408 -- (353) 32,055
---------- -------- -------- ---------- --------- ----- ----------
TOTAL CURRENT
LIABILITIES........... 222,844 48,931 2,000 273,775 123,937 (353) 397,359
Long-term debt, less current
portion....................... 962,232 -- 962,232 526,370 1,488,602
Long-term portion of capital
lease obligations............. 187,900 -- 187,900 -- 187,900
Related party long-term debt,
less current portion.......... 3,530 -- 3,530 -- 3,530
Taxes and other non-current
liabilities................... 27,378 1,486 28,864 32,403 61,267
---------- -------- -------- ---------- --------- ----- ----------
TOTAL LIABILITIES....... 1,403,884 50,417 2,000 1,456,301 682,710 (353) 2,138,658
COMMITMENTS AND CONTINGENCIES
Minority interest............. 43,957 -- 43,957 -- 43,957
Common stock, subject to
repurchase.................. 15,643 -- 15,643 -- 15,643
SHAREHOLDERS' EQUITY
Common stock, 80,434,986 pro
forma combined shares issued
and outstanding............. 6,050 745 396 6,446 2,133 (536) 8,043
Additional paid-in capital.... 696,574 23,402 97,109 793,683 97,071 536 891,290
Accumulated other
comprehensive loss.......... (7,496) -- (7,496) -- (7,496)
Accumulated deficit........... (343,719) (24,437) (343,719) (111,438) 1,229 (453,928)
---------- -------- -------- ---------- --------- ----- ----------
TOTAL SHAREHOLDERS'
EQUITY................ 351,409 (290) 97,505 448,914 (12,234) 1,229 437,909
---------- -------- -------- ---------- --------- ----- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY................ $1,814,893 $ 50,127 $ 99,505 $1,964,815 $ 670,476 $ 876 $2,636,167
========== ======== ======== ========== ========= ===== ==========
</TABLE>
See accompanying notes.
99
<PAGE> 107
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The accompanying unaudited pro forma combined financial statements do not
include any transition costs and expenses which are expected to be incurred
in connection with consummating the combination and integrating the
operations of GTS and Esprit. It is not feasible to determine the actual
amount of these costs and expenses until the combination is completed and the
related operational and transitional plans are complete. These costs and
expenses relate directly to completing the transaction, such as professional
and registration fees; employee benefit-related costs such as severance,
relocation and retention incentives, facility consolidations, systems
integration, and satisfaction of contractual obligations. It is anticipated
that a significant portion of these costs and expenses will result in charges
to the earnings of the Combined Group. The exact timing of these charges
cannot be determined; however, management of the Combined Group anticipate
that plans and decisions will be completed and a substantial portion of the
related charges recorded in 1999. Additionally, while the pro forma combined
statement of operations does not reflect any anticipated cost savings or
other synergies that may be achieved by the combination, the combination is
expected to result in reduced costs for the combined group.
2. These columns represent historical results of operations and financial
position.
3. On November 30, 1998 GTS completed the acquisition of NetSource in a
transaction accounted for as a purchase. GTS' results of operations for the
year ended December 31, 1997 and the nine months ended September 30, 1998
have been adjusted to give effect to the acquisition of NetSource as if it
had occurred as of January 1, 1997. GTS' balance sheet as of September 30,
1998 has been adjusted to give effect to the acquisition of NetSource as if
it had occurred on that date.
4. This entry reflects the adjustment to amortization expense for the effect of
the excess of consideration over net assets acquired in the NetSource
acquisition. For purposes of the unaudited pro forma combined financial
statements, the excess consideration has been amortized over an estimated
life of 15 years. A final determination of the lives attributable to the
intangible assets has not yet been made. As discussed in Note 5, a portion of
the excess consideration may be allocated to certain in-process research and
development projects. To the extent amounts are allocated to certain
in-process research and development projects, pro forma amortization expense
would be reduced accordingly.
5. These adjustments reflect the acquisition of NetSource by GTS. A preliminary
allocation of the purchase price has been presented in the unaudited pro
forma combined financial statements. The excess of consideration over the
fair value of the net assets acquired from NetSource has been preliminarily
allocated to goodwill and other intangibles. A final allocation of the
purchase price to the fair value of the NetSource assets acquired and
liabilities assumed is dependent upon certain valuations and studies that
have not progressed to a stage where there is sufficient information to make
such an allocation in the accompanying pro forma financial information. GTS'
management believes that the consideration in excess of the historical book
value of NetSource's net assets acquired is comprised of goodwill, certain
in-process research and development projects and other intangible assets. To
the extent that a portion of the purchase price is allocated to in-process
research and development projects, a charge, which may be material to GTS'
results of operations, would be recognized in the quarter ended December 31,
1998. See Note 4.
6. During July 1998, Esprit Telecom completed the acquisition of Plusnet in a
transaction accounted for as a purchase. Esprit Telecom's results of
operations for the year ended September 30, 1997 and the nine months ended
September 30, 1998 have been adjusted to give effect to the acquisition of
Plusnet as if it had occurred as of October 1, 1996.
7. These adjustments reflect the elimination of intercompany revenue between
Esprit Telecom and Plusnet, the additional amortization expense associated
with amortizing the excess of consideration over net assets acquired in the
Plusnet acquisition, and the assumed interest expense incurred by Esprit
Telecom in order to finance the Plusnet acquisition.
100
<PAGE> 108
8. These adjustments reflect the following:
An adjustment to prepaid phone card revenue in order to conform Esprit
Telecom's revenue recognition policy to GTS' revenue recognition policy.
Esprit Telecom recognizes prepaid phone card revenue upon sale of the phone
card. GTS recognizes prepaid phone card revenue over the estimated service
period.
An adjustment to depreciation expense in order to conform Esprit
Telecom's fiber optic cable depreciation policy with GTS' policy. Esprit
Telecom depreciates fiber optic cable using an accelerated method whereas
GTS depreciates fiber optic cable on a straight-line basis.
To eliminate inter-company revenue.
To reclassify the stockholders' equity accounts as a result of the
pooling of interests.
101
<PAGE> 109
EXCHANGE RATES
All currency amounts in this Offering Circular/Proxy Statement/Prospectus
are, unless otherwise indicated, expressed in US dollars ("US$" or "$"). This
Offering Circular/Proxy Statement/Prospectus contains translations of certain
amounts in pounds sterling or pence ("L" or "p") into US dollars. For
convenience purposes only, unless otherwise indicated, translations of L into US
dollars have been calculated at the rate of L1 to $1.6530, which represents the
Noon Buying Rate as of December 7, 1998. These should not be construed as
representations that the UK amounts actually represent such US dollar amounts or
that such amounts could be converted into US dollars at the rate indicated or at
any other rate. The Noon Buying Rate at the end of each of five years ended
December 31, 1998 and the one month ended January 31, 1999 and the average, the
high and low exchange rates for each of such calendar-year and six-month periods
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JANUARY ------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
At end of period................... 1.6457 1.6628 1.6427 1.7123 1.5535 1.5665
Average for period*................ 1.6498 1.6573 1.6376 1.5607 1.5785 1.5319
High for period.................... 1.6585 1.7222 1.7035 1.7123 1.6940 1.6368
Low for period..................... 1.6308 1.6411 1.5775 1.4948 1.5302 1.4615
</TABLE>
- ---------------
* Represents the average of the Noon Buying Rates on the last practicable day of
each full month during the relevant period. For January 1999, it represents
the average of the Noon Buying Rates for each trading day of the month.
DESCRIPTION OF CERTAIN GTS INDEBTEDNESS
SENIOR NOTES DUE 2005
Concurrently with the IPO, GTS offered $105 million of 9 7/8% Notes. The
9 7/8% Notes were issued pursuant to an indenture between GTS and The Bank of
New York as trustee, dated February 10, 1998. The 9 7/8% Notes mature in 2005
and bear interest, payable semi-annually, at 9 7/8% per annum. The indenture
governing the 9 7/8% Notes does not provide for a sinking fund. The 9 7/8% Notes
are subject to redemption at any time on or after February 15, 2002, at the
option of GTS, in whole or in part, at declining redemption prices set forth in
the indenture governing the 9 7/8% Notes. Notwithstanding the foregoing, during
the first three years after the date of the indenture governing the 9 7/8%
Notes, GTS will be permitted to redeem up to 33 1/3% of the aggregate principal
amount of the 9 7/8% Notes at 109.875% of the principal amount thereof with the
net proceeds of any public equity offerings or strategic equity investments (as
such terms are defined in the indenture governing the 9 7/8% Notes) resulting in
aggregate gross proceeds to GTS of at least $75 million; provided, that at least
two-thirds of the principal amount of the 9 7/8% Notes originally issued remain
outstanding immediately after giving effect to any such redemption. GTS placed
net proceeds of US$19.6 million from the offering of the 9 7/8% Notes
representing funds that, together with the proceeds from the investment thereof,
are sufficient to pay the first four scheduled interest payments (but not
additional interest) on the 9 7/8% Notes, into an escrow account to be held by
The Bank of New York as trustee for the benefit of the holders of the 9 7/8%
Notes. GTS granted to the Trustee for the benefit of the holders of the 9 7/8%
Notes, a first priority and exclusive security interest in the escrow account
and the proceeds thereof. Funds will be disbursed from the escrow account for
interest payments (but not additional interest) on the 9 7/8% Notes. Pending
such disbursement, all funds contained in the escrow account are invested in
cash equivalents.
Upon a change of control (as defined in the related indenture) of GTS, or
in the event of asset sales (as defined in the related indenture) in certain
circumstances, GTS is required by the terms of the indenture to make an offer to
purchase the outstanding 9 7/8% Notes at a purchase price equal to 101% and
100%, respectively, of the principal amount thereof plus accrued and unpaid
interest thereon to the date of repurchase.
102
<PAGE> 110
The indebtedness of GTS evidenced by the 9 7/8% Notes ranks pari passu in
right of payment with all other existing and future unsubordinated indebtedness
of GTS and senior in right of payment to all existing and future obligations of
GTS expressly subordinated in right of payment to the 9 7/8% Notes. The
indenture governing the 9 7/8% Notes contains a number of covenants restricting
the operations of GTS and its restricted group members (as defined in the
indenture governing the 9 7/8% Notes), including those restricting: the
incurrence of indebtedness; the making of restricted payments unless no default
or event of default exists, its leverage ratio does not exceed 6.0 to 1.0 and
such restricted payments do not exceed the basket (as defined in the indenture
governing the 9 7/8% Notes); transactions with stockholders and affiliates; the
incurrence of liens; sale-leaseback transactions; issuances and sales of capital
stock of subsidiaries; the incurrence of guarantees by subsidiaries; dividend
and other payment restrictions affecting subsidiaries; consolidation, merger or
sale of substantially all of GTS' assets; and requiring the purchase of 9 7/8%
Notes, at the option of the holder, upon the occurrence of a change of control
and certain asset sales.
The events of default under the indenture governing the 9 7/8% Notes
include provisions that are typical of senior debt financings, including a
cross-acceleration to a default by GTS or any restricted group member on any
indebtedness that has an aggregate principal amount in excess of certain levels.
Upon the occurrence of such an event of default, the trustee or the holders of
not less than 25% in principal amount at maturity of the outstanding 9 7/8%
Notes may immediately accelerate the maturity of all the Notes as provided in
the related indenture.
THE CONVERTIBLE BONDS
In July, 1997, GTS issued $144.8 million principal amount of Senior
Subordinated Convertible Bonds. The Convertible Bonds were initially issued
under an indenture dated as of July 14, 1997 between GTS, The Bank of New York,
as trustee, registrar and paying, conversion and transfer agent. The Convertible
Bonds mature on June 30, 2000. At September 30, 1998, US$119.4 million aggregate
principal amount of the Convertible Bonds was outstanding. An aggregate
principal amount of US$25.4 million had been converted at that date into GTS
Stock. The conversion price of the Convertible Bonds is US$20 per share.
The Convertible Bonds bear interest payable at the rate of 8.75% per annum
from and including the date of their issuance. Interest is payable semiannually
in arrears on July 15 and January 15 of each year commencing January 15, 1998.
The Convertible Bonds are redeemable at the option of GTS, in whole but not in
part on or after the second anniversary of a complying public equity offering
(as defined in the indenture governing the Convertible Bonds), at the principal
amount thereof plus accrued interest to the redemption date. The IPO in February
1998 constituted a complying public equity offering.
Upon the occurrence of a change of control (as defined in the indenture
governing the Convertible Bonds), GTS will be obligated to make an offer to
purchase all of the outstanding Convertible Bonds at a purchase price equal to
113.5%, (if the date of such purchase occurs after June 30, 1998 but on or
before June 30, 1999) or 121.0%, (if the date of such purchase occurs after June
30, 1999), as applicable, of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
DEBENTURES DUE 2010
On July 8 and July 22, 1998, GTS issued approximately US$466.9 million of
Debentures. The Debentures were issued under an indenture between GTS and The
Bank of New York, as trustee, dated July 8, 1998. The Debentures will mature on
July 1, 2010 and are unsecured senior subordinated obligations of GTS. In the
event of a change of control of GTS, holders of the Debentures will have the
right to require GTS to purchase such holder's Debentures at a price equal to
100% of the principal amount plus accrued interest. The Debentures will bear
interest payable semiannually at a rate of 5 3/4% per annum.
Each Debenture will be convertible into such number of shares of GTS Stock
as is equal to the principal amount of such Debenture divided by US$55.05. GTS
covenanted that at all times it will cause there to be authorized and reserved
for issuance upon conversion of the Debenture such number of shares of common
stock as would be issuable upon conversion of all the Debentures then
outstanding. The Debentures are subordinated to all existing and future senior
indebtedness (as defined in the indenture) of GTS and to all
103
<PAGE> 111
current and future obligations of subsidiaries of GTS, including trade
obligations. The Debentures rank pari passu with the convertible bonds.
GTS, at its option, may elect to redeem all or a portion of the Debentures
commencing on July 1, 2001, at redemption prices beginning at 104.025% of
principal amount plus accrued and unpaid interest thereon for the twelve-month
period commencing July 1, 2001 declining to par at July 1, 2008 and thereafter.
HER NOTES
HER sold US$265 million aggregate principal amount of HER Notes in August
1997. The HER Notes have a ten year maturity and are unsecured, senior
obligations of HER. HER placed approximately $56.6 million of the net proceeds
in escrow for the first two years' interest payments on the HER Notes. The HER
Notes were issued pursuant to an indenture among HER, GTS and The Bank of New
York as trustee, dated August 19, 1997, containing certain covenants for the
benefit of the holders of HER Notes, including, among other things, covenants
limiting the incurrence of indebtedness, restricted payments, liens, payment
restrictions affecting certain subsidiaries, transactions with affiliates, asset
sales and mergers. The HER Notes are redeemable in whole or part, at the option
of HER at any time on or after August 15, 2002 at a price ranging from 105.75%
to 100.0% of the principal amount.
A portion of the HER Notes are also redeemable at any time or from time to
time prior to August 15, 2000 at a redemption price equal to 111.5% of the
principal amount of the HER Notes so redeemed, plus accrued and unpaid interest
thereon, if any, to the date of redemption with the net cash proceeds of one or
more public equity offerings or strategic equity investments resulting in
aggregate gross cash proceeds to HER of at least US$75 million provided that at
least two-thirds of the principal amount of the HER Notes originally issued
remain outstanding immediately after giving effect to any such redemption. In
the event of a change of control of HER, holders of the HER Notes have the right
to require HER to purchase such holder's HER Notes at a price equal to 101% of
the aggregate principal amount plus accrued and unpaid interest thereon to the
date of repurchase.
NEW HER NOTES
On December 21, 1998, HER sold US$200 million aggregate principal amount of
US dollar New HER Notes and Euro 85 million aggregate principal amount of Euro
denominated New HER Notes. This transaction closed on January 4, 1999. The US
dollar New HER Notes have a ten year maturity, and the Euro denominated New HER
Notes have a seven year maturity. The New HER Notes are unsecured, senior
obligations of HER. The New HER Notes were issued pursuant to two indentures
among HER and The Bank of New York as trustee, both dated January 4, 1999, which
are substantially similar to the indenture governing the HER Notes. Both
indentures dated January 4, 1999, contain certain covenants made by HER for the
benefit of the holders of New HER Notes, including, among other things,
covenants limiting the incurrence of indebtedness, restricted payments, liens,
payment restrictions affecting certain subsidiaries, transactions with
affiliates, asset sales and mergers. The US dollar New HER Notes are redeemable
in whole or in part, at the option of HER at any time on or after January 15,
2004 at a price ranging from 105.188% to 100.0% of the principal amount. The
Euro denominated New HER Notes are redeemable in whole or in part, at the option
of HER at any time on or after January 15, 2003 at a price ranging from 105.188%
to 100.0% of the principal amount.
A portion of the New HER Notes are also redeemable at any time prior to or
from time to time prior to January 15, 2002 at a redemption price equal to
110.375% of the principal amount of the New HER Notes so redeemed, plus accrued
and unpaid interest thereon, if any, to the date of redemption with the net cash
proceeds of one or more public equity offerings or strategic equity investments
resulting in aggregate gross cash proceeds to HER of at least US$75 million,
provided, however, that following such redemption at least two-thirds of the
principal amount of each of the original US dollar New HER Notes and Euro New
HER Notes remain outstanding. In the event of a change of control of HER or GTS,
holders of the New HER Notes have the right to require HER to purchase such
holder's New HER Notes at a price equal to 101% of the aggregate principal
amount plus accrued and unpaid interest thereon to the date of repurchase.
104
<PAGE> 112
EQUIPMENT FINANCING
In connection with the purchase of equipment and services for certain
cellular ventures in the CIS region, GTS entered into a credit agreement with a
bank providing for up to $30.7 million financing. The facility is guaranteed by
the vendor of such equipment and services, and is insured against certain
political risks by the Overseas Private Investment Corporation. The loans under
the facility bear interest at LIBOR plus 35 basis points, with principal and
interest payments due semiannually in June and December of each year through
December 15, 2002. At September 30, 1998, an initial US$18.6 million was funded
under the facility.
105
<PAGE> 113
DESCRIPTION OF GTS CAPITAL STOCK
GTS' authorized capital stock consists of 135,000,000 shares of GTS Stock,
par value $0.10 per share, of which 64,744,221 shares were issued and
outstanding as of December 31, 1998, and 10,000,000 shares of Preferred Stock,
none of which is outstanding. See "Risk Factors -- Shares Eligible for Future
Sale; Registration Rights; Potential Adverse Impact on Market Price from Sales
of GTS Stock" (page 37). The following summary of the rights, privileges,
restrictions and conditions of each of the classes of shares issued by GTS does
not purport to be complete and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the GTS Certificate and By-laws, and
to the applicable provisions of the DGCL.
GTS STOCK
Holders of GTS Stock are entitled to one vote for one share held of record
on all matters upon which shareholders have the right to vote. There are no
cumulative voting rights. All issued and outstanding shares of GTS Stock are,
and the GTS Stock to be issued hereunder, when issued and paid for, will be,
validly issued, fully paid and non-assessable. Holders of GTS Stock are entitled
to such dividends as may be declared from time to time by the GTS Board out of
funds legally available for that purpose. See "-- Dividend Policy" (page 107).
Upon dissolution, holders of GTS Stock are entitled to share pro rata in the
assets of GTS remaining after payment in full of all of its liabilities and
obligations, including payment of the liquidation preference, if any, of any
Preferred Stock then outstanding.
PREFERRED STOCK
The GTS Board may authorize the issuance of one or more series of Preferred
Stock having such rights, including voting, conversion and redemption rights,
and such preferences, including dividend and liquidation preferences, as the GTS
Board may determine, without further action by the stockholders of GTS.
The issuance of Preferred Stock by the GTS Board could adversely affect the
rights of holders of GTS Stock. For example, the issuance of Preferred Stock
could result in a series of securities outstanding that would have preferences
over the GTS Stock with respect to dividends and in liquidation and that could,
upon conversion or otherwise, enjoy all the rights appurtenant to the GTS Stock.
As of July 1998, GTS has authorized 200,000 shares of Series A Preferred Stock.
No other series of Preferred Stock has been authorized. There are no issued and
outstanding shares of Series A Preferred Stock and no such shares are being
offered hereby. A Right to purchase shares of Series A Preferred Stock, however,
is attached to each share of GTS Stock pursuant to the Rights Agreement
discussed below. GTS has authorized 200,000 shares of Series A Preferred Stock
initially for issuance upon exercise of such Rights.
The units of Series A Preferred Stock that may be acquired upon exercise of
the Rights will be nonredeemable and subordinate to any other shares of
preferred stock that may be issued by GTS. Each Unit of Series A Preferred Stock
will have a minimum preferential quarterly dividend of $.01 per Unit or any
higher per share dividend declared on the GTS Stock. In the event of
liquidation, the holder of a Unit of Series A Preferred Stock will receive a
preferred liquidation payment equal to the greater of $.01 per Unit and the per
share amount paid in respect of a share of GTS Stock.
Each unit of Series A Preferred Stock will have one vote, voting together
with the GTS Stock. The holders of units of Series A Preferred Stock, voting as
a separate class, shall be entitled to elect two directors if dividends on the
Series A Preferred Stock are in arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of GTS Stock are exchanged, each Unit of Series A Preferred Stock will be
entitled to receive the per share amount paid in respect of each share of GTS
Stock. The rights of holders of the Series A Preferred Stock to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary antidilution provisions. Because of the nature of the
Series A Preferred Stock's dividend, liquidation and voting rights, the economic
value of one Unit of Series A Preferred Stock that may be acquired upon the
exercise of each Right is expected to approximate the economic value of one
share of GTS Stock.
106
<PAGE> 114
DIVIDEND POLICY
GTS has not paid any dividend on GTS Stock and does not intend to pay
dividends in the foreseeable future. In addition, the indenture governing GTS'
9 7/8% Notes currently prohibits the payment of dividends. This indenture
contains restrictions on the making of restricted payments (in the form of the
declaration or payment of certain dividends or distributions, the purchase,
redemption or other acquisition of any GTS Stock, the voluntary prepayment of
pari passu or subordinated indebtedness and the making of certain investments,
loans and advances) unless no default or event of default (each, as defined in
the indenture governing the 9 7/8% Notes) exists, its leverage ratio does not
exceed 6.0 to 1.0 and such restricted payments do not exceed certain amounts.
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or such other court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Delaware
Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The GTS Certificate provides that GTS' directors shall not be liable to GTS
or its stockholders for monetary damages for breach of fiduciary duty as a
director provided, however, that such exculpation from liabilities is not
permitted with respect to liability arising from items described in clauses (i)
through (iv) in the preceding paragraph. The GTS Certificate and GTS By-laws
further provide that GTS shall indemnify its directors and officers to the
fullest extent permitted by the DGCL.
The directors and officers of GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.
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CERTAIN CHARTER AND BY-LAW PROVISIONS
Shareholders' rights and related matters are governed by the DGCL, the GTS
Certificate and the GTS By-laws. Certain provisions of the GTS Certificate and
the GTS By-laws, which are summarized below, may discourage or make more
difficult a takeover attempt that a shareholder might consider in its best
interest, although certain of such provisions in the GTS By-laws are subject to
final approval by the GTS Board. Such provisions may also adversely affect
prevailing market prices for the GTS Stock. See "Risk Factors -- Anti-takeover
Provisions" (page 38).
Classified Board of Directors and Related Provisions. The GTS Certificate
provides that the GTS Board be divided into three classes of directors serving
staggered three-year terms. The classes of directors (designated Class I, Class
II and Class III) shall be, as nearly as possible, equal in number. Accordingly,
one-third of the GTS Board will be elected each year. The term of the initial
Class I directors shall terminate on the date of the 2001 annual meeting of
stockholders; the term of the initial Class II directors shall terminate on the
date of the 1999 annual meeting of stockholders; and the term of the initial
Class III directors shall terminate on the date of the 2000 annual meeting of
stockholders. The classified board provision may prevent a party who acquires
control of a majority of the outstanding voting stock of GTS from obtaining
control of the GTS Board until the second annual shareholders meeting following
the date such party obtains the controlling interest.
Subject to the rights of the holders of any series of Preferred Stock or
any other class of capital stock of GTS (other than the GTS Stock) then
outstanding, directors may only be removed for cause by a majority vote of the
holders of capital stock of GTS issued and outstanding and entitled to vote
generally in the election of directors, voting together as a single class.
No Shareholder Action by Written Consent; Special Meetings. The GTS
Certificate prohibits shareholders from taking action by written consent in lieu
of an annual or special meeting, and thus shareholders may take action at an
annual or special meeting called in accordance with the GTS By-laws. The GTS
Certificate and the GTS By-laws provide that special meetings of shareholders
may only be called only by the Chairman of the GTS Board, the Chief Executive
Officer or a majority of the GTS Board. Special meetings may not be called by
the shareholders, except as permitted by the Shareholder Rights By-law described
below.
Amendments to the Certificate of Incorporation. The provisions of the GTS
Certificate described above may not be amended, altered, changed or repealed
without the affirmative vote of the holders of at least 75% of the shares of
capital stock of GTS issued and outstanding and entitled to vote.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder," which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder,
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
In addition, the GTS Certificate grants the GTS Board the authority to
issue up to 10,000,000 shares of preferred stock in one or more series and to
determine the rights, voting powers, dividend rate, conversion
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rights, redemption price, liquidation preference and other terms of such
preferred stock without any further vote or action by the stockholders. The
foregoing provisions of Section 203 of the DGCL and the GTS Certificate, and any
issuance of preferred stock with voting or conversion rights, may adversely
affect the voting power of the holders of GTS Stock and may have the effect of
delaying or preventing a change of control of GTS or adversely affect the market
price of GTS Stock.
SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
Shareholder Rights Plan. GTS has entered into a rights agreement. In
connection with the rights agreement, the GTS Board declared a distribution of
one Right for each outstanding share of GTS Stock, each share of GTS Stock
offered hereby and each share of GTS Stock issued (including shares distributed
from treasury) by GTS thereafter and prior to the Distribution Date (as defined
below). Each Right will entitle the registered holder, subject to the terms of
the rights agreement, to purchase from GTS one unit of Series A Preferred Stock
at a purchase price of $75 per unit, subject to adjustment.
Initially, the Rights will attach to all certificates representing shares
of outstanding GTS Stock, and no separate rights certificates will be
distributed. The Rights will separate from the GTS Stock and the "Distribution
Date" will occur upon the earlier of (i) 10 days following a public announcement
(the date of such announcement being the "Stock Acquisition Date") that a person
or group of affiliated or associated persons (other than GTS, any subsidiary of
GTS or any employee benefit plan of GTS or such subsidiary) (an "Acquiring
Person") has acquired, obtained the right to acquire, or otherwise obtained
beneficial ownership of 15% or more of the then outstanding shares of GTS Stock
and (ii) 10 business days (or such later date as may be determined by action of
the GTS Board prior to such time as any person becomes an Acquiring Person)
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 15% or more of the then outstanding
shares of GTS Stock. The Soros Associates and Alan B. Slifka and his affiliates
are excluded from the definition of "Acquiring Person" under the rights
agreement unless such persons increase the aggregate percentage of their
ownership interest in GTS to 20%.
Until the Distribution Date, (i) the Rights will be evidenced by GTS Stock
certificates and will be transferred with and only with such GTS Stock
certificates, (ii) new GTS Stock certificates issued after date of consummation
of the July 1998 Offerings (including the New GTS Stock and any shares
distributed from treasury) will contain a notation incorporating the rights
agreement by reference and (iii) the surrender for transfer of any certificates
representing outstanding GTS Stock will also constitute the transfer of the
Rights associated with the GTS Stock represented by such certificates.
The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the rights agreement
unless earlier redeemed by GTS as described below.
In the event that (i) GTS is the surviving corporation in a merger with an
Acquiring Person and shares of GTS Stock shall remain outstanding, (ii) a person
becomes an Acquiring Persons, (iii) an Acquiring Person engages in one or more
"self-dealing" transactions as set forth in the rights agreement or (iv) during
such time as there is an Acquiring Person, an event occurs which results in such
Acquiring Person's ownership interest being increased by more than 1% (e.g., by
means of a recapitalization), then, in each such case, each holder of a Right
(other than such Acquiring Person) will thereafter have the right to receive,
upon exercise, Units of Series A Preferred Stock (or, in certain circumstances,
GTS Stock, cash, property or other securities of GTS) having a value equal to
two times the exercise price of the Right. The exercise price is the purchase
price multiplied by the number of Units of Series A Preferred Stock issuable
upon exercise of a Right prior to the events described in this paragraph.
In the event that, at any time following the Stock Acquisition Date, (i)
GTS is acquired in a merger or other business combination transaction and GTS is
not the surviving corporation (other than a merger described in the preceding
paragraph), (ii) any person consolidates or merges with GTS and all or part of
the GTS Stock is converted or exchanged for securities, cash or property of any
other person or (iii) 50% or more of GTS' assets or earning power is sold or
transferred, each holder of a Right (other than an Acquiring Person) shall
thereafter have the right to receive, upon exercise, GTS Stock of the ultimate
parent of the Acquiring Person having a value equal to two times the exercise
price of the Right.
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The purchase price payable, and the number of units of Series A Preferred
Stock issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A Preferred Stock,
(ii) if holders of the Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or convertible securities at
less than the current market price of the Series A Preferred Stock or (iii) upon
the distribution to the holder of the Series A Preferred Stock of evidences of
indebtedness, cash or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
At any time until ten US Business Days following the Stock Acquisition
Date, either (i) 75% of GTS Board or (ii) a majority of GTS Board and a majority
of the Continuing Directors (as defined below), may redeem the Rights in whole,
but not in part, at a nominal price. Immediately upon the action of a majority
of GTS Board ordering the redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive such redemption
price. As used in the rights agreement, a Continuing Director means any person
(other than an Acquiring Person or an affiliate or associate of an Acquiring
Person or a representative of an Acquiring Person or of any such affiliate or
associate) who was a director prior to the date of the rights agreement and any
person (other than an Acquiring Person or an affiliate or associate of an
Acquiring Person or a representative of an Acquiring Person or of any such
affiliate or associate) nominated for selection or elected to the GTS Board
pursuant to the approval of a majority of the Continuing Directors.
At its option, either (i) 75% of GTS' Board or (ii) a majority of GTS'
Board and a majority of the Continuing Directors, may exchange each Right for
(i) one unit of Series A Preferred Stock or (ii) such number of Units of Series
A Preferred Stock as will equal the spread between the market price of each unit
to be issued and the purchase price of such unit set forth in the rights
agreement.
Any of the provisions of the rights agreement may be amended without the
approval of either (i) 75% of GTS Board or (ii) a majority of GTS' Board and a
majority of Continuing Directors in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the rights agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable.
Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all GTS' outstanding shares of GTS Stock for cash or
securities that are traded on a nationally recognized exchange and, in the
opinion of an independent investment bank, provide sufficient value and
liquidity so that they would be treated as substantially equivalent to cash
consideration at a price that is at least 40% greater than the average closing
price of such shares on the principal exchange on which such shares are listed
during the 30 days prior to the date on which such offer is first published or
sent to security holders (the "Offer Date") and the GTS Board opposes such
offer, the holders of more than 50% of the outstanding shares of GTS Stock may,
at any time subsequent to the date that is nine calendar months after the Offer
Date, call a special meeting of the stockholders, notwithstanding the provisions
described in "-- Certain Charter and By-Law Provisions -- No Shareholder Action
by Written Consent; Special Meetings," at which meeting stockholders may be
asked to vote upon a proposal to request that the GTS Board amend the rights
agreement to exempt such offer from the terms of the Rights Agreement; provided,
however, if prior to the expiration of such nine-month period, the GTS Board
determines that it is in the best interests of the shareholders to undertake
efforts to sell GTS, such period shall be extended as long as the GTS Board
continues its efforts to solicit, evaluate and negotiate alternative bids to
acquire GTS. If the proposal to amend the rights agreement is approved by a vote
of 70% of the votes cast for or against such proposal at such meeting of
stockholders at which a quorum is present, the GTS Board shall amend the Rights
Agreement to exempt such offer from its terms no later than 60 days after the
date of such stockholders' meeting.
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COMPARATIVE RIGHTS OF SHAREHOLDERS
Esprit Telecom is a public limited company incorporated in England, and GTS
is a corporation incorporated under the laws of the state of Delaware. As a
result of the Offer Esprit Telecom Securityholders will become beneficial owners
of GTS Stock. The following is a summary of material differences between the
rights of Esprit Telecom Securityholders and the rights of GTS stockholders and
of the differences between the corporate laws of Delaware and England and Wales
and the companies' respective charter documents.
Certain differences between the rights of holders of GTS Stock under
Delaware law and the rights of holders of Esprit Telecom Securities under the
law of England and Wales are not discussed below where rights afforded under
Delaware law are more favorable to shareholders than under English law.
Furthermore, since both the Esprit Telecom ADSs and the GTS Stock are listed on
both the Nasdaq and EASDAQ, the Nasdaq and EASDAQ listing rules have not been
considered below.
VOTING RIGHTS
Under Delaware law, each shareholder is entitled to one vote per share
unless the certificate of incorporation provides otherwise. In addition, the
certificate of incorporation or by-laws may provide for cumulative voting at all
elections of directors of the corporation. Under the GTS By-laws, holders of GTS
Stock are entitled to one vote per share on all matters, and cumulative voting
is not permitted. A quorum consists of a majority of the outstanding shares of
capital stock entitled to vote, present in person or represented by proxy,
unless otherwise required by law or the GTS By-laws.
Under English law, the voting rights of shareholders are governed by a
company's articles of association, subject to the statutory right of
shareholders to demand a poll (a vote by the number of shares held) at a general
meeting. Cumulative voting is essentially unknown under English law. Two
shareholders entitled to vote and present in person constitute a quorum for the
purposes of a general meeting, unless the company's articles of association
specify otherwise. The Esprit Telecom Articles specify that two persons present
and entitled to vote upon the business to be transacted and each being either a
member or a proxy for a member or a duly authorized representative of a
corporation which is a member shall be a quorum for all purposes.
ACTIONS BY WRITTEN CONSENT
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action required or permitted to be taken at any meeting of
shareholders may instead be taken without a meeting, without prior notice or
without a vote if a written consent to the action is signed by the shareholders
representing the number of shares necessary to take such action at a meeting at
which all shares entitled to vote were present and voted. The GTS Certificate
does not permit action to be taken by written consent in lieu of a meeting.
Under English law, a private company's articles of association may provide
that a resolution in writing executed by or on behalf of each shareholder who
would have been entitled to vote upon it if it had been proposed at a general
meeting at which he was present will be as effective as if it had been passed at
a general meeting properly convened and held. Esprit Telecom is a public company
and accordingly, the Esprit Telecom Articles do not contain any such provision.
SPECIAL MEETING OF SHAREHOLDERS
Under the Delaware law, a special meeting of shareholders may be called by
the board of directors, and by such other person or persons as may be authorized
to do so by the certificate of incorporation or by-laws. The GTS By-laws provide
that a special meeting of stockholders may be called by: (i) the Chief Executive
Officer; (ii) the GTS Board; or (iii) the Chairman of the Board.
Under English law, an extraordinary general meeting of shareholders may be
called by the board of directors or (notwithstanding any provision to the
contrary in a company's articles of association) requisitioned by a request from
shareholders holding not less than one-tenth of the paid-up capital of the
company carrying voting rights at general meetings. An ordinary resolution
requires 14 clear days notice, and requires a majority vote of those present and
entitled to vote. An extraordinary resolution requires 14 clear days notice
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and a 75% majority vote of those present and entitled to vote. A special
resolution requires 21 clear days notice and requires a 75% majority vote of
those present and entitled to vote. An annual general meeting requires 21 clear
days notice regardless of the type of resolution to be proposed thereat.
"Extraordinary resolutions" are relatively unusual and are confined to certain
matters out of the ordinary course of business such as a proposal to wind up the
affairs of the company. Proposals which are the normal subject of "special
resolutions" generally involve proposals to change the name of the company, to
alter its capital structure in certain respects, to change or amend the right of
shareholders, to permit the company to issue new shares for cash without
applying the shareholders' pre-emptive rights, to amend the company's objects
(purpose clause) and articles of association and to carry out certain other
matters where either the company's articles of association or the Companies Act
prescribe that a "special resolution" is required. All other proposals relating
to the ordinary course of the company's business, such as the election of
directors, would be subject to an "ordinary resolution."
Under the rules of EASDAQ to which both GTS and Esprit Telecom are subject,
shareholders should be notified at least three weeks prior to any meeting of
stockholders.
SOURCES AND PAYMENT OF DIVIDENDS
Delaware law permits the payment of dividends in cash, property or capital
stock out of surplus or if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year,
subject to any restrictions contained in the certificate of incorporation,
except that payment of dividends from such net profits is prohibited when
capital represented by stock having a preference on distribution of assets would
be impaired thereby. The GTS Certificate and By-laws do not restrict the payment
of dividends.
Under English law, a company may pay dividends on its ordinary shares,
subject to the prior rights of holders of its preferred shares (if any), only
out of distributable profits (namely its accumulated, realized profits less
accumulated, realized losses) and not out of share capital, which includes share
premiums (paid in surplus). Amounts credited to the share premium account
(representing the excess of the consideration for the issue of outstanding
shares over other aggregate par value of such shares) may not be paid out as
cash dividends but may be used, among other things, to pay up unissued shares
which may then be distributed to shareholders in proportion to their holdings.
In addition, a public company such as Esprit Telecom may only make a
distribution if, at that time and immediately after such distribution, the
amount of its net assets is not less than the aggregate of its called up (i.e.
issued and paid up) share capital and undistributable reserves.
The Esprit Telecom Articles provide that, subject to certain conditions,
the shareholders may by ordinary resolution, in respect of any dividend proposed
to be paid or declared in any period, offer ordinary shareholders the right to
elect to receive in lieu of such dividend (or a part thereof) an allotment of
additional ordinary shares.
RIGHTS OF PURCHASE AND REDEMPTION
Under Delaware law, a corporation may purchase or redeem its own shares out
of surplus, provided, with certain exceptions, that no repurchase or redemption
shall occur (i) when the capital is or would thereby become impaired, (ii) at a
price higher than the redemption price in the case of stock redeemable at the
option of the corporation, or (iii) where in the case of redemption, such
redemption is not authorized by other provisions of Delaware law or the
certificate of incorporation. The GTS Certificate does not restrict GTS' rights
to repurchase or redeem shares.
Under English law, a company may issue redeemable shares if authorized to
do so by its articles of association and subject to the conditions stated
therein. Such shares may be redeemed only if fully paid and, in the case of
public companies, only, subject as provided below, out of distributable profits
or the proceeds of a new issue of shares made for the purpose of the redemption.
Where redeemable shares are redeemed wholly out of profits the amount by which
the par value of the company's issued share capital is diminished must be
transferred to the capital redemption reserve, which is generally treated as
paid-up share capital. In addition, any amount payable on redemption of any
redeemable shares in excess of the par value must be paid out of distributable
profits unless the shares were issued at a premium. In that case, any amount
payable in excess of
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the par value thereof may be paid out of the proceeds of a fresh issue of shares
up to an amount equal to whichever is the lesser of the aggregate of the
premiums received by the company on the issue of those shares or the amount of
the company's share premium account as at the time of the redemption, including
any sum transferred to that account in respect of premiums on the new issue. A
company may purchase its own shares including any redeemable shares, if
authorized by its articles of association and provided that such purchase has
been previously approved by an ordinary resolution of its shareholders in the
case of an on-market purchase or a special resolution in other cases. The above
provisions that apply to redemption of redeemable shares apply also to purchases
of shares.
RIGHTS OF APPRAISAL
Under Delaware law, stockholders who follow prescribed statutory procedures
are entitled to dissent from certain corporate reorganizations and instead
demand payment of the fair value of their shares. Unless the certificate of
incorporation provides otherwise, dissenters do not have rights of appraisal
with respect to (a) a merger or consolidation by a corporation, the shares of
which are (i) listed on a national securities exchange or (ii) held by more than
2000 shareholders or (b) an exchange by shareholders of the constituent
corporation of their shares in such constituent corporation for (i) shares in
the surviving corporation, (ii) shares of another corporation that are publicly
listed or held by more than 2000 shareholders, (iii) cash in lieu of fractional
shares or (iv) any combination of the above, or (c) a corporation surviving a
merger if no vote of the shareholders of the surviving corporation is required
to approve the merger.
English law does not generally provide for appraisal rights. The Companies
Act, however, does allow a shareholder to apply to the court for an order on the
grounds of unfair prejudice. Also if a shareholder applies to a court as
described under "Shareholders' Votes on Certain Reorganizations" below, the
court may specify such terms for the acquisition as it considers appropriate.
PRE-EMPTIVE RIGHTS
Unless the certificate of incorporation expressly provides otherwise,
shareholders of a Delaware corporation do not have pre-emptive rights. The GTS
Certificate does not provide for pre-emptive rights.
Under English law, equity securities, which are shares in the company other
than (i) shares which with respect to dividends and capital carry a right to
participate only up to a specified amount in a distribution, and (ii) shares in
an employee share scheme and rights to subscribe for or convert into such shares
and which are to be issued for cash, must be offered in the first instance to
the existing equity shareholders in proportion to the respective nominal values
of their holdings, unless a special resolution has been passed at a general
meeting of the shareholders to disapply these pre-emptive rights.
The Esprit Telecom Articles authorize the directors to allot equity
securities up to the defined nominal amount for a specified period otherwise
than pro rata to its existing shareholders.
AMENDMENT OF GOVERNING INSTRUMENTS
Under Delaware law, the affirmative vote of a majority of the "outstanding
stock" entitled to vote and of the shares of each class entitled to vote on the
amendment as a class is required. In addition, the affirmative vote of a
majority of the shares of a class is required with respect to amendments which
would (as to the class) (i) increase or decrease the aggregate number of
authorized shares, (ii) increase or decrease the par value of shares, or (iii)
alter or change the powers, preferences, or special rights of shares so as to
affect them adversely. In addition, under the GTS Certificate the corporation
may amend, alter, change or repeal any provision contained in the GTS
Certificate, and all rights and powers conferred upon stockholders and directors
are granted subject to such power. In addition, the provisions governing
amendment to the GTS Certificate, the number, term and classification of
directors, and action by written consent, each as amended, and notwithstanding
the fact that a lesser percentage may be specified by law, may not be amended,
altered, changed or repealed without the affirmative vote of the holders of at
least 75% of the shares of capital stock of GTS issued and outstanding and
entitled to vote.
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Under Delaware law, the by-laws of a corporation may be amended or repealed
by shareholders entitled to vote, and the certificate of incorporation may
confer this power to the board of directors. The fact that such power has been
conferred upon the directors does not divest the shareholders of their power to
amend or repeal by-laws. The GTS Certificate provides that the GTS Board is
expressly authorized to make, alter or repeal the by-laws.
Under English law, the shareholders have the authority to alter most
provisions of a company's memorandum and all provisions of its articles of
association by special resolution, subject in the case of certain alterations to
the memorandum of association, to the right of dissenting shareholders to apply
to the courts to cancel the alterations. Under English law, the board of
directors is not authorized to change the memorandum or the articles of
association.
SHAREHOLDERS' VOTES ON CERTAIN REORGANIZATIONS
Delaware law requires a majority vote of the shares entitled to vote in
order to effectuate a merger between two Delaware corporations or between a
Delaware corporation and a corporation organized under the laws of another state
(a "foreign corporation"). However, unless required by the certificate of
incorporation, Delaware law does not require a vote of the shareholders of a
constituent corporation surviving the merger if (i) the merger agreement does
not amend that corporation's certificate of incorporation and (ii) each share of
that corporation's stock outstanding immediately prior to the effective date of
the merger is identical to an outstanding or treasury share of the surviving
corporation after the merger. Any sale, lease or exchange of all or
"substantially all" of a corporation's assets requires authorization by a
majority vote of the outstanding stock entitled to vote.
English law provides for schemes of arrangement, which are arrangements or
compromises between a company and any class of its shareholders (or any class of
its creditors) and are used for certain types of reconstructions, amalgamations,
capital reorganizations or takeovers. They require the approval at a special
meeting of the company of a majority in number of the shareholders representing
75% of the relevant class of shares present and voting, either in person or by
proxy, and the sanction of the courts. Once so approved and sanctioned, all
shareholders of the relevant class are bound by the terms of the scheme: a
dissenting shareholder would have no rights comparable to the appraisal rights
described above.
English law also provides that where a takeover offer (as defined therein)
is made for the shares of a company incorporated in the UK and, within four
months of the date of the offer the offeror has, by virtue of acceptances of the
offer, acquired or contracted to acquire not less than nine-tenths in value of
the shares to which the offer relates, the offeror may, within two months of
reaching the nine-tenths level, by notice require shareholders who do not accept
the offer to transfer their shares on the terms of the offer. A dissenting
shareholder may apply to the court within six weeks of the date on which such
notice was given objecting to the transfer or its proposed terms. The court is
unlikely (in the absence of fraud or oppression) to exercise its discretion to
order that the acquisition not take effect, but it may specify such terms of the
transfer as it finds appropriate. A minority shareholder is also entitled in
these circumstances to require the offeror to acquire his shares on the terms of
the offer. This is the compulsory acquisition procedure referred to in this
Offering Circular/Proxy Statement/Prospectus.
CERTAIN PROVISIONS RELATING TO SHARE ACQUISITIONS
Delaware law generally prevents a corporation from entering into certain
business combinations such as mergers, consolidations and sales of assets, with
an interested shareholder (defined generally as any person or entity that is the
beneficial owner of at least 15% of a corporation's voting stock) or its
affiliates for a period of three years after such stockholder because an
interested stockholder unless (i) the business combination or the transaction in
which the person becomes an interested stockholder is timely approved by the
board of directors of the corporation prior to the person becoming an interested
stockholder, (ii) the interested stockholder acquired 85% of the corporation's
voting stock in the same transaction in which it exceeded 15% or (iii) the
business combination is approved by the board of directors and by a vote of
66 2/3% of the outstanding voting stock not owned by the interested stockholder.
This statute does not apply to a corporation
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that so provides in an amendment to its certificate of incorporation or by-laws
passed by a majority of its outstanding shares at any time. Such stockholder
action does not become effective for 12 months following its adoption and would
not apply to persons who were already interested stockholders at the time of the
amendment. The GTS Certificate does not contain such a provision.
In the UK, takeovers of public companies are regulated by the City Code.
The City Code comprises rules administered by the Panel, a body comprised of
representatives of certain UK financial and professional institutions, which
oversees the conduct of such takeovers. Under the City Code, if a person,
together with any persons acting in concert (as defined in the City Code) with
him or her, acquires shares which, when taken together with shares already held
or acquired by such persons, carry 30% or more of the voting rights of a public
company, generally he or she must make an offer for all of the equity shares of
the company (whether voting or non-voting) and all voting, non-equity shares for
cash, or accompanied by a cash alternative, at not less than the highest price
paid by him or her or any person acting in concert with him or her for the
relevant shares during the offer period (as defined in the City Code) and during
the 12 months preceding the commencement of the offer period. An offer may also
be required to be in cash or to be accompanied by a cash alternative in certain
other circumstances, including where a person, together with person acting in
concert with him or her, has purchased for cash shares carrying 10% or more of
the voting rights during the offer period and within the preceding 12 months.
DISCLOSURE OF INTERESTS
There is no requirement under Delaware law relating to the disclosure of
interests of shares held by corporation shareholders.
English law provides that a person (including a company and other legal
entities) who acquires an interest or becomes aware that he has acquired a
material interest of 3% or more (including an interest of ADSs) or an interest
(whether or not including material interests) of 10% or more of the nominal
value of any class of shares comprised in a public company's "relevant share
capital" (which, for these purposes, means that company's issued share capital
carrying rights to vote in all circumstances at general meetings of the company)
in certain circumstances is obliged to notify that company, in writing, of his
interest within two days following the day on which the obligation arises.
Thereafter, similar notification must be made where the percentage level of
interest increases or decreases through 3% or 10% or any greater whole number
percentage.
In addition, English law provides that a public company may by notice in
writing require a person whom the company knows or has reasonable cause to
believe to be, or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in shares comprised
in the company's "relevant share capital" to confirm that fact and where he
holds or has during the relevant time held an interest in such shares, to give
such further information as may be required relating to his interest and any
other interest in the shares of which he is aware.
For the purpose of the above obligations, the interest of a person in
shares means any kind of interest (including an interest in ADSs) in shares
including interests in any shares (i) in which his spouse, or his child or
stepchild under the age of 18 is interested, (ii) if a corporate body is
interested in them and either (a) that corporate body is or its directors are
accustomed to act in accordance with that person's directions or instructions or
(b) that person controls one-third or more of the voting power of that corporate
body, or (iii) if another party is interested in shares and the person and that
other party are parties to a "concert party" agreement under English law (being
an agreement which provides for one or more parties to it to acquire interests
in shares of a particular public company, which imposes obligations or
restrictions on any one or more of the parties as to the use, retention or
disposal of such interests acquired pursuant to such agreement and any interest
in the company's shares is in fact acquired by any of the parties pursuant to
the agreement).
Where a notice under English law is served by a company on a person who is
or was interested in shares of the company and that person fails to give the
company any information required by the notice within the time specified in the
notice, the company may apply to the court for an order directing that the
shares in question be subject to restrictions. In addition a person who fails to
fulfil the obligations described above is
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subject to criminal penalties in the UK. Under the Esprit Telecom Articles,
certain of the powers granted to the courts to impose restrictions may be
imposed by the Esprit Telecom Board in certain circumstances.
CLASSIFICATION OF THE GTS BOARD OF DIRECTORS
Under Delaware law, the certificate of incorporation or initial by-law or a
by-law adopted by a vote of the shareholders may provide for the classification
of the board of directors with respect to the terms for which directors
severally hold office. The term "classified board" generally means the
specification of selected board seats for a term of more than one year (but not
more than three years), with different classes of board seats coming up for
election each year. The GTS Certificate does provide for such classification of
the GTS Board.
The Esprit Telecom Articles provide that one-third (or the number nearest
to but not exceeding one-third) of the members of the Esprit Telecom Board,
shall be subject to retirement by rotation at each annual general meeting of
Esprit Telecom. The directors to retire by rotation at each general meeting will
be those who wish to retire and not to offer themselves for re-election and
otherwise will be those who, at the date of the notice of the meeting, have been
longest in office since their last appointment or re-appointment. As between
persons who became or were last re-appointed directors on the same day, those to
retire will be determined by lot unless otherwise agreed among themselves. A
retiring director is eligible for re-election. Like a classified board in the
United States, a provision by which directors retire by rotation provides
corporate stability and continuity in that it assures the shareholders that
irrespective of the outcome of any one annual election of directors, the board
of directors will generally consist of a majority of directors who have served
during the previous year. A director appointed by the Board since the last
annual general meeting holds office only until the next annual general meeting
following his appointment, when he will retire, but will be eligible for
re-election.
REMOVAL OF DIRECTORS
Under Delaware law, any director or the entire board of directors generally
may be removed, with or without cause by a majority vote of the shares then
entitled to vote at an election of directors. However, a director of a
corporation with a classified board of directors may be removed only for cause
unless the certificate of incorporation otherwise provides. The GTS Certificate
is silent as to removal of directors.
Under English law, shareholders have the right to remove a director by
ordinary resolution of which special notice (28 clear days) has been given to
the company. In addition to the power of removal conferred by English law the
Esprit Telecom Articles provide that the shareholders may by special resolution
remove any director before the expiration of his term of office notwithstanding
any agreement between Esprit Telecom and such director.
LIABILITY OF DIRECTORS
Delaware law permits a Delaware corporation to include in its certificate
of incorporation a provision that limits or eliminates a director's monetary
liability for certain breaches of his fiduciary duty of care in a lawsuit by or
on behalf of the corporation or in an action by shareholders of the corporation.
The GTS Certificate does contain such a provision.
Except under the limited circumstances described below under
"Indemnification of Officers and Directors," any provision of an English
company's articles of association or in any contract with the company exempting
an officer of the company (including a director) from or indemnifying him or her
against any liability in respect of any negligence, default, breach of duty or
breach of trust of which he or she may be guilty in relation to the company is
void. A company is permitted to purchase and maintain insurance against such
liabilities for its officers (including directors). The existence of such
insurance must be disclosed in the directors' report for each financial year of
the relevant company for as long as such insurance continues in effect. Under
the Esprit Telecom Articles the directors of Esprit Telecom have the power to
obtain, and have obtained, such insurance.
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware law provides that a corporation may, and in certain circumstances
must indemnify its officers, directors, employees or agents for expenses,
judgments or settlements actually and reasonably incurred by them in connection
with suits and other legal proceedings if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful, and must indemnify such
individuals in connection with successful defenses of such actions. The GTS
Certificate and By-Laws provide that directors and officers of GTS and certain
others will be entitled to such indemnification, subject to certain conditions.
Delaware law permits a corporation to advance expenses to directors and
officers, so long as, in the case of officers and directors, they provide an
undertaking to repay the amounts advanced if it is ultimately determined that
the officer or director was not entitled to be indemnified. The GTS Certificate
provides for advancing expenses in the manner provided for in the Delaware law.
Under English law, a company may only indemnify its officers (including
directors) against any liability they may incur in defending any proceedings,
whether civil or criminal, in which judgment is given in his or her favor or in
which he or she is acquitted or in connection with any application in which
relief is granted to him or her by the court from liability for any amount
otherwise payable as a result of an acquisition of shares by a nominee of the
company or for negligence, default, breach of duty or breach of trust in
relation to the affairs of the company where he or she acted honestly and
reasonably. The Esprit Telecom Articles provide that the directors, other
officers and auditors of Esprit Telecom will be entitled to the benefit of such
indemnification, subject to certain conditions.
SHAREHOLDERS' AND CLASS ACTION SUITS
Under Delaware law, a stockholder may institute a lawsuit on behalf of the
corporation. An individual shareholder also may commence a class action suit on
behalf of himself or herself and other similarly situated shareholders where the
requirements for maintaining a class action under the procedural rules of the
court in which the suit has been brought have been met.
Under English law, a shareholder generally has no right to sue in the name
of the company; the proper plaintiff when a wrong has been done to the company
is normally the company itself. There are exceptions to this general rule in the
case of fraud on minority shareholders or where the act complained of is illegal
or ultra vires. English law permits an individual shareholder to apply for a
court order where the company's affairs are being or have been conducted in a
manner unfairly prejudicial to the interests of one or more of the shareholders
(including himself or herself) or that any actual or proposed act or omission is
or would be so prejudicial. A court when granting relief has wide discretion,
including the ability to authorize civil proceedings to be brought in the name
and on behalf of the company by a shareholder on such terms as the court may
decide. English law generally does not provide for class action lawsuits.
Although the above discussion sets forth information concerning the
material differences between the rights of GTS Stockholders and the rights of
Esprit Telecom Securityholders, the above summary does not purport to be
complete and is qualified in its entirety by reference to the laws of Delaware
and of England and Wales (and other laws or rules cited herein), the GTS
Certificate and the GTS By-laws, and the Esprit Telecom Articles and the Esprit
Telecom Memorandum.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby have been passed upon for GTS by Shearman & Sterling.
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EXPERTS
The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of EDN Sovintel as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young (CIS) Ltd., independent auditors, as set forth in their report appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Esprit Telecom Group plc as of
September 30, 1998, and for the year ended September 30, 1998, appearing in this
Prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers, independent auditors, as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Esprit Telecom Group plc as of
September 30, 1996 and 1997, and for each of the two years in the period ended
September 30, 1997 appearing in this Prospectus and Registration Statement, have
been audited by Price Waterhouse, independent auditors, as set forth in their
report appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firms as experts in accounting and auditing.
The financial statements of the Plusnet Business as of September 30, 1996
and 1997, and for each of the three years in the period ended September 30,
1997, appearing in this Prospectus and Registration Statement, have been audited
by KPMG, independent auditors, as set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
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CERTAIN INFORMATION CONCERNING GTS
DESCRIPTION OF GTS
INTRODUCTION
GTS provides a broad range of telecommunications services to businesses,
other telecommunications service providers and consumers in Russia, the CIS and
Central Europe. Through its subsidiary HER, GTS is developing and operating a
pan-European high capacity fiber optic network that is designed to interconnect
a majority of the largest Western and Central European cities and to transport
international voice, data and multimedia/image traffic for other carriers
throughout Western and Central Europe. GTS' strategy in emerging markets to
develop its businesses generally has been to establish joint ventures with a
strong local partner or partners while maintaining a significant degree of
operational control. GTS' business activities consist of the ownership and
operation of (i) international long distance businesses, which operate through
international gateways that provide international switching services and
transmission capacity, (ii) local access networks, which provide local telephone
service, (iii) cellular networks, which provide wireless telecommunications
services, (iv) a domestic long distance business, (v) data networks, which are
wired and wireless, and (vi) carriers' carrier networks, which provide high
volume transmission capacity to other carriers. In addition, GTS has recently
developed a business plan to offer facilities-based telecommunications products
and services to businesses and other high-usage customers in certain
metropolitan markets throughout Europe. See "-- Business Strategy -- European
Services Strategy" (page 121) and "-- Western Europe -- European Services
Strategy" (page 139).
In Western Europe, GTS believes that it is well-positioned to establish
itself as the leading independent carriers' carrier through the development of
two ventures, HER and GTS-Monaco Access S.A.M. ("GTS-Monaco Access"). HER is one
of the leading carriers' carriers providing centrally managed cross-border
telecommunications transmission capacity in Europe. Its network, when completed
by the end of 2000, will extend approximately 25,000 kilometers, with points of
presence in approximately 50 cities in 20 European countries. GTS-Monaco Access
operates an international gateway in Monaco in partnership with, and utilizing
the existing gateway infrastructure of, the Principality of Monaco and provides
transit and routing of international calls to other telecommunications
operators. Through its HER and GTS-Monaco Access ventures, GTS is building a new
network for transporting voice, data and multimedia/image traffic for other
carriers throughout Western and Central Europe and for worldwide international
voice, data and multimedia/ image traffic that either originates or terminates
in, or transits through, Western and Central Europe. See "-- Western Europe"
(page 122).
In Central Europe, GTS' objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic, Slovakia and Romania. In the Czech Republic, GTS
provides outgoing voice services and operates an international gateway and a
data services network. In Hungary, GTS operates a nationwide microwave network
and a VSAT network, which GTS believes is the largest VSAT network in Central
Europe as measured by number of VSAT sites. In Slovakia and Romania, GTS
provides VSAT services using its VSAT hub in Hungary. Subject to certain
regulatory approvals, GTS has also obtained a license to provide international
data services in Poland and expects to being operations during the first quarter
of 1999. GTS' strategy is to expand its service offerings as the regulatory
environment permits, leverage its existing VSAT and international gateway
infrastructure where possible and provide a broad range of services to its
target markets. See "-- Central Europe" (page 142).
In Russia and the CIS, GTS' objective is to become the premier alternative
telecommunications operator. To attain its objective, GTS has partnered with
regional telephone companies and with Rostelecom, the national long distance
carrier in Russia. GTS currently operates in 34 regions and the city of Moscow
in Russia, as well as in 14 additional cities in the CIS, and believes it is
well-positioned to become the leading independent telecommunications service
provider in Russia. These businesses include: (i) EDN Sovintel ("Sovintel"),
which provides Moscow and St. Petersburg with international long distance and
local telephone services and access to the major domestic long distance
carriers; (ii) TeleCommunications of Moscow
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("TCM"), which provides local access services in Moscow; (iii) TeleRoss (as
defined below), which provides domestic long distance services in 14 cities in
Russia, including Moscow, as well as VSAT services to customers outside its
primary long distance satellite network; (iv) Sovam Teleport ("Sovam"), which
provides data services, including high-speed data transmission, electronic mail,
Internet access services, as well as Russia On Line, the first Russian language
Internet service; and (v) GTS' cellular operations ("GTS Cellular"), which
operate cellular networks in 14 regions in Russia and also in Kiev, Ukraine,
with licenses covering regions with an aggregate population of approximately 42
million people at September 30, 1998. Whenever practical, GTS' businesses
integrate and co-market their service offerings in Russia and the other
independent republics of the CIS, utilizing TeleRoss as the domestic long
distance provider, Sovintel as the international gateway, TCM and GTS Cellular
for local access, and Sovam as the data communications and Internet access
network for business applications and on-line services. Together, GTS' Russian
and other CIS ventures carried approximately 442 million and 462 million minutes
of traffic for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, and had approximately 34,100 customers,
including approximately 25,200 cellular subscribers, as of September 30, 1998.
See "-- Russia and the CIS" (page 145).
GTS does not currently own or operate significant telecommunication assets
in Asia. See "-- Asia" (page 167).
Restructuring
In October 1998, GTS announced it would restructure its business operations
into five primary lines of business as follows:
- GTS Carrier Services, which will include HER's cross-border transport
carrier services in Europe, Ebone Internet transit services, transoceanic
infrastructure and services, and Internet service units;
- GTS Access Services, which will pursue GTS's entry into the Western
European CLEC market;
- GTS Business Services -- Western Europe, which will offer voice, data,
Internet and other telecommunications services to businesses in Western
Europe, principally in locations not served by GTS Access Services;
- GTS Business Services -- CIS, which will incorporate all of GTS's CIS
"wireline" assets, including Sovintel, Sovam, TeleRoss and TCM; and
- GTS Mobile Services, which will operate all of GTS's cellular businesses
in Russia and the Ukraine.
RECENT DEVELOPMENTS
On November 30, 1998, GTS completed the acquisition of NetSource for an
initial purchase price consisting of 4,037,500 newly issued shares of GTS stock
that has a value of $99.3 million and $46.1 million in cash. In addition to the
initial consideration paid at the closing, GTS has agreed to make additional
payments of up to $35 million in either cash or shares of GTS stock, contingent
on NetSource's achieving certain performance targets during the first two
quarters of 1999. NetSource is a pan-European provider of long distance
telecommunications services focusing primarily on small- to medium-sized
businesses, with operations in Norway, Sweden, Germany and Ireland, as well as
in the Netherlands, Belgium and Denmark. At June 30, 1998, NetSource had 27,900
business customers throughout Europe and 61,400 residential customers in Germany
and The Netherlands. NetSource will become part of GTS Business
Services -- Western Europe. The acquisition of NetSource provides the GTS
Business Services -- Western Europe line of business with a customer and revenue
base in several key Western European countries, a portfolio of licenses and
interconnection agreements and an entrepreneurial management team.
On January 4, 1999, HER issued in a private placement $200 million
principal amount of 10 3/8% Senior Notes due 2009 and Euro 85 million principal
amount of 10 3/8% Senior Notes due 2006. See "Description of Certain GTS
Indebtedness -- New HER Notes" (Page 104). The net proceeds of this offering,
approximately $289.7 million, will be used to finance the cost of HER network
assets, to expand the HER network beyond
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the currently contemplated scope, including by adding transatlantic capacity,
enhancing the speed of the HER network and continuing the buildout of the HER
network.
On January 12, 1999, GTS, through its subsidiary GTS Translantic Holdings
Ltd., entered into an agreement with FLAG Telecom to form a 50/50 joint venture
company in Bermuda, to be known as FLAG Atlantic Limited, that will build and
operate a transoceanic fiber optic link between Europe and the United States.
FLAG Atlantic Limited's link is designed to carry voice, high-speed data and
video traffic at speeds of 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 Limited, GTS Carrier
Services and its subsidiary HER 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 be offering service by the end
of the year 2000. The project is subject to financing, the execution of related
agreements and other conditions.
BUSINESS STRATEGY
GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS seeks to position itself as the leading
independent telecommunication service provider in Europe through the development
of a pan-European fiber optic network and an international gateway in Monaco. In
addition, GTS has introduced a business plan to offer a broad range of
integrated telecommunications services to businesses and other high-usage
customers in certain metropolitan markets throughout Europe. See "-- Western
Europe -- European Services Strategy" (page 139). GTS' goal in emerging markets
is to establish itself as the leading alternative to the incumbent
telecommunications service providers and as a premier provider of value-added
services.
GTS has developed market strategies to achieve its goals in both emerging
markets and Western Europe. It has developed and is implementing a business plan
to offer comprehensive telecommunications services to business end users
throughout Europe.
Western Europe. GTS believes it is well-positioned to establish itself as
the leading independent carriers' carrier within Western Europe through the
development of HER's pan-European fiber optic network and the operation by GTS
of international gateway switching capacity. HER and the international gateway
switching capacity are complementary and enhance the services provided by PTOs
and New Entrants in a way that helps them to more successfully meet the needs of
their end-user customers. HER has been able to enter the market ahead of
competition and encourage a wide variety of carriers to use its network with
service offerings that meet their needs. To establish itself as the leading
carriers' carrier for international telecommunications within Europe, HER
intends to provide its customers with significantly higher quality transmission
and advanced network capabilities at a competitive price by utilizing advanced,
uniform technology across the region and providing redundant routing for higher
levels of reliability.
European Services Strategy. In June 1998, GTS introduced a business plan to
offer, through several new subsidiaries, a broad range of integrated
telecommunications services to businesses and other high usage customers in
certain metropolitan markets throughout Europe. GTS believes that the size and
growth potential of the European market combined with increasing liberalization
of European telecommunications regulations provides GTS with the opportunity to
successfully develop local networks and other end-user services. Through GTS
Business Services -- Western Europe, GTS intends to enter up to 50 metropolitan
markets as a reseller of services to end-users. Through GTS Access Services, GTS
proposes to develop CLECs in up to 12 European cities. Implementation of the
European Services Strategy may involve one or more of the following: (i) the
construction of fiber loop networks, (ii) the purchase or lease of dark fiber,
(iii) obtaining high frequency microwave licenses for "wireless fiber," or (iv)
partnership with, or acquisition of, resellers or facilities-based CLECs. In
evaluating potential markets GTS will consider among others the
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following characteristics of each market: (i) its business concentration, (ii)
the national and local regulatory environment, (iii) the technical difficulties
of local network construction and (iv) the extent of existing competition. See
"Risk Factors -- Risks Relating to European Services Strategy" (page 23),
"Recent Developments" (page 120), and "-- Western Europe -- European Services
Strategy" (page 139).
Emerging Markets. GTS pursues its goals in emerging markets through a
three-stage approach of market entry, market expansion and market integration.
- Market Entry. GTS identifies a market as a suitable target for entry
based upon: (i) superior growth prospects for such market, demonstrated
by growing demand for high quality telecommunications services; (ii) the
provision of inadequate services by incumbent providers, typically
resulting from the incumbents' unwillingness to offer high quality
services with reliable customer support at attractive prices; and (iii)
attractive regulatory environments in which emerging alternative
telecommunications providers such as GTS have, or are expected to have
over a clearly defined time horizon, the ability to compete on a
substantially equal basis with the incumbent providers in terms of
certain services and the cost of providing those services. Once GTS has
identified a market as suitable for entry, GTS seeks to establish its
presence in that market by establishing a venture with a strong local
partner or partners. In general, GTS maintains a significant degree of
operational control in such ventures. Through such ventures, GTS benefits
from its partners' ability to provide infrastructure, regulatory
expertise and personnel that will provide GTS with a competitive
advantage in entering that market. When entering a new market, GTS'
strategy is to provide its customers with service of higher quality than
that provided by incumbents.
- Market Expansion. Having entered a market successfully and established a
limited service offering to its targeted customer base, GTS then seeks to
expand the range of services it offers to existing and potential
customers and to further develop its relationships with local partners.
By broadening its service offerings and providing a bundled service
offering, GTS expects to both expand its customer base and increase GTS'
share of each customer's telecommunications spending. GTS also expects to
achieve increased economies of scale through the common use of
administrative and operating functions already in place. GTS also seeks
to expand its targeted geographic market by forming new partnerships and
installing infrastructure and offering services in additional geographic
regions, allowing GTS to further enhance its operating leverage and
ability to service its customers' telecommunications needs.
- Market Integration. GTS ultimately intends to integrate and co-market its
service offerings in each of the markets in which it operates. GTS
believes such integration will enable it to enhance its operating
efficiency by leveraging its distribution channels, infrastructure,
networks and management information systems. As customers develop a need
for a broader variety of telecommunications services, GTS believes that
GTS' integrated operations will represent an attractive service
alternative for customers seeking a single provider that can meet all
their telecommunications needs.
WESTERN EUROPE
Overview
GTS seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of two ventures, HER and
GTS-Monaco Access. HER is one of the leading carriers' carriers providing
centrally managed cross-border telecommunications transmission capacity in
Europe. Its high capacity fiber optic network, when completed by the end of
2000, will extend approximately 25,000 kilometers, with points of presence in
approximately 50 cities in 20 European countries. GTS-Monaco Access operates an
international gateway in Monaco in partnership with, and utilizing the existing
gateway infrastructure of, the Principality of Monaco and provides transit and
routing of international calls to other telecommunications operators. Through
its HER and GTS-Monaco Access ventures, GTS is building a new network for
transporting voice, data and multimedia/image traffic for other carriers
throughout Western and Central Europe and for worldwide international voice,
data and multimedia/image traffic that either originates or terminates in, or
transits through, Western and Central Europe.
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GTS believes that the international segment of the Western and Central
European telecommunications market will be an attractive market for new
telecommunications entrants because of its large size, the high operating costs
and low productivity of current providers, and the barriers to entry created by
the need to control a network and its rights-of-way.
The European telecommunications market has historically been dominated by
monopoly PTOs. This system has ensured the development of broad access to
telecommunications services in Europe, but it has also restricted the growth of
high quality and competitively priced pan-European voice and data services. The
current liberalization occurring in Europe is intended to address these
structural deficiencies by breaking down PTO monopolies, allowing new
telecommunications operators to enter the market and increasing the competition
within the European telecommunications market. In March 1996, the European
Commission adopted a directive (the "Full Competition Directive") requiring the
full liberalization of all telecommunications services in most EU member states
by January 1, 1998. GTS expects that full liberalization in these European
countries will lead to the emergence of New Entrants with new and competitive
service offerings. HER expects this increase in competition will result in lower
prices and a substantial increase in the volume of traffic and range of
telecommunication services provided. HER believes that as a result of the
increased call volume and growth in value added services, participants in these
markets will require significant amounts of new cross-border telecommunications
transport capacity to provide their services.
The HER network will offer PTOs and New Entrants an attractive alternative
for the transport of cross-border European telecommunications traffic. In the
traditional system, PTOs own and control circuits only within their national
borders, and as a result, cross-border traffic must be passed from one PTO to
another PTO at the national boundary. No single PTO therefore owns or controls
end-to-end circuits for cross-border calls. The alternative for carriers of this
traffic will be to build their own transport capacity or use IPLCs which are
provisioned by combining half-circuits on the networks of two or more PTOs. GTS
believes that there are a number of problems with these options that result in
HER being well-positioned to become the leading independent carriers' carrier in
Western and Central Europe. In particular, building their own transport capacity
is unlikely to be an attractive option for most carriers because of the high
traffic volumes required to justify the expense, the need to focus resources on
marketing and customer service, the time commitment and the regulatory and
administrative complexities involved, particularly in obtaining the rights of
way across national borders. Likewise, IPLCs provided by the PTOs also have a
number of disadvantages, including high prices, lack of end-to-end quality
control, lack of redundancy, low quality due to diversity of network systems and
equipment, limited availability of bandwidth and long lead times for
provisioning. See "Risk Factors -- Risks Specific to GTS -- HER Network
Roll-out" (page 21) and "Risk Factors -- Competition" (page 33).
HER
HER is one of the leading carriers' carriers providing centrally managed
cross-border telecommunications transmission capacity in Europe. Its network
when completed by the end of 2000, will extend approximately 25,000 kilometers,
with points of presence in approximately 50 cities in 20 European countries.
HER's customers include PTOs and New Entrants. HER offers these customers a
superior transport system than is currently available in Europe through PTOs
with a higher and more consistent level of transmission quality, redundancy,
network functionality and service at lower prices. HER currently operates in
Belgium, The Netherlands, the UK, France, Germany, Switzerland, Italy, Denmark
and Sweden. At present, the network links 17 cities: Brussels, Antwerp,
Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich, Geneva,
Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen and Stockholm. In
November 1998, HER leased capacity on a transatlantic cable linking the HER
network with North America and is exploring various interconnectivity options to
Russia. Although HER believes that its cost estimates and the build-out schedule
are reasonable, there can be no assurance that the actual construction costs or
time required to complete the network build-out will not substantially exceed
current estimates. Any significant delay or increase in the costs associated
with the completion of the HER network could have a material adverse effect on
HER and GTS.
HER intends to continue to build the network using an accessible and
cost-efficient infrastructure of railways, motorways, pipeline companies,
waterways and power companies. HER has a flexible approach to the network
build-out plan and intends to fine-tune the scope, route and design of the
network based upon the
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evaluation of customer demand. There can be no assurance that HER will be
successful in concluding necessary agreements, or that delays in concluding such
agreements will not materially and adversely affect the speed or successful
completion of the network. The successful and timely completion of the network
will also depend on, among other things, (i) timely performance by various third
parties of their contractual obligations to engineer, design and construct
portions of the network and (ii) HER's ability to obtain and maintain applicable
licenses and authorizations.
HER has entered into agreements for the construction and/or lease of fiber
optic routes for the network in Belgium, The Netherlands, the UK, France,
Germany, Switzerland, Italy, Denmark, Sweden and Spain. HER continues to
negotiate rights-of-way and other infrastructure arrangements in order to extend
its network in Western Europe and will need to negotiate similar agreements to
complete the network in four Central European countries. Buildout of the HER
network is subject to numerous risks and uncertainties that could delay
deployment or increase the costs of the network, or make the network
commercially infeasible. See "Risk Factors -- Risks Specific to GTS -- HER
Network Roll-out."
On June 24, 1998, HER completed the acquisition of a 75% interest in Ebone
for ECU 90 million (approximately $99.5 million based on the ECU/US dollar
exchange rate in effect on that date). Headquartered in Copenhagen, Denmark,
Ebone is a Tier 1 Internet backbone provider focused on connecting Internet
service providers in Europe to the Internet. As of September 30, 1998, Ebone
served more than 89 customers in 23 cities. As part of the transaction, Ebone
purchased under a transmission capacity agreement long-term capacity rights on
the HER network valued at ECU 90 million. The transmission capacity agreement is
expected to provide for the majority of Ebone's current and forecasted capacity
requirements. HER will provide Ebone with capacity of up to 622 megabits per
second between the majority of European cities that Ebone serves. In addition to
the majority interest held by HER, Ebone's new ownership structure will continue
to include many of Ebone's existing customers, which own the balance of Ebone's
shares through an association.
HIT Rail B.V. ("HIT Rail") formed HER on July 6, 1993. HIT Rail was
incorporated in 1990 by eleven national railways to carry out telecommunications
engineering activities in order to construct and exploit a data communications
network for railway traffic. GTS-Carrier Services, Inc. (formerly GTS-Hermes,
Inc.), a Delaware corporation ("GTS-CSI"), purchased a 34.4% interest in HER in
1994 and increased its interest to 50% in 1995 and to 79.1% in 1997. In March
1998, GTS-CSI increased its ownership of HER to approximately 89.4% by
purchasing a portion of HIT Rail's ownership interest in HER. GTS-CSI currently
owns an 89.9% equity interest in HER. GTS-CSI is a wholly owned subsidiary of
GTS. In an effort to expand its presence in Europe, HER has formed wholly owned
subsidiaries in The Netherlands, Ireland, the UK, Germany, France, Italy and
Spain to conduct marketing and other activities. In Belgium, the activities of
the Network Operations Center have been transferred to HER Network Services
B.V.B.A. (formerly Hermes Europe Railtel N.V.), a wholly owned subsidiary of
HER. Following the development of its corporate structure, HER will be a holding
company with limited assets and will operate its business through subsidiaries.
Business and Marketing Strategy
The overall strategy of HER is to offer PTOs and New Entrants pan-European
cross-border telecommunications transport services to help them, in turn, more
successfully meet the needs of their end-user customers. The HER network also
provides a vehicle through which a carrier can compete in markets where it does
not own infrastructure. HER's primary service offerings are large-capacity
circuits for "wholesale" customers such as PTOs and New Entrants. HER designed
its focus on carriers to complement and not compete with carriers' own business
objectives in providing services to end-users.
Following the acquisition of Ebone and given the increased market demand
for transatlantic low cost city-to-city services, HER now plans to expand its
objective to become a leading player in the provision of seamless transatlantic
city-to-city services. In November 1998 HER leased capacity on a transatlantic
cable linking the European network to North America. To meet its objective it
now needs to further augment its transatlantic capacity and invest further in
extending its network, as well as increasing the capacity of the network.
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To establish HER as the leading carriers' carrier for international
telecommunications within Europe, HER offers its customers significantly higher
quality transmission and extended/advanced network capabilities at a competitive
price by focusing on the following:
High Capacity Cross Border Network Facilities. The HER network is designed
to offer its customers access to high capacity network facilities outside their
domestic markets, providing cross-border capabilities without requiring
customers to invest in network infrastructure or being constrained by a narrow
range of capacity offerings. With DWDM upgrades, HER's fiber deployment plan
provides for a minimum of 800 Gigabits on all major routes. Options are in place
to expand fiber capacity further on a number of routes.
Uniform Network Architecture. The HER network is designed to offer managed
transport services from country to country and across multiple countries
utilizing a single uniform network, in contrast to services currently available
that use multiple providers over several networks with varying technologies and
each under the control of separate, not necessarily compatible, network control
systems. The HER network's uniform technology enhances service by providing
quality and reliability as well as uniformity of features throughout the
network.
Diverse Routing. The HER network architecture includes diverse, redundant
routes that are designed to provide high levels of reliability. The network is
designed to provide availability of over 99.9% for most routes and to provide
customers with a wide range of telecommunications transmission capacity. To
achieve this level of reliability without the use of a network similar to the
HER network, HER believes that carrier customers would need to purchase
additional dedicated circuits to provide for redundancy.
Rapid Provisioning. Customers can quickly obtain additional capacity on the
HER network. This access provides a level of capabilities that HER believes is
unavailable in Europe today. This ability to rapidly provide service is largely
due to HER's development of capacity substantially in excess of HER's forecasted
requirements.
Flexibility. HER services are focused on providing customers flexibility
across the network through which the customer may minimize risk by enabling
network rerouting, eventually even under customer direct control.
Advanced Technology. HER is deploying SDH and DWDM technology which is
upgradeable and will permit significant expansion of transmission capacity
without increasing the number of fiber pairs in the network. This technology
also provides the basis for structuring advanced operating features, such as
virtual private network service and IP Services.
Innovative Pricing. Currently the price of high-bandwidth circuits on
transborder European routes is artificially high and not necessarily related to
the cost of such circuits. HER offers competitive pricing. HER also offers
highly tailored contract terms and volume discounts, which allow carrier
customers to plan more efficiently the fixed costs of their service portfolio.
Customers can select varying capacity, access, guaranteed availability and
contract terms at competitive prices. Customers sourcing from PTOs are generally
limited to order from a very narrow set of capabilities offered under inflexible
pricing plans.
GTS intends to offer comprehensive, facilities-based telecommunications
products and services to business and other high-usage customers in certain
metropolitan markets in Europe. See "-- European Services Strategy" (page 139).
Many of GTS' planned service offerings will compete directly with services
offered by HER's customers, which may affect the perception of HER as an
independent carrier's carrier. There can be no assurance that GTS' European
Services Strategy will not negatively impact HER's ability to attract and retain
customers which would have a material adverse affect on HER and GTS.
Managed Bandwidth Services
HER's primary service is large capacity cross-border European circuits and
transatlantic services provided to carriers and service providers over an
integrated, managed pan-European network structure for wholesale customers such
as PTOs and New Entrants. The HER network, based on SDH and DWDM technology,
provides digital transmission capability upon which a broad range of advanced
functionality may
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be built and which offers network availability, flexibility, bandwidth speeds
and error performance not otherwise available to carriers for transport of
telecommunications traffic across national borders in Western and Central
Europe. The network is designed to provide customers with a wide variety of
bandwidth speeds, ranging from VC12/E1 Standard (equivalent to 2.048 Mbps) to
STM-16 Standard (equivalent to 155 Mbps).
Point-to-Point Transmission Capacity. The current market for cross-border
transport is served by IPLCs provided by PTOs. Traditionally, IPLCs are formed
by combining half-circuits from two PTOs between customer locations, often with
additional PTOs providing transit segments. Under the IPLC service, overall
service quality guarantees generally are not provided and only a limited range
of bandwidth is available, usually only E1 and in certain instances, E3. GTS
believes that its Point-to-Point Transmission Capacity will be a major
improvement to the PTO-based approach because it provides a greater range of
bandwidths (from 2 Mbps (E1 or VC-12) to multiple 140/155 Mbps (E4 or VC-4)) and
allows customers to choose a service level agreement with guarantees appropriate
for their applications, including guarantees for on-time service delivery and
service availability.
Point-to-Point Transmission Capacity consists of two services, "Integrated"
and "Node-to-Node." The HER "Integrated" service provides an end-to-end service
between customer-specified locations where the customer can request for HER to
arrange for "last mile" services from the HER node location to the customer's
location. The "Node-to-Node" service can be selected when the customer prefers
to provide its own services to reach the local HER node location. In
Node-to-Node Service, HER guarantees service only on its portion of the network
between HER nodes. Both services are competitively priced relative to current
service offerings. The customer can choose flexible contract terms from one to
ten or more years' duration, with discount schemes designed to ensure that HER
remains a cost-effective solution.
Virtual Network Transmission Services. Carriers and operators that plan to
expand their operations to become pan-European service providers as the European
marketplace is liberalized require a flexible and cost-effective means of
telecommunications transport. Such service providers have traditionally obtained
international transport service by leasing IPLCs. Leasing IPLCs requires a
carrier to lease channels on a segment-by-segment basis from multiple PTOs,
linking the target cities under arrangements having fixed capacity and pricing
structure for each segment of the carrier's network. Leasing IPLCs has several
disadvantages, including (i) difficulty in obtaining discount/volume pricing
schemes since there is no single provider of pan-European coverage, (ii) delays
in implementation due to numerous contractual negotiations and having to
interconnect numerous IPLCs, (iii) limited availability of pan-European leased
capacity at high bandwidth and (iv) variability of quality due to multiple
operators and the absence of a single uniform network. Operators could also
construct their own network, which is expensive, time-consuming and complex and
which may not be justified by such operators' traffic volume. See "Risk Factors
- -- Competition" (page 33).
HER's Network Transmission Service will offer a new solution and an
attractive alternative to leasing IPLCs or building infrastructure. This service
enables HER's customers to obtain a uniform pan-European or cross-border network
under one service agreement by allowing the customer to select any number of
cities along the HER network at a pricing structure based on the overall amount
of leased capacity for the customer's entire network.
Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements, and prefer to have physical
configuration control over their networks. The HER Ring Service connects
multiple customer locations with multiple VC-4 paths in a ring configuration.
All VC-4 paths within a ring are routed via physically diverse fibers to allow
the customer to have reliable and direct control over the configuration of its
VC-3 and VC-12 paths within the ring, and have exclusive control over the
routing. Additional ring capacity can be added with no service interruption and
additional customer locations may be added to the ring with minimal service
interruption. Because HER is not required to configure "idle" bandwidth or to
manage the "SDH subnet" this service can be provided at a very competitive rate
vis-a-vis other point-to-point services.
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Internet-Based Services
Ebone Internet Services. ISPs have been buying Internet access from Ebone
since 1991. Building on the expertise developed since these early days of the
Internet in Europe, Ebone now offers a carriers' grade Internet access service
with the following significant features:
- Reliable access to Internet service throughout the European and American
backbone of Ebone, which is made possible by always oversizing the
bandwidth capacity on HER's backbone that is allocated to Ebone's
Internet network;
- Access to one of the largest installed bases of ISP customers in Europe;
- Access to the other Internet networks with multi-point high speed
peerings with major Tier 1 Internet backbone providers in Europe and in
the US; and
- Access speeds ranging up to 140 Mbps.
IP Services. This new line of HER services is being developed for service
providers that focus on Internet, Intranet or voice over IP services. This IP
traffic has been traditionally supported by a combination of managed bandwidth
services (like the ring or the point-to-point services of HER) and Internet
backbone services (like the Ebone Internet services).
Today, service providers building their IP backbones demand the speed
offered by fiber infrastructure, the reliability of HER managed bandwidth
services and the flexibility of Internet backbone services.
The IP services carry the international Internet traffic of service
providers between their private points of presence and/or Internet exchange
points. These services combine the quality of a carrier class transmission
service with the easy bandwidth upgrades that are the strength of large Internet
backbone providers.
Pricing and Distribution
Sales of HER's services are conducted through its subsidiary Hermes Europe
Railtel (Ireland) Limited. HER accesses additional distribution channels using
local or regional network access providers.
Currently, the price of cross-border pan-European calls are often
significantly higher than the underlying cost of transport and terminating such
calls and higher than the price of intra-country calls or transborder calls to
and from liberalized markets. The low cost of operating the network enables HER
to attractively and competitively price services in the face of declining
overall tariffs for telecommunication services. HER's low-cost basis is due to,
among other things, its use of up-to-date technology without the burden of
legacy networks, which requires fewer employees to operate.
The term of a typical customer agreement currently ranges from one to three
years in length. The customer agrees to purchase, and HER agrees to provide,
cross-border transmission services. In general the customer agrees to pay
certain non-recurring charges upfront and recurring charges on an annual basis,
payable in twelve monthly installments. If the customer terminates the service
order prior to the end of the contract term, it is generally required to pay HER
a cancellation charge equal to three months service for each of the twelve
months remaining in the contract term. HER guarantees transmission services to a
certain service level. If such levels are not met or HER fails to deliver
service by the committed delivery date, the customer is eligible for a credit
against charges otherwise payable in respect of the relevant link.
Customers
HER's high capacity, SDH and DWDM-based fiber optic network is designed to
enable PTOs and New Entrants to integrate high quality, cross-border capacity
into their end user offerings. As of September 30, 1998, 48 customers contracted
for service on the HER network including PTOs, global consortia of PTOs, ISPs,
alternative carriers, an international carrier, VANs and resellers. For the
three months ended September 30, 1998, HER installed and sold capacity of
approximately 1,209 and 5,157 E1 equivalents, respectively. As of September 30,
1998, the HER backlog, cumulative contractually obligated future revenues, was
$257.3 million. The type and quality of HER's customers validates the concept of
the HER network and
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illustrates the type of customers who will be attracted to the full network. The
success of the existing network also demonstrates the demand for cross-border
transport services. In total, HER is targeting seven major market segments or
customer groups, which can be characterized as follows:
Existing PTOs. This customer segment consists of the traditional European
PTOs that generally participate in the standard bilateral agreements for
cross-border connectivity. HER provides a vehicle for PTOs to compete in
non-domestic markets both before and after January 1, 1998. As of January 1,
1998, both reserved and non-reserved traffic could be transported by alternative
infrastructure providers, thus vastly expanding the available PTO market for
HER.
Global Consortia of Telecommunications Operators. Many of the largest PTOs
and international carriers have pooled resources and formed consortia in order
to compete more effectively in important telecommunications markets, such as
those in Western Europe, particularly outside their home markets. Prior to
liberalization of the provision of switched voice services in Western European
markets, one of the primary objectives of these consortia is to provide
pan-European services to multinational business customers, including X.25/frame
relay (high speed data network) service and closed-user group voice services.
Under the current regulatory framework, consortia would otherwise be required to
purchase leased lines at negotiated retail rates, even within their home
countries. HER believes that it provides an attractive alternative at better
pricing in those environments where such a consortium does not already own its
infrastructure. Furthermore, HER believes that it is well positioned to provide
cross-border connectivity between different domestic infrastructures of these
alliances.
International Carriers. This customer segment consists of non-European
carriers with traffic between European and other international gateways.
Existing customers in this segment include Teleglobe and GTS-Monaco Access.
Targeted future customers include the US Regional Bell Operating Companies. HER
can provide these customers a pan-European distribution network to gather and
deliver traffic to and from their own and other hubs.
Alternative Carriers. This segment consists of second carriers, cable TV
and mobile carriers and competitive access providers. These new carriers have
chosen to compete with the incumbent PTOs in their respective countries, and GTS
believes that they would look favorably to an alternative such as HER. HER also
believes that non-PTO competitors in Europe will prefer to use a non-PTO
alternative like HER to meet their cross-border telecommunication transport
needs.
Internet Backbone Networks. Internet backbone networks are a fast emerging
segment and are expected to generate significant requirements for the services
HER offers. These require large capacity international connectivity services
between Internet nodes (point of interconnection between local Internet service
providers) in all local European markets. The Internet segment is experiencing
significant growth in demand for transmission capacity. On June 24, 1998, HER
entered into an agreement with Ebone, a Tier 1 Internet backbone provider which
at September 30, 1998 served 89 Internet service providers in 23 European
countries, to provide long-term transmission capacity of up to 622 megabits per
second across the majority of European cities that Ebone serves. As part of the
transaction, HER purchased a majority interest in Ebone.
Resellers. Resellers are carriers that do not own transmission facilities,
but obtain communications services from another carrier for resale to the
public. Resellers are also a growing segment of the market and are expected to
increase in conjunction with the liberalization of the European
telecommunications market. In the US, for example, resellers were a significant
factor in the expansion of competition.
VANs and other Service Providers. VANs are data communications systems in
which special service features enhance the basic data transmission facilities
offered to customers. Many of these networks are targeted to the data transfer
requirements of specific international customer segments such as airlines and
financial institutions. VANs' basic network transmission requirement is to
connect data switches or processors. VANs currently purchase their own
international circuits and build additional resiliency into their network
infrastructure. HER will allow them to meet these needs cost-effectively, and to
extend their services to new markets or customers without substantial capital
investment.
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HER expects that additional demand for alternative service providers will
come from increased usage of dedicated circuits for Internet access, private
lines for the deployment of wide-area networks by large corporations, "single
source" local and long distance services by small and medium-sized businesses
and emerging broad band applications such as cable TV programming distribution
(other than broadcast) to the end user.
Network Design
The network design is based on a layered architecture separating physical,
optical and telecom layers of the HER network with standard interfaces in order
to optimize design and operation and provide flexibility for introducing new
technologies such as IP.
The physical layer of the HER network is based on a mesh of dark fiber
routes interconnecting cities on the network via at least two or three
physically diverse paths for maximum resilience against fiber or facilities
failures. In each major city there will additionally be two customer access
sites for resilience.
The optical layer of the HER network, which is expected to be extended
during 1999 to cover ten countries, representing the core of the HER network, is
based on DWDM. This layer supports the provision of optical services direct to
customers at 2.5 Gbps and provides for the operation of multiple SDH and/or IP
systems to run concurrently on a single fiber pair in a highly cost efficient
manner. The HER network, currently in seven countries, is based on Ciena 40
wavelength systems with a capacity of 100 Gbps on a fiber pair.
The SDH layer of the HER network, running via DWDM channels in the core of
the network, and directly on the fiber elsewhere supports the provision of
point-to-point services to customers at speeds of E1/VC-12 (2 Mbps) up to STM-1
(155 Mbps). The SDH layer is itself a multilayered architecture consisting of
multiple SDH rings optimized for different traffic characteristics. Each SDH
ring supports full automatic re-routing of traffic in the case of a break in the
ring. This layer is based on Alcatel STM-16 (2.5 Gbps) systems which are
installed throughout the operational HER Network.
An IP layer is expected to be added to the HER network starting in the
second quarter of 1999. This layer will support high capacity IP routers, which
can deliver IP services to customers at speeds from 1 Mbps to 622 Mbps. These
routers will be supported on the DWDM layer of the network directly and/or via
ATM in the core of the HER network, and on top of the SDH layer elsewhere. HER
plans to extend IP service delivery capabilities to all cities on the network by
the end of the year 2000. This layer will be able to handle failures
independently of the lower layers via re-routing at the IP level.
The HER network is controlled by a single active Network Operations Center
in Brussels, Belgium, with a backup center, with equivalent management systems
continuously synchronized with the primary center, being maintained in
Amsterdam.
The Network Operations Center can pinpoint potential service impacting
problems and deal with service re-routing if required much more effectively than
in networks controlled by multiple operators in different countries. HER's
advanced operational support systems also provide comprehensive capabilities for
managing the large number of network components and local repair organizations
required in an extensive international network of this size, as well as for
advanced customer care in managing the large number of network components and
local repair organizations required in an extensive international network of
this size, as well as for advanced customer care in managing customer
operational activities.
Overall the combination of high levels of redundancy of physical and
management components and the ability to recover from individual failures at the
optical, SDH and IP layers provides for a high degree of network performance. As
a result, HER is able to enter into strong performance commitments with its
customers and services on most routes of its network has performed at above
99.9% availability.
HER expects to operate the network and to own substantially all of the
network equipment as well as some segments of the fiber optic cable. A
substantial part of the fiber is leased on a long-term basis. Long-term leases
for fiber are advantageous to HER because they reduce the capital expense burden
of building
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large quantities of capacity before they can be used. Where HER leases dark
fiber, the infrastructure provider will generally be responsible for maintaining
such fiber optic cable. HER will enter into agreements with equipment vendors
and infrastructure providers and other third parties to supply and/or maintain
the equipment for the HER network. See "Risk Factors -- Risks Specific to
GTS -- HER Network Roll-out" (page 21).
Network Capacity
The HER network is being built to include 40 wavelength DWDM systems on all
routes. This allows for incremental SDH and IP systems of 2.5 Gbps to be
installed when and only when required, thus providing for efficient management
of capital investment.
Should capacity be required beyond the initial 100 Gbps on the first fiber
pair, additional fiber pair(s) can be brought into operation utilizing either
higher capacity DWDM systems at 2.5 Gbps or at 10 Gbps. Such systems will be
available from 1999. HER plans to have a minimum of two fiber pairs on all
routes and to extend capacity both via additional routes providing further
resilience, as well as on selecting existing routes where available over time.
This approach to fiber utilization again provides for an optimal management of
fiber investment.
Network Agreements. HER has entered into agreements and letters of intent
with various infrastructure providers for construction and/or dark fiber lease
of portions of the HER network. HER's agreements for leases of portions of the
network typically require the infrastructure provider to provide a certain
number of pairs of dark fiber and in some cases, facilities along the network
route commencing on certain dates provided by HER. The term of a lease agreement
typically ranges from ten to 18 years. An agreement typically contains optical
specification standards for the fiber and methods of testing. HER is allowed to
use the cable for the transmission of messages and in other ways, including
increasing capacity. The infrastructure provider may also provide space for the
location of HER equipment and related maintenance. The infrastructure provider
is responsible for maintenance of the cable facilities. An agreement also
provides for an annual price for the provision of fiber and for the facilities
and maintenance. The agreements typically provide for termination by the parties
only for material breach, with a 90-day minimum cure period. The agreements
typically contain a transition period after termination of the agreement to
allow HER to continue to serve its customers until it can reach agreement with
an alternative infrastructure provider. In certain areas of the network, where
it is not possible to lease dark fiber, HER has signed agreements or letters of
intent for indefeasible rights of use to managed bandwidth. The terms of these
agreements typically range from ten to 25 years.
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Local Access. Access to the HER network will be primarily provided to
clients through SDH access lines including at the STM-1 or STM-4 level. However,
customers who continue to use the older PDH technology may also access the HER
network for optical service STM-16 level. In each city, as a HER point of
presence is deployed, HER may contract with one or more local access network
suppliers for "last mile" services to customer locations. HER will not invest in
building local access infrastructure, but such connectivity can be supplied on a
case-by-case basis via preferred local access partner arrangements. Currently,
HER has contracted with a number of local access providers to connect the HER
network to intra-city networks. Pursuant to such agreements, HER can offer its
carrier customers local connectivity in those cities. Various local access
network suppliers may also be interested in HER for the purpose of linking the
business centers in which they are active. Therefore, GTS believes that the
relationships between HER and local access network suppliers can benefit both
parties. Set forth below is an illustration of the connection between the HER
network and local access providers.
[SDH/WDM NETWORK CHART]
The portion of the HER network currently in operation extends approximately
9,200 kilometers. When completed by the end of 2000, the network will extend
approximately 25,000 kilometers. In November 1998, HER also leased capacity on a
transatlantic cable linking the European network with North America. During the
first quarter of 1999, the network is planned to be expanded through France,
Madrid and Barcelona in Spain, and in the second quarter of 1999, extended
further in Italy and to Luxembourg. By the end of 1999, the HER network will be
further extended to Austria, the Czech Republic and Portugal.
The routes to be completed by the first half of 1999 are currently under
construction. "Under construction" means that with respect to each of the
segments that make up each of these routes, one of the following is occurring:
(i) HER has contracted to build or is contracting to build the fiber optic cable
segment, and (ii) HER has leased or will lease such segment of dark fiber optic
cable from a third party who has built or is currently building such segment.
The dates set forth above may be subject to delays due to a variety of factors,
many of which are beyond the control of GTS. See "Risk Factors -- Risks Specific
to GTS -- HER Network Roll-out" (page 21).
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HER is deploying the network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. The rights-of-way of HER-built portions of the network will be
provided pursuant to long-term leases or other arrangements entered into with
railways, highway commissions, pipeline owners, utilities or others. It is the
policy of HER to evaluate multiple alternative infrastructure suppliers in order
to maximize flexibility. As a result of its network development activities to
date, HER has gained access to infrastructure for its network routes which, in
certain cases, HER believes will be difficult for its competitors to duplicate.
See "Risk Factors -- Risks Specific to GTS -- HER Network Roll-Out" (page 21).
Competition
The European and international telecommunications industries are
competitive. HER's success depends upon its ability to compete with a variety of
other telecommunications providers offering or seeking to offer cross-border
services, including (i) the respective PTO in each country in which HER
operates, (ii) global alliances among some of the world's largest
telecommunications carriers; and (iii) global operators. HER expects that some
of these potential competitors may also become its customers. HER believes that
the ongoing liberalization of the European telecommunications market will
attract additional entrants to the market and increase the intensity of
competition. Competitors in the market compete primarily on the basis of price
and quality. HER intends to focus on these factors and on service innovation as
well. HER business plan anticipates substantial head-to-head competition as well
as indirect competition.
Various telecommunications companies, including MCI WorldCom, Inc., Viatel,
Inc., KPN N.V., Deutsche Telekom AG and France Telecom S.A., Global Crossing
Ltd., British Telecommunications plc and Esprit plc, have announced plans to
construct, have begun to construct or are operating fiber optic networks across
various European countries. Some of these networks include, or their promoters
have expressed their intentions to include, transatlantic connectivity. The
Company also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through International
Private Leased Circuits.
If HER's competitors, many of whom possess greater technical, financial and
other resources than HER, devote significant resources to the provision of
pan-European, cross-border telecommunications transport services to carriers,
such action could have a material adverse effect on HER's business, financial
condition and results of operations. There can be no assurance that HER will be
able to compete successfully against such new or existing competitors. See "Risk
Factors -- Competition" (page 33).
Licenses and Regulatory Issues
A summary discussion of the regulatory framework in certain countries where
HER has developed and is developing the HER network is set forth below. This
discussion is intended to provide a general outline, rather than a comprehensive
discussion, of the more relevant regulations and current regulatory posture of
the various jurisdictions.
National authorities in individual member states of the EU are responsible
for regulating the construction and operation of telecommunications
infrastructure. HER believes that the adoption of the Full Competition Directive
and the various related Directives adopted by the European Parliament and the
Council of the EU have resulted in the removal of most regulatory barriers to
the construction and operation of telecommunications infrastructure in the
countries of the EU and Switzerland where HER currently has operations.
HER requires licenses, authorizations or registrations in all countries to
operate the network. There can be no assurance that HER will be able to obtain
such licenses, authorizations or registrations or that HER's operations will not
become subject to other regulatory, authorization or registration requirements
in the countries in which it operates or plans to operate. Licenses,
authorizations or registrations have been obtained in Belgium, Denmark, France,
Germany, Italy, The Netherlands, Spain, Sweden, Switzerland, the UK and the
United States. HER intends to file applications in other countries in
anticipation of service launch in accordance with the network roll-out plan.
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European Union. On June 28, 1990, the European Commission, in an effort to
promote competition and efficiency in the European Union, issued the 1990
Directive requiring EU member states to immediately liberalize all
telecommunication services with the exception of voice telephony to the general
public (basic voice services provided over the public switched voice network).
This step liberalized value added services and voice services over corporate
networks and/or "closed user groups," although the exact definitions of the
terms used in the 1990 Directive were not altogether clear.
On March 13, 1996, the European Commission adopted the Full Competition
Directive extending the 1990 Directive to all services, requiring that licensing
procedures for these services be transparent and non-discriminatory, requiring
member states to fully liberalize alternative infrastructure to allow a
competitive market for "non-reserved" services such as data, value added
services and non-public (closed-user group) switched voice services by July 1,
1996 and mandating open competition in all public telecommunications services,
including voice telephony to the general public, by January 1, 1998. Deferrals
of the obligations to liberalize were granted to Spain, Ireland, Greece and
Portugal, subject to formal application and satisfaction of certain
requirements. Luxembourg, because of the small size of its market, is eligible
for a special transitional period of up to two years.
On November 5, 1997, the European Commission initiated several infringement
proceedings against those Member States which had not implemented the relevant
transposition measures of the 1990 Directive and other liberalization
directives. The Member States concerned were Denmark, Greece, Italy, Luxembourg,
Germany, Portugal and Belgium. The European Commission also decided to continue
the infringement procedure it had already opened against Spain. Subsequently, in
March 1998, it was reported in the press that several of these infringement
proceedings had been closed because the Member States concerned had properly
implemented the relevant provisions. The identity of the Member States for whom
such proceedings had been closed has not been made public.
On April 10, 1997, the European Parliament and the Council of Ministers
adopted a Directive on a common framework for general authorizations and
individual licenses in the field of telecommunications services, including
networks. Licenses must be awarded through open, non-discriminatory and
transparent procedures and applications will be required to be dealt with in a
timely fashion. The number of licenses may be restricted only to the extent
required to ensure the efficient use of radio frequencies or for the time
necessary to make available sufficient numbers in accordance with EC law.
On June 11, 1997, the European Parliament and the Council of Ministers
adopted a Directive on interconnection with regard to ensuring universal service
and interoperability through application of ONP principles; among other things
this requires Member States to ensure that PTOs with significant market power
should provide interconnection on the basis of cost-oriented charges.
On February 26, 1998, the European Parliament and the Council of Ministers
adopted a Directive on the application of ONP to voice telephony and on
universal service.
The European Commission has also recently initiated several infringement
proceedings for incomplete or wrong transposition into national law of the April
1997 Licensing Directive (against Austria, Italy, Belgium, France and
Luxembourg) and the June 1997 ONP Interconnection Directive (against Belgium,
France and Luxembourg).
Notwithstanding the above-mentioned infringement proceedings, HER believes
that many European countries have revised telecommunications regulations to
comply with the 1990 Directive and the Full Competition Directive and that such
changes will enhance HER's ability to obtain other necessary regulatory
approvals for its operations.
As a multinational telecommunications company, HER is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which HER operates.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on HER, that domestic or
international regulators or third parties will not raise material issues with
regard to HER's compliance or noncompliance with applicable regulations or that
regulatory activities will not have a
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material adverse effect on HER. See "Risk Factors -- Government Regulation"
(page 32). The regulatory framework in certain jurisdictions in which HER
provides its services is briefly described below.
Belgium. Belgium has implemented the "alternative infrastructure" provider
provision of the Full Competition Directive. Most of the EC telecommunications
liberalization package was adopted at the end of December 1997. The implementing
legislation (Royal Decrees) regarding the licensing regimes for the provision of
voice telephony services and the establishment of public network infrastructure
was approved by the Council of Ministers at the end of June 1998. The official
publication and the entry into force of that implementing legislation took place
in July 1998. Until such entry into force, the Belgian Telecommunication
Authority will continue to work with the system of provisional licenses. HER has
already obtained, through a wholly owned subsidiary, a license in February 1997
from the Belgian regulatory authority to build infrastructure between major
Belgian population centers and the relevant border crossings. HER also has an
authorization to provide liberalized services using alternative infrastructure.
The liberalization legislation requires all previously licenced operators to
apply for new licenses or authorizations. HER applied for a new license in
October 1998. HER expects that its existing license will be renewed in due
course although there can be no assurance that this will be the case or that
such license will be granted on terms acceptable to HER.
Denmark. With the liberalization of infrastructure as of July 1, 1997,
Denmark has fully liberalized its telecommunications markets in accordance with
the requirements of the relevant EC Directives. According to the Danish rules,
HER will not require any regulatory approval in order to install or operate the
network in Denmark.
France. A new regulatory agency, the Autorite de Regulation des
Telecommunications, was established in France effective January 1, 1997. In
1996, France approved legislation to implement the Full Competition Directive
and to remove all remaining restrictions on competition from January 1998. In
October 1997, HER obtained authorization to operate its network in specific
regions of France. In August 1998, HER was granted an extension of its license
in order to extend its network in France to reach Italy and Spain. Such
authorization requires prior notification to and approval of the Autorite de
Regulation des Telecommunications of any substantial changes in the capital of
HER or its controlling shareholder.
Germany. Germany has approved legislation to implement the Full Competition
Directive and remove all remaining restrictions on competition from August 1996.
HER was granted a license by the German regulatory authorities on July 18, 1997.
The license permits HER to operate the portions of the network in Germany
connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to the Dutch border;
and Stuttgart to the French border. In 1998, HER was granted extensions to its
license to include operation of routes linking Hamburg, Hanover, Munich and
Berlin and of routes to Denmark.
Italy. Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy enacted legislation on July 31, 1997 creating an
independent national regulatory authority for the telecommunications and
audiovisual sectors. On September 19, 1997, Italy enacted a regulation
implementing all EC directives in the telecommunications sector and since then
specific laws relating to licensing and interconnection have been approved. HER
was granted a license by the Italian authorities in August 1998, enabling the
development of its network in the northwest region of Italy, including Milan.
Luxembourg. A new Telecommunication Act entered into force in April 1997,
and a Royal Decree on licensing conditions entered into force in July 1998. HER
applied to the Luxembourg regulatory authority for a license to build and
operate its network in Luxembourg in October 1998. HER expects to be granted a
license in Luxembourg by the first quarter of 1999. There can be no assurance,
however, that such license will be granted on terms acceptable to HER.
The Netherlands. On July 1, 1997, the Dutch government abolished the
prohibition on the use of fixed infrastructure for the provision of public voice
telephony, thereby complying with the requirements of the Full Competition
Directive six months ahead of schedule. On August 1, 1996, HER was granted an
authorization for the installation, maintenance and use of a fixed
telecommunications infrastructure.
A new Telecommunications Act was adopted on October 13, 1998, and is now in
force. The new Act confirms the full liberalization of the telecommunications
market according to European Community
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standards. It is not expected that the new Telecommunications Act will
detrimentally affect the conduct of business by HER. HER's existing
authorization will lapse in June 1999. HER intends to register as a public
telecommunications network operator under the new Act before that time. This
will allow it to install, maintain and use a fixed telecommunications
infrastructure.
Spain. Under the Full Competition Directive, Spain was granted the right to
request a delay of up to five years in liberalizing fully its telecommunications
market. In April 1998, Spain adopted the LGT, its new telecommunications law.
The LGT was implemented through the use of secondary legislation. The LGT and
the secondary legislation resulted in the full liberalization of the Spanish
telecommunications market on December 1, 1998. On December 3, 1998, the Spanish
regulatory authority began to issue licenses under the new regime. HER was
granted a license to install and operate a telecommunications network in Spain
on January 14, 1999.
Sweden. Full liberalization of the Swedish telecommunications market
occurred in 1993. A new Telecommunications Act was passed in 1997 to reinforce
the powers of the national regulatory authority, to ensure conformity with EC
Directives and to supplement the pre-existing licensing regime with a general
authorization regime for certain services. HER registered with Swedish
authorities has been able to provide service in Sweden since July 1998.
Switzerland. The Swiss Parliament has passed a Telecommunications Law which
entered into force on January 1, 1998. Although Switzerland is not a Member
State of the EU, the effect of the law is largely to mirror the EC
telecommunications liberalization directives. From that date, voice telephony
monopoly was abolished and services fully liberalized. In September 1998, the
Swiss regulatory authority granted HER a definitive concession (replacing an
earlier provisional concession) to build and operate its network in Switzerland.
United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the UK telecommunications regulatory authority, to create
a competitive marketplace from which detailed regulation could eventually be
withdrawn. The UK has already liberalized its market beyond the requirements of
the Full Competition Directive, and most restrictions on competition have been
removed in practice as well as in law. HER has received a license from the
Secretary of State for Trade and Industry dated December 18, 1996 which grants
it the right to run a telecommunications system or systems in the UK connected
to an overseas telecommunications system and to provide international services
over such systems. Like the licenses granted to other providers of international
facilities-based services, the license granted to HER was for an initial six
months' duration and thereafter is subject to revocation on one month's notice
in writing. The short duration of these initial licenses was adopted for
administrative convenience to facilitate reforms to the licensing regime which
are expected in 1999. The Department of Trade and Industry has confirmed that it
intends to replace the initial licenses with new licenses and that it would not
revoke an initial license without replacing it with another license giving an
equivalent authorization. The Department of Trade and Industry is currently
discussing with license holders the arrangements to put these new licenses into
effect. Although the Department of Trade and Industry has indicated that the new
licenses are expected to be of 25 years' duration, there can be no certainty
that this will be the case or that the new licenses will not contain terms or
conditions unfavorable to HER.
United States. HER was granted a license by the FCC pursuant to section 214
of the Communications Act of 1934 authorizing it to provide limited global
facilities-based and global resale services (except US services, subject to
items and conditions imposed by law and the authorization, to and from Hungary,
Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine, Kazakhstan,
Uzbekistan, Azerbaijan, China and India) effective October 23, 1998.
In addition to the discussion above, HER intends to file applications in
other countries in anticipation of service launch in accordance with the HER
network roll-out plan. The terms and conditions of HER's licenses,
authorizations or registrations may limit or otherwise affect HER's scope of
operations. There can be no assurance that HER will be able to obtain, maintain
or renew licenses, authorizations or registrations to provide the services it
currently provides and plans to provide, that such licenses, authorizations or
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registrations will be issued or renewed on terms or with fees that are
commercially viable, or that the licenses, authorizations or registrations
required in the future can be obtained by HER. The loss of, or failure to
obtain, these licenses, authorizations or registrations or a substantial
limitation upon the terms of these licenses, authorizations or registrations
could have a material adverse effect on HER.
GTS-Monaco Access
GTS owns a 50% interest in and manages GTS-Monaco Access, a joint venture
with the Principality of Monaco created to develop Monaco's existing
international telecommunications infrastructure into an international gateway
hub for transport of international traffic to European and overseas
destinations. The Principality has constructed and operates a sophisticated
gateway infrastructure that includes an international digital switching center
and a satellite earth station to support significant amounts of carriers'
carrier traffic. Through Monaco's network, GTS-Monaco Access is linked to
approximately 170 countries worldwide through its network. GTS believes that
this partnership provides it with the opportunity to build a strong
international gateway presence in lucrative Western European markets.
GTS-Monaco Access offers competitively priced international switching and
transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, as distinguished
from "retail" services offered to end users. Basic service offerings include (i)
international switched traffic; (ii) international private lines; (iii)
facilities management, including billing, customer management and fault
reduction systems; (iv) resale distribution for Internet service providers; and
(v) prepaid calling card platform services.
With the cooperation of Monaco Telecom ("MT"), GTS-Monaco Access is
entitled to exercise the privileges of signatories to international treaties
such as the ITU, and to international satellite agreements, such as Intelsat,
Inmarsat and Eutelsat. Other signatories are generally PTOs and other
quasi-governmental telecommunications entities. GTS-Monaco Access purchases
capacity on international fiber routes at rates available only to recognized
operators which are substantially below the rates charged to other service
providers. These fiber-based facilities are an important element for GTS-Monaco
Access's core network and provide it with capacity that may be leased or resold
to customers. Monaco inaugurated its independent country code, 377, on June 21,
1996, which made it eligible for certain privileges, including special terms
(generally reserved for PTOs) in connection with transmission agreements,
transit agreements, settlements and low-cost accounting rates with select
carriers.
GTS' partner in GTS-Monaco Access is an investment fund designated by the
Principality of Monaco to represent its interests. GTS-Monaco Access functions
in cooperation with MT under a commercial agreement governing, among other
things, the terms of use of existing facilities, access to and acquisition of
new international infrastructure. GTS exercises operational control of the joint
venture, and provides managerial and financial support, international
telecommunications expertise and strategic planning. Neither GTS nor its partner
is obligated to fund operations or capital expenditures of GTS-Monaco Access.
Losses and profits of GTS-Monaco Access are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1998, GTS and its partner had each made equity contributions
of $0.8 million to GTS-Monaco Access. In addition, GTS-Monaco Access had
outstanding loans of $2.9 million to GTS as of September 30, 1998. See "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology -- Profit and Loss Accounting" (page 173).
The agreement between GTS-Monaco Access and MT, by its terms, continues in
operation until 2020.
Business and Marketing Strategy
GTS' strategy for developing GTS-Monaco Access into an international
gateway hub includes the following:
Develop Advanced Carrier Services Offerings. GTS-Monaco Access may develop
its "advanced carrier services" offerings to include global 0800 services and
international free phone services, which GTS believes will broaden customer
relationships, enhance revenues and help to protect it from price-based
competition.
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Develop Relationships to Broaden Service Offerings. GTS-Monaco Access may
develop relationships to broaden its service offerings. GTS-Monaco Access has
entered into agreements with UUNET, one of its gateway customers, to provide
wholesale Internet access to GTS-Monaco Access's carrier customers in a number
of Western European countries. The agreement allows these services to be
"cobranded" with GTS' affiliates.
Pricing. Price is a critical factor in the market for international
switching as competition increases due to expanding international capacity,
advances in technology and falling regulatory barriers. GTS-Monaco Access
intends to price its services competitively with the prevailing price for
comparable inter-PTO transit and gateway services. GTS-Monaco Access is not
bound by legacy systems, infrastructure and personnel levels and can, therefore,
manage competitive cost operations.
Leverage Non-Aligned Position. Because GTS' Western European activities are
not allied with any of the major consortia or large Western European
telecommunications companies, GTS-Monaco Access may be considered an attractive
service provider for Western European carriers who may otherwise be reluctant to
obtain services from the larger operators of international gateways that are
often their competitors in the retail market.
Exploit GTS Synergies. GTS-Monaco Access may ally with other GTS companies
in Europe and the CIS. GTS-Monaco Access is expected to realize significant
reductions in its cost structure through access to low-cost pan-European
transmission capacity through alternative infrastructure providers such as HER,
Sovintel and C-Datacom International, Inc., GTS' Indian venture, already route
international traffic through GTS-Monaco Access's gateway.
Customers
Targeted customers for GTS-Monaco Access include:
Non-Aligned PTOs. GTS believes that various large American and Western
European PTOs that lack adequate international switching and transport
facilities of their own may be persuaded to purchase international services
from GTS-Monaco Access, rather than from competing PTOs or consortia.
Mobile Carriers. GTS believes that some of the non-PTO mobile
carriers, which currently provide only a small percentage of Western
European mobile telecommunications traffic, may prefer the "independent"
international gateway service offerings of GTS-Monaco Access to those of
their PTO competitors.
Internet Service Providers. Growth in Internet usage creates a
significant opportunity for a nonaligned Internet access provider such as
GTS-Monaco Access, since many Internet service providers will be in direct
competition with PTO-owned services in large European markets.
Second Carriers/Resellers. GTS believes that many second carriers will
seek to enter new markets quickly without investing in international
switching capacity.
Established ("Aligned") PTOs. This customer segment will be a niche
market for GTS-Monaco Access. As markets are deregulated and carriers
become increasingly competitive, traditional friendly correspondent
relations may become strained, and opportunities may emerge to leverage
GTS' non-aligned status to route traffic between rivals or to displace
incumbents for transit relationships.
Other GTS Companies. GTS-Monaco Access currently provides gateway
services indirectly to Sovintel, CDI and other GTS companies that aggregate
traffic or provide international long distance services. It may also
provide these services to HER.
In January 1998, GTS-Monaco Access terminated its relationship with a major
traffic partner as a result of which GTS expected that the venture would lose
approximately $6 million of revenues in 1998. GTS-Monaco Access has put in place
plans to replace such revenues from other sources.
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Network
GTS has enhanced MT's existing technology platform of digital switching,
fiber optic transmission, satellite and submarine cable facilities by
interconnecting this existing network infrastructure to multiple terrestrial
routes covering Europe and to undersea fiber optic cables connecting the
GTS-Monaco Access network to Asia and the Americas.
The network infrastructure of GTS-Monaco Access is complementary with that
of HER, with each serving the carriers' carrier market from different
perspectives; HER for bandwidth services and GTS-Monaco Access for switched call
terminations and other carrier services.
Licenses and Regulatory Issues
Because it operates in coordination with MT, the licenced operator of the
Monaco public network, and in indirect partnership with the government,
GTS-Monaco Access's telecommunications activities in Monaco require no
telecommunications license.
Because the Principality of Monaco is not an EU member state, GTS-Monaco
Access's telecommunications activities in the Principality are not directly
subject to European Community law. However, GTS-Monaco Access will have to
comply with EU regulation to the extent it does business in EU member states or
its business has an effect on trade between EU member states. The regulatory
requirements established by the EU create general guidelines under which the
national agencies of EU member states regulate. Accordingly, local laws and
regulations may differ significantly among these jurisdictions, and the
interpretation and enforcement of such laws and regulations may vary. In certain
of GTS' existing and target markets, there are laws and regulations which affect
the number and types of customers which GTS can address. For instance, certain
countries may and do require licenses for communication companies to
interconnect to the public network to originate traffic.
In addition, one of the services provided by GTS-Monaco Access is a form of
transit service, known in the industry as "re-filing." Re-filing is the practice
of routing traffic through a third country in order to take advantage of
disparities in settlement rates between different countries, allowing traffic to
a country of termination to be treated as if it originated in the third country
that enjoys lower settlement rates with the destination country, thereby
resulting in lower overall costs on an end-to-end basis. Re-filing is prevalent
in the industry even though the practice is technically in contravention of ITU
regulations. In practice, because of the widespread non-observance of these
regulations, such a contravention normally does not give rise to specific legal
problems. However, their enforceability essentially depends on the status given
to ITU obligations by Member countries' domestic laws. Accordingly, there can be
no assurance that GTS-Monaco Access's re-filing services might not be disrupted
or be the subject of legal process at some time in the future. In such event,
within the EU a defense may be available that the ITU regulations are
anti-competitive and contravene the Treaty of Rome, although there can be no
certainty that such a defense would succeed.
Competition
GTS-Monaco Access faces competition from consortia of telecommunications
operators, large PTOs and other international telephone operators with advanced
network infrastructures, access to large quantities of long-haul capacity and
established customer bases. PTOs currently providing large amounts of
international traffic have already established direct routes, transit
arrangements and correspondent relations and many have excess capacity that they
resell in competition with GTS-Monaco Access.
With the advent of deregulation in the Western European telecommunications
markets in 1998, opportunities for the establishment of international gateways
will likely develop in Europe and as a result competition in the market for
GTS-Monaco Access's services will increase. GTS-Monaco Access intends to
evaluate additional locations in Europe for the establishment of international
hubs based upon prospective costs and the availability of call routing at these
locations. GTS-Monaco Access plans to locate these prospective points of
presence in cities served by HER and to allow the termination of traffic through
HER.
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GTS-Monaco Access may benefit from the establishment of these points of presence
by incurring reduced transmission expenses.
While GTS believes that GTS-Monaco Access will be able to compete
effectively in certain identified market segments because most of its targeted
customers are in new and fast growing markets and have not established long-term
relationships with international gateway providers, and because it has equal
access to advanced infrastructure and international fiber routes, potential
access to low cost transport from HER and an "independent" status that allows it
to service a worldwide range of potential customers, GTS intends continually to
review the competitiveness of GTS-Monaco Access with respect to its competitors.
European Services Strategy
General. In order to capitalize on the increasing liberalization of
telecommunications regulation in Europe, GTS intends to become a leading
provider of a broad range of integrated telecommunications services to business
and other high-usage customers in certain metropolitan markets throughout
Europe. GTS presently provides end user services in Russia, the CIS and Central
Europe and carriers' carrier services in Western Europe and has experience in
developing cross-border networks in Western Europe through HER. Through GTS
Business Services -- Western Europe, GTS intends to establish service
capabilities as a reseller in up to 50 additional European metropolitan markets.
In furtherance of its European Services Strategy, in October 1998 GTS hired Les
Harris and Philip Blanchette as President and Vice President, Network Operations
and Engineering, respectively, of GTS Access Services. Since such date, GTS
Access Services has hired certain other key management and technical personnel.
Through GTS Access Services, GTS intends to leverage its experience in
developing and operating local, national and international telecommunications
networks by building, acquiring or leasing technologically advanced fiber optic
networks and establishing CLEC service capabilities in up to 12 metropolitan
markets throughout Europe, as regulatory conditions permit, within three years
after GTS commences implementing its European Services Strategy. Currently, the
regulatory regimes in Europe vary from country to country and some countries do
not permit competitive local exchange carriers to operate. See "Risk
Factors -- Risks Relating to European Services Strategy."
Recent Developments. On November 30, 1998, GTS completed the acquisition
of NetSource. NetSource is a pan-European provider of long-distance
telecommunications services focusing primarily on small-to medium-sized
businesses, with operations in Norway, Sweden, Germany and Ireland, as well as
in The Netherlands, Belgium and Denmark. The acquisition of NetSource provides
the GTS Business Services -- Western Europe line of business with a customer and
revenue base in several key Western European countries, a portfolio of licenses
and interconnection agreements and an entrepreneurial management team.
If the acquisition of Esprit Telecom is consummated, the combined business
will have (i) presence in 19 countries throughout Europe, (ii) increased network
capacity and resilience; (iii) a 500-person sales force, one of the largest
among independent telecommunications providers in Europe, (iv) the ability to
provide a wide array of services, and (v) increased management depth.
Furthermore, the combined business is expected to benefit from reduced network
operations costs, reduced administrative costs and capital expenditure savings.
Market and Business Strategy. GTS believes that the size and growth
potential of the European telecommunications market, and the increasing
liberalization of telecommunications regulations in Europe, offer considerable
opportunities to expand into end-user services into metropolitan markets
throughout Europe.
The size of the European telecommunications services market is estimated to
be approximately $188 billion in 1998. GTS estimates that the total European
addressable market (defined as non-residential core voice, enhanced voice,
non-residential international voice, data, leased line voice and internet) in
1998 is approximately $96.5 billion, which is estimated to grow at a compound
annual growth rate of approximately 13.7% to approximately $306.7 billion by
2007.
Through construction of owned facilities or acquisition or partnership with
other providers, GTS intends to enter up to 12 European metropolitan markets as
a CLEC. GTS' strategy with respect to entry into a
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specific market will be determined through an analysis of a number of
demographic, economic and telecommunications demand and spending
characteristics, including business concentration; presence of governmental,
financial and business end-user customers; local economic trends and prospects;
demand for switched and non-switched telecommunications services; feasibility of
construction; presence of existing and potential competitors; the regulatory
environment; the market's proximity to HER's network; and the presence of
potential CLEC or reseller acquisition candidates. In targeting cities in which
its entry strategy will be the construction of a fiber network, GTS, through GTS
Access Services, will initially focus on cities in which there are no CLEC
competitors or only one other such competitor. GTS Access Services' current
intention is to enter six metropolitan markets by the end of 1999 and to provide
services in up to 12 target metropolitan markets within three years after it
initiates implementing the European Services Strategy. GTS Business
Services -- Western Europe's current intention is to enter 50 metropolitan
markets as a reseller of retail services over the same time period.
GTS expects to use one or more of the following strategies to enter a
market: (i) construction of a fiber-loop network; (ii) purchase or long-term
lease of dark fiber; (iii) obtaining of high frequency microwave licenses for
"wireless fiber," (iv) partnership with or acquisition of a local
facilities-based CLEC or (v) acquisition or development of a local reseller. In
the case of market entry through a reseller, it is GTS' objective to build or
acquire facilities when economically justifiable. There are a number of risks
attendant with each of these strategies and there can be no assurance that GTS
will be successful in pursuing any of these strategies. See "Risk
Factors -- Risks Relating to European Services Strategy" (page 23).
Customers. GTS plans to offer its products and services primarily to
telecommunications-intensive businesses for which reliable telecommunications
services are critical, using GTS' facilities where available and/or reselling
other carriers' facilities as needed. These business segments include financial
services companies, multi-national companies, governmental agencies, resellers,
ISPs, disaster recovery service providers and wireless communications companies.
Products and Services. GTS intends to offer a broad array of competitively
priced, comprehensive services to meet customer telecommunications service
requirements, including private line services, local, national and international
switched telephony services, high-speed LAN interconnection services, virtual
private network services, video transmission services and IP-based services,
including IP telephony, Web hosting and data transmission services. According to
industry sources, bandwidth demand for data in the United States is currently
growing significantly faster than voice, and GTS expects that this trend will
develop in Europe as competitively priced capacity becomes available.
Additionally, GTS intends to develop competitively priced value-added
telecommunications services that are tailored to the specific needs of
individual customers. The types of services that GTS intends to offer include:
Switched Services. Switched services involve the transmission of voice,
data or video to locations specified by end-users or carriers. GTS expects to
have the technological capability to offer a full range of switched service,
including local, national and international calls as well as enhanced services.
GTS intends to own and operate switches and enter into interconnection
agreements with other telecommunication service providers, including HER, in
order to offer to customers cost- effective local, national and international
calling services. Switched service features are expected to include, as allowed
by local regulations, enhanced services such as conference calling, call
forwarding, analog or digital connectivity, desk-to-desk calling, four digit
dialing full network monitoring and maintenance, caller ID, voice mail/messaging
and E-mail to voice-mail conversion.
Non-Switched Services. Non-switched services involve a fixed, dedicated
communications link between two or more specific locations. Commonly this
service is utilized by an end-user to provide a private communications medium
between multiple business facilities or to another end-user/carrier. GTS expects
to provide high capacity, advanced technology to deliver customer traffic with a
lower cost and higher reliability as compared to the local PTO. Through its high
capacity, high reliability and cost-efficient network, GTS intends to provide
non-switched voice, data and video transmission between (i) end users, (ii) end
users and carriers and (iii) multiple carriers, allowing its customers the
option to bypass the older, less efficient technology and higher-priced services
of the incumbent PTOs.
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Other Services. GTS also intends to develop service offerings to take
advantage of emerging market opportunities. Such services are expected to
involve one or more of the following: frame relay, ISDN and ATM services;
IP-based services, including intranet and extranet services, high capacity
internet for multi-media applications, Web hosting, voice over IP and the
establishment of a pan-European IP backbone in alliance with others; calling
card services; and enhanced voice services. These products are expected to be
developed and offered as customer demand dictates and as the relevant regulatory
environment permits. GTS believes that there will be substantial demand for data
and internet services by large business and other high-usage customers, and that
a bundled service offering of national and international data and voice services
will be attractive to this targeted customer base.
Regulatory. GTS' European Services Strategy will subject GTS to significant
additional regulation at the EU, national and local level. GTS Access Services
has applied for licenses to operate as a CLEC in seven major cities in Germany
and has submitted a draft application to the French regulatory authorities,
pursuant to which informal discussions have been conducted with respect to the
greater Paris metropolitan area. GTS' determination as to which markets it may
enter will depend in part on GTS' evaluation of the regulatory regime in such
market. The detailed regulation varies from country to country. Delays in
receiving required regulatory approvals and licenses, or the enactment of
adverse regulations or regulatory requirements, may delay or prevent GTS from
entering a particular market or offering its services in any European market,
restrict the types of services offered by GTS, constrain GTS' deployment of its
networks or otherwise adversely affect GTS' operations. There can be no
assurance that GTS will be able to obtain the necessary regulatory approvals on
a timely basis or that GTS will not otherwise be affected by regulatory
developments, either of which may have a material adverse affect on GTS. See
"Risk Factors -- Risks Relating to European Services Strategy" (page 23).
Competition. The telecommunications industry is highly competitive.
Competition in the telecommunications industry is based largely on price,
customer service, network quality, value-added services and customer
relationships. Competition for the provision of local services in Europe is in
its early stages of development. Generally, PTOs offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. PTOs generally have a number of competitive
advantages over emerging competitors, such as GTS and other CLECs, due to
substantially greater economic and human resources, close ties to local and
national regulatory authorities and control over virtually all local
telecommunications connectivity. Additionally, GTS believes that the market for
the provision of local services is sufficiently attractive to cause additional
CLECs, including multi-national carriers, to enter the market to offer products
and services which would compete with GTS.
GTS will compete with PTOs and, in certain markets, CLECs in the provision
of high quality, integrated telecommunications services to end-users and
resellers. CLEC competitors include, among others, COLT TeleCom Group plc, which
is providing service through networks in London, Frankfurt, Munich, Hamburg,
Berlin, Paris, Zurich, Amsterdam, Brussels, Madrid and Dusseldorf; and MCI
WorldCom, whose pan-European fiber network connects London, Amsterdam, Brussels,
Frankfurt and Paris. Reseller competitors include RSL Communications, Viatel and
Facilicom. GTS believes, based on its experience in providing end-user services
in Russia, the CIS and Central Europe and carrier's services in Western Europe
and in developing cross-border networks in Western Europe through HER, that it
has the knowledge and ability to develop products and services which will be
competitive with other CLECs and resellers in terms of content, quality and
price. However, there can be no assurance that GTS will be able to translate
such experience in other markets in order to compete effectively with PTOs,
CLECs or resellers in the European markets it has targeted. See"Risk
Factors -- Risks Relating to European Services Strategy" (page 23).
Network. In those markets which GTS determines to enter as a
facilities-based CLEC, GTS intends to construct, acquire or lease facilities to
operate advanced, competitive local telecommunications networks employing
current transmission technology with dual ring architecture and central system
monitoring and maintenance. GTS believes that a base of uniform, reliable
networks, which employ the most current technology and support a broad array of
high quality services, will allow GTS to compete cost-effectively against
products and services offered by PTOs and, in certain markets, other CLECs.
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GTS' plan for its basic transmission platform is optical fiber deployed in
rings, equipped with high-capacity SDH equipment. Such rings will provide
redundancy by using dual paths for telecommunications transmissions and will
extend to a customer facility either directly or on a point-to-point link from
the rings. Such rings will finally connect to the customer through
customer-dedicated or shared electronics on or near the customer premises.
Network Construction. Prior to undertaking acquisition or construction of a
network in a particular market, GTS will undertake an analysis of a number of
factors, as discussed above, to determine whether such acquisition or
construction is economically justifiable. Wherever appropriate, GTS will seek to
purchase or lease dark fiber or utilize high-frequency short-haul microwave as a
method of accelerated entry into a selected market.
GTS expects that construction and installation services will be provided by
independent contractors selected through a competitive bidding process. GTS
personnel are expected to provide project management services, including
contract negotiation, construction supervision, testing and certification of
installed facilities. The construction period of a network is expected to vary
greatly, depending on such factors as network route kilometers, number of
buildings involved in the initial installation and local construction
regulations. Upon completion of the first phase of construction, or the initial
loop, GTS expects to commence generating revenue. Further expansion of the
network will be dictated by customer growth and customers' relative proximity to
the initial loop.
The initial capital requirement for GTS Access Services and GTS Business
Services -- Western Europe to implement the European Services Strategy will be
financed with a majority of the proceeds of the July 1998 Offerings received by
GTS. In addition, GTS contemplates that it will raise additional debt financing
through a newly formed subsidiary of GTS, the proceeds of which will be applied
toward the implementation of GTS' European Services Strategy. The size and
timing of such financing has not yet been determined by GTS. GTS cannot estimate
with any degree of certainty the amount and timing of GTS' future capital
requirements for implementing the European Services Strategy, which will be
dependent on many factors, including the success of GTS' European services
business, the rate at which GTS expands its networks and develops new networks,
the types of services GTS offers, staffing levels, acquisitions and customer
growth, as well as other factors that are not within GTS' control including
competitive conditions, regulatory developments and capital costs. GTS believes,
however, that if the European Services Strategy is implemented, it is likely
that GTS will need to raise additional capital. See "Risk Factors -- Risks
Relating to the Combined Business and the Industry -- Additional Capital
Requirements" (page 18) and "-- GTS Management's Discussion and Analysis of
Financial Condition and Results of Operations -- European Services Strategy"
(page 186).
Sales and Marketing. In each of its target markets, GTS intends to
establish its own direct sales force. As GTS will be targeting large financial,
corporate and governmental customers with demanding telecommunications service
requirements, GTS expects that its internal sales force will include dedicated
sales and customer service representatives. The acquisition of NetSource
provides GTS with a sales force for its retail services business of 40 direct
sales personnel and 182 sales agents throughout Europe. If consummated, the
acquisition of Esprit Telecom will add an additional 230 direct sales personnel,
which is expected to grow to 350 in 1999.
Billing and Information Systems. Sophisticated information and processing
systems will be vital to GTS' success. Specifically, GTS will need to develop
systems to enter, schedule, provision, and track a customer's order from the
point of sale to the initiation of service and such systems will need to
include, or interface with, trouble-shooting systems, management, billing,
collection and customer service systems. GTS expects the development of its
systems to require substantial capital and management resources.
CENTRAL EUROPE
In Central Europe, GTS' objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary, the Czech Republic, Slovakia and Romania. In the Czech Republic, GTS
provides outgoing voice services and operates an international gateway and a
data services network. In
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Hungary, GTS operates a nationwide microwave network and a VSAT network, which
GTS believes is the largest VSAT network in Central Europe as measured by number
of VSAT sites. In Slovakia and Romania, GTS provides VSAT services using its
VSAT hub in Hungary. Subject to certain regulatory approvals, GTS has also
obtained a license to provide international data services in Poland and expects
to begin operations during the first quarter of 1999. GTS' strategy is to expand
its service offerings as the regulatory environment permits, leveraging its
existing VSAT and international gateway infrastructure where possible and
providing a broad range of services to its target markets.
Hungary
GTS-Hungary. GTS-Hungary, a 99% owned subsidiary of GTS, is a leading
provider of customized data services offering high quality, reliable virtual
private network services to customers throughout Hungary and, through other GTS
affiliates, other countries in Central Europe. GTS-Hungary provides these
services through VSATs installed at customer sites throughout the country and a
microwave-based high speed overlay network for points in the Budapest
metropolitan area and in Hungary's 18 county capitals. Along with these data
transmission services, GTS-Hungary provides high quality customer service
including (i) significant system integration support in the initial
implementation of the customers' networks and in on-going expansion and
improvements and (ii) an excellent maintenance and technical support service,
which include "rapid response" service calls and 24-hour hub service operations
support, which can be backed by financial guarantees when required.
As of September 30, 1998, GTS-Hungary's VSAT network consisted of
approximately 993 owned and operated VSAT sites which GTS believes makes it the
largest VSAT-based network in Central Europe. GTS believes that its choice of
VSAT technology as a way of quickly deploying a full range of business services
nationwide will allow it to capture key customers and market segments. Such
positioning, GTS believes, will enable GTS-Hungary to expand its service
offerings as the Central European market matures and as regulatory authorities
further privatize and deregulate the telecommunications industry. GTS-Hungary
has recently completed a nationwide expansion of its microwave-based Budapest
overlay network and plans to develop two fiber loops in Budapest. The expansion
will increase GTS-Hungary's revenue base in the region and provide opportunities
to leverage further its other service offerings. There can be no assurance,
however, that this development will be completed on a timely and commercially
feasible basis.
The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 50% of GTS-Hungary's total revenue for the year ended December 31,
1997 and 48% of GTS-Hungary's total revenue for the nine months ended September
30, 1998. GTS-Hungary has also targeted its VSAT network services to business
customers in the domestic service industry and other government organizations.
Although GTS-Hungary continues to diversify its revenue and customer base, the
loss of the Hungarian state lottery as a customer would have a material adverse
effect on GTS-Hungary's business.
GTS-Hungary generally charges its data services customers a flat monthly
fee for a fixed amount of usage and usage-based fees for use above the
contractual amount. Customers are billed in Hungarian forints (indexed to US
dollars) on a monthly basis. In general, GTS-Hungary's strategy is to minimize
the initial customer investment in order to lower the barriers to purchase,
while committing customers to long-term contracts.
GTS-Hungary's major competitors include BankNet, Hungaro-DigiTel and MATAV,
the Hungarian PTO, each of which operates a network with at least 200 VSAT
sites. MATAV offers a broad range of services and has recently targeted the
business sector that GTS serves. Additionally, at least three new joint
ventures, all with international partners, have announced their intentions to
compete in the Hungarian telecommunications industry by leveraging existing
assets from the utility (electric, oil and gas), railway and cable industries.
GTS believes that, while some of its competitors have stronger financial
resources, GTS-Hungary remains the leading VSAT service provider in Hungary in
terms of number of VSAT sites, the size and quality of its infrastructure and
the quality of its service. GTS also believes it has a good reputation for
customer service.
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CZECH REPUBLIC
Czechnet. Czechnet, a wholly owned subsidiary of GTS, offers alternative
international telephony service in the Czech Republic, as well as a full range
of private data services, delivered through a combination of a fully digital
microwave overlay network and an international satellite gateway in Prague and
GTS-Hungary's VSAT network. Through an intercompany arrangement with
GTS-Hungary, Czechnet provides all of the same VSAT services offered by
GTS-Hungary. In addition, Czechnet offers high-speed Internet access service.
Czechnet is also targeting opportunities in Slovakia, based upon the historic
relationship between the Czech and Slovak markets.
The Czechnet network consists of an earth station linked to GTS-Monaco
Access and to British Telecom, a series of point-to-point and
point-to-multipoint microwave connections providing dedicated access to the
buildings served by Czechnet and individual VSATs based on, and controlled by,
GTS-Hungary's hub in Budapest.
Czechnet's target customers include real estate developers, hotels and
multinational companies which require international voice or data services or
Internet connectivity, where both GTS' own services and the services of GTS
partners are sold. Czechnet provides outgoing international voice services and
high-speed Internet access to large commercial buildings in Prague. As of
September 30, 1998, Czechnet had connected 35 buildings in Prague to its private
voice network. International voice services are offered at prices similar to
those of the Czech PTO. Czechnet plans to pursue customers who require
value-added services which may be offered at higher prices and better margins.
Czechnet is licenced to provide international satellite services, leased
line services and data services. It received its operating licenses in 1994 and
1995 and began offering services in 1995. The licenses grant permission to
install and operate up to 150 earth stations and, upon application, an
additional 150 earth stations. The licenses currently prohibit the provision of
switched voice services and the interconnection to public voice, telex and data
networks and telecommunications networks of other providers.
Czechnet is the only alternative international telephony provider licenced
in the Czech Republic. As such, its only licenced competitor is SPT Telecom, the
Czech PTO. Should SPT decide to compete aggressively with Czechnet, it has the
ability to discount prices below those which could be easily sustained by
Czechnet. Czechnet's international telephony business is also subject to
competition from unlicenced callback services, Internet telephony services and
services provided by unlicenced operators. In data services, Telenor, GITY and
Nextel (a subsidiary of SPT Telecom) are Czechnet's three major competitors for
data services in the Czech Republic. GTS believes that its experience in
establishing VSAT services in the region and its emphasis on integrated voice
and data services provides Czechnet with a competitive advantage. Additionally,
GTS' transmission facilities and infrastructure in Hungary and Monaco provide
them with a relatively low cost infrastructure and, as a consequence, greater
pricing flexibility than their competitors.
New Ventures
In September 1998 certain affiliates of GTS acquired 100% of the ownership
interests in Datanet kft., one of the leading Internet service providers in
Hungary. This acquisition has substantially increased GTS' market share in the
residential and business Internet markets in Hungary.
In July 1998, GTS became the largest single shareholder of Dattel, a.s., a
competitive local exchange carrier in the Czech Republic providing portions of
downtown Prague with telephony and leased line services. Dattel is also the
leading member of a consortium of Czech companies operating a fiber optic ring
in Prague.
In September 1998, GTS acquired a substantial minority stake in Catalina
Sp.z.o.o., a Polish company holding an international data services license. This
acquisition is subject to certain regulatory approvals. Catalina, however,
expects to begin operations in the first quarter of 1999.
In January 1999, GTS entered into two transactions to enter the market for
Internet services in Poland. GTS purchased a minority interest in ATOM S.A., an
Internet service provider in Poland. By the end of 1999, GTS contemplates that
it will increase its ownership in this company. In addition, GTS entered into an
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agreement to purchase Internet Technologies S.A., a company that owns 100% of
Internet Technologies Polska Sp. z.o.o., which provides Internet-related
services in Poland. Subject to satisfaction of certain conditions, the
acquisition of this company is expected to occur in February 1999.
RUSSIA AND THE CIS
Overview
GTS is a leading provider of a broad range of telecommunications services
in Russia. GTS' services include international long distance services, domestic
long distance services, high speed data transmission and Internet access,
cellular services and local access services. GTS was among the first foreign
telecommunications operators in the former Soviet Union, where it began offering
data links to the United States in 1986, international long distance services in
1992, local access to its networks in 1994 and cellular services in 1995. GTS
has developed these businesses into a leading provider of telecommunications
service offerings in Russia by building its own infrastructure, including a
fully digital overlay network and interconnections with its local Russian
telecommunications partners.
GTS believes that evolving changes in government policy over the last
several years and the overall inadequacy of basic telecommunications services
throughout Russia have created a significant opportunity. Before 1990, all
international, domestic long distance and local telecommunications in the Soviet
Union were provided by a monopoly state telecommunications company managed by
the Ministry of Posts and Communications. In 1990, the Council of Ministers
established a joint-stock company called Sovtelecom and transferred to it all of
the telecommunications assets and operations of the Soviet Ministry of Posts and
Communications. Following the dissolution of the Soviet Union in 1991, the name
of Sovtelecom was changed to Intertelecom. In 1992, the Russian government
decided to split Intertelecom into several components to foster privatization,
competition and investment. The international and long-distance assets and
operations were combined into Rostelecom, creating a monopolistic service
provider. The local telecommunications assets and operations were broken up into
88 independent regional joint-stock companies, seven of which serve cities,
including the Moscow City Telephone Network and the Petersburg Telephone
Network. Most of the regional companies have a telecommunications trunk operator
and provide domestic long distance service within their service region. Domestic
long distance calls to and from areas outside the companies' service area, as
well as international calls, are switched to and from Rostelecom, which forwards
the calls to and from another regional company or a foreign carrier for
international calls. Exceptions to this rule include the seven city operators.
In Moscow and St. Petersburg, the trunk operators have been isolated into
separate, long distance companies called Moscow MMT and St. Petersburg MMT. All
domestic long distance and international calls originating from or terminating
in Moscow and St. Petersburg are switched through the MMTs, which forward the
calls to and from Rostelecom.
Following the former Soviet Union's transformation from a centralized
economy to a more market-oriented economy, increased demand from emerging
private businesses and from individuals, together with the poor state of the
public telephone network, has led to rapid growth in the telecommunications
sector in Russia and the other independent republics of the CIS. In 1991 the MOC
was established as the Russian successor to the Soviet Ministry of Posts and
Communications to regulate and improve the Russian telecommunications industry.
In 1998, Goskomsvyaz was established as the successor to the MOC. As a result,
Goskomsvyaz succeeded to the MOC's role as the government's representative for
its ownership share of the 88 regional operating companies, the assets currently
held by Svyazinvest (then the monopoly international and domestic long distance
service provider), and the principal regulatory authority for national radio,
television and satellite operating companies. This enabled first the MOC and
later Goskomsvyaz and operating organizations to begin the privatization
process, attract foreign investment and initiate joint ventures with foreign
partners.
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the other
independent republics of the CIS has occurred. Under Russian law, state-owned
enterprises within the telecommunications sector were subject to privatization
but only pursuant to a decision of the Russian government in each individual
case and with the state retaining a certain percentage of the stock of the
privatized entity for three years, subject to extension for national security
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reasons. At present, virtually all of the former state telecommunications
enterprises have been privatized and, subject to the above restrictions, shares
of the newly formed joint stock companies have been sold to the public. Also, a
significant number of private operators provide a wide variety of
telecommunications services pursuant to licenses from Goskomsvyaz to a growing
number of customers throughout Russia. Judging from the sequential numbering of
licenses issued since 1992 more than 10,000 licenses have been granted to
telecommunications operators in Russia, a large portion of which is assumed to
represent licenses reissued to the same operators as a result of their
reorganization or obligation to hold such licenses on counterfeit-proof paper,
among other reasons.
In October 1994, the President authorized the establishment of Svyazinvest
with the stated purpose of fostering greater efficiency and economies of scale
within the industry through competition. As a wholly government-owned company,
Svyazinvest was granted a controlling stake in approximately 85 regional
telecommunications companies in order to compete in these respective markets.
Svyazinvest was also given control of more than 20 million of the 25.5 million
telephone lines in Russia, except in Moscow and St. Petersburg.
In April 1997, President Yeltsin approved the transfer of the federal
government's 51% stake in Rostelecom, as well as similar stakes in Central
Telegraph (the national PTO), the Ekaterinburg City Telephone Network and
Giprosvyaz (a telecommunications research institute), to Svyazinvest. On July
30, 1997, Mustcom Limited, a Cyprus-based company that represents the interests
of a consortium which includes ICFI Cyprus, Renaissance International Limited,
Deutsche Morgan Grenfell, Morgan Stanley, and certain entities affiliated with
an affiliate of George Soros, purchased a 25% stake in Svyazinvest for $1.87
billion. The President had also authorized the sale of another 24% of
Svyazinvest at a future date. This sale was scheduled to occur in the second
half of 1998 and was subsequently opened to foreign investors. However, this
sale was first cancelled and then rescheduled to take place by July 1999 because
of the overall decline in the Russian economy. See "Risk Factors -- Risks
Relating to Operations in Russia and the CIS -- Economic" (page 28). The Russian
government has announced that it will retain a controlling 51% interest in
Svyazinvest.
Goskomsvyaz votes the Russian government's interest in Svyazinvest, which
was reclassified as the State Committee on Telecommunications and Information
Technology during a recent government reorganization. Goskomsvyaz remains the
central body of federal authority in the Russian Federation, having
responsibility for state management of the communications industry and
supervisory responsibility for the condition and development of all types of
communications systems. Its subordinated body, Gossvyaznador, is directly
responsible for supervising the proper operation and maintenance of such
systems.
Despite the recent changes in the Russian telecommunications industry, the
level of telecommunications service generally available from most public
operators in Moscow remains significantly below that available in cities of
Western Europe and the United States, although in recent years, the Moscow local
telephone infrastructure has benefited from significant capital investment. By
1995, there were approximately 16 lines per 100 persons in Russia and 45 lines
per 100 persons in Moscow. In comparison, there were 60 and 58 lines per 100
persons in the United States and Western Europe, respectively. In addition, the
quality of services, reflected as the percentage of digital switching in local
telephone networks, currently is approximately 12% in Russia compared to 65% and
66% in the United States and Western Europe, respectively.
Outside Moscow (and to a lesser extent St. Petersburg), most standard
Russian telecommunications equipment is obsolete. For example, many of the
telephone exchanges are electromechanical and most telephones still use pulse
dialing. The Russian population is over 145 million, of which approximately two-
thirds is concentrated in urban areas. The telecommunications market in Russia
currently includes a number of operators that compete in different service
offering segments -- local, inter-city, international, data and cellular
services. In large measure, the relative lack of economic development in the
regions accounts for the lack of improvement in local telecommunications
infrastructure. Although the regions still generally rely on an outdated
infrastructure inherited from the former Soviet Union, they are starting to
resort to sophisticated sources of finance, such as municipal bond offerings and
leasing, in order to upgrade the infrastructure.
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Businesses in Moscow requiring international and domestic long distance
voice and data services and consumers using mobile telephony have principally
driven growth in the Russian telecommunications industry. This growth has been
most significant as multinational corporations have established a presence in
Moscow and Russian businesses have begun to expand beyond the country's
political and financial capital. The service sector, which includes operations
in distribution, financial services and professional services and tends to be
the most telecommunications-intensive service sector of the economy, is growing
rapidly in Moscow. The telecommunications industry in the outlying regions has
experienced recent growth, principally as a result of growth in the industrial
sector as well as the establishment of satellite offices in the regions by
multinational corporations and growing Russian businesses. The extent of overall
market growth will depend in part on the rate at which the Russian economy
expands, although recent revenue growth in the sector has been significant (in
spite of a declining economy in certain regions) because of increasing traffic
from pre-existing customers and the normalization of tariffs for business
services. It is unclear, however, what the effects of the August 17 Decision and
its consequences will be on the Russian economy. See "Risk Factors -- Risks
Relating to Operations in Russia and the CIS -- Economics" (page 28).
GTS believes it is well-positioned to take advantage of market growth
factors due to (i) its early market entry, (ii) its strong infrastructure
position in Moscow, by far the most important regional market, (iii) the local
market experience of its local partners, (iv) the extent of its existing
customer base and (v) its extensive range of international and domestic
telecommunications services.
Strategy
GTS' objective is to become the premier alternative carrier in Russia and
other key growth markets of the CIS. To attain this objective, GTS has developed
and implemented the following strategy:
Develop Strong Local Partnerships. GTS has developed and continues to
develop its Russian and other CIS business through alliances with experienced
local partners. These ventures combine the management, financial and marketing
expertise of GTS together with its partner's ability to provide infrastructure
and local regulatory experience. GTS believes that these relationships lend it
credibility and increase its ability to anticipate and respond to the evolving
regulatory and legal environment. GTS maintains a significant degree of
managerial and operational control in its joint ventures through its foundation
documents, which enable GTS to develop them in a manner consistent with its
overall strategic objectives.
Expand Customer Base. GTS continues to expand its customer base through the
provision of basic telephone and digital services in markets where such services
are not currently provided. Once they have established a presence in a market,
GTS' ventures seek for opportunities to expand further into neighboring regions
and cities.
Increase Range of Digital Services. As its business customers expand their
operations throughout Russia and the CIS and as their telecommunications needs
become more sophisticated, GTS seeks to increase its revenues by expanding the
range of integrated digital services offered to its customers.
Offer High Quality Telecommunications Service and Customer Service. Subject
to stabilization of the political and economic situation in Russia, GTS will
continue to invest in and build sophisticated high-speed digital networks and
other infrastructure through which customers can gain local access to GTS'
services. In addition to providing advanced, high quality network
infrastructure, GTS emphasizes and offers its customers a level of customer
service which GTS believes cannot be found elsewhere in the market.
To date, GTS has made substantial progress employing this strategy. GTS
provides digital voice, data, Internet and local services in Moscow through its
Sovintel, Sovam and TCM ventures and provides these same services to fourteen
additional Russian cities through its TeleRoss long distance network. GTS
believes that attractive acquisition opportunities currently exist in the
markets in which it operates in Russia and the other independent countries of
the CIS. GTS continuously considers a number of potential transactions, some of
which may involve the contribution of certain of its Russian businesses in
exchange for an interest of equivalent or greater value in the surviving entity
and, if consummated, may be material to GTS' operations and financial condition.
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Operations
GTS provides a broad range of telecommunications services in Russia and
Ukraine, including international long distance services, domestic long distance
services, cellular services, high speed data transmission, Internet access and
local access services. These services are supported by operator assistance,
itemized call reporting and billing, and other value-added capabilities that
leverage GTS' investment in advanced switching, data collection and processing
equipment. GTS also provides customized systems integration, including PABXs,
key systems, wiring and interconnectivity. Dedicated and leased capacity
supplements GTS' own infrastructure, allowing GTS to bypass the severely
congested and poorly maintained local, domestic and long distance circuits of
the Russian and Ukrainian carriers.
Whenever practical, GTS' business units integrate and co-market their
service offerings, utilizing TeleRoss as the long distance provider, Sovintel as
the international gateway, TCM and GTS Cellular for local access, and Sovam as
the data communications and Internet access network for business applications
and on-line services. This integrated marketing approach enables GTS to provide
comprehensive telecommunications solutions to multinational corporations
operating throughout Russia and the other independent countries of the CIS.
The following table sets forth certain operating data related to GTS'
operating ventures in Russia and the Ukraine.
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1996 1997 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Cities In Service................................... 33 40 40 58
Total Voice Minutes (millions)
Inter-city........................................ 15.8 57.1 35.8 73.4
Local............................................. 133.0 269.1 174.4 306.5
International Outgoing............................ 20.5 46.0 31.8 46.8
Incoming.......................................... 33.2 69.9 50.0 35.1
Total Data Customers (thousands).................... 6.2 9.9 8.3 9.0
Total Active Paying Subscribers (thousands)......... 9.8 20.4 14.9 25.2
</TABLE>
Sovintel
GTS owns 50% of Sovintel, a joint venture with Rostelecom, the national
long distance carrier. Sovintel was founded in 1990 by GTS, Rostelecom and GTE
Spacenet, with GTS acquiring GTE Spacenet's interest in 1994. Sovintel markets a
broad range of high quality telecommunications services by (i) directly
providing international direct dial access to over 180 countries and private
line dedicated voice channels and (ii) leveraging the infrastructure and
services of the other GTS ventures, including TeleRoss, TCM and Sovam. In
addition, Sovintel provides and installs for its customers equipment such as
PABXs, key systems and wiring and provides maintenance and other value-added
services. Sovintel customers, which primarily consist of businesses, hotels and
Moscow-based cellular operators, are able to access these telecommunications
services through Sovintel's fully-digital overlay network in Moscow. In
addition, Sovintel continues construction of its St. Petersburg network which is
interconnected to Sovintel's Moscow network and is intended to support
Sovintel's Moscow clients which have a presence in St. Petersburg. Sovintel
serviced over 51,410 Moscow telephone numbers, or "ports," for business
customers and cellular providers and had over 350 employees as of September 30,
1998.
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Sovintel has constructed and operates a fully-digital overlay network in
and around Moscow which consists of (i) an approximately 600-Kilometer fiber
optic ring, (ii) over 430 PABXs linked to the fiber optic ring, (iii) a
fully-digital microwave network, (iv) a wireless local loop and (v) an
international gateway connected to the fiber optic ring. In addition, Sovintel
leases dedicated international long distance channels. Customers are connected
to the Sovintel network via last mile connections to over 430 PABXs that provide
"points-of-presence" in and around Moscow. The PABXs are connected to the
network through a direct fiber connection or a digital microwave network. Some
of Sovintel's new customers are temporarily connected to the network through a
wireless local loop. The wireless local loop provides a competitive advantage
because it allows Sovintel to connect customers to its network more quickly than
alternative methods. As these customers are provided permanent connections to
Sovintel's network through direct connections to the PABXs, additional customers
are rolled onto the wireless local loop.
[GTS SOVINTEL MOSCOW NETWORK CHART]
After a customer is connected to the Sovintel network, local telephone
services are provided through the Sovintel fiber optic ring's interconnection
with the switches of either TCM or MTU Inform. These switches provide access to
local telephone service in Moscow through interconnections with the local
telephone network, which is operated by MGTS and the principal Moscow cellular
providers. Sovintel provides its customers access to domestic long distance
service through the TeleRoss long distance network, or through Rostelecom's
network in cities not currently served by TeleRoss. The Sovintel international
gateway primarily provides international service, transmitting international
traffic via dedicated international leased long distance channels. Sovintel's
customers also can receive high speed data services through Sovintel's
interconnection with the Sovam data network. Sovintel has obtained a license to
provide large business customers in Moscow and St. Petersburg high speed data
services and Internet access through private line channels, thus
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complementing Sovam's regional offering and supporting its customer base in
Moscow and St. Petersburg. Accordingly, from a customer's perspective, Sovintel
offers a broad range of telecommunication services.
The following table sets forth certain operating data related to Sovintel's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Minutes Of Use(1)
International
Number of Minutes.............. 10,516 20,839 43,664 30,628 43,440
Average Rate Per Minute........ $ 2.06 $ 1.55 $ 1.12 $ 1.19 $ 0.96
Domestic Long Distance
Number of Minutes.............. 2,047 10,098 26,606 16,946 35,663
Average Rate Per Minute........ $ 0.86 $ 0.65 $ 0.52 $ 0.55 $ 0.45
Moscow (Local) Fixed Line
Number of Minutes.............. -- -- 3,501 2,302 5,113
Average Rate Per Minute........ -- -- $ 0.05 $ 0.06 $ 0.03
Moscow (Local) Cellular
Number of Minutes.............. 21,478 83,673 118,447 82,333 76,835
Average Rate Per Minute........ $ 0.06 $ 0.08 $ 0.08 $ 0.08 $ 0.08
Incoming
Number of Minutes.............. 3,839 24,306 43,626 34,571 20,841
Average Rate Per Minute........ $ 0.58 $ 0.28 $ 0.30 $ 0.29 $ 0.29
Ports
Approximate Number of Ports
(cumulative)................... 6,079 29,646 43,976 40,563 51,410
Approximate Number Of Private Line
Channels (cumulative)
International..................... 26 89 201 162 306
Inter- and Intra-City............. 26 103 243 184 438
Approximate Equipment Sales
(thousands)....................... $ 1,400 $ 2,200 $ 3,400 $ 2,500 $ 3,651
</TABLE>
- ---------------
(1) Minutes in thousands. Amounts include minutes among affiliates.
Services. Sovintel markets a broad range of high quality telecommunications
services by (i) directly providing international direct dial access to over 180
countries and private line dedicated voice services and (ii) by leveraging the
infrastructure and services of the other GTS ventures. Sovintel's services
include:
Switched International, Domestic Long Distance and Local
Services. Customers are provided switched international long distance services
directly through Sovintel's international gateway in Moscow and its leased long
distance channels. Domestic long distance services are marketed by Sovintel and
provided either through the TeleRoss long distance network or, where the call
destination is not served by TeleRoss, through Rostelecom's network. Local call
service is provided by Sovintel indirectly as a result of its interconnection,
through TCM or MTU Inform, with the Moscow city telephone network. Based on its
familiarity with the market, GTS believes that Sovintel's services are
distinguished by a higher level of quality than those of its competitors,
particularly with respect to call completion rates for its domestic long
distance and local call services. In addition, GTS trains its employees to
provide customer service at a level which is comparable to that provided by
Western telecommunications companies.
Private Line Channels. Private line channels, which are provided over
dedicated leased lines, are principally utilized by customers with high-volume
data traffic needs, such as Sovam and large data providers. Private line
customers have access to intra-city service in Moscow through Sovintel's fiber
optic ring and to
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inter-city service between Moscow and St. Petersburg via fiber optic line or
channel leased by Sovintel, in each case benefitting from Sovintel's high
quality infrastructure. Private line domestic long distance service is provided
through TeleRoss and, for cities not served by TeleRoss, through Rostelecom.
International private line service is provided through dedicated leased fiber
channels from Rostelecom.
Equipment Sales, Installation Services and Project Planning and Management
Services. In providing the above services to its customers, Sovintel installs
and maintains equipment on its customers' premises, including PABXs, key systems
and wiring. Sovintel also provides project planning and management services,
including system design and management, to its customers.
World Access Service. Customers are able to access Sovintel's international
long distance services through the World Access Card, which provides customers
either direct or calling-card-based portable access to domestic and
international long distance service. The calling card can be used in 18 Russian
cities, including Moscow and St. Petersburg, and 25 countries.
Sovintel complements its service offerings by providing a wide range of
value-added services, including operator assistance, maintenance and customer
support and itemized call reporting and billing.
Customers and Pricing. Sovintel's customers consist primarily of
high-volume business and professional customers, such as IBM, Credit Suisse
Group and Reuters, other multinational corporations and Russian enterprises,
including a number of premium Moscow hotels and other telecommunications
carriers. In addition, Sovintel is one of the primary providers of domestic and
international long distance service for the major cellular service providers in
Moscow, including VimpelCom (Bee-Line), MTS and Moscow Cellular. Sovintel's
customers typically demand a higher level of service than generally available in
the market. Sovintel further provides to its large corporate customers data
services such as frame relay and Internet access contracted from Sovam in order
to offer an "one-stop shopping" telecommunications solution to these customers,
who increasingly require this type of service.
The pricing structure for international and domestic long distance calls is
based upon traffic volume and overall market rates, with Sovintel's rates
varying on the duration and destination of the call. Local calls, other than
calls placed to cellular phones, are completed without charge. Sovintel expects
to continue its practice of not charging to complete local calls unless and
until MGTS begins to charge for completion of such calls. Sovintel prices its
international long distance services competitively with those of its principal
competitors. Sovintel's average revenue per minute for outgoing international
long distance calls has declined from approximately $2.35 per minute for the
year ended December 31, 1994 to approximately $0.96 per minute for the nine
months ended September 30, 1998. Sovintel is experiencing increased pricing
pressure from competitors. Sovintel prices domestic long distance services in
line with those of its principal competitors. Due to its obligations under
certain agreements with affiliated entities, however, Sovintel's margins for
these services had been declining, though Sovintel recently succeeded in
reversing this trend by achieving lower settlements through least-cost routing.
Prices for domestic long distance services have increased significantly over the
last several years, although such prices stabilized in the second half of 1996.
Sovintel's private line services are priced competitively. Sovintel provides
private line channels by releasing lines it leases from Rostelecom. Sovintel
leases the lines from Rostelecom at wholesale rates and to its customers at
prices in line with Rostelecom's retail rate. In addition, Sovintel provides
private line channels through "one-stop shopping" arrangements with
international carriers, such as AT&T, British Telecom and Cable & Wireless.
Customers are billed monthly, with larger-volume customers receiving
discounts of up to 25%. GTS bills customers using Sovintel services, either in
US Dollars or Russian rubles. All underlying pricing is based on US Dollar
tariffs. For customers invoiced in rubles, Sovintel has the contractual ability
to recover devaluation losses that exceed 3% by re-invoicing the customer. To
the extent permitted by law, payment is made either in US Dollars or in rubles
at the ruble/dollar exchange rate at the time of payment, plus a conversion
charge in order to minimize the impact of currency fluctuations. To the extent
Sovintel receives remittances in rubles, Sovintel will have higher ruble cash
and receivable balances which will expose it to correspondingly greater exchange
risk. See "Risk Factors -- Risks of Conducting Business in Foreign Currencies"
(page 34). In addition, due to the ruble devaluation that was part of the August
17 Decision and the attendant scarcity of US Dollars, there may be a lower
general level of remittances to Sovintel in US Dollars. Sovintel currently
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bills on an invoicing system that was internally developed. Currently, the
system is adequate for Sovintel's present customer base; however, GTS is
evaluating alternatives for upgrading the system in anticipation of future
growth.
Sales and Marketing. Sovintel's sales and marketing strategy targets large
multinational and Russian businesses both directly and through contacts with
real estate developers and business center managers in the greater Moscow area.
These developers and managers typically determine which telecommunications
service provider will service their respective properties. By identifying and
building relationships with these developers and managers at an early stage
(typically up to one year prior to the completion of a new building project),
Sovintel seeks to enhance the likelihood of winning the service contract. In
addition to its traditional target market, Sovintel has recently begun to market
its services to smaller businesses. Sovintel utilizes a departmentalized sales
force in order to focus its sale efforts on the different segments within its
target market. The sales force is comprised of 17 account managers, all of whom
specialize in serving specific targeted industries. Dedicated marketing, project
management and customer support comprised of 23 personnel provide technical
support, customer service, training, market monitoring and promotional functions
for Sovintel. Sovintel's sales and marketing personnel are paid through a
combination of salary, commissions and incentive bonuses.
Ownership and Control. Sovintel is a joint venture between a wholly owned
entity of GTS and Rostelecom, with each having a 50% ownership interest. Under
Sovintel's charter, GTS and Rostelecom each have the right to appoint three of
the six members of Sovintel's managing board. Rostelecom has the right to
nominate the Director General (the highest ranking executive officer at
Sovintel), while GTS has the right to nominate the First Deputy Director General
(the next-highest ranking executive officer at Sovintel). In practice, the
Director General and the First Deputy Director General together perform the role
of a chief executive officer. Certain business decisions, including the adoption
of Sovintel's annual budget and business plan as well as the distribution of
profits and losses, require the approval of both GTS and Rostelecom. Neither GTS
nor Rostelecom are obligated to fund Sovintel's operations or capital
expenditures. Losses and profits of Sovintel are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1998, GTS and Rostelecom have each made equity contributions
of $1.0 million to Sovintel. The Sovintel joint venture agreement does not have
an expiration date. See "Risk Factors -- Dependence on Certain Local Parties;
Absence of Control" (page 32) and "GTS Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting" (page 173).
TCM
Subsequent to June 30, 1998, GTS increased its beneficial ownership of TCM
to 95%. TCM, a joint venture founded in 1994, provides a licensed numbering plan
and interconnection to the Moscow city telephone network for carriers needing
basic local access service in Moscow. GTS' partner in TCM is MTU-Inform, a
Russian telecom operator. TCM is currently licensed to provide 100,000 numbers
in Moscow, of which over 78,000 have been leased. However, TCM was unable to
lease an additional 22,000 numbers to VimpelCom, TCM's primary customer, during
1998 as it had previously expected it would. TCM is seeking alternative lessees
for these numbers, but there can be no assurance that these numbers will be
leased in a timely manner. TCM has completed agreements required to construct
and provide an additional 50,000 numbers. The construction started in 1998 and
is expected to be completed in the third quarter of 1999. TCM's switching
facilities are fully integrated with the networks of Rostelecom, Sovintel, and
MGTS, allowing it to provide high quality digital service to its customers.
Services. TCM acts as a local gateway by providing numbers and ports to
carriers in Moscow, including Sovintel, VimpelCom, MTS and Moscow Cellular, and
thus providing interconnectivity to the Moscow city telephone network. Access to
the Moscow city telephone network provides customers with the higher quality and
broader range of services available in Moscow, such as the services provided by
Sovintel. Access from outlying regions is typically obtained through a domestic
long distance service provider such as TeleRoss. See "-- Sovintel" (page 148)
and "-- TeleRoss" (page 153).
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Customers and Pricing. TCM provides its services on the wholesale level to
primary carriers. VimpelCom is TCM's primary customer and accounts for
substantially all of TCM's revenues. Hence the loss of VimpelCom as a customer
would have a material adverse effect on GTS. TCM also provides ports to Sovintel
and to other network operators. TCM's ports are leased principally to carriers
in Moscow. Although local access services are priced upon the basis of supply
and demand factors in the local market, in general, for each port cellular
operators pay an approximately $360 installation fee and a $15 flat monthly fee
plus a per minute charge for traffic while other carriers pay a larger initial
fee of approximately $500 and a monthly fee of approximately $25. Local access
services are typically provided pursuant to five-year contracts that may be
renewed upon expiration for additional one-year periods. TCM has entered into an
agreement with Sovintel pursuant to which Sovintel bills and collects for
TCM-Sovintel joint customers, with Sovintel remitting such amounts (less
applicable settlement charges and administrative costs) to TCM. The rapid growth
of cellular services in markets like Moscow has placed a premium on new numbers,
which has translated into attractive prices for these numbers. TCM, however,
believes these prices will decline over time.
Ownership and Control. GTS' indirect interest in TCM is represented by its
100% interest in a holding company, which owns 95% of TCM. This structure
provides GTS with 95% beneficial ownership interest in TCM. At both the holding
company and TCM level, losses and profits are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
None of the operative charters and agreements relating to the holding company or
TCM have expiration dates. See "Risk Factors -- Dependence on Certain Local
Parties; Absence of Control" (page 32) and "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting" (page 173).
TeleRoss
TeleRoss, which began operations in 1995, consists of a wholly owned
subsidiary of GTS that operates a domestic long distance network (the "TeleRoss
Operating Company") and 14 joint ventures that are 50% beneficially-owned by GTS
that originate traffic and provide local termination of calls (the "TeleRoss
Ventures" and, together with TeleRoss Operating Company, "TeleRoss"). The
TeleRoss domestic long distance network serves 15 major Russian cities,
including Moscow and, through VSAT technology, 21 customers located outside
these cities. TeleRoss provides digital domestic long distance services and
other value-added services through its own infrastructure as well as access to
Sovintel's international gateway services and access to the Moscow city
telephone network through TCM's switching facilities. Sovam uses the TeleRoss
digital channels to provide regional data service and has co-located its access
facilities with TeleRoss. As of September 30, 1998, TeleRoss employed
approximately 231 persons of which approximately 98 people were based in Moscow
and approximately 133 people were deployed in the regions in which TeleRoss
operates.
TeleRoss's licenses cover the city of Moscow and a total of 38 regions
throughout Russia. Most of the 14 cities in which TeleRoss primarily operates
are regional capitals, with an aggregate population of approximately 13 million.
TeleRoss's licenses cover the entire region surrounding these cities, with
populations totaling approximately 41 million persons, and GTS intends
eventually to extend the reach of the TeleRoss network beyond the regional
capitals to the surrounding areas. The cities in which TeleRoss currently offers
its services are: Arkhangelsk, Ekaterinburg, Irkutsk, Khabarovsk, Krasnodar,
Nizhny Novgorod, Novosibirsk, Samara, Syktyvkar, Tyumen, Ufa, Vladivostok,
Volgograd and Voronezh.
The TeleRoss network architecture involves local city switches connected to
remote earth stations which communicate via satellite or satellite connection to
a Moscow-based hub. This hub consists of the network control center, earth
station equipment, multiplexing equipment and a switch. The earth stations, hub
and related equipment are owned by TeleRoss, which gives TeleRoss the
flexibility to redeploy network assets to other locations as necessary. The hub
interconnects to Sovintel's network providing access to Sovam's data networks,
TCM's switching facilities and Sovintel's international gateway, which
transports international traffic via dedicated international leased satellites
and fiber channels and provides access to Rostelecom's long distance networks.
Outside of Moscow, TeleRoss's local joint venture partners provide
interconnection to the local public telephone networks in each of the cities it
serves. In addition to providing services through its
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network, TeleRoss currently serves 21 customers in additional sites through VSAT
technology which links the customers via satellite to the Moscow hub.
The following table sets forth certain operating data related to TeleRoss's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -----------------
1996 1997 1997 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
Minutes of Use(1)
Domestic Minutes (thousands).................. 4,035 23,233 14,440 31,244
Average Rate Per Domestic Minute.............. $ 0.99 $ 0.63 $ 0.66 $ 0.51
International Minutes (thousands)............. 272 744 486 806
Average Rate Per International Minute......... $ 2.76 $ 2.47 $ 2.56 $ 2.01
Number of Cities Served(2)...................... 13 14 14 15
World Connect Dial/Russia
Number of Connect Dial Ports.................. 472 1,112 961 2,106
Average Revenue Per Port Per Month............ $ 767 $ 370 $ 378 $ 339
Moscow Connect
Number of Ports............................... 49 78 56 66
Average Revenue Per Port Per Month............ $1,165 $ 1,358 $ 1,513 $ 1,295
Dedicated Circuits
Number of Dedicated Channels.................. 33 60 43 109
Average Price Per Channel..................... $4,553 $ 4,140 $ 4,264 $ 2,816
World Access Service
Number of World Access Card Users............. 3,929 4,595 4,360 3,675
Average Revenue Per Card Per Month............ $ 52 $ 48 $ 45 $ 57
VSAT Services
Number of VSATs............................... 12 24 20 21
</TABLE>
- ---------------
(1) Includes minutes among affiliates.
(2) Includes connection to Moscow.
Services. Through its network and VSAT offerings, TeleRoss offers the
following services:
Carriers' Carrier Services. TeleRoss provides services as a carriers'
carrier, providing domestic long distance carrier services to cellular
operators, Sovintel, the TeleRoss Ventures' regional partners and competitive
bypass operators from the cities in which the TeleRoss Ventures operate, and to
customers in remote sites using VSAT stations. These services are provided to
and from Moscow, and are provided by TeleRoss at wholesale rates competitive
with those offered by Rostelecom. TeleRoss also provides private line channels
to Sovam in cities where the TeleRoss Ventures operate. In addition, TeleRoss
has recently received a license to provide international private line service.
World Connect Dial/Russia Connect Dial. Customers in TeleRoss's cities are
provided dedicated local access to the regional TeleRoss switch through lines
leased from the TeleRoss Venture's regional joint venture partner. These
customers then have access to the domestic long distance service provided by
TeleRoss, international long distance service provided by Sovintel and are fully
integrated into the local phone networks operated by the applicable TeleRoss
Venture's partner and to the Moscow city telephone network through TCM.
Moscow Connect. Customers are provided with dedicated last mile connection
over lines leased from the regional joint venture partner and connected to a
local TeleRoss switch. The TeleRoss network and its interconnection to TCM
provide customers with a Moscow dial tone which allows users in remote locations
better access to Moscow's advanced telecommunications infrastructure. In
addition, Moscow Connect service provides better call quality at lower rates for
domestic and international long distance. Moscow Connect also
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<PAGE> 162
facilitates communications between users and their Moscow-based associates as
calls can be made to and from Moscow without the use of prefixes and without
long distance charges accruing to the Moscow-based parties.
Dedicated Circuits. Customers are provided with point-to-point clear
channel circuits within Russia and internationally through the TeleRoss backbone
and its interconnection with Sovintel's international gateway in Moscow.
Dedicated circuits are generally used by news services, banks and other
commercial customers who require high capacity and high quality service. This
service can be used for voice or data, depending on the user's needs. In
providing dedicated circuits, TeleRoss competes against other alternative
communications providers; however, TeleRoss believes that it has a price
advantage over its competitors because of the use of its own infrastructure and
the bulk purchase of satellite capacity.
World Access Service. TeleRoss and Sovintel co-market World Access Service
to their customers in each of the cities they serve through two products: World
Access Direct and World Access Card. Through World Access Direct, TeleRoss
customers can access domestic long distance and international service anywhere
within the customer's city through the local telephone network. The World Access
Card is a calling card which allows TeleRoss customers portable access to
domestic long distance and international service from 18 Russian cities,
including Moscow and St. Petersburg, and 25 countries. TeleRoss provides this
service through Sovintel's infrastructure.
VSAT Services. For customers that are located outside the cities serviced
by TeleRoss or that cannot be physically linked to TeleRoss's regional switches,
TeleRoss offers VSAT service which connects these customers directly to
TeleRoss's Moscow-based hub through a VSAT antenna installed at the customer's
location. TeleRoss provides both dedicated and switched services through these
VSAT arrangements.
In addition to continuing the development of its core domestic long
distance business, TeleRoss's strategy includes the development of local access
networks to capitalize on demand for local phone service and to capture
additional customers for its long distance and value-added service offerings.
Outside Moscow, TeleRoss has primarily pursued a strategy whereby it develops
its own intra-city trunking network with copper based or fiber optic facilities
leased from the regional joint venture partners. As of September 30, 1998,
TeleRoss, in conjunction with regional joint venture partners, has installed
approximately 30 kilometers of fiber optic cable in three cities and had plans
to install an aggregate of approximately 100 kilometers of additional fiber
optic cable in up to an additional six cities over the next 21 to 27 months.
Because of the economic crisis in Russia, GTS is reconsidering the advisability
of proceeding with such plans. Customers who obtain local phone numbers from
TeleRoss's venture partners are directly interconnected to the local telephone
company and to GTS' long distance network and Sovintel's international gateway
and may obtain a broad range of value-added services offered by GTS.
Customers and Pricing. TeleRoss's customers include businesses and other
telecommunications service providers such as carriers, PTOs, cellular operators,
Sovintel and Sovam. TeleRoss's business customers consist of large multinational
and Russian businesses in each of the regions it services, as well as medium and
small-sized businesses. Between 1993 and mid-1996, consumer prices in TeleRoss's
industry increased significantly as a result of Rostelecom raising its prices in
an effort to raise capital for investment and development of its network
infrastructure, although prices have stabilized over the past years. During the
first nine months of 1998, TeleRoss increased sales to carriers, which sales
were made at wholesale rates, resulting in a decrease in the average rate per
minute for TeleRoss. The financial crisis and consequent ruble devaluation
versus the US Dollar has affected the competitiveness of TeleRoss's business.
The regional operations, whose prices are defined in rubles need local
government approval for price increases. It is uncertain that substantial
increases will be granted soon, implying that TeleRoss may have to reduce its
tariffs substantially to remain competitive. Rostelecom may be more able to
raise its prices to higher levels. TeleRoss, however, also anticipates that to
remain competitive, it may have to reduce its wholesale tariffs for the
carriers' carrier business.
Although its tariffs are set in US Dollars, TeleRoss historically has
billed its customers in rubles. Since August 17, 1998, TeleRoss has signed new
contracts with the majority of customers to return to US Dollar invoicing. To
the extent permitted by law, payment is made either in US Dollars or in rubles
at the ruble/ dollar exchange rate at the time of payment, plus a conversion
charge in order to minimize the impact of
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<PAGE> 163
currency fluctuations. To the extent it receives remittances in rubles, TeleRoss
will have higher ruble cash and receivable balances which will expose it to
correspondingly greater exchange risks. See "Risk Factors -- Risks of Conducting
Business in Foreign Currencies" (page 34). In addition, due to the ruble
devaluation that was part of the August 17 Decision and the attendant scarcity
of US Dollars, there may be a lower general level of remittances to TeleRoss in
US Dollars.
Sales and Marketing. TeleRoss markets its services to carriers and
businesses through direct sales channels. As of September 30, 1998, TeleRoss
employed 42 sales and marketing personnel, approximately 15 of whom are based in
Moscow with the remainder deployed regionally to identify and contact
prospective customers. The Moscow-based sales and marketing personnel are
organized into industry groups in order to better identify and serve customer
needs. One or two sales representatives typically serve each region. TeleRoss's
sales efforts are supported by market research and promotional activities
carried out at the joint venture level and tailored to the specific market base
of each region. TeleRoss's marketing strategy is to attract carrier customers by
focusing on those carriers with high volume minutes operating in regions where
TeleRoss has a competitive advantage. Through cross-marketing agreements with
Sovintel and Sovam, TeleRoss markets many of the other service offerings of GTS'
Russian businesses to customers throughout its service regions. Billing
functions and the monitoring of quality control and technical issues are
performed centrally through the Moscow-based hub.
Ownership and Control. TeleRoss consists of the TeleRoss Operating Company,
and the 50% beneficially owned TeleRoss Ventures. GTS controls TeleRoss
Operating Company (which holds the network license) and co-manages the TeleRoss
Ventures under the terms of the applicable TeleRoss Ventures' foundation
agreements and charters. Under some of these charters, GTS generally has the
right to designate the Chairman of the board of directors, and GTS' local
partner has the right to designate the Deputy Chairman, for the first two-year
term (and thereafter GTS and the local partner nominate the Chairman and Deputy
Chairman for approval by the entire board on a rotating basis). The foundation
agreements and charters do not have expiration dates. While GTS has significant
influence within these ventures, decisions, including the decision to declare
and pay dividends, are generally subject to GTS' partner's approval. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control" (page 32).
Neither GTS nor its respective joint venture partners are obligated to fund
operations or capital expenditures of the TeleRoss Ventures. Losses and profits
are allocated to the partners in accordance with their ownership percentages, in
consideration of funds at risk. As of September 30, 1998, GTS and its partners
had each made equity contributions aggregating $1.9 million to the various
TeleRoss Ventures. Contributions made by the partners include contributions of
cash and intangible assets, such as local support and assistance with respect to
the issuance of licenses in the name of the TeleRoss Operating Company. In
addition, the various TeleRoss Ventures had outstanding loans and interest of
$0.44 million to GTS and $2.3 million to Citibank as of September 30, 1998. In
addition, as of September 30, 1998, GTS had made equity contributions of $5.8
million to the TeleRoss Operating Company and the TeleRoss Operating Company had
outstanding loans and interest of $34.0 million to GTS and $7.0 million to
Citibank. See "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Methodology -- Profit and Loss
Accounting" (page 173).
Sovam
Sovam is a venture that is wholly owned by GTS. Sovam was founded in 1990
as a venture equally owned by GTS and the IAS. In 1992, Cable & Wireless
acquired a 33% ownership interest in Sovam, which interest was subsequently
acquired by GTS in 1994, bringing GTS' ownership interest to 66.7%. GTS
purchased IAS's interest in Sovam in February 1998, thereby making Sovam a
wholly owned subsidiary of GTS. Sovam provides high-speed data communications
services, electronic mail and database access over a high-speed packet/frame
relay network in 47 major Russian and CIS cities. Sovam also offers Russia On
Line, the first Russian language Internet service, which provides direct access
to the Internet as well as access to a wide range of local and international
information services and databases. (Russia On Line(TM) is a trademark of GTS.)
As of September 30, 1998, Sovam had approximately 1,500 data service customers
and approximately 3,914 Russia On Line customers (which includes approximately
345 trial subscribers). Sovam employed
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approximately 158 persons in Moscow and other regions of the CIS as of September
30, 1998. Sovam provides equipment and maintains marketing and technical support
personnel at each location either through its own infrastructure or through the
infrastructure of partners, including TeleRoss.
In addition to serving the Moscow and St. Petersburg markets, Sovam
co-locates its operations with the TeleRoss Ventures, offering its services in
all TeleRoss cities, and also serves 32 additional cities in Russia and the CIS.
Sovam operates under its own license within Russia while applicable local
partner licenses provide services elsewhere in the CIS. The local partners of
the TeleRoss Ventures provide facilities, assist in the provision of leased
lines to Sovam customers that allow them to connect with Sovam's local data
switches and also provide technical support. Sovam utilizes Sovintel's
international capabilities and, in TeleRoss-served locations, TeleRoss's
satellite overlay network, to take data through its local data switches and over
the leased lines to its customers. Customers may obtain virtual private data
networks without investing in, acquiring, installing and maintaining their own
network nodes and switches.
The following table sets forth certain operating data related to Sovam's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
NINE MONTHS
AT AND FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Basic Data Service
Percentage of Total Sovam Revenue....... 91% 79% 81% 80% 83%
Number of Customers..................... 1,587 1,726 1,571 1,667 1,500
Average Revenue Per Month Per
Customer............................. $ 201 $ 446 $ 728 $ 675 $1,077
Number of Cities in Service............. 11 25 30 30 47
Equipment and Hardware Sales Percentage of
Total Sovam Revenue..................... 8% 14% 8% 10% 6%
Russia on Line Service Percentage of Total
Sovam Revenue........................... 1% 7% 11% 10% 11%
Number of Subscribers(1)................ 407 1,854 3,159 2,606 3,569
Average Revenue Per Month Per
Subscriber........................... $ 49 $ 52 $ 64 $ 67 $ 65
</TABLE>
- ---------------
(1) In addition to the subscribers included above, Sovam frequently connects
potential Russia On Line subscribers on a complimentary one-month trial
basis. As of September 30, 1998, there were approximately 345 such potential
subscribers.
Services. Sovam's service offerings are comprised of data services,
equipment and hardware sales and its Russia On Line services.
Data Services. Sovam provided high speed connectivity, electronic mail,
database access and fax services to approximately 1,500 customers as of
September 30, 1998, in Russia and the CIS. Sovam customers can use electronic
mail systems to send and receive messages and data and to access public and
private data networks (including the Internet) worldwide. Customers may obtain
virtual private data networks without investing in, acquiring, installing and
maintaining their own network nodes and switches. In addition, Sovam offers its
customers value-added data services. For example, Sovam offers "one-stop
shopping" for hardware, software, installation and maintenance support and
products such as "SovamMail," an electronic mail service which allows customers
to use Sovam's data network to send telex or facsimile messages to overseas
recipients worldwide. Data services are currently available in 47 cities
throughout Russia and the CIS, including Moscow, St. Petersburg, each of the
cities served by TeleRoss and some cities outside of the TeleRoss network.
Equipment and Hardware Sales. Sovam sells communications equipment and
hardware, and provides related installation, maintenance and support functions,
to its customers. Sovam's primary customers in the equipment and hardware market
are banking clients who use the equipment to interface with Sovam's network.
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Russia On Line. Russia On Line is the first Russian language, as well as
the first dual language, graphical user interface online service for accessing
domestic and international information sources designed to appeal to a wide
commercial audience. This service, which is distributed via GTS' domestic long
distance infrastructure, provides customers with access to international
databases (including the Internet), as well as an array of proprietary Russian
and English language information services, such as news stories and market
updates. Sovam had 3,914 Russia On Line subscribers (which includes
approximately 345 trial subscribers) as of September 30, 1998. Sovam has
developed a modified version of Netscape's Internet browser, which utilizes the
Cyrillic alphabet, as part of its Russia On Line package. Sovam's enhanced
Russian version of Netscape's browser is provided by Sovam to its customers
under a distribution agreement with Netscape. In addition, Sovam has also
entered into agreements with equipment manufacturers, including an affiliate of
Motorola, to include Russia On Line software with their products.
Customers and Pricing. Sovam's data communications customers consist
primarily of banking and financial services organizations and large
multinational companies, while Sovam's Russia On Line customers consist of a
wide variety of commercial enterprises. Continued deterioration in the political
and economic environment in Russia may adversely affect Sovam's customer base.
See "Risk Factors -- Risks Relating to Operations in Russia and the CIS" (page
27). Sovam charges customers an installation fee when service is commenced and a
charge for any equipment which is installed. Thereafter, customers are billed on
a monthly basis for leased line fees, port access charges and charges for data,
and Russia On Line services rendered during the month. Sovam prices data
services on a two-tier structure with high volume users generally negotiating a
flat-rate fee and lower volume users paying a volume-based fee which on average
was $446 and $728 per subscriber in 1996 and 1997, respectively. Russia On Line
customers pay a fixed monthly access charge plus an additional volume-based fee.
Sovam bills customers in dollars and, customers remit payment in rubles and, to
the extent permitted by law, in US dollars, with a 2% to 5% conversion fee added
to ruble-denominated payments. To the extent it receives remittances in rubles,
Sovam will have higher ruble cash balances which will expose it to
correspondingly greater exchange risks. See "Risk Factors -- Risks Specific to
GTS -- Risks of Conducting Business in Foreign Currencies" (page 34). In
addition, the ruble devaluation that was part of the August 17 Decision and the
attendant scarcity of US Dollars may cause a lower general level of remittances
to Sovam in US Dollars.
Sales and Marketing. Sovam employs a dedicated sales and marketing force
comprised of three non-Russian nationals and 33 Russian nationals, 28 of which
are based in Moscow with the remainder deployed in the other Russian and CIS
regions. Sovam pays salespersons a fixed salary supplemented by sales
commissions and performance-based bonuses. Sovam's sales efforts are focused
primarily on the banking and financial communities and large multinational
companies, although small- and medium-sized entities are also emerging as
potential Sovam customers. Bundled service packages, which include Sovam's data
and Internet service, Sovintel's international service and TeleRoss's long
distance service, are frequently marketed together in order to offer customers a
comprehensive telecommunications solution. In addition to data communications
services, Sovam offers its customers hardware, installation and maintenance
service and is a distributor of Northern Telecom equipment.
Ownership and Control. At December 31, 1997, GTS owned 66.7% of Sovam and
IAS owned the remaining 33.3%. GTS purchased IAS's interest in Sovam in February
1998, thereby making Sovam a wholly owned subsidiary of GTS. See "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Accounting Methodology -- Profit and Loss Accounting" (page 173).
GTS Cellular
GTS Cellular operates cellular businesses in Russia and Ukraine. In Russia,
GTS has a wholly owned subsidiary Vostok Mobile (which is organized in The
Netherlands), which currently operates AMPS cellular companies in Russian
regions located primarily west of the Urals under the trade name Unicel. Vostok
Mobile owns, between 50% and 100% of these cellular joint ventures (the "Unicel
Ventures") in Russia. In addition, through Vostok Mobile, GTS participates in
PrimTelefone, a 50%-owned joint venture that operates an NMT network in
Vladivostok and other cities in the Primorsky region of Russia. In April 1998,
PrimTelefone was also awarded a license to operate GSM-1800 in 14 regions of the
Russian Far East, including Vladivostok,
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Khabarovsk and Irkutsk. In Ukraine, GTS has an approximately 57% beneficial
interest in Golden Telecom which operates a GSM-1800 cellular network in Kiev,
and an international overlay network in Ukraine. GTS Cellular entities possess
licenses covering major Russian and Ukrainian markets (excluding Moscow and St.
Petersburg) with an aggregate 1997 population of approximately 42 million
people.
GTS currently offers cellular services in the following regions as of
September 30, 1998:
<TABLE>
<CAPTION>
GTS' NUMBER OF
ECONOMIC ACTIVE
OPERATING COMPANY INTEREST(1)(2) CITY SUBSCRIBERS
----------------- -------------- ---- -----------
<S> <C> <C> <C>
Russia
Vostok Mobile(2)
Arkhangelsk Mobile Networks.................. 50.0% Arkhangelsk 646
Astrakhan Mobile............................. 50.0% Astrakhan 871
Altaisvyaz(3)................................ 50.0% Barnaul 330
Chuvashia Mobile............................. 70.0% Cheboksary 785
Lipetsk Mobile............................... 70.0% Lipetsk 809
Murmansk Mobile Network...................... 50.0% Murmansk 859
Penza Mobile................................. 60.0% Penza 517
Saratov Mobile............................... 50.0% Saratov 1,638
Parma Mobile................................. 50.0% Syktyvkar 476
Volgograd Mobile............................. 50.0% Volgograd 1,724
Votec Mobile................................. 50.0% Voronezh 2,055
Mar Mobile................................... 50.0% Yoshkar-ola 339
Novotel(4)................................... 100% Novgorod 169
PrimTelefone................................. 50.0% Vladivostok(5) 5,112
Ukraine
Golden Telecom............................... 56.8%(6) Kiev 8,836
------
Total................................ 25,166
======
</TABLE>
- ---------------
(1) Represents the indirect economic interest of GTS in each entity.
(2) Prior to September 26, 1997, GTS owned 62% of Vostok Mobile. On September
26, 1997, GTS acquired the minority interest in Vostok Mobile, making Vostok
Mobile a wholly owned subsidiary of GTS. Vostok Mobile owns between 50% and
100% of a series of 14 operational cellular joint ventures in various
regions in Russia. As of June 30, 1998, GTS' Vostok Mobile had established
new joint ventures which had received additional licenses to operate AMPS
networks in the regions of Bashkiria (Ufa), Yaroslavl, Bryansk and Kostroma.
Because of the current Russian economic crisis, GTS has decided not to
pursue operating under these licenses.
(3) Joint venture acquired in October 1997; cellular operations commenced in
February 1998.
(4) Acquired and started commercial service in April 1998.
(5) Includes Vladivostok and other cities in the Primorsky region.
(6) GTS has completed a restructuring of the capital and ownership of Golden
Telecom, which gives GTS an approximately 57% beneficial ownership.
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The following table sets forth certain operating data related to GTS
Cellular's operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1996 1997 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Vostok Mobile
Total Active Paying Subscribers.............. 6,884 11,527 9,562 11,218
Average Service Revenue Per Subscriber Per
Month..................................... $ 128 $ 159 $ 158 $ 144
Minutes of Use(1)(thousands)................. 10,561 27,771 18,800 26,262
Population Covered by Licenses (thousands)... 18,400 18,400 18,400 30,192
Population Covered by Networks (thousands)... 6,500 6,500 6,500 8,198
Subscriber Penetration of Population Covered
by Networks............................... 0.11% 0.18% 0.15% 0.14%
PrimTelefone
Total Active Paying Subscribers.............. 2,822 5,162 3,907 5,112
Average Service Revenue Per Subscriber Per
Month(2).................................. $ 236 $ 201 $ 199 $ 186
Minutes of Use(1)(thousands)................. 6,919 14,270 9,108 16,204
Population Covered by Licenses (thousands)... 2,200 2,270 2,200 13,334
Population Covered by Networks (thousands)... 1,175 1,175 1,175 1,170
Subscriber Penetration of Population Covered
by Networks(2)............................ 0.24% 0.44% 0.39% 0.44%
Golden Telecom Cellular Network Total Active
Paying Subscribers........................... 121 3,664 1,438 8,836
Average Service Revenue Per Subscriber Per
Month..................................... $ 62 $ 160 $ 185 $ 143
Minutes of Use(1)(thousands)................. 9 5,085 2,261 23,214
Population Covered by Licenses (thousands)... 4,500 4,536 4,500 4,536
Population Covered by Networks (thousands)... 1,669 2,507 1,669 2,507
Subscriber Penetration of Population Covered
by Networks............................... 0.01% 0.15% 0.09% 0.35%
Overlay Network Minutes of Use(1)(thousands)... -- 4,909 2,232 13,381
Number of Ports.............................. -- 751 555 1,566
Average Revenue Per Minute................... -- $ 0.34 $ 0.36 $ 0.25
</TABLE>
- ---------------
(1) Includes minutes among affiliates.
(2) Active Paying Subscribers differ from previously reported totals, which
included blocked subscribers. Active Paying Subscribers is the more accurate
portrayal of true revenue base. Vostok Mobile and PrimTelefone 1997 numbers
have been adjusted to reflect this difference.
Vostok Mobile. Through Vostok Mobile, GTS currently operates 14 cellular
joint ventures in Russia. Vostok Mobile owns between 50% and 100% interests in
each of the 14 Unicel Ventures with, in most cases, regional telephone companies
owning the remaining ownership interest. The Unicel Ventures, except
PrimTelefone, each operate an AMPS-based cellular network, which was chosen
principally because of the lower licensing fees.
AMPS technology is widely used by other cellular networks throughout
Russia, making roaming commercially feasible. The Unicel Ventures have entered
into roaming agreements with other AMPS-based cellular providers, which allow
their subscribers to manually roam throughout Russia. Manual roaming, as opposed
to automated roaming, requires subscribers to notify their local cellular
providers of their travel plans in order to receive roaming capability. In the
first quarter of 1998, Vostok Mobile, Vimpelcom and Millicom
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entered into an agreement in principle to cooperate in the establishment of a
clearing center to support nationwide automatic AMPS roaming. Since executing
the agreement, such operators, in conjunction with other AMPS operators, have
been cooperating with Goskomsvyaz to define the terms and conditions under which
AMPS operators may offer automated roaming services under their current
licenses. GTS is unable to predict the final terms and conditions under which
AMPS operators will be allowed to offer automated roaming, but believes that the
clearing center will be established and that AMPS operators will be permitted to
introduce automated roaming in the first half of 1999.
Each region in which the Unicel Ventures operate has the potential for at
least five licensed operators, including one operator for each of the AMPS, NMT
and GSM cellular standards and two operators in the DCS cellular standard, and
GTS is experiencing increased competition and expects such competition to
increase further. Each of the Unicel Ventures operates independently within
uniform guidelines established by Vostok Mobile. The Unicel Ventures employ
local engineering and marketing personnel, which helps the ventures maximize
their presence in their respective markets and maintain quality control. Vostok
Mobile and its ventures employed approximately 448 persons as of September 30,
1998, with 390 persons employed regionally.
PrimTelefone. PrimTelefone, a 50% owned GTS subsidiary, conducts GTS'
cellular operations in Vladivostok with the local electrosvyaz which owns the
remaining 50%. PrimTelefone began operations in 1995 and operates an NMT-450
network in Vladivostok and four other cities in the Primorsky region.
PrimTelefone entered and penetrated the Vladivostok market by leveraging its
network design and full interconnection with the city telephone network. As a
result, PrimTelefone's active subscriber base was 5,112 as of September 30,
1998, capturing approximately half of the Vladivostok cellular market.
PrimTelefone has also updated its switch and billing system, which allows it to
offer automated roaming. PrimTelefone competes with a GSM operator and an AMPS
operator, both of which are fully interconnected to the city telephone network
and provide wide city coverage. PrimTelefone employs approximately 65 persons
which include dedicated sales, marketing and customer service personnel.
PrimTelefone holds licenses for NMT-450 and GSM-1800 to provide cellular
service to regions having populations of approximately 2.2 and 11.1 million
people and, as of September 30, 1998, its cellular network covered an area with
a population of approximately 1.2 million people. PrimTelefone received the
GSM-1800 license for the Russian Far East in April 1998. PrimTelefone has plans
to expand its NMT network's coverage and to deploy a GSM-1800 network to include
all major population centers in the Russian Far East over the next five years,
but is reconsidering them in light of the current economic crisis in Russia.
On April 27, 1998, the PKGCN issued the PKGCN Letters. As requested in the
PKGCN Letters, on April 28, 1998, PrimTelefone's management submitted a
compliance plan to the PKGCN specifying measures to be undertaken to bring
PrimTelefone's network into compliance with Gossvyaznadzor requirements and a
timetable for doing so. On April 29, 1998, the PKGCN agreed to the compliance
plan. To date, PrimTelefone's management has continued to timely perform its
obligations under the compliance plan and believes that the plan will be
completed on schedule. PrimTelefone's management has obtained approvals for new
frequency plans for certain base stations cited in the PKGCN orders. See "Risk
Factors-- Risks Relating to Operations in Russia and the CIS" (page 27).
On May 13, 1998, a local division of the Ministry for Internal Affairs
opened the PKMIA Investigation, a criminal investigation under Article 327 of
the Russian Federation Criminal Code against certain employees of PrimTelefone
concerning the use of forged state documents in connection with an application
for a frequency plan submitted (and subsequently abandoned) by PrimTelefone. On
June 22, 1998, several employees of PrimTelefone, among others, were interviewed
by a militia investigator in connection with this matter. On November 15, 1998
the investigator decided to suspend the investigation for lack of a person to be
charged and recommended that the matter be closed, subject to the concurrence of
the local prosecutor. PrimTelefone's management intends to cooperate fully in
this investigation until the matter is closed.
Although no assurance can be provided, GTS does not believe that either the
PKGCN Letters or the PKMIA Investigation will have a material adverse effect on
GTS' business, results of operations or financial condition.
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Golden Telecom. GTS owns 75% of an intermediate holding company which holds
an approximately 49% interest in Golden Telecom, giving GTS an indirect
approximately 37% economic interest in Golden Telecom. The remaining
approximately 52% interest in Golden Telecom is owned by three Ukrainian
companies and a Ukranian national. One of the Ukrainian companies, which is a
wholly owned indirect subsidiary of GTS, owns 20% of Golden Telecom. As a
result, GTS' total economic interest in Golden Telecom is approximately 57%.
Golden Telecom is co-managed by GTS and its Ukrainian partners, with such
partners appointing the General Director and GTS appointing the Chief Operating
Officer, Chief Financial Officer and two Business Line directors. The current
General Director has been active in the development of the telecommunications
industry in Ukraine. Through Golden Telecom, GTS participates in the operation
of a cellular network and an international overlay network. With approximately
153 employees, Golden Telecom markets its services and closely monitors
technical and quality-related issues.
Cellular network. Golden Telecom operates a cellular network in Kiev under
the trade name Golden Telecom. The operation utilizes DCS-1800 cellular
technology and operates under a cellular license that covers Kiev City and Kiev
Oblast. Golden Telecom began cellular operations in 1996 by covering the city
center of Kiev and expanded its coverage to include the entire city in 1997.
Golden Telecom provides GSM cellular roaming with 25 cellular operators
worldwide, with the majority of roaming traffic coming from European countries.
Roaming agreements have also been signed with another nine operators and the
Iridium consortium.
Golden Telecom holds a license to provide cellular service to a region
having a population of approximately 4.5 million people and, as of September 30,
1998, its cellular network covered an area with approximately 2.5 million
people.
Overlay network. Golden Telecom provides local exchange carrier services
and international gateway services through its overlay network in Kiev. Golden
Telecom currently owns and operates a partitioned mobile switch for both its
cellular and overlay businesses. A second switch has been ordered and was
commissioned in 1998.
Golden Telecom has 14 central offices in the city and also provides last
mile connections (both copper and fiber optic) from the central offices to
customers. A 50-Kilometer fiber optic ring consisting of a main loop and two
sub-rings has been constructed in Kiev. Golden Telecom plans to extend the total
fiber optic network. Local traffic is routed to the local telephone network.
International outgoing and incoming traffic is routed via fiber optic cable to
the GTS-Monaco Access international gateway, Sovintel in Moscow and several
other international operators. Golden Telecom emphasizes its high quality
service and markets primarily to multinational companies, real estate developers
and hotels.
Sales and Marketing. The GTS Cellular entities have direct sales teams and
have also entered into agreements with local distributors to more effectively
reach their target markets. Particular emphasis is placed on product branding.
Vostok Mobile's sales and marketing efforts are focused on the branding of its
trade name, Unicel, which is marketed and promoted at the local level by each of
the Unicel Ventures. By promoting the Unicel trade name, local ventures can
emphasize their relationships with Vostok Mobile and the other Unicel Ventures,
allowing customers to view the Unicel Ventures as integrated parts of a larger
cellular organization rather than as lone, regional operators. Golden Telecom
operates under the trade name Golden Telecom.
Customers and Pricing. The customers of the various GTS Cellular Ventures
are primarily large, mid-sized and start-up businesses and wealthy individuals.
Increases in the number of customers for GTS Cellular's ventures are typically
linked to the economic health of the region in which such ventures operate.
Cellular service is generally a premium service in the cities in which GTS
Cellular operates and is priced as such. All GTS Cellular Ventures price their
service in US dollars and accept payment in local currency. Each venture begins
with at least two tariff plans, a "standard" tariff plan and a "premium" tariff
plan, which includes a fixed amount of airtime at a discounted per-minute rate.
Each plan prices late night and weekend calls at off-peak rates. GTS expects
that prices will decrease as competition increases. Connection fees are
minimized in order to reduce license fees in AMPS regions (which are partially
calculated by reference to connection fees), as well as to keep market entry
costs low. The GTS Russian and Ukrainian cellular ventures
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record cellular accounts in US dollars, and customers remit payment in rubles
and hryvnas, respectively, at the exchange rate on the date of the bill and, in
instances permitted by law, in US dollars. Payments in hryvnas are applied at
the rate of exchange on the date of payment. In order to lessen risks to its
receivables, GTS and its cellular ventures typically require advance payment
from customers with prepayments averaging approximately six to eight weeks of
service per customer. To the extent remittance is made by customers in rubles
and hryvnas, the GTS Cellular Ventures will have higher local currency cash and
receivables balances which will expose them to correspondingly greater exchange
risks. See "Risk Factors -- Risks Specific to GTS -- Risks of Conducting
Business in Foreign Currencies" (page 34). In addition, the ruble devaluation
that was part of the August 17 Decision and the attendant scarcity of US Dollars
may cause a lower general level of remittances to GTS Cellular in US Dollars.
The subsequent ruble devaluation in Russia also caused a significant price
increase in ruble terms (prices are recorded in dollars and paid in rubles) and
a resulting adverse effect on the customer base development.
Ownership and Control. GTS Cellular's Russian and Ukrainian operations are
conducted through ventures which require partner approval for most decisions.
The applicable foundation agreements and charters do not have expiration dates.
See "Risk Factors -- Dependence on Certain Local Parties; Absence of Control"
(page 32). Neither GTS nor any of its respective partners in its Russian or
Ukrainian operations are obligated to fund operations or capital expenditures.
Losses and profits of all such ventures are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1998, GTS and its partners had made equity contributions
aggregating $13.5 million and $10.2 million, respectively, to the various GTS
Cellular Ventures. Contributions made by the partners include contributions of
cash and intangible assets, such as local support and assistance with respect to
the issuance of licenses in the names of each of the GTS Cellular Ventures. In
addition, the various GTS Cellular Ventures had outstanding loans of $17.8
million to GTS as of September 30, 1998. See "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting" (page 173).
Licenses and Regulatory Issues
Telecommunications operators in Russia are nominally subject to the
regulations of Goskomsvyaz, the successor of the Russian Ministry of
Communications, and its subordinated bodies, Gossvyaznadzor and the State Radio
Frequency Commission. As a practical matter, these national telecommunications
authorities as well as certain regional and local authorities generally regulate
telecommunications operators in their jurisdictions through their power to issue
licenses and permits.
The Communications Law sets out a comprehensive legal and regulatory
framework for the sector. It also sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. Separate
legislation implements this institutional framework.
Goskomsvyaz issues licenses to provide telecommunications services on the
basis of a decision by the Licensing Commission at Goskomsvyaz. Goskomsvyaz has
generally issued no new licensing regulations since the enactment of the
Communications Law, and in practice Goskomsvyaz continues to issue licenses
based on the pre-existing licensing regulations (the "General Licensing
Regulations"), except licenses to provide cellular services (the "Cellular
Licensing Regulations"). According to the Licensing Regulations, licenses for
rendering telecommunications services may be issued and renewed for periods
ranging from 3 to 10 years and several different licenses may be issued to one
person. Under the Cellular Licensing Regulations, licenses for rendering
cellular services may be issued only on the basis of a competitive tender for
longer periods, which range from 5 to 15 years. Once the licenses are received,
the licensee is required to register its right to hold and operate under the
license with Gossvyaznadzor, the national authority responsible for monitoring
compliance with regulatory and technical norms. Renewals may be obtained upon
application to Goskomsvyaz and verification by appropriate government
authorities that the licensee has conducted its activities in accordance with
the licenses. Officials of Goskomsvyaz have fairly broad discretion with respect
to both the issuance and
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renewal procedures. The Communications Law as well as the General and Cellular
Licensing Regulations provide that a license may not be transferred or assigned
to another holder. Regional authorities also exercise some influence especially
in the issuance of AMPS licenses because AMPS has been designated a "regional
standard." In August 1995, the Russian government created Svyazinvest, a holding
company, to hold the federal government's interests in the majority of Russian
local telecommunications operators. In addition, entities such as Svyazinvest at
the federal level, as well as other entities at the oblast and krai levels
(administrative regions within Russia) and Moscow and St. Petersburg exercise
significant control over their respective local telephone networks, and may
therefore affect the licensing process.
License procedures for GTS' cellular services include frequency licensing
from Goskomsvyaz through a two step process. A license must first be obtained
from Goskomsvyaz for permission to operate mobile cellular services on a
commercial basis in a specific standard and frequency bandwidth. Thereafter, an
approval to use specific frequencies within the band must be received from the
State Radio Frequencies Commission. Once the licenses are received,
Gossvyaznadzor confirms the rights of an operator to offer radio frequency
transmissions on specific frequencies, administers type acceptance procedures
for radio communications equipment and monitors compliance with licensing
constraints. Both the General and the Cellular Licensing Regulations require GTS
to obtain additional permits with respect to the use of equipment and the
provision of services.
Telecommunications laws and regulations in Ukraine are similar in many
respects to those of Russia, but are subject to greater risks and uncertainties.
Regulations currently prohibit foreign entities from directly owning more than
49% of any telecommunications operating company. GTS' Ukrainian joint venture
agreements provide it with the option of purchasing an additional 1% of the
cellular network if these rules are liberalized. The Ukrainian government has
imposed substantial frequency permit fees in connection with providing GSM
service in Ukraine, and Golden Telecom has paid a $2.9 million frequency license
fee on Golden Telecom's license. There can be no assurance that additional fees
will not be imposed in the future upon the reissuance and/or renewal of such
license. See also "Risk Factors -- Risks Relating to Operations in Russia and
the CIS" (page 27).
GTS' subsidiaries and ventures hold the following licenses in Russia and
Ukraine which are materially significant to their operations:
Switched Services. In Russia, GTS indirectly holds two licenses for
switched services. The first license was reissued to Sovintel in November 1996
and authorizes Sovintel to operate as an international overlay network with the
ability to interconnect with the Moscow region and St. Petersburg PSTN. This
license ultimately requires Sovintel to provide service to at least 50,000
subscribers and expires in May 2000. It was amended in February 1997 to cover
the Leningrad region. The second license was reissued to TeleRoss, a wholly
owned subsidiary of GTS in October 1998, for provision of intercity services in
40 regions including the city of Moscow with ability to interconnect with the
PSTN. In Kiev, Ukraine, GTS holds a license for provision of overlay network
services, including international services, in the name of its affiliate, Golden
Telecom. In addition, Sovintel is an ITU RPOA, which enables it to maintain a
separate dialing code (7-501) that can be directly dialed from over 170
countries. Sovintel's status as an RPOA also enables it to terminate calls
directly with other operators.
Leased Circuits. In September 1996 the MOC issued to Sovintel a five-year
license to lease local, intercity and international circuits in the territory of
Moscow, the Moscow region and St. Petersburg, valid until September 2001. The
total number of circuits leased is in excess of 500 and may be increased up to a
total authorized capacity of 2,500.
Data Services. In November 1998, Goskomsvyaz reissued to Sovam a 5 1/2-year
license to provide data transmission services via a dedicated network to a
number of regions covering a large portion of Russia. The license permits a
network capacity of not less than 14,000 customers and allows it to interconnect
with other data transfer networks in Russia.
Local Access Services. In January 1997, the MOC licensed TCM to provide
local telephone service in Moscow to not less than 100,000 subscriber local
access lines. The license expires in May 2006. TCM has
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received authorization from Goskomsvyaz to construct an additional 50,000
numbers. TCM has also completed negotiations with MGTS to interconnect these
numbers with the Moscow city telephone network. TCM is currently discussing with
Goskomsvyaz whether an amendment to its license is necessary to add these
numbers to its license.
Cellular Services. In connection with cellular operations, Russian law
apportions the responsibility for regulating and licensing cellular businesses
between national and regional regulators. National telecommunications regulators
have been assigned the responsibility of regulating and licensing cellular
businesses utilizing the GSM and NMT-450 cellular standards prevalent in Europe.
These regulators have auctioned licenses to provide these services to a number
of ventures that have included large, well capitalized western
telecommunications providers such as US WEST and Nokia during the last four
years. Regional telecommunications authorities have been given the rights to
supervise the observance of licenses by cellular businesses utilizing AMPS
cellular standard service. However, AMPS licenses are issued by the MOC based on
the recommendations of regional administrations. GTS believes that, in many
instances, cellular operators obtaining AMPS standard licenses, particularly
those in second tier cities, pay license fees that are lower than those paid for
the GSM and NMT-450 "national standards". Licenses for cellular providers have a
term of approximately 10 years. It is unclear whether the competitive tender
requirement in the new Cellular Licensing Regulations will apply to all cellular
operators or only those utilizing the GSM and NMT-450 standards.
GTS' 14 Russian cellular companies have licenses which expire between 2005
and 2008. One of the companies initially received an operating license in 1994,
five companies initially received an operating license in 1995, five companies
initially received an operating license in 1996, and one company initially
received an operating license in 1997, and one company has renewed its license
in 1999 for an extended term of more than 8 years. Additionally, Vostok Mobile
has received licenses for five cities where it intends to begin operations later
this year, if economic conditions improve.
Golden Telecom holds a license for provision of DCS-1800 mobile services in
the Kiev oblast.
Competition
Overview. GTS faces significant competition in virtually all of its
existing telecommunications businesses in the CIS. Many of GTS' competitors and
potential competitors, which include large multinational telecommunications
companies, have substantially greater financial and technical resources than GTS
and have the ability to operate independently or with global or local partners
and to obtain a dominant position in these markets. GTS believes that it has
certain competitive advantages in each of these markets because of its operating
history, its ability to bundle a broad range of telecommunications services in
the region and its ability to make rapid decisions in pursuing new business
opportunities and addressing customer service needs. GTS also believes that its
local partnerships and reliance on nationals in the management of its businesses
and joint ventures provide it with better knowledge of local political and
regulatory structures, cultural awareness and access to customers.
International Services. Sovintel faces significant competition from more
than ten other existing service providers in Moscow, including Rostelecom and
joint ventures between local parties and multinational telecommunications
providers. Large competitors include the "Combellga" joint venture, an RPOA
operator in which Alcatel and the Belgian PTO participate as foreign investors,
"Comstar," a joint venture between GPT Plessey and MGTS, providing services
similar to those provided by GTS, TelMos, a joint venture between AT&T, MGTS,
Global One, through its Moscow based ventures, and Peterstar, in Petersburg,
which is part of the PLD Telekom group. Several smaller companies, such as
DirectNet and Aerocom, provide high-volume and carrier's carrier services in
Moscow. Golden Telecom competes in the switched international traffic market
with the Kiev electrosvyaz and UTel, a joint venture that includes Western
partners with substantial capital and technical resources who together hold a
dominant share of the Kiev market. GTS expects that market consolidation will
take place among the competitive field in international services.
Domestic Long Distance Services. GTS believes its major competitors in the
Russian domestic long distance market consist of Rostelecom, the electrosvyazs,
including those which are partners in GTS' TeleRoss Ventures, and a variety of
ventures that include foreign partners with substantial financial resources.
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The most significant of such competitors include: Global One, through its
regional operations; Rustel, a venture that includes Rostelecom, other Russian
partners and International Business Communication Systems, a Massachusetts
telecommunications firm; Belcom, a private company in which Comsat has a
majority interest and which provides VSAT services primarily to the energy
sector; Satcom, a Russian joint venture licensed to provide local, long distance
and international service over private and public switched networks; Teleport
TP, a satellite overlay company jointly owned by Rostelecom and Petersburg Long
Distance that provides satellite teleports in cities throughout Russia; and
Comincom, a Russian private venture. In the Russian Far East, TeleRoss competes
with Vostok Telecom, which is owned by the Japanese companies KDD and NIC and
certain Russian partners; and Nakhodka Telecom, which is owned by Cable &
Wireless and certain Russian partners.
GTS both cooperates and competes with Rostelecom. Rostelecom provides only
international and long distance services to international carriers and regional
electrosvyazs, and does not provide end-to-end customer services. GTS provides
last mile, account management, and transit services for Rostelecom in Moscow,
and uses Rostelecom channels and switches for both international and long
distance services. GTS provides long distance and international services on an
end-to-end basis, using service elements of Rostelecom, the electrosvyazs and
its own resources. However, Rostelecom does compete with TeleRoss, in that
TeleRoss provides intercity services to customers, using satellite channels
provided by other state agencies (Intersputnik), and provides transit services
to various electrosvyazs, on a traffic overflow basis.
GTS believes that it enjoys a number of competitive advantages in the
Russian domestic long distance market, the most important being the maturity of
its international and data service businesses in Russia. This provides GTS with
access to the services, customers, products, licenses and facilities of its
other businesses. GTS also believes that it has more experienced management, a
more comprehensive strategy to build out a nationwide long distance network and
stronger relationships with many regional telephone companies and with satellite
capacity providers, such as Intersputnik, than most of its competitors.
Data Services. Sovam has several primary competitors in the market for data
services: Global One, which began packet-switched service in Moscow and St.
Petersburg in June 1992, under the Sprint Networks venture; Demos, an Internet
service provider; and Relcom, a cooperative affiliation of computer users that
relies on an older generation of technology that supplies slower and lower-cost
messaging facilities to customers (primarily domestic commodities traders) that
do not require higher levels of service. In addition, MCI and Rostelecom have
recently announced their agreement to create a national Internet access network
utilizing Rostelecom's domestic network and MCI's international infrastructure.
Several voice operators including Sovintel have also announced the intention to
provide Internet access and other data services. Although Sovam's business has
grown quickly, GTS believes that Global One is the market leader. GTS believes
that other potential competitors, including foreign PSTNs, Infotel, Infocom and
Glasnet, are also active in this market.
Although GTS faces significant competition in this market, it believes that
it enjoys certain competitive advantages, including the ability to reach a wide
area throughout Russia, innovative service offerings such as Russia On Line, the
maturity of its business in the key banking services segment, high levels of
customer service and support, and high speed digital channels.
Local Access Services. GTS believes that its major competition in the
Moscow local access market consists of a number of ventures with Western
partners, including Telmos (which includes AT&T), Comstar (which includes GPT
Plessey) and Combellga. However, since TCM has obtained an allocation of up to
150,000 numbers, GTS believes that TCM will account for a substantial proportion
of the new capacity to come onto the market within the next five years.
Cellular Services. Most Russian cellular markets have the potential for at
least five licenced operators, including one operator for each of the GSM and
NMT-450 cellular standards, which Russia has adopted as national standards, one
operator using the AMPS cellular standard, which has been set as a regional
standard and two operators in the DCS Cellular Standard. Many large Western
telecommunications operators, including U S WEST, Deutsche Telekom, STET and
Millicom, have participated in auctions for licenses to provide GSM and NMT-450
cellular service to certain significant Russian urban centers. In addition, a
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CDMA auction recently occurred which could result in one or more CDMA "fixed
wireless" providers entering the markets, where GTS has cellular operations. In
Ukraine, Golden Telecom competes primarily with an NMT-450 and GSM-900 operator,
a D-Amps operator, and a national DCS cellular standard operator, a CDMA
operator.
ASIA
GTS does not currently own or operate significant telecommunications assets
in Asia.
China
Through Shanghai V-Tech Telecommunications Systems Co., Limited ("V-Tech"),
a venture in which GTS holds a 75% interest, GTS provides financing, operational
consulting, technical and engineering services to a Shanghai-based VSAT network
operator. With respect to V-Tech, in addition to GTS' initial equity
contribution of $3.75 million, GTS committed to fund up to an additional $3.0
million (all of which has been funded by the end of the third quarter of 1997).
The joint venture expires in April 2015, and profits and losses are allocated
according to ownership interests in consideration of funds at risk. See "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology -- Profit and Loss Accounting" (page 173).
GTS has reached an agreement to sell its ownership interest in V-Tech in
consideration of an equity interest in the purchaser of GTS' interest in such
venture. Consummation of such sale is subject to certain conditions precedent.
GTS China Investments LLC, a company in which GTS holds a 75% interest and
in which an affiliate of a shareholder of GTS owns a 25% interest, holds an
indirect 63% interest in Bejing Tianmu Satellite Communications Technology Co.
Limited ("Bejing Tianmu") which has provided technical, operational and
financial support for a tourist industry VSAT network operated by the minority
holder in Bejing Tianmu. The VSAT license of that partner was revoked in
December 1998. Accordingly, Bejing Tianmu no longer provides the support for the
network described above and GTS has no plans to make additional investments or
to arrange additional investments in Bejing Tianmu. GTS China Investments LLC
had made an initial equity contribution of $8.75 million in Bejing Tianmu. See
"GTS Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology -- Profit and Loss Accounting" (page 173).
India
GTS' operations in India are conducted through C-Datacom International,
Inc. ("CDI"), a wholly owned subsidiary which provides digital international
private line communications to targeted business customers to and from India for
multiple applications, including data and voice.
EMPLOYEES
On September 30, 1998, GTS, its consolidated subsidiaries and joint
ventures in which GTS participates, employed approximately 1,935 persons. GTS
believes its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. GTS believes that its relations
with its employees are good.
Although GTS' employees are not unionized, unions represent employees of
GTS' railroad partners in HER. Under the agreements contemplated between HER and
its railroad partners, some of these employees will be required to construct and
maintain certain portions of the HER network. There can be no assurances that
unionized employees of HER's partners will not experience labor unrest.
PROPERTIES
GTS leases, under long-term leases, office space to serve as sales office
and/or administrative facilities, including its 15,000 square-foot headquarters
in McLean, Virginia with a five year lease expiring December, 2000. GTS has
entered into a new lease for its headquarters in McLean covering 33,000 square
feet,
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which lease will expire September, 2005. GTS expects to relocate to the new
space in 1999 and plans to sublease its current offices. GTS maintains regional
headquarters offices in Moscow and Budapest, as well as facilities in McLean,
Virginia and London. HER is headquartered just outside of Brussels, Belgium.
HER leases, under long-term leases, portions of railroad, utility and other
rights-of-way for its fiber-optic routes. HER is creating a fiber optic network
consisting of optical fiber pairs, which are leased under long-term leases, and
technical sites leased under long-term leases. See "Description of
GTS -- Western Europe -- HER" (page 123).
LITIGATION
In addition to routine legal proceedings incidental to the conduct of its
business, GTS, GTS-Hungaro and GTS-Hungary are named as defendants in an action
captioned USH Ventures and USH Telecom, L.L.C. v. Global TeleSystems Group, Inc.
and GTS-Hungaro, Inc., Civil Action No. 97C-08-86, commenced in August 1997,
which is currently pending in the Superior Court of the State of Delaware in and
for New Castle County. The complaint alleges breach of contract and interference
with a business relationship. On May 21, 1998, the Superior Court of the State
of Delaware denied GTS' motion to dismiss the claim. While it is not possible at
this time to make a meaningful assessment of the outcome of this litigation,
based upon information currently available and upon consultation with counsel,
GTS does not believe that the outcome of this litigation will have a material
adverse effect upon the financial condition of GTS.
On March 27, 1998, V-Tech brought a claim for approximately $1.1 million
against Gilat Satellite Networks, Limited, the vendor of a Ku-band VSAT hub and
system which V-Tech purchased in 1996, in an arbitration proceeding under the
Rules of Arbitration of the ICC International Court of Arbitration. V-Tech has
demanded in the request for arbitration that Gilat accept return of the
equipment, which V-Tech has not accepted or commissioned because it has failed
to meet contract specifications, and refund purchase amounts already paid under
the contract, plus other sums. On June 2, 1998 Gilat filed a counterclaim
against V-Tech seeking the balance due under the contract and other alleged
damages, in the aggregate amount of $685,000. Gilat has stated its intention to
join GTS as a third-party respondent to its counterclaim. Although it is not
possible at this time to make an assessment of the outcome of the arbitration
proceeding, GTS does not believe that Gilat's counterclaim, even if successfully
asserted against GTS, would have a material adverse effect upon GTS' financial
condition.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GTS
The following selected historical consolidated financial data as of and for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from
GTS' audited Consolidated Financial Statements. The following unaudited selected
historical consolidated financial data as of September 30, 1998 and for the
three and nine months ended September 30, 1997 and 1998 are derived from GTS'
unaudited Consolidated Financial Statements. The selected financial data
presented below should be read in conjunction with "GTS Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Prospectus.
Under generally accepted accounting principles, many of GTS' ventures are
accounted for by the equity method of accounting. Under this method, the
operating results of the ventures are included in our Consolidated Statement of
Operations as a single line item, "Equity in (losses) earnings of ventures." GTS
recognizes 100% of the losses in ventures where we bear all of the financial
risk (which includes all of our significant ventures except for Sovintel and,
historically, HER). Also, the assets, liabilities and equity of the ventures are
included in GTS' Consolidated Balance Sheets as a single line item "Investments
in and Advances to Ventures." See Note 3 to GTS' audited Consolidated Financial
Statements and "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview." Financial information about GTS' equity
ventures is included below under "Supplemental Information -- Selected
Historical Financial Data -- Combined Equity Investments."
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------- ------------------- --------------------
1993 1994 1995 1996 1997(1) 1997 1998 1997 1998
------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................ $ 328 $ 2,468 $ 8,412 $ 24,117 $ 47,098 $ 12,921 $ 63,834 $ 30,216 $ 117,299
Gross margin................. 328 23 16 5,176 4,379 (2,468) 24,985 1,864 35,232
Operating expenses........... 3,340 12,863 41,016 52,955 78,410 24,971 42,833 53,732 94,243
Equity in earnings (losses)
of ventures................ 472 (135) (7,871) (10,150) (14,599) (8,067) (3,485) (18,234) 4,142
Other income (expense)....... 100 990 11,034 (8,729) (29,551) (10,942) (15,484) (16,902) (34,857)
Loss before extraordinary
loss....................... (2,440) (11,985) (40,400) (67,991) (116,986) (48,185) (37,478) (87,872) (88,131)
Extraordinary loss(2)........ -- -- -- -- -- -- -- -- (12,704)
Net loss..................... (2,440) (11,985) (40,400) (67,991) (116,986) (48,185) (37,478) (87,872) (100,835)
Loss per share before
extraordinary loss......... (0.29) (0.74) (1.70) (2.33) (3.26) (1.34) (0.62) (2.49) (1.65)
Extraordinary loss per
share(2)................... -- -- -- -- -- -- -- -- (0.24)
Net loss per share........... (0.29) (0.74) (1.70) (2.33) (3.26) (1.34) (0.62) (2.49) (1.89)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1993 1994 1995 1996 1997(1) 1998
------- -------- -------- -------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents........................ $ 3,641 $ 29,635 $ 9,044 $ 57,874 $ 318,766 $ 993,928
Property and equipment, net...................... 829 8,393 29,523 35,463 236,897 436,019
Investments in and advances to ventures.......... 794 13,841 56,153 104,459 76,730 61,705
Total assets..................................... 5,968 61,957 115,621 237,378 780,461 1,814,893
Total debt....................................... 725 2,152 27,454 85,547 639,359 1,208,533
Minority interest and stock subject to
repurchase..................................... -- 8 5,273 6,248 31,255 59,600
Shareholders' equity............................. 4,685 54,684 55,322 113,668 26,967 351,409
</TABLE>
- ---------------
(1) As a result of GTS' increase in ownership interest and amendment to the HER
Shareholders Agreement that was completed on July 16, 1997, GTS accounts for
its ownership interest in HER under the consolidation method of accounting.
Prior to this date, GTS accounted for HER under the equity method of
accounting.
(2) GTS recognized a $12.7 million extraordinary charge to earnings in the first
quarter of 1998, as a result of GTS' early extinguishment of certain related
party debt obligations. The nature of the charge is comprised of the
write-off of $11.6 million of unamortized debt discount and $1.1 million of
unamortized debt issuance costs that were deferred as financing costs and
were being amortized over the original maturity of the debt.
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SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
FINANCIAL DATA OF GTS -- COMBINED EQUITY INVESTMENTS
The following unaudited selected historical financial data -- equity
investments for the years ended December 31, 1995, 1996 and 1997 and for the
three and nine months ended September 30, 1997 and 1998, are derived from GTS'
financial records. It is intended to supplement the aforementioned selected
historical consolidated financial data. The financial data set forth below
represents 100% of the results of operations for each of the entities.
GTS believes that this information provides additional insight on GTS'
unconsolidated equity method investments. Generally accepted accounting
principles prescribe inclusion of revenues and expenses for consolidated
interests (generally interests of more than 50%, absent some other factors), but
not for equity interests (generally interests of 20% to 50%) or cost interests
(generally interests of less than 20%). Further, equity accounting ordinarily
results in the same net income as consolidation; however, the net operating
results are reflected on one line within the income statement.
<TABLE>
<CAPTION>
OWNERSHIP COST OF OPERATING NET
INTEREST(1) REVENUES REVENUES EXPENSES INCOME/(LOSS)
----------- -------- -------- --------- -------------
(IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Sovintel........................................... 50% $44,292 $26,247 $ 7,047 $ 7,648
TCM................................................ 50% 49 -- 57 (7)
TeleRoss........................................... 50% 176 59 242 (193)
Sovam.............................................. 66.7% 4,434 2,914 3,273 (1,789)
GTS Cellular Companies............................. 50%(2) 4,574 2,834 2,960 (2,165)
Other.............................................. 50%(2) 526 957 9,379 (9,874)
-------- -------- -------- --------
Total........................................ 54,051 33,011 22,958 (6,380)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3).... (2,270) (2,215) (6,967)
YEAR ENDED DECEMBER 31, 1996
Sovintel........................................... 50% $75,040 $43,910 $ 10,411 $ 14,762
TCM................................................ 50% 16,507 3,330 1,854 8,874
TeleRoss........................................... 50% 2,413 832 2,293 (841)
Sovam.............................................. 66.7% 11,671 8,236 5,714 (2,138)
GTS Cellular Companies............................. 50%(2) 25,778 11,883 13,614 (3,406)
Other.............................................. 50%(2) 12,063 12,235 21,132 (22,471)
-------- -------- -------- --------
Total........................................ 143,472 80,426 55,018 (5,220)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3).... (15,385) (13,562) (8,083)
YEAR ENDED DECEMBER 31, 1997
Sovintel........................................... 50% $113,962 $72,629 $ 17,020 $ 18,464
TCM................................................ 50% 29,308 7,169 3,286 12,512
TeleRoss........................................... 50% 6,794 2,138 3,612 71
Sovam.............................................. 66.7% 17,808 10,684 5,653 780
GTS Cellular Companies............................. 50%(2) 44,275 21,355 17,678 (906)
Other.............................................. 50%(2) 14,013 13,757 27,596 (26,591)
-------- -------- -------- --------
Total........................................ 226,160 127,732 74,845 4,330
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3).... (24,927) (23,250) (8,357)
</TABLE>
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<TABLE>
<CAPTION>
OWNERSHIP COST OF OPERATING NET
INTEREST(1) REVENUES REVENUES EXPENSES INCOME/(LOSS)
----------- -------- -------- --------- -------------
(IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
Sovintel........................................... 50% $82,029 $51,048 $ 12,324 $ 14,215
TCM................................................ 50%(2) 20,715 4,733 2,270 9,653
TeleRoss........................................... 50% 5,113 1,419 2,460 512
Sovam.............................................. 66.7%(3) 12,877 7,867 4,635 (168)
GST Cellular Companies............................. 50%(4)(5) 29,412 14,227 13,022 (2,746)
Other.............................................. 50%(4) 8,860 8,400 25,736 (25,146)
---- -------- -------- -------- --------
Total........................................ 159,006 87,694 60,447 (3,680)
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(6).... (17,049) (15,853) (11,105)
NINE MONTHS ENDED SEPTEMBER 30, 1998 (2)(3)(5)
Sovintel........................................... 50% $99,498 $65,779 $ 17,653 $ 6,891
TCM................................................ 50%(2) 21,586 5,689 1,857 8,843
TeleRoss........................................... 50% 7,436 2,163 3,241 (121)
GTS Cellular Companies............................. 50%(4)(5) 40,186 18,737 14,158 458
Other.............................................. 50%(4) 18,838 18,107 3,961 (2,591)
---- -------- -------- -------- --------
Total........................................ 187,544 110,475 40,870 13,480
ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(6).... (25,001) (23,960) 1,493
</TABLE>
- ---------------
(1) The ownership interest column indicates GTS' legal ownership percentage for
the respective equity investments. The information is being provided to
assist an investor or analyst in determining GTS' legal rights associated
with the presented financial data.
(2) During the quarter ended September 30, 1998, GTS purchased the remaining
47.36% interest in GTS Vox Limited, the intermediate holding company of TCM.
As a result, effective July 1998, GTS will have a 95% interest in TCM and
will also account for its interest in TCM using the consolidation as opposed
to the equity method of accounting. The results of TCM for the six months
ended June 30, 1998 have been included within the nine months ended
September 30, 1998 presented above.
(3) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
result, effective February 1998, Sovam is accounted for by the consolidation
as opposed to the equity method of accounting.
(4) GTS generally maintains a 50% ownership interest in these equity
investments.
(5) Prior to July 1, 1998, GTS beneficially owned approximately 25% of Golden
Telecom and included its results within the GTS Cellular companies accounted
for under the equity method. During the second quarter of 1998, GTS
completed a restructuring of the capital and ownership of Golden Telecom,
which results in GTS beneficially owning approximately 57% of Golden
Telecom. As a result, effective June 30, 1998, Golden Telecom is accounted
for under the consolidation as opposed to equity method of accounting. The
results of Golden Telecom for the three months ended March 31, 1998 have
been included within the nine months ended September 30, 1998 presented
above.
(6) The adjustment amounts represent the effect of inter-affiliate transactions
between GTS' consolidated and equity method ventures. More detailed
information about inter-affiliate transactions is included under "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology" (page 173).
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GTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of GTS as of September 30, 1998 and December 31, 1997 and 1996 and
for the three and nine months ended September 30, 1998 and 1997 and for the
years ended December 31, 1997, 1996 and 1995. The following discussion should be
read in conjunction with GTS' Consolidated Financial Statements and the notes
related thereto included elsewhere in this Offering Circular/Proxy
Statement/Prospectus.
OVERVIEW
Business. GTS is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers in
Russia and the CIS, Central Europe and Asia. In Western Europe, through HER, GTS
is operating and continuing to develop a pan-European high capacity fiber optic
network which is designed to interconnect a majority of the largest Western and
Central European cities and to transport international voice, data and
multimedia/image traffic for other carriers throughout Western and Central
Europe. GTS' strategy to develop its businesses generally has been to establish
joint ventures with a strong local partner or partners while maintaining a
significant degree of operational control. GTS' business activities consist of
the ownership and operation of (i) international long distance businesses, which
operate through international gateways that provide international switching
services and transmission capacity, (ii) local access networks, which provide
local telephone service, (iii) cellular networks, which provide wireless
telecommunications services, (iv) a domestic long distance business, (v) data
networks and (vi) carriers' carrier networks, which provide high volume
transmission capacity to other carriers.
GTS began to acquire interests in numerous telecommunications ventures
beginning in 1994 and continued to acquire such interests throughout 1995 and
1996. Ventures with significant financial results in 1994 included Sovintel (an
international long-distance and domestic and local access telecommunications
service provider) and GTS-Hungary (a VSAT network telecommunications service
provider); ventures that incurred start-up costs associated with building out
their business infrastructure in 1994 included Sovam (a data and Internet
telecommunications service provider) and EuroHivo (a paging telecommunications
service provider). In 1995, TeleRoss (a domestic long distance
telecommunications service provider) and GTS Cellular (a basic cellular
telecommunications service provider) began operations and expanded into numerous
regions within the CIS by the end of 1996. TCM (a local access
telecommunications service provider) began operations in 1996. HER (a carriers'
carrier telecommunications service provider) began its network build-out in
1995, began limited operations at the end of 1996 and expects to continue to
develop its network during 1998 and beyond. The fact that these ventures are in
various stages of development affects the discussion of comparative results
below. See "Description of GTS" (page 119).
GTS has invested significantly in its ventures through capital
contributions and loans. In addition, GTS has made a significant commitment to
its businesses and ventures through the provision of management assistance and
training. GTS has also incurred significant expenses in identifying, negotiating
and pursuing new telecommunications opportunities. GTS and certain of its
ventures are experiencing continuing losses and negative operating cash flow
primarily because the businesses are in the developmental and start-up phases of
operations. Management recognizes that GTS must generate additional capital
resources in order to continue its operations and meet its new development
initiatives. The ultimate recoverability of GTS' investments in and advances to
ventures is dependent on many factors including, but not limited to, the ability
of GTS to obtain sufficient financing to continue to meet its capital and
operational commitments, the economies of the countries in which it does
business and the ability of GTS to maintain the necessary telecommunications
licenses.
GTS' businesses are developing rapidly. Some of the businesses operate in
countries with emerging economies which have uncertain economic, political and
regulatory environments. The general risks of operating businesses in the CIS
and other developing countries include the possibility for rapid change in
government policies including telecommunications regulations, economic
conditions, the tax regime and foreign currency regulations. See "Risk
Factors -- Risks Specific to GTS" (page 19).
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ACCOUNTING METHODOLOGY
Accounting for Business Ventures. Wholly owned subsidiaries and
majority-owned ventures where GTS has unilateral operating and financial control
are consolidated. Those ventures where GTS exercises significant influence, but
does not exercise unilateral operating and financial control, are accounted for
by the equity method. GTS has certain majority-owned ventures that are accounted
for by the equity method as a result of minority shareholder rights,
super-majority voting conditions or other governmentally imposed uncertainties
so severe that they prevent GTS from exercising unilateral control of the
venture.
Profit and Loss Accounting. GTS recognizes profits and losses in accordance
with its underlying ownership percentage or allocation percentage as specified
in the agreements with its partners; however, GTS recognizes 100% of the losses
in ventures where GTS bears all of the financial risk (which includes all of
GTS' significant ventures except for Sovintel and, historically, HER).
Accordingly, the portion of the losses that would normally be assigned to the
minority interest partner ("Excess Losses") is recognized by GTS. When such
ventures become profitable, GTS recognizes 100% of the profits until such time
as the Excess Losses previously recognized by GTS have been recovered. As of
September 30, 1998, $8.3 million and $7.6 million represent the net unrecovered
Excess Losses for GTS' consolidated and equity method investments, respectively,
that is expected to favorably benefit future period results from operations upon
GTS' existing business ventures becoming profitable. This accounting policy was
adopted prior to 1995; however, 1995 was the first year that the excess loss
amount was deemed material for recognition within GTS' accounting records. For
the period from January 1, 1997, through August 31, 1997, GTS recognized 100% of
HER's losses due to GTS being the financing partner during this period. As a
result of HER's issuance in August 1997, of $265 million aggregate principal
amount of 11.5% senior notes due 2007 (of which $56.6 million was placed in
escrow for the first two years' interest payments) GTS no longer considers
itself as the financing partner.
Inter-Affiliate Transactions. Several of GTS' ventures have entered into
business arrangements through which they provide integrated solutions for their
customers by leveraging each others' telecommunications infrastructure. These
arrangements have historically been focused primarily within a region; however,
as GTS has increased its geographic coverage and telecommunication capabilities,
these arrangements have expanded between regions. In accordance with generally
accepted accounting principles, all significant intercompany accounts and
transactions are eliminated upon consolidation.
Turnover Taxes. GTS' ventures within the CIS region incur a 4% turnover tax
that is based on the revenues earned. GTS includes these taxes as a component of
its operating expenses, since these taxes are incidental to the revenue cycle.
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The following table, as of September 30, 1998, summarizes the accounting
methodology for the principal business ventures through which GTS conducts its
business.
<TABLE>
<CAPTION>
EFFECTIVE
COUNTRY/REGION GTS ACCOUNTING
COMPANY NAME OF OPERATIONS OWNERSHIP METHODOLOGY
------------ -------------- --------- -----------
<S> <C> <C> <C> <C>
CIS
Sovintel................................ Russia 50 % Equity
TCM..................................... Russia 95 %(1) Consolidated(1)
TeleRoss Operating Company.............. Russia 100 %(2) Consolidated
TeleRoss Ventures....................... Russia 50 %(3) Equity
Sovam................................... Russia 100 %(4) Consolidated(4)
GTS Cellular............................ CIS 50%-75 %(5) Equity/Consolidated
Western Europe
HER..................................... Western Europe 89 %(6) Consolidated(6)
GTS-Monaco Access....................... Monaco 50 % Equity
Central Europe
GTS-Hungary............................. Hungary 99 % Consolidated
EuroHivo................................ Hungary 70 %(7) Equity
Czechnet................................ Czech Republic 100 % Consolidated
CzechCom................................ Czech Republic 100 % Consolidated
Asia
V-Tech.................................. China 75 % Equity
Beijing Tianmu.......................... China 47 % Equity
CDI..................................... India 100 % Consolidated
</TABLE>
- ---------------
(1) During the quarter ended September 30, 1998, GTS purchased the remaining
47.36% interest in GTS Vox Limited, the intermediate holding company of TCM.
As a result, effective July 1998, GTS has a 95% interest in TCM and accounts
for its interest in TCM using the consolidation as opposed to the equity
method of accounting.
(2) The TeleRoss Operating Company is comprised of a wholly-owned subsidiary
that operates a domestic long distance network and holds the applicable
operating license for TeleRoss and performs the customer invoicing and
collection functions for telecommunications services. TeleRoss Operating
Company is accounted for under the consolidation method of accounting
because GTS has unilateral control over the operations and management
decisions. TeleRoss Operating Company's operations are further discussed in
"-- Results of Operations -- Consolidated Ventures" (page 175) and
"Description of GTS -- Russia and the CIS -- TeleRoss" (page 153). A
significant portion of TeleRoss Operating Company's costs of revenue
consists of settlement fees paid to the TeleRoss Ventures [as defined in (3)
below], with such fees being recorded as revenue by the TeleRoss Ventures.
To date, all of the TeleRoss Ventures' revenue was derived from such fees.
Any decline in the business or operations of the TeleRoss Ventures would
have a material adverse effect on the results of TeleRoss Operating Company.
(3) TeleRoss Ventures is comprised of 14 joint ventures that are 50%
beneficially owned by GTS, which originate traffic and provide local
termination of calls through agency arrangements with TeleRoss Operating
Company. GTS does not exercise unilateral control over the TeleRoss
Ventures, and therefore they are accounted for under the equity method of
accounting. TeleRoss Ventures' operations are further discussed in
"-- Results of Operations -- Non-Consolidated Ventures (Equity Investees)"
(page 180).
(4) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
result, effective February 1998, Sovam is accounted for by the consolidation
as opposed to the equity method of accounting.
(5) GTS conducts its cellular operations through (i) Vostok Mobile, a wholly
owned GTS venture that owns between 50% and 100% of a series of thirteen
cellular joint ventures in various regions in Russia, (ii) PrimTelefone, a
50% owned venture in Vladivostok, Russia and (iii) Golden Telecom, an
approximately 57% beneficially owned venture in Kiev, Ukraine. GTS completed
a restructuring of the capital and ownership of Golden Telecom on June 30,
1998, which results in GTS beneficially owning
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approximately 57% of Golden Telecom. As a result, effective June 30, 1998,
Golden Telecom is accounted for by the consolidation as opposed to equity
method of accounting.
(6) As of July 16, 1997, HER is accounted for by the consolidation as opposed to
the equity method of accounting. In addition, in March 1998 and October
1998, GTS's ownership interest in HER increased 10% and 0.5%, respectively.
(7) GTS sold its interest in EuroHivo in August 1998. The closing of this
transaction did not have a material effect on GTS' results from operations
and financial condition.
Russian Economic Crisis. GTS recorded a $13.1 million pre-tax charge to
earnings in its third quarter 1998 financial results that resulted from the
devaluation of the ruble and the consequences of the banking and economic crisis
within Russia. See "Liquidity and Capital Resources" (page 184).
Further, as identified in the preceding table that summarizes the
accounting methodology for GTS' principal business ventures, several of GTS'
business ventures within Russia are accounted for under the equity method of
accounting. Accordingly, the $13.1 million pre-tax charge; that is mainly
comprised of foreign currency exchange losses for ruble-denominated net monetary
assets with the remainder associated with estimates for uncollectible accounts
receivable and unrecoverable cash deposits in Russian banks, is primarily
reflected in the "equity in losses/(earnings) of ventures" line item with the
remainder in the "foreign currency losses" and "selling, general and
administrative" line items within GTS' Condensed, Consolidated Statements of
Operations.
RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, Sovam, TCM, Golden Telecom, HER,
GTS-Hungary and the Czech Companies. Although GTS was not able to follow the
consolidation method of accounting for Sovam, TCM and Golden Telecom in the
three and nine months ended September 30, 1997, and TCM and Golden Telecom for
the first six months of 1998, GTS has included, for comparative purposes, a
discussion of their financial performance for the three and nine months ended
September 30, 1997, and nine months ended September 30, 1998, respectively, in
our discussion of "-- Results of Operations -- Consolidated Ventures." See
"-- Results of Operations -- Non-Consolidated Ventures (Equity Investees)" (page
180) for a discussion of the operating results of Sovintel, TeleRoss Ventures,
GTS Cellular and GTS-Monaco Access.
Revenue. GTS' consolidated revenue was $63.8 million and $117.3 million for
the third quarter and year to date ended September 30, 1998, respectively, which
was $50.9 million and $87.1 million above the same periods in 1997. The growth
in revenue was primarily attributable to the inclusion of HER, TeleRoss, Sovam,
TCM and Golden Telecom in GTS' consolidated financial results, who contributed
$42.9 million, $22.2 million, $18.8 million, $12.3, and $7.0 million,
respectively, for the nine months ended September 30, 1998. TCM and Golden
Telecom third quarter revenues are included in GTS' consolidated revenues for
the third quarter and year to date ended September 30, 1998.
The CIS region's consolidated revenue increased 345.1% and 237.1% to $31.6
million and $60.0 million for the three and nine months ended September 30,
1998, respectively, from the comparable periods in 1997. TeleRoss Operating
Company generated revenue of $6.8 million and $22.2 million, representing 21.5%
and 37.0% of the CIS region's consolidated revenue for the three and nine months
ended September 30, 1998, respectively. The growth in TeleRoss Operating Company
revenue of 35.4% for the year to date from the same periods last year was the
result of the increase in traffic volume generated by the TeleRoss Ventures due
to the increase in the number of cities and number of VSAT's installed at
customer locations outside of cities in which they have a presence.
Sovam generated revenue of $6.4 million and $18.8 million for the three and
nine months ended September 30, 1998, respectively. The 30.6% and 45.7% increase
from prior year periods in Sovam revenue is primarily attributable to the
expansion of Sovam's network throughout Russia and the CIS and the wider variety
of service offerings. (Sovam was an equity method company in 1997.)
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TCM's revenue for the three and nine months ended September 30, 1998
increased 57.7% and 63.8% to $12.3 million and $33.9 million, respectively, from
the comparable periods in 1997. This increase was primarily due to increases in
local and international/long distance traffic revenue and increases in monthly
port charges and the sale of additional local access lines. (TCM was an equity
method company prior to July 1, 1998.)
Revenue for Golden Telecom was $7.0 million and $16.9 million for the three
and nine months ended September 30, 1998, respectively, which represents a
218.2% and 322.5% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to the increase in cellular subscribers.
(Golden Telecom was an equity method company prior to July 1, 1998.)
HER generated $27.0 million and $42.9 million of revenue in the three and
nine months ended September 30, 1998, respectively, compared to $1.7 million and
$2.3 million, respectively, in the same periods in 1997 (HER was an equity
method company prior to July 1997). The growth in revenue is attributable to the
continued deployment of the HER network as well as the inclusion of Ebone, whose
revenue was $7.4 million for the three months ended September 30, 1998. HER
commenced commercial service over the Brussels-Amsterdam route in late 1996, the
London-Paris portion in November 1997, Frankfurt, Zurich, Geneva, Stuttgart,
Dusseldorf and Munich were added in the second quarter of 1998, and Milan was
added during the third quarter of 1998.
The Central Europe region's consolidated revenue increased 29.4% and 32.6%
to $4.4 million and $12.6 million for the three and nine months ended September
30, 1998, respectively, from the comparable periods in 1997. This growth is
attributable to the expansion of the customer base and product offerings of
these businesses.
Gross Margin. GTS's consolidated gross margin was $25.0 million and $35.2
million, or 39.2% and 30.0% of revenue, for the three and nine months ended
September 30, 1998, respectively, and ($2.4) million and $1.9 million, or
(18.6%) and 6.3% of revenue, for the three and nine months ended September 30,
1997, respectively.
Sovam represented 11.2% and 25.0% of the consolidated gross margin for the
three and nine months ended September 30, 1998, respectively. (Sovam was an
equity method company in 1997.) Sovam had gross margin as a percentage of
revenues of 43.8% and 46.8% for the three and nine months ended September 30,
1998, respectively. The increase of 0.9% and 8.0% in gross margin as a
percentage of revenue in comparison to the same periods in 1997 reflects the
higher margin service offerings that Sovam is currently providing and also
management's focus to improve its cost structure; i.e., the negotiation of
improved channel costs from suppliers and controlled growth in both personnel
and capital expenditures.
The TeleRoss Operating Company represented 1.2% and 6.0% of the
consolidated gross margin for the three and nine months ended September 30,
1998, respectively, and 20.8% and 52.6% for the three and nine months ended
September 30, 1997, respectively. TeleRoss had gross margin as a percentage of
revenue of 4.4% and 9.5% for the three and nine months ended September 30, 1998,
respectively. The increase of 12.1% and 3.4% in margin as a percentage of
revenue in comparison to the comparable periods in 1997 reflects the overall
increase in revenue as discussed above.
TCM represented 36.0% of the consolidated gross margin for the third
quarter 1998 (TCM was an equity method company prior to July 1, 1998). TCM had
gross margin as a percentage of revenues of 73.2% and 73.5% for the three and
nine months ended September 30, 1998, respectively. Gross margin as a percentage
of revenue decreased 1.2% and 3.8% in comparison to the same period in 1997 as a
result of higher infrastructure and settlement costs.
Golden Telecom represented 17.6% of the consolidated gross margin for the
third quarter 1998 (Golden Telecom was an equity method company prior to July 1,
1998). Golden Telecom's gross margin was 62.9% and 58.6% of revenue for the
three months ended September 30, 1998 compared to gross margin of 54.5% and
37.5% of total revenue for the comparable periods during 1997.
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HER had a favorable effect on consolidated gross margins of $7.3 million
and $6.3 million for the three months and nine months ended September 30, 1998.
For comparative purposes, HER had an unfavorable gross margin of ($1.0) million
and ($3.7) million for the three and nine months ended September 30, 1997 (HER
was an equity method company prior to July 1997). HER represented 29.2% and
17.9% of the consolidated gross margin for the three and nine months ended
September 30, 1998. The improvement in gross margins in 1998 as compared to 1997
is reflective of the increased utilization of the network as well as the
inclusion of Ebone, whose gross margin was $3.9 million for the three months
ended September 30, 1998.
The Central European region had gross margin as a percentage of revenue of
31.8% and 33.3% for the three and nine months ended September 30, 1998,
respectively. The decrease of 3.5% and 5.6% in gross margin as a percentage of
revenue in comparison to the comparable periods in 1997 primarily reflects the
startup activities of the GTS Net product offering in Hungary.
Operating Expenses. Consolidated operating costs were $42.8 million and
$94.2 million for the three and nine months ended September 30, 1998,
respectively, a 71.5% and 81.0% increase above the comparable periods in 1997.
The increase in operating costs is attributable to the inclusion of HER, Sovam,
TCM and Golden Telecom in the Company's consolidated financial results, the
growth in expenditures associated with building business infrastructure for
primarily the TeleRoss Operating Company and costs attributable to increasing
the corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized (losses)/earnings
of ($3.5) million and $4.1 million for its investments in non-consolidated
ventures in the three and nine months ended September 30, 1998, respectively, as
compared to recognizing losses of $8.1 million and $18.2 million in the
comparable periods, respectively, in 1997. This improvement was primarily the
result of HER and Golden Telecom no longer being equity method investees offset
by a $7.7 million charge to earnings associated with GTS' business operations in
Russia as a result of the deterioration of the economic conditions in Russia
during the quarter. The $7.7 million charge is principally comprised of foreign
exchange losses with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks. In
addition, GTS' third quarter 1997 financial results were unfavorably affected by
management's decision to write-off certain investments in and advances to
ventures in Asia and Central Europe. As a result of the application of GTS'
previously discussed profit and loss accounting, additional losses of $1.6
million were recognized for the three and nine months ended September 30, 1998.
Included in the quarter and year to date results for September 30, 1997 were
$3.1 million and $10.9 million of additional losses. See "-- Results of
Operations -- Non-Consolidated Ventures (Equity Investees)" (page 180) for a
discussion of the results of operations of GTS' significant equity investees.
Interest, Net. GTS earned interest income of $13.9 million and $28.1
million for the three and nine months ended September 30, 1998, respectively, a
344.7% and 432.6% increase over the same periods in 1997, primarily as a result
of investing the proceeds from GTS' 1997 and 1998 capital raise efforts. See
"-- Liquidity and Capital Resources" (page 184).
GTS incurred interest expense of $22.0 million and $52.6 million for the
three and nine months ended September 30, 1998, respectively, which was 58.1%
and 149.5% above the comparable periods in 1997. The significant increase in
interest expense was due to the $571.9 million increase in debt raised in 1998
and the $409.8 million debt raised in 1997. See "-- Liquidity and Capital
Resources" (page 184).
Foreign Currency Losses. GTS recognized foreign currency losses of $7.3
million and $10.4 million for the three and nine months ended September 30,
1998. These losses are primarily attributable to the devaluation of the Russian
ruble and foreign currency exposure at HER. HER has recorded foreign exchange
losses due to its foreign exchange exposure associated with its issuance in
August 1997 of aggregate principal $265 million U.S. dollar denominated debt,
other U.S. dollar denominated cash and payable balances, losses on several
forward exchange contracts and the weakening of the U.S. dollar versus European
currencies in the third quarter of 1998. See "-- Liquidity and Capital
Resources -- Liquidity Analysis" (page 186) for further discussion.
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Provision for Income Taxes. GTS' consolidated tax provision was $0.8
million and $2.2 million for the three and nine months ended September 30, 1998
and $1.0 million and $1.8 million for the three and nine months ended September
30, 1997, respectively. GTS' financial statements do not reflect any provision
for benefits that might be associated with the U.S. and non-U.S. loss
carryforwards. There can be no assurance that such non-U.S. loss carryforwards
will be allowed, in part or in full, by local tax authorities against future
income.
Extraordinary Loss. GTS recognized a $12.7 million extraordinary charge to
earnings in the first quarter of 1998, as a result of GTS' early extinguishment
of certain related party debt obligations. The nature of the charge is comprised
of the write-off of $11.6 million of unamortized debt discount and $1.1 million
of unamortized debt issuance costs that were deferred as financing costs and
were being amortized over the original maturity of the debt.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, GTS-Hungary, the Czech Companies
and HER (for 1997). See "-- Results of Operations -- Non-Consolidated Ventures
(Equity Investees)" (page 180) for a discussion of the operating results of
Sovintel, TCM, Sovam, TeleRoss Ventures, GTS Cellular, HER (prior to 1997),
GTS-Monaco Access, EuroHivo and the Asia business ventures.
Revenue. GTS' consolidated revenue was $47.1 million, $24.1 million and
$8.4 million for the years ended December 31, 1997, 1996, and 1995,
respectively. The growth in revenue was attributable to the commencement in 1995
of commercial operations by TeleRoss Operating Company, as well as the continued
expansion of services and customer base in Central Europe, and HER's initial
Amsterdam to Brussels route and further expansion to London and Paris during
1997.
The CIS region's consolidated revenue was $27.1 million, $12.7 million, and
$3.8 million for the years ended December 31, 1997, 1996 and 1995 respectively.
TeleRoss Operating Company generated revenue of $24.7 million, $9.2 million and
$3.8 million, representing 91.1%, 72.4% and 100% of the region's consolidated
revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
Service revenue represented 81.8%, 64.1% and 21.1% of TeleRoss Operating
Company's revenue for the years ended December 31, 1997, 1996 and 1995,
respectively, with the balance of its revenue in such periods principally
represented by installation and equipment sales. The growth in revenue was a
result of increased traffic volume generated by the TeleRoss Ventures as they
expanded to 13 cities for the year ended December 31, 1997, added customers in
existing cities and installed several VSATs at customer locations outside of
cities in which they have a presence.
Within the Central Europe region, GTS-Hungary and the Czech Companies
accounted for 100% of the revenue earned, of which GTS-Hungary and the Czech
Companies provided $8.5 million and $5.1 million of GTS' consolidated revenue in
1997, respectively, compared to $6.9 million and $2.3 million in 1996,
respectively, and $4.2 million and $0.3 million in 1995, respectively. The
growth in revenue of GTS-Hungary from 1995 to 1997 was due to the expansion of
its customer base and the introduction of microwave technology services. The
Hungary state lottery accounted for 50.6%, 55.3% and 65.0% of GTS-Hungary's
revenue in 1997, 1996 and 1995, respectively. The growth in revenue of the Czech
Companies was generated through increases in voice traffic carried from
twenty-five buildings at December 31, 1997, as compared to sixteen buildings at
December 31, 1996.
All of Western Europe's consolidated revenue of $5.4 million for the year
ended December 31, 1997 was derived from HER.
Gross Margin. GTS's consolidated gross margin was $4.4 million, or 9.3% of
revenue, for the year ended December 31, 1997, $5.2 million, or 21.6% of
revenue, for the year ended December 31, 1996 and $0.02 million, or 0.0% of
revenue, for the year ended December 31, 1995.
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The CIS region had a gross margin of $4.0 million, $0.8 million and $(0.9)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
TeleRoss Operating Company had a gross margin of $3.5 million, or 14.2% of
revenues, for the year ended December 31, 1997 and a negative gross margin of
$(1.0) million for each of the years ended December 31, 1996 and 1995, which was
the result of the high fixed cost component of its network hub in Moscow.
GTS-Hungary and the Czech Companies comprised 100% of the Central Europe
region's gross margin. GTS-Hungary had a gross margin of $3.5 million, $3.0
million, and $1.7 million, representing 41.2%, 43.4%, and 40.5% of GTS-Hungary's
revenue for the years ended December 31, 1997, 1996 and 1995, respectively. The
favorable gross margin trend reflected the increased utilization of
GTS-Hungary's 1,000 VSAT capacity hub located in Budapest. The Czech Companies
had a gross margin of $1.5 million, $0.3 million and $(0.1) million for the
years ended December 31, 1997, 1996 and 1995, respectively. HER incurred a
negative gross margin of $(4.6) million for the year ended December 31, 1997,
which was primarily due to the initial cost structure of the new routes and
minimal revenue generated.
Operating Expenses. Consolidated operating costs were $76.7 million, $52.9
million, and $41.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in operating costs reflected the growth in
expenditures associated with building business infrastructure for primarily the
TeleRoss Operating Company and GTS-Hungary, the inclusion of HER's operating
expenses in 1997 and increasing corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $14.6 million, $10.2 million and
$7.9 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in these losses were $3.6 million, $5.7 million and $5.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively, that related to
GTS's ownership share of the losses. Also included in the losses for the year
ended December 31, 1997 was a write-off of approximately $5.4 million which
represented the net balance of certain investments in and advances to ventures
in Asia (primarily Beijing Tianmu and V-Tech) and Central Europe (EuroHivo) that
were stated in excess of their net realizable value. GTS followed the
authoritative guidance as prescribed by APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock," for its determination of the $5.4
million charge. GTS' recoverability analysis was based on its projected
undiscounted cash flows of their equity investees, since this is the lowest
level of cash flow information available. The underlying reasons for the
write-down of GTS' investments were the result of the problems that are more
specifically addressed in "-- Results of Operations -- Non-Consolidated Ventures
(Equity Investees) -- Asia" (page 183), "Description of GTS -- Central Europe"
(page 142) and "Description of GTS -- Asia" (page 167). Additionally, included
within GTS's ownership share of the losses incurred and the Excess Losses for
the year ended December 31, 1997 is approximately $14.4 million of losses (of
the $14.4 million, approximately $13.5 million related to the write-off of
advances to several Chinese-owned operating telecommunications companies to
which GTS provides technical and financial assistance, and $0.9 million related
to the write-off of inventories, receivables, and other assets) which
represented GTS' share of asset write-offs recorded by certain of the ventures
in Asia (Beijing Tianmu and V-Tech). See "-- Results of
Operations -- Non-Consolidated Ventures (Equity Investees) -- Asia" (page 183).
GTS would have recognized earnings from its investments in non-consolidated
ventures of $5.2 million for the year ended December 31, 1997, had GTS not
recognized the write-downs of investments and assets of approximately $5.4
million and $14.4 million, respectively. The write-down of Central Europe's
investment in EuroHivo was a result of GTS' decision in the third quarter to
recognize the contingent liabilities associated with the expected liquidation
and discontinuation of EuroHivo's operations as of September 30, 1997. In
addition, GTS' results were negatively affected due to the recognition of Excess
Losses of $5.6 million, $4.5 million and $2.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively. See "-- Overview" (page 172).
GTS' losses from its ventures were primarily the result of most of its ventures
being in the early stages of operations. Sovintel and TCM, however, generated
combined earnings of $15.5 million, $11.8 million and $3.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively, which partially offset
losses generated by other ventures.
Other Non-Operating Income. Favorably affecting the 1995 results was the
non-recurring $10.3 million gain that GTS recognized as a result of its cash
settlement of certain claims with a third party in 1995.
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Interest, Net. GTS incurred interest expense of $39.1 million, $11.1
million and $0.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Interest expense is comprised of interest incurred from debt
maturing within one year, long-term debt obligations, capital lease obligations,
amortization of debt discount on the long-term debt obligations and various
other debt obligations. The significant increase in interest expense was due to
the $409.8 million increase in debt raised in 1997. See "-- Liquidity and
Capital Resources" (page 184).
GTS earned interest income of $11.4 million, $3.6 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively, primarily as
a result of investing the proceeds from private placements of common stock in
various highly liquid investments.
Provision for Income Taxes. GTS' consolidated tax provision was $2.5
million, $1.4 million and $2.6 million for the years ended December 31, 1997,
1996 and 1995, respectively. GTS' financial statements do not reflect any
provision for benefits that might be associated with the U.S. and non-U.S. loss
carryforwards. There can be no assurance that such non-U.S. loss carryforwards
will be allowed, in part or in full, by local tax authorities against future
income.
RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES (EQUITY INVESTEES)
Three and Nine Months Ended September 30, 1998 compared to Three and Nine
Months Ended September 30, 1997
RUSSIA -- CIS
Sovintel. Sovintel's revenue was $32.4 million and $99.5 million for the
third quarter and year to date ended September 30, 1998, which increased $4.5
million and $17.5 million over revenues for the comparable periods in 1997. The
growth in revenue was primarily the result of telecommunications service
revenue, which increased 8.3% and 14.3% to $21.8 million and $70.2 million for
the three and nine months ended September 30, 1998, respectively, from
comparable periods in 1997, due to the Moscow customer base growth and traffic
from other GTS ventures that generated increased volume of outgoing
international and domestic minutes carried by Sovintel. Sovintel realized a
35.4% and 28.7% increase in outgoing international and domestic revenues for the
three and nine months ended September 30, 1998, as compared with the same
periods a year ago. Revenue from incoming international minutes decreased by
55.1% and 38.5% to $1.5 million and $6.1 million for the three and nine months
ended September 30, 1998, respectively, from the same periods in 1997.
Sovintel's non-traffic-related revenue increased 36.6% and 42.4% to $10.6
million and $29.3 million for three and nine months ended September 30, 1998,
respectively, over the comparable periods in 1997, which was primarily
attributable to port sales and monthly port fees revenue.
Sovintel's gross margin as a percentage of revenues was 34.6% and 33.9%,
for the three and nine months ended September 30, 1998, and was 34.8% and 37.8%
for comparable periods in 1997. The decrease in gross margin as a percentage of
revenue for the respective periods in 1998 and 1997 was attributable to a
general price decrease in international and domestic revenue due to competitive
pressures and a higher percentage of domestic minutes, which yield a lower
margin.
Operating expenses were $7.9 million and $17.7 million, or 24.4% and 17.8%
of total revenue, for the three and nine months ended September 30, 1998. The
increase of 9.3% and 2.8% in operating expenses in comparison to the same
periods in 1997 was primarily due to charges related to the Russian financial
crisis, specifically, $1.9 million of uncollectible accounts receivable and $0.4
million in unrecoverable cash.
Sovintel recorded a foreign exchange loss of $5.2 million during the
quarter, of which $5.1 million was attributable to the devaluation of the ruble
in mid-August 1998.
TeleRoss Ventures. Revenue for the TeleRoss Ventures increased 4.3% and
45.1% to $2.4 million and $7.4 million for the three and nine months ended
September 30, 1998, respectively, from the comparable periods in 1997. Revenues
were primarily resulted from settlement fees charged to TeleRoss Operating
Company. The growth in revenue reflects the growth of the customer base.
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Gross margin as a percentage of revenue was 75.0% and 71.6% for the three
and nine months ended September 30, 1998, respectively, compared to 60.9% and
72.5% for the three and nine months ended September 30, 1997, respectively.
Operating expenses were $1.0 million and $3.2 million, or 41.7% and 43.2% of
revenue, for the three and nine months ended September 30, 1998, respectively,
compared to 30.4% and 49.0% of revenue, for the comparable periods in 1997.
GTS Cellular. GTS operates three cellular networks through differing
ownership structures: Vostok Mobile, PrimTelefone and Golden Telecom
(consolidated for the three months ended September 30, 1998).
Revenue for Vostok Mobile was $6.2 million and $20.9 million for the three
and nine months ended September 30, 1998, respectively, which represented a
47.6% and 39.3% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to subscriber growth.
Vostok Mobile's gross margin was 40.9% and 46.9% of revenue, for the three
and nine months ended September 30, 1998, respectively, compared to 45.2% and
50.7% of revenue, for the comparable periods in 1997. Operating expenses were
$5.5 million and $11.7 million, or 88.7% and 56.0% of revenue, for the three and
nine months ended September 30, 1998, respectively, compared to ($0.2) million
and $4.8 million, or (4.8%) and 32% of revenue, for the comparable periods in
1997.
Vostok Mobile recorded a foreign exchange loss of $2.4 million during the
third quarter 1998, that resulted primarily from the devaluation of the ruble in
mid-August 1998.
Revenue for PrimTelefone was $2.9 million and $10.2 million for the three
and nine months ended September 30, 1998, respectively, which represented a 9.4%
decrease and a 24.4% increase from the comparable periods in 1997. The decrease
in current period revenue is due to decreases in airtime, subscriber fees and
handset sales during the third quarter of 1998. The growth in year to date
revenue was primarily attributable to the subscriber growth in the first and
second quarters of 1998.
PrimTelefone's gross margin was 58.6% and 57.8% of total revenue, and
operating expenses were $0.9 million and $3.2 million for the three and nine
months ended September 30, 1998, respectively, compared to gross margin of 43.8%
and 57.3% of total revenue, and operating expenses of $1.2 million and $2.7
million, respectively, for the comparable periods in 1997.
WESTERN EUROPE
GTS-Monaco Access: Total revenue was $6.8 million and $18.7 million for the
three and nine months ended September 30, 1998, respectively, which represented
a 100.0% and 136.7% increase from the comparable periods in 1997. Gross margin
was ($0.3) million and $0.7 million, or (4.4%) and 3.7% of revenue, for the
three and nine months ended September 30, 1998, respectively, compared to $0.3
million and $0.4 million, or 7.7% and 5.1% of revenue, for the comparable
periods in 1997. The decrease in gross margin for the third quarter of 1998 is
primarily the result of service credit recorded in September.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
RUSSIA -- CIS
Sovintel. Sovintel's revenue for the years ended December 31, 1997, 1996
and 1995 was $114.0 million, $75.0 million and $44.3 million, respectively. The
increase in revenue was primarily the result of telecommunications service
revenue, which increased to $85.4 million for the year ended December 31, 1997
from $50.8 million and $26.8 million for the years ended December 31, 1996 and
1995, respectively, due to the Moscow customer base growth and traffic from
other GTS ventures that generated increased volume of outgoing international and
domestic minutes carried by Sovintel. Revenue from incoming international
minutes also increased to $13.1 million for the year ended December 31, 1997,
from $6.8 million and $2.2 million for the years ended December 31, 1996 and
1995, respectively. Included in Sovintel's traffic revenue for 1997 and 1996 was
$12.4 million and $5.0 million, respectively, that was related to customers
using phone numbers provided by TCM. This revenue was derived primarily from
international/long distance
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traffic and local traffic. Sovintel and TCM have an arrangement whereby Sovintel
reimburses TCM 50% of installation charges, monthly fees and local traffic
revenues and approximately 33% of international/long distance billings from
TCM-supplied phone numbers.
Sovintel's non-traffic-related revenue of $28.6 million, $24.2 million and
$17.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively, was primarily attributable to port sales and monthly port fees
revenues.
Sovintel's gross margin was $41.3 million, $31.1 million and $18.0 million,
or 36.2%, 41.5% and 40.6% of revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in gross margin percentage was
attributable to a general price decrease in international and domestic revenues
due to competitive pressures and a higher percentage of domestic minutes, which
yield a lower margin.
Operating expenses were $17.0 million, $10.3 million and $7.1 million, or
14.9%, 13.7% and 16.0% of total revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The increase in operating expenses was related to
increases in turnover taxes associated with revenues and also increased
personnel, advertising and sales force costs required to support Sovintel's
growth.
Income tax expense was $5.7 million, $5.2 million and $2.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
income tax expense was attributable to Sovintel's profitable operations.
TCM. TCM's revenue was $29.3 million and $16.5 million for the years ended
December 31, 1997 and 1996, respectively. TCM had minimal activities in 1995.
TCM had a gross margin of $22.1 million and $13.2 million, or 75.4% and 80.0% of
total revenue. The decrease in gross margin as a percentage of revenue was
attributable to higher infrastructure and settlement costs. TCM had operating
expenses of $3.3 million and $1.9 million, or 11.3% and 11.5% of total revenue,
for the years ended December 31, 1997 and 1996, respectively.
Sovam. Sovam's revenue was $17.8 million, $11.7 million and $4.4 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The increase
in revenues is primarily attributable to the expansion of Sovam's network
throughout Russia and the CIS and the wider variety of service offerings,
including the introduction of Russia On Line services.
Gross margin was $7.1 million, $3.4 million and $1.5 million, or 39.9%,
29.1% and 34.1% of total revenue for the years ended December 31 in 1997, 1996
and 1995, respectively. Operating expenses were $5.7 million, $5.7 million and
$3.3 million, or 32.0%, 48.7% and 75.0% of total revenue, for the years ended
December 31, 1997, 1996 and 1995, respectively.
TeleRoss Ventures. Revenue for the TeleRoss Ventures for the years ended
December 31, 1997, 1996 and 1995 was $6.8 million, $2.4 million and $0.2
million, respectively. Revenues resulted from settlement fees charged to
TeleRoss Operating Company. The growth in total revenue was the result of steady
growth in sales of core switched voice services in the five cities serviced in
1995, an additional seven new cities in the network in 1996 and an additional
city in 1997.
Gross margin for the years ended December 31, 1997, 1996 and 1995 was $4.7
million, $1.6 million and $0.1 million, respectively. Operating expenses of $3.6
million, $2.3 million and $0.2 million were incurred for the years ended
December 31, 1997, 1996 and 1995, respectively.
GTS Cellular. GTS operates three cellular networks through differing
ownership structures: Vostok Mobile, PrimTelefone and Golden Telecom.
Revenue for Vostok Mobile was $25.8 million, $16.5 million and $2.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Vostok
Mobile's gross margin was $13.6 million, $9.3 million and $1.1 million, or
52.7%, 56.4% and 55.0% of total revenue, and operating expenses were $10.1
million, $9.2 million and $4.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Revenue for PrimTelefone was $12.1 million, $8.4 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
PrimTelefone's gross margin was $6.6 million, $4.7 million
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and $0.6 million, or 54.5%, 56.0% and 27.3% of total revenue, and operating
expenses were $3.6 million, $3.7 million and $0.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
Golden Telecom did not have significant operations until 1997. Revenue for
Golden Telecom was $7.2 million and gross margin was $2.8 million, or 38.9% of
total revenue, for the year ended December 31, 1997. Operating expenses were
$4.9 million for the year ended December 31, 1997.
WESTERN EUROPE
HER. HER earned a small revenue stream in 1996 and no revenue in 1995.
Operating expenses were $10.6 million and $6.7 million for the years ended
December 31, 1996 and 1995, respectively. The increase in selling, general and
administrative expenses reflected HER's continued transition from the start-up
phase to the operational phase. In 1997, HER was included in the consolidated
results of GTS.
GTS-Monaco Access. Limited international traffic was carried from GTS
subsidiaries through GTS-Monaco Access for termination worldwide during 1995
which resulted in minimal revenues earned. Total revenue was $13.0 million and
$3.9 million and gross margin was $0.2 million and $(0.4) million for the years
ended December 31, 1997 and 1996, respectively.
CENTRAL EUROPE
EuroHivo. EuroHivo's operating results were minimal for the years ended
December 31, 1997, 1996 and 1995. In September 1997, GTS recorded a $2.4 million
charge to recognize the liabilities associated with the planned liquidation and
discontinuance of EuroHivo's operations. See Footnote 3 in GTS audited financial
statements for additional disclosures related to EuroHivo.
ASIA
Most of GTS' ventures within the Asia region were in the start-up phase and
had not commenced operations in 1996. The non-consolidated ventures in the Asia
region had revenue of $7.0 million for the year ended December 31, 1996, and had
minimal revenues in 1997 and 1995. The revenue in 1996 consisted principally of
equipment sales. GTS believes that future revenue will be derived primarily from
providing telecommunications engineering and consulting services.
During the year ended December 31, 1997, the V-Tech and Beijing Tianmu
business ventures (the "Asia Ventures") determined that a charge of $14.4
million (GTS's portion) was appropriate as a result of the write-off of $13.5
million of advances to several Chinese-owned operating telecommunications
companies to which the Asia Ventures provide technical and financial assistance
and $0.9 million related to the write-off of inventories, receivables and other
assets. The Asia Ventures followed the authoritative guidance as prescribed by
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," for their determination of the $13.5
million charge as they believed that the advances, as evidenced by legal
agreements between the Asia Ventures and the underlying operating
telecommunications companies, represents long-lived assets. (The Asia Ventures
would have reflected the same charge had they followed the authoritative
accounting guidance as prescribed by APB No. 18 or SFAS No. 5, "Accounting for
Contingencies.") The Asia Ventures recoverability analysis was based on their
projected undiscounted cash flows of their respective operations since this is
the lowest level of cash flow information available. The underlying reasons for
the write-offs were the result of problems dealing with one of the Asian
partners, the inability of the Chinese operating telecommunications companies to
develop markets for their services, and technical problems, all of which
surfaced during the third quarter of 1997. See Footnote 3 in GTS' audited
financial statements for additional disclosures related to GTS' Asia operations
and "Description of GTS -- Asia" (page 167).
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LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The telecommunications business is capital intensive. GTS generally is the
primary source of funding for its ventures, both for working capital and capital
expenditures. Under a typical arrangement, GTS's venture partner contributes the
necessary licenses or permits under which the venture will conduct its business,
office space and other equipment. GTS's contribution is generally cash and
equipment, but may consist of other specific assets as required by the joint
venture agreement.
GTS has raised capital through the issuance of equity securities and
through various debt agreements. The issuance of equity securities has raised
$358.6 million, $36.4 million, $107.7 million, $42.1 million and $62.1 million
in the first nine months of 1998, and in the full years of 1997, 1996, 1995 and
1994, respectively, net of placement fees, for a total of $606.9 million. In
addition, GTS and HER received $571.9 million, $409.8 million, $60.0 million and
$23.3 million in gross proceeds in the first nine months of 1998, and in the
full years of 1997, 1996 and 1995, respectively, for a total of $1,065.0 million
under various debt agreements. Included within the debt proceeds identified
above, GTS received $3.5 million, $60.0 million and $10.0 million in 1997, 1996
and 1995, respectively, from lenders who are affiliated with, and are considered
related parties to, GTS as a result of their (or their affiliates) ownership of
GTS' Common Stock, of which $70.0 million was repaid in 1998.
GTS had working capital of $907.6 million and $353.4 million as of
September 30, 1998 and 1997, respectively. GTS had an accumulated deficit of
$343.7 million as of September 30, 1998, including net losses of approximately
$37.5 million and $100.8 million for the three and nine months ended September
30, 1998 and $48.2 million and $87.9 million for the three and nine months ended
September 30, 1997, respectively. During 1998, GTS has incurred and expects to
continue to incur substantial expenditures to fund the working capital
requirements of its ventures, to provide capital equipment for certain of its
ventures, and to engage in new development and acquisitions.
GTS will require substantial capital investment to execute its business
plans and to fund expected operating losses. Management expects that GTS and its
ventures will spend over $1.2 billion in cash related to capital expenditures
and investments in ventures during the next three years. GTS obtained funds in
1998 through a variety of financing arrangements, including (i) approximately
$255.3 million in gross proceeds from the IPO, (ii) $105.0 million in gross
proceeds from the sale of 9.875% senior notes due February 15, 2005, of which
$19.6 million was placed in escrow to fund the first two years' interest
payments. The initial public stocking offering constituted a "complying public
equity offering" under GTS' 8.75% Senior Subordinated Convertible Bonds due 2000
(the "Bonds"), and as a result, the conversion price of the Bonds is $20 per
share, (iii) approximately $127.4 million in gross proceeds from a secondary
public stock offering of 2.8 million shares of common stock at $45.50 per common
share, and (iv) approximately $466.9 million in gross proceeds from the sale of
the Debentures. The Debentures are redeemable from July 1, 2001 at the option of
GTS, at redemption prices set forth in the agreement relating to the Debentures
and are convertible into shares of common stock at any time prior to maturity or
redemption at a conversion price of $55.05 per common share. The Debentures are
subordinated to all existing and future indebtedness of GTS, except for the
Bonds, with which they rank pari passu in right of payment.
GTS believes that its existing cash balances, after giving effect to the
New HER Notes Offering which notes are on substantially similar terms as HER's
existing senior notes, and cash flow from operations will be sufficient to fund
its expected capital needs under its current business plan, excluding any funds
expended in connection with the implementation of GTS' European Services
Strategy. See "Liquidity and Capital Resources -- European Services Strategy"
(page 186). GTS contemplates that it will raise additional debt financing
through a newly formed subsidiary of GTS, the proceeds of which will be applied
toward the implementation of GTS' European Services Strategy. GTS has not yet
determined the actual amount and timing of such financing.
The actual amount and timing of GTS' future capital requirements may differ
materially from management's estimates. In particular, the accuracy of
management's estimates is subject to changes and
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fluctuations in GTS' revenues, operating costs and development expenses, which
can be affected by GTS' ability to (i) effectively and efficiently manage the
expansion of the HER network and operations, (ii) obtain infrastructure
contracts, rights-of-way, licenses and other regulatory approvals necessary to
complete and operate the HER network, (iii) negotiate favorable contracts with
suppliers, including large volume discounts on purchases of capital equipment
and (iv) access markets, attract sufficient numbers of customers and provide and
develop services for which customers will subscribe. GTS' revenues and costs are
also dependent upon factors that are not within GTS' 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 GTS' 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 GTS' future capital
requirements. Historically, GTS has experienced liquidity problems resulting in
part from GTS' need to meet the capital requirements of certain of its ventures
in excess of forecast amounts. In addition, certain of GTS' ventures have not
met management's financial performance expectations or have not been able to
secure local country financing and thus have not been able to generate the
expected cash inflows. In addition, if GTS expands its operations at an
accelerated rate or consummates acquisitions, GTS' funding needs will increase,
possibly to a significant degree, and it will expend its capital resources
sooner than currently expected. GTS may also be required to repay the Bonds upon
maturity on June 30, 2000 to the extent the Bonds are not converted into Common
Stock. As a result of the foregoing, or if GTS' capital resources otherwise
prove to be insufficient, GTS will need to raise additional capital to execute
its current business plan and to fund expected operating losses, as well as to
consummate future acquisitions and exploit opportunities to expand and develop
its businesses.
There can be no assurances that GTS will be able to consummate additional
financing on favorable terms. As a result, GTS may be subject to additional or
more restrictive financial covenants, its interest obligations may increase
significantly and its existing shareholders may be adversely diluted. Failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require GTS to delay or abandon some or
all of its anticipated expenditures, to sell assets, or both, either of which
could have a material adverse effect on the operations of GTS.
HER
Construction of the HER fiber optic network is one of GTS' most significant
business activities. HER has spent approximately $136 million in cash on network
capital expenditures through September 30, 1998 and expects to incur an
additional $654 million in cash through 2000 in order to complete the buildout
of the network. The total capital expenditures required for the buildout of the
network has increased as a result of additional routes being planned, including
transatlantic capacity, and for enhancing the speed and capacity of the network.
Additionally, as of September 30, 1998, GTS has capitalized $242.2 million in
connection with long-term fiber lease arrangements and expects to capitalize an
additional $181 million through 2000 in order to complete the buildout of the
network. Moreover, subsequent to September 30, 1998, HER entered into an
additional contractual commitment for $36.8 million, payable within twelve
months, to lease an indefeasible right of use to transatlantic capacity for a
term of twenty-five years. In August 1997, HER completed the issuance of $265.0
million in gross proceeds of 11.5% Senior Notes (the "Senior Notes") due in
August 2007. The Senior Notes are general unsecured obligations of HER. GTS
believes that the net proceeds from the Senior Notes and the offering of New HER
Notes, combined with HER's projected internally generated funds, should be
sufficient to fund HER's expected capital expenditures as well as payments on
the long-term fiber lease arrangements and other cash needs. However the actual
amount and timing of HER's future capital requirements may differ materially
from management's estimates. If the actual amount and timing of HER's future
capital requirements differ materially from management's estimates, any failure
to obtain necessary financing may require HER to delay or abandon its plans for
deploying the remainder of the network and would jeopardize the viability of
HER, or may require GTS to make additional capital contributions to HER at the
expense of GTS' other operations, either of which could have a material adverse
effect on the operations of GTS. There can be no assurance that GTS or its
partners in HER would have sufficient capital to make contributions to HER, or
that they would be willing to do so.
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EUROPEAN SERVICES STRATEGY
Due to the early stage of implementation of GTS' European Services
Strategy, GTS cannot estimate with any degree of certainty the amount and timing
of GTS' future capital requirements for its implementation, which will be
dependent on many factors, including the success of GTS' European end-user
services business, the rate at which GTS expands its networks and develops new
networks, the types of services GTS offers, staffing levels, acquisitions and
customer growth, as well as other factors that are not within GTS' control,
including competitive conditions, regulatory developments and capital costs.
Management believes that it is likely that GTS will need to raise additional
capital above that raised through July 31, 1998. GTS expects that it will have
significant operating and net losses and will record significant net cash
outflow, before financing, in coming years in connection with its European
end-user services business. There can be no assurance that GTS' operations,
including the Company's European end-user services business, will achieve or
sustain profitability or positive cash flow in the future.
LIQUIDITY ANALYSIS
GTS had cash and cash equivalents of $993.9 million and $366.8 million as
of September 30, 1998 and 1997, respectively. GTS had restricted cash of $66.9
million and $59.8 million as of September 30, 1998 and 1997, respectively. The
restricted cash at September 30, 1998 primarily represents amounts held in
escrow to pay the first two years interest payments on the $105 million of the
9.875% Senior Notes due 2005 of GTS and $265 million of the Senior Notes of HER.
During the three and nine months ended September 30, 1998, GTS' operations
provided cash of $29.2 million and used $5.4 million, respectively, compared to
a cash use of $15.7 million and $38.9 million, respectively, in the comparable
periods of 1997. Cash used for investing activities was $89.7 million and $142.9
million for the three months and nine months ended September 30, 1998 and $55.9
million and $73.0 million for the three and nine months ended September 30,
1997, respectively. The use of cash in operations and for investing activities
reflected primarily the development and buildout of existing telecommunications
networks and the funding of fully operational ventures. There can be no
assurance that GTS' operations will achieve or sustain profitability or positive
cash flow in the future. If GTS cannot achieve and sustain operating
profitability or positive cash flow from operations, it may not be able to meet
its debt service obligations or working capital requirements.
In February 1998, GTS used approximately $85.2 million of the net proceeds
from the initial public offering and the $105.0 million Senior Notes to repay
$70.0 million plus accrued interest of debt from lenders who are affiliated
with, and are considered related parties to, GTS as a result of their (or their
affiliates) ownership of GTS' Common Stock.
Substantially all of GTS' operations are in foreign countries and therefore
GTS' consolidated financial results are subject to fluctuations in currency
exchange rates. The Company's consolidated operations transact their business in
the following significant currencies: Russian Ruble, Hungarian Florint, Belgium
Franc and the European Currency Equivalent. For those operating companies that
transact their business in currencies that are not readily convertible, GTS
attempts to minimize its exposure by indexing its invoices and collections to
the applicable dollar/foreign currency exchange rate to the extent its costs
(including interest expense, capital expenditures and equity) are incurred in
U.S. dollars. Although GTS is attempting to match revenues, costs, borrowing and
repayments in terms of their respective currencies, GTS has 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 GTS' 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. GTS may also experience economic
loss and a negative impact on earnings related to these monetary assets and
liabilities.
GTS has developed risk management policies that establish guidelines for
managing foreign exchange risk. GTS is currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. GTS' ability to hedge its exposure is
limited since
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certain of its operations are located in countries whose currencies are not
easily convertible. Financial hedge instruments for these countries are
nonexistent or limited and also pricing of these instruments is often volatile
and not always efficient. GTS is designing reporting processes to monitor the
potential exposure on an ongoing basis and expects to implement this process
before the end of 1998. GTS will use the output of this process to execute
financial hedges to cover foreign exchange exposure when practical and
economically justified.
In April 1998, GTS consummated an economic transaction to hedge the foreign
exchange exposure resulting from the issuance of $265 million Senior Notes by
HER.
In the August 17 Decision the Russian government and the Russia Central
Bank announced the following measures: a) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. b) The value of
the ruble was allowed to fluctuate below the ruble/US dollar exchange rate
corridor that the government had committed to support; this represented an
effective devaluation of the ruble. c) A 90-day moratorium on offshore credit
repayments was issued. The 90-day moratorium was not extended when it expired on
November 16, 1998 and it is anticipated that the ruble will continue to be
devalued. Due to the devaluation and the end of the 90-day moratorium, there is
an ongoing risk that many Russian banks may be declared bankrupt. Deposits held
at Russian banks, other than Sberbank, are not insured. The official exchange
rate as of September 30, 1998 and December 18, 1998 was 16.0645 and 20.7 rubles
per US dollar, respectively. The last official exchange rate prior to the
suspension of trading on August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, GTS recorded a $13.1 million pre-tax
charge within its financial statements for the third quarter 1998, that is
mainly comprised of foreign currency exchange losses for ruble-denominated net
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks. See
"-- Results of Operations -- Consolidated Ventures" (page 175) and "-- Results
of Operations -- Non-Consolidated Ventures (Equity Investees)" (page 180).
Moreover, the Russian government has defaulted on payments, and proposed a
restructuring, of GKO treasury bills and OFZ federal bonds which has been
criticized by Western holders of such obligations. As a result, it is likely
that the Russian government and Russian businesses will have difficulty
accessing Western financial markets for the foreseeable future. The consequences
of the August 17 Decision and its aftermath remain unclear, but no assurance can
be given that these emergency measures, coupled with the policies of Russia's
new government, will be sufficient to stabilize the currency, enhance liquidity
or prevent further economic dislocation. In particular, there can be no
assurance that there will not be a further significant and sudden decline in the
value of the ruble and consequent increased GTS exchange-related losses and
increased loss of investor confidence in the Russian economy. Such consequences
coupled with an overall downturn in the Russian economy and resulting reduced
demand for telecommunication services could have a material adverse effect on
GTS and its financial condition and results of operations.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year (the "Year 2000 Issue"). 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.
Issues Posed by the Year 2000 Issue. GTS is exposed to the Year 2000 Issue
in a number of ways. Among other things, the Year 2000 Issue might affect GTS':
(i) computer hardware and software; (ii) telecommunications equipment and other
systems with embedded logic (among other things, this includes GTS' fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply); (iii) operating partners and organizations
upon which GTS is dependent; (iv) local access connections, upon which GTS is
dependent; and (v) supply chain.
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Global TeleSystems Group Inc.'s Year 2000 Compliance Program. GTS has
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 GTS
or its customers due to these risks (the "Year 2000 Compliance Program"). The
object of the Year 2000 Compliance Program is to ensure that neither the
performance nor functionality of GTS' 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 GTS. The resources which are within the scope of the Year 2000
Compliance Program are, among other things, GTS' 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, GTS' efforts to assess
its systems as well as non-system areas related to Year 2000 compliance involve
(i) a wide-ranging assessment of the Year 2000 problems that may affect GTS,
(ii) the development of remedies to address the problems discovered in the
assessment phase and (iii) 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 GTS has identified substantially all of its 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. GTS' observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of GTS' 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. GTS completed the assessment phase of its Year 2000
readiness in the fourth quarter of 1998.
Remediation, Prevention and Testing Phases. Based on those resources
identified in the assessment phase, GTS 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, GTS has also
undertaken under its 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 GTS, GTS is
obtaining confirmations from GTS' 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. GTS intends to continue follow up with any
vendors who indicate any material problems in their replies. GTS expects to
receive statements of intended compliance by mid-1999.
Worst Case Scenario for GTS. The worst case scenario for GTS would be the
failing of its telecommunications equipment, power providers and/or interfaces
with other telecommunication vendors. These cases would create business
interruption at some of GTS' operations and would adversely affect GTS'
revenues. For example, the Moscow power authorities have publicly stated that
they do not intend to address Year 2000 issues until problems arise. However,
GTS has operations that are geographically diversified; therefore, it is not
anticipated that the worst case scenario would affect all operations at the same
time. Additionally, if power failures occur, GTS currently has diesel generators
at certain of its major sites. Based on its assessment during the third and
fourth quarters of 1998, GTS does not foresee a material loss due to these
conditions and management is hopeful that its remediation and testing efforts
will ensure that it has addressed its Year 2000 readiness. However, there can be
no assurance that Year 2000 non-compliance by GTS' systems or the systems of
vendors, customers, partners or others will not result in a material adverse
effect.
Contingency Plans. GTS is considering a contingency plan to address its
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
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reasonable terms. Moreover, GTS is further limited in resources in certain
geographical regions due to the market volatility and weak economies in which
GTS has business operations. See "Risk Factors -- Risks Specific to GTS -- Risks
Relating to Operation in Russia and the CIS" (page 27).
Costs Related to the Year 2000 Issue. GTS expects that it will incur
between $2.0 million to $3.5 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 $0.6 million had been incurred for the nine months ended September
30, 1998. It is estimated that between $1.0 million to $2.0 million of the total
expenditure will be required to complete the remediation and testing phase,
excluding the replacement of telecommunications equipment and software. GTS is
currently unable to quantify the costs that it may incur during the remediation
and testing phase associated with the replacement of any telecommunications
equipment and software due to the early stage of the 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. GTS does
not expect that the costs of addressing its Year 2000 readiness will have a
material effect on GTS' financial condition or results of operations. However,
there can be no assurance that Year 2000 non-compliance by GTS' systems or the
systems of vendors, customers, partners or others will not result in a material
adverse effect on GTS.
Risks Related to the Year 2000 Issue. Although GTS' efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
GTS' 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 GTS to fully implement the planning or remediation phases or the
failure of its 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 GTS'
business, results of operations, and financial condition. See "Risk
Factors -- Risks Specific to GTS -- Risks Associated with Potential Failure of
GTS' Systems to Recognize Year 2000" (page 37).
INTRODUCTION OF THE EURO
On January 1, 1999, certain countries of the European Union established
fixed conversion rates between their existing sovereign currencies and a new
currency to be called the "Euro." The Euro is now trading on currency exchanges
and is available for non-cash transactions. 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. Through certain of its subsidiaries, GTS has significant operations
within the European Union, including many of the countries that are scheduled to
adopt the Euro. GTS is currently evaluating the systems and business issues
raised by the adoption of the Euro, including the need to adapt information
systems and the competitive impact of cross-border pricing transparency. GTS has
not yet completed its evaluation of the potential impact likely to be caused by
the Euro adoption.
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DIRECTORS AND EXECUTIVE OFFICERS OF GTS
Directors and Executive Officers of Purchaser. The following table sets
forth the name, current business address, citizenship and present principal
occupation or employment, and material occupations, positions, offices or
employments and business addresses thereof for the past five years of each
director and executive officer of GTS. Unless otherwise indicated, the current
business address of each person is 1751 Pinnacle Drive, North Tower -- 12th
floor, McLean, VA 22102. Unless otherwise indicated, each such person is a
citizen of the US.
DIRECTORS
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Robert J. Amman...................... 60 Mr. Amman was elected to GTS's Board of Directors in May
1998. Mr. Amman was Chairman, President and Chief
Executive Officer of John H. Harland Company, a printing
firm, from 1995 to 1998. Previously, from 1994 to 1995,
he served as Vice Chairman of First Financial Management
Corporation, where he was responsible for the merchant
services businesses consisting of Western Union,
NaBanco, Telecheck, Nationwide Credit and International
Banking Technologies. From 1988 to 1994, Mr. Amman
served as President and Chief Executive Officer of
Western Union Corporation, where he oversaw the
transformation of the firm from a telecommunications to
a financial services company. Mr. Amman is a member of
the Executive and Governance Committees of the Board of
Directors.
David Dey............................ 60 Mr. Dey was elected to GTS's Board of Directors in May
1998. Since 1995, Mr. Dey has served as an independent
consultant, particularly to high technology start-up
companies in Europe. In that capacity, he serves as
Chairman of World Telecom and as Chairman of STARTECH
Scotland. From 1992 to 1995, Mr. Dey served as Chief
Executive Officer of Energis Communications, which grew
from a start-up company to become the United Kingdom's
third national telecommunications operation during his
tenure. Mr. Dey was employed by British Telecom plc from
1987 to 1991, most recently as Managing Director of its
Business Communications Division, and he held various
management positions at IBM Corporation where he was
employed from 1961 to 1985. Mr. Dey is a member of the
Audit and Budget, and Compensation Committees of the
Board of Directors. Mr. Dey is a citizen of the United
Kingdom.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Michael A. Greeley................... 35 Mr. Greeley has served as a director of GTS since
September 1996. Mr. Greeley is the Senior Vice President
of GCC Investments, Inc., the investment group of GC
Companies, Inc. From June 1989 to July 1994, Mr. Greeley
was a Vice President at Wasserstein Perella & Co., Inc.,
an international investment bank, specializing in
mergers and acquisitions and corporate finance
transactions. Mr. Greeley is also a director of American
Capital Access Holdings, LLC, Crescent Communications,
Fuelman, Inc. and Teletrac, Inc. By contractual
arrangement, GCC Investments, Inc. has the right to
designate one person for nomination to the Board of
Directors as long as it holds not less than two and
one-half percent of the issued and outstanding shares of
the Common Stock on a fully diluted basis. Mr. Greeley
is the designee of GCC Investments, Inc. to the Board of
Directors. Mr. Greeley is a member of the Audit and
Budget and Compensation Committees of the Board of
Directors.
Roger W. Hale........................ 54 Mr. Hale was elected to GTS's Board of Directors in May
1998. Mr. Hale is Chairman, President and Chief
Executive Officer of LG&E Energy Corp., a diversified
energy services company with businesses in retail gas
and electric utility services, energy marketing and
power generation and project development. Mr. Hale has
served in that capacity since August 1990. Previously,
Mr. Hale served as Executive Vice President of Bell
South Corp. and Bell South Enterprises, Inc. from 1986
to 1989 and with AT&T Corporation from 1966 to 1986,
serving in various management positions including Vice
President of Marketing, Southern Region. Mr. Hale is a
Director of H&R Block, Inc. Mr. Hale is a member of the
Executive and Governance Committees of the Board of
Directors.
Bernard McFadden..................... 64 Mr. McFadden has served as a director of GTS since
February 1994. Mr. McFadden currently serves as an
independent consultant for GTS and is a GTS
representative on the supervisory board of HER. Mr.
McFadden's career in international telecommunications
includes 32 years with ITT Corporation, where he served
as President and Chief Executive Officer of ITT's
Telecom International Group, and a four and one-half
year assignment as President and Chief Operating Officer
of Alcatel Trade International, S.A. Mr. McFadden is a
member of the Executive, Compensation, and Governance
Committees of the Board of Directors.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Stewart J. Paperin................... 50 Mr. Paperin has served as a director of GTS since March
1997. Mr. Paperin serves as Chief Financial Officer of
the Soros Foundations. In addition, he has served as the
President of Capital Resource East since October 1993.
Prior to that, Mr. Paperin was President of Brooke Group
International from 1990 to 1993 where he was responsible
for investments in the former Soviet Union. Mr. Paperin
also served as Chief Financial Officer of Western Union
Corporation from 1989 to 1990. Mr. Paperin serves as a
director of the Board of Penn Octane Corporation. Mr.
Paperin is a member of the Audit and Budget,
Compensation, and Governance Committees of the Board of
Directors.
W. James Peet........................ 43 Mr. Peet has served as a director of GTS since January
1996. Mr. Peet has been affiliated with The Chatterjee
Group, an investment firm, since 1991. Mr. Peet is a
director of Hainan Airlines. Mr. Peet served as director
of Viatel, Inc. from November 1995 until June 1998; he
was also previously a director of Phoenix Information
Systems Corporation. Immediately prior to joining The
Chatterjee Group, Mr. Peet spent six years with McKinsey
& Company. By contractual arrangement, The Chatterjee
Group has the right to designate one person for
nomination to the Board of Directors to serve a term of
five years. Mr. Peet is the designee of The Chatterjee
Group to the Board of Directors. Mr. Peet is a member of
the Executive Committee of the Board of Directors.
Jean Salmona......................... 62 Mr. Salmona has served as a director of GTS since March
1996. Between December 1989 and November 1998, Mr.
Salmona was Chairman and C.E.O. of CESIA Consulting
Group ("CESIA"), of which he is now Honorary Chairman
and member of the Board. He is President and C.E.O. of
J&P Partners, a consulting concern for high-tech
companies which invest in Europe, India and China. Mr.
Salmona is also Chairman and Director General, Data for
Development International Association, a nongovernmental
organization with consultative status to the United
Nations Economic and Social Council. Mr. Salmona is a
graduate of Ecole Polytechnique, Paris, Institut
d'Etudes Politiques, Paris, and Ecole Nationale de la
Statistique et de l'Administration Economique, Paris.
Mr. Salmona is a member of the Audit and Budget
Committee of the Board of Directors. Mr. Salmona is a
citizen of France.
Joel Schatz.......................... 61 Mr. Schatz has served as a director of GTS since the
inception of the Company. Mr. Schatz was a founder of
the Company and served as its President from 1985 to
1991. Mr. Schatz is presently the Chairman and Chief
Executive Officer of Datafusion, Inc., a company
developing software to accelerate knowledge synthesis.
Mr. Schatz is a member of the Audit and Budget Committee
of the Board of Directors.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Alan B. Slifka....................... 68 Mr. Slifka has served as a director of GTS since 1990.
Mr. Slifka is a New York investment banker and the
Managing Principal of Halcyon/Alan B. Slifka Management
Company LLC, an equity asset management firm
specializing in nontraditional investments, specifically
corporate event investing. Previously, Mr. Slifka was a
partner of L.F. Rothschild, Unterberg, Towbin from 1961
to 1982. He is a director of Pall Corporation and is
active in other business, civic and philanthropic
affairs as founder, director or officer of numerous
for-profit and not-for-profit corporations and
foundations. Mr. Slifka served as acting Chief Executive
Officer of GTS during most of 1993. Mr. Slifka is a
member of the Executive and Governance Committees of the
Board of Directors.
Adam Solomon......................... 45 Mr. Solomon has served as a director of the Company
since June 1995. Mr. Solomon is also Chairman of Shaker
Investments, Inc., a growth equity investment firm and
Chairman of Signature Properties International, L.P., a
venture/development firm whose initial focus is
redeveloping existing residential/golf communities, and
a member of the board of directors of MetaSolv Software,
Inc. Prior to that, Mr. Solomon spent eleven years with
E.M. Warburg, Pincus & Co., Inc., where he was Managing
Director from 1988 to 1992. While at E.M. Warburg,
Pincus & Co., Inc., Mr. Solomon served as a member of
the board of directors of LCI International, Inc., a
regional long-distance carrier. Mr. Solomon is a member
of the Executive and Compensation Committees of the
Board of Directors.
Gerald W. Thames..................... 51 Mr. Thames joined GTS as Chief Executive Officer in
February 1994, and has served as a director of GTS since
February 1994. He was elected Vice Chairman of the Board
of Directors in 1998. From 1990 to 1994, Mr. Thames was
President and Chief Executive Officer for British
Telecom North America and Syncordia, a joint venture
company focused on the international outsourcing market.
Mr. Thames has spent over 18 years in senior positions
with telecommunications companies, where he was
responsible for developing start-up telecommunications
companies, including 15 years with AT&T, where he rose
to the position of General Manager of Network Services
for the Northeast Region of AT&T Communications. Mr.
Thames is a member of the Executive Committee of the
Board of Directors.
</TABLE>
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EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Bruno d'Avanzo....................... 56 Mr. d'Avanzo joined GTS as Executive Vice President and
Chief Operating Officer in August 1996. From 1994 to
1996, Mr. d'Avanzo was Executive Vice President and
Chief Operating Officer of Intelsat, the largest
telecommunications satellite operator in the world. From
1992 to 1994, Mr. d'Avanzo was a senior executive with
Olivetti Corporation, serving as Vice President and
General Manager -- Europe and as Vice President -- U.S.,
Canada and South America. Mr. d'Avanzo also spent 15
years with Digital Equipment Corporation, a diversified
computer manufacturer where his last position was Vice
President -- European Sales and Marketing. Mr. d'Avanzo
is a citizen of Italy.
Gerard Essing........................ 35 Mr. Essing is the Chief Executive Officer -- GTS Mobile
Services (CIS). Mr. Essing has been general director of
Vostok Mobile, a GTS subsidiary, since 1994. Prior to
that, Mr. Essing held a variety of management positions
with what is now Lucent Technologies from 1989 to 1994.
Mr. Essing holds a Master's Degree in International
Management from American Graduate School of
International Management in the United States. He has
also received post-graduate telecommunications training
at Technical University Delft in the Netherlands.
Leslie M. Harris..................... 49 Mr. Harris joined GTS in October 1998 as President of
GTS Access Services, which is based in London. Since
1995, he was President and Chief Executive Officer of
New T&T (Hong Kong) Ltd., the leading competitive local
exchange carrier in Hong Kong. From September 1992 to
December 1994, Mr. Harris was Joint Managing Director of
BT. Australasia Ltd. Prior to that, Mr. Harris held a
variety of senior executive positions with British
Telecom in the United Kingdom and Australia.
Jan Loeber........................... 54 Mr. Loeber is President, GTS Carrier Services, and
Managing Director of HER. Mr. Loeber joined GTS in
January 1995. From October 1992 to December 1994, Mr.
Loeber was a Managing Director of BT Securities
Corporation. From April 1990 to September 1992, Mr.
Loeber held positions as Managing Director of Unitel
Ltd. (now One 2 One) in the United Kingdom, Group
President of Nokia North America Inc., Vice President of
ITT Corporation, and Marketing and Product Management
Director of ITT Europe. Mr. Loeber also spent almost 10
years with AT&T, where his last position was Executive
Director, Bell Laboratories. Mr. Loeber has over 22
years of experience in the telecommunications industry
and an additional 9 years of experience in information
technology with the Pentagon, IBM and Chemical Bank of
New York.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
Raymond I. Marks..................... 51 Mr. Marks joined GTS as Senior Vice President -- Asia in
July 1994. From October 1986 to June 1994, Mr. Marks
served as Vice President and General Manager of GTE
Spacenet Corporation, where he had overall
responsibility for strategic planning, domestic and
international business development, creation of joint
ventures and international alliances, as well as the
worldwide management of the marketing, sales and
technical support organizations. Mr. Marks has also
served as Vice President for the Digital Information
Group for MCI Communications Corporation. Mr. Marks has
28 years of experience in the telecommunications and
computer industries.
Kevin Power.......................... 44 Mr. Power is currently serving as Interim Head of GTS
Business Services (Western Europe). Prior to joining GTS
Monaco Access in October 1995, Mr. Power was Vice
President, Carrier Relations for GTS beginning in
November 1994, where he was responsible for assisting
and coordinating the carrier activities of the GTS group
of companies. In 1988, Mr. Power was one of a group of
five people who started the commercial operations of
Orion Network Systems and he stayed with the company
until the launch of its first satellite in 1994. His
last position there was Vice President of Carrier
Services. Prior to that, he held positions with
Intelsat, National Economic Research Associates (NERA)
and the U.S. Department of Commerce.
Grier C. Raclin...................... 46 Mr. Raclin joined GTS as its Senior Vice President and
General Counsel in September, 1997, and was elected
Corporate Secretary of the Company in December 1997.
Prior to joining GTS, Mr. Raclin served as Vice-Chairman
and a Managing Partner of the Washington, D.C. office of
Gardner, Carton & Douglas, a 250-attorney, corporate law
firm based in Chicago, Illinois, where his practice was
concentrated in the area of international
telecommunications. Mr. Raclin received his
undergraduate and law degrees from Northwestern
University and attended the University of Chicago School
of Business Executive Program.
Stewart P. Reich..................... 53 Mr. Reich joined GTS as President -- GTS Russia in
September 1997. From September 1992 to August 1997, Mr.
Reich was President of UTEL, a joint venture of AT&T,
Deutsche Telekom, PTT Telecom (Netherlands), and
Ukrtelecom (a Ukrainian telecommunications company)
which provides international and interregional
telecommunications services in Ukraine. From 1982 to
1992, Mr. Reich held various positions at AT&T where his
last position was Financial Manager, AT&T International
Communications Switched Services. Mr. Reich was also
employed for 20 years with Western Electric Company from
1961 to 1981.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME, CITIZENSHIP MATERIAL POSITIONS HELD DURING THE PAST
AND CURRENT BUSINESS ADDRESS AGE FIVE YEARS AND BUSINESS ADDRESSES THEREOF
---------------------------- --- -------------------------------------------
<S> <C> <C>
William H. Seippel................... 41 Mr. Seippel joined GTS as Executive Vice President of
Finance and Chief Financial Officer in October 1996.
From July 1992 to October 1996, Mr. Seippel was Vice
President -- Finance and Chief Financial Officer of
Landmark Graphics Corporation. From August 1990 to July
1992, Mr. Seippel was Director of Finance for Covia,
Inc., an affiliate of United Airlines. From April 1984
to August 1990, Mr. Seippel held the positions of Group
Business Controller (1989 to 1990), Group Controller
Sales/Marketing (1986 to 1989), and Product Line
Controller (1984 to 1986) with Digital Equipment
Corporation, a diversified computer manufacturer.
Eileen K. Sweeney.................... 46 Ms. Sweeney joined GTS as Senior Vice President -- Human
Resources in November, 1997. Prior to joining GTS, Ms.
Sweeney was President of Global Resource Associates, a
consulting company specializing in international human
resource issues. Prior to that time, Ms. Sweeney spent
10 years with ITT Corporation in a variety of human
resource management positions, including eight years
based in Europe and in the Middle East. Ms. Sweeney
holds a Master's Degree in Business Administration from
Simmons Graduate School of Management in Boston.
Gerald W. Thames..................... 51 See biographical information under "Directors" above.
Louis T. Toth........................ 55 Mr. Toth joined GTS as Senior Vice President -- Central
Europe in July 1993. From February 1987 to July 1991,
Mr. Toth served as President of Dynaforce Inc. and as
Partner and General Manager for the pan-European
expansion of Andlinger & Company. Mr. Toth, who is
currently based in London, has 23 years of
telecommunications experience with ITT Corporation in
Europe, Latin America and Asia.
</TABLE>
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director of GTS, except Mr. Thames, receives an annual directors' fee
of $15,000. In addition, the fee paid to each Director, except for Mr. Thames,
for attending any meeting of the Board of Directors is $1,500 per meeting,
except for telephonic Board of Directors meetings of two hours or less, where
the fee is $750 for each such meeting. Each Director, except Mr. Thames, who
attends a committee meeting is entitled to a directors' fee of $1,000 per
meeting, except for telephonic committee meetings of a duration of two hours or
less, for which a fee of $500 is paid.
For the year ended December 31, 1997, the aggregate compensation paid by
the Company to its directors and executive officers for services in all
capacities was approximately $4.7 million.
GTS maintains the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan that permits directors to share in the growth of the value of
GTS through the grant and exercise of nonqualified stock options. See "-- Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan." In addition,
on February 27, 1998 the Board of Directors granted to each of certain of its
then incumbent members options to purchase 15,000 shares of GTS Stock at an
exercise price of $20 per share.
GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The purpose of the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") is to permit eligible non-employee
directors of GTS (each a "Non-Employee Director") to share in the growth of the
value of GTS through the grant and exercise of nonqualified stock options.
The total number of shares of Common Stock presently reserved and available
for delivery under the Directors' Plan is 1,275,000. The Directors' Plan is
administered by the compensation committee of the Board of Directors (the
"Committee"). Only directors of GTS who are not employees of GTS or any
subsidiary of GTS on the date on which an option is to be granted are eligible
to participate in the Directors' Plan on such date.
An option (a "Directors' Option") to purchase shares of Common Stock was
granted to each Non-Employee Director on the effective date of the Directors'
Plan and a Director's Option is granted to each new Non-Employee Director when
he or she is first elected or appointed to serve as a director of GTS. One-half
of the Directors' Options vests six months after the date of grant. An
additional one quarter become exercisable on the date six months following the
first annual meeting of GTS's shareholders to occur after such date of grant,
and the remaining one quarter shares become exercisable on the date six months
following the second annual meeting of GTS's shareholders to occur after such
date of grant. An initial Directors' Option represents 22,500 shares of Common
Stock. On the date of each annual meeting of GTS's shareholders, an additional
Directors' Option to purchase 9,000 shares will be granted each year on the date
of the Company's annual meeting to the individuals who will serve as elected
Non-Employee Directors of the Company during the next year.
Directors' Options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of GTS Stock purchasable under a Directors' Option will be equal
to 100% of the fair market value of GTS Stock on the date of grant. Each
Directors' Option will expire upon the earliest of (a) the tenth anniversary of
the date of grant, (b) one year after the Non-Employee Director ceases to serve
as a director of GTS due to death or disability (except that, in the case of
disability, if the Non-Employee Director dies within that one-year period, the
Directors' Option is exercisable for a period of one year from the date of
death), (c) three months after the Non-Employee Director ceases to serve as a
director of GTS for any reason other than death or disability (except that, if
the Non-Employee Director dies within that three-month period, his or her
Directors' Options are exercisable for a period of one year from the date of
such death), and (d) three months after the Non-Employee Director ceases to be
employed by GTS if such Non-Employee Director had become an employee of GTS
(except that, if the Non-Employee Director dies within that three-month period,
his or her Directors' Options are
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<PAGE> 205
exercisable for a period of one year from the date of such death). Each
Directors' Option may be exercised in whole or in part by giving written notice
of exercise to GTS specifying the Directors' Option to be exercised and the
number of shares to be purchased. Such notice must be accompanied by payment in
full of the exercise price in cash or by surrender of shares of GTS Stock or a
combination thereof. Directors' Options granted under the Directors' Plan may
not be sold, pledged, assigned or otherwise disposed of in any manner other than
by will or by the laws of descent and distribution.
At the time of grant, the Board of Directors may provide in connection with
any grant made under the Directors' Plan that the shares of GTS Stock received
as a result of such grant are subject to a right of first refusal by GTS.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which GTS Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
The following table sets forth each component of compensation paid or
awarded to, or earned by, the Chief Executive Officer and the four other most
highly compensated executive officers serving as of December 31, 1998
(collectively, the "Named Executive Officers") for the years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
AWARDS
ANNUAL COMPENSATION --------------------------
----------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS(1) COMPENSATION AWARD(S) OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)(11)
--------------------------- ---- -------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald W. Thames,............... 1998 $395,000 $330,000 (2) -0- 350,000(6) $ 19,065
Vice Chairman, President and 1997 375,417 140,000 (2) -0- 141,195(6) 19,850
Chief Executive Officer 1996 325,000 113,750 (2) -0- 112,500(6) 9,954
Bruno d'Avanzo,................. 1998 $340,000 $173,333(3) -0- -0- 175,000(6) $ 18,105
Executive Vice President and 1997 340,000 83,313(3) -0- -0- 104,475(6) 21,675
Chief Operating Officer 1996 141,667 33,333(3) -0- -0- 83,025(6) 5,650
Jan Loeber,..................... 1998 $310,000 $119,400 $101,840(4) -0- 150,000(6) $178,565
Senior Vice President -- HER; 1997 235,000 177,308 46,598(4) -0- 4,812(7) 179,450
President - GTS Carrier
Services 1996 235,000 -0- 42,806(4) 30,000(5) 3.5(8) 12,986
William H. Seippel(12).......... 1998 $245,833 $120,000 (2) -0- 150,000(6) $ 9,650
Executive Vice President -- 1997 200,000 11,469 $ 25,225(9) -0- 97,500(6) 52,215
Chief Financial Officer 1996 43,205 -0- (2) -0- 285,000(6) 943
Stewart P. Reich(13)............ 1998 $243,750 $ 98,300 $187,008(10) -0- 150,000(6) $ 5,197
President -- GTS Business 1997 78,333 75,000 59,772(10) -0- 112,500(6) 384
Services -- CIS
</TABLE>
- ---------------
(1) Represents cash bonus paid in the year indicated for services rendered in
the immediately preceding year, except in the case of Mr. Loeber, whose
bonus paid in 1997 was for services rendered in 1996 and 1995.
(2) Perquisites and other personal benefits paid to the Named Executive Officer
were less than the lesser of $50,000 and 10 percent of the total of salary
and bonus report for the Named Executive Officer.
(3) Mr. D'Avanzo's bonuses in 1998, 1997 and 1996 include the three equal
installments of a $100,000 sign-on bonus that GTS agreed to pay in three
equal annual installments when he was hired in 1996.
(4) For 1998, the amount disclosed includes an overseas living allowance of
$21,700 and a tax equalization payment of $58,613 that compensated Mr.
Loeber for the higher taxes he pays because he resides in Belgium instead of
the United States. For 1997, the amount disclosed includes an overseas
living allowance of $16,450, a tax equalization payment of $13,953 and a
gross-up payment of $11,648 for certain tax liabilities. For 1996, the
amount disclosed includes an overseas living allowance of $16,450 and a
gross-up payment of $12,778 for certain tax liabilities.
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<PAGE> 206
(5) Shares of restricted stock that vest in an amount of one-third each year on
the three anniversary dates of grant, beginning on January 2, 1997.
(6) Shares of common stock underlying stock options awarded under the Stock
Option Plan.
(7) Stock options awarded under The Key Employee Stock Option Plan of Hermes
Europe Railtel B.V.(the "HER Stock Option Plan").
(8) Stock options awarded under the GTS-Hermes, Inc. Stock Option Plan, which
will be terminated. The stock options granted to Mr. Loeber in 1997 and
described in footnote (6) are in substitution for the 3.5 stock options
granted to Mr. Loeber in 1996, which have been cancelled.
(9) Amount disclosed represents a gross-up payment of $25,225 associated with
certain tax liabilities.
(10) For 1998, the amount disclosed includes an overseas living allowance of
$72,000, rent on a residence in Moscow of $90,000, and a tax equalization
payment of $19,844 that compensated Mr. Reich for the higher taxes he pays
because he resides in Russia instead of United States. For 1997, the amount
disclosed includes an overseas living allowance of $24,000 and rent on a
residence in Moscow of $30,300.
(11) Amounts disclosed hereunder represent the sum of premiums paid by GTS for
$1 million in term life insurance for each Named Executive Officer and
contributions by GTS under the 401(k) Plan, as defined below, to each Named
Executive Officer's account, except Mr. D'Avanzo who does not participate
in the 401(k) Plan because of his foreign citizenship and Mr. Seippel in
1996 and Mr. Reich in 1997 because their tenure with GTS did not qualify
them for participation in the 401(k) Plan in those years. In each case in
which GTS paid 401(k) Plan contributions, $4,000 was paid in each of 1997
and 1996 and $3,750 was paid in 1996 to the Named Executive Officers. In
addition, for 1998 and 1997, the amounts disclosed for Mr. Loeber include
$156,700 in each year, which represents the value as of December 31, 1997
and December 31, 1998 of 10,000 shares of restricted stock which vested in
each of 1997 and 1998.
(12) Mr. Seippel commenced his employment with GTS in October 1996.
(13) Mr. Reich commenced his employment with GTS in September 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock option grants to the
Named Executive Officers in 1998 under the Stock Option Plan
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR GRANT DATE
OPTIONS IN BASE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE VALUE($)(2)
---- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Gerald W. Thames..................... 350,000(1) 9.4 $25.75 10-14-08 $6,016,500
Bruno d'Avanzo....................... 175,000(1) 4.7 25.75 10-14-08 3,008,250
Jan Loeber........................... 150,000(1) 4.0 25.75 10-14-08 2,578,500
William H. Seippel................... 150,000(1) 4.0 25.75 10-14-08 2,578,500
Stewart P. Reich..................... 150,000(1) 4.0 25.75 10-14-08 2,578,500
</TABLE>
- ---------------
(1) The options vest one-sixth on each of the first six anniversaries of the
date of grant. However, the options may vest on an accelerated basis if GTS
and the individual grantees meet certain performance targets. Under that
accelerated vesting, all the options could vest by the third anniversary of
the date of grant.
(2) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of 0.75, risk-free
interest rate of 4.23% and expected life of five years.
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<PAGE> 207
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information on the number and value of GTS
stock options exercised by the Named Executive Officers during 1998, the number
of options under the Stock Option Plan held by such persons at December 31,
1998, and the value of all unexercised options held by such persons as of that
date.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT FY-END (#) OPTIONS AT FY-END($)(1)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Gerald W. Thames.......... 487,500 $20,048,438 354,048/512,147 $16,296,754/$17,458,263
Bruno d'Avanzo............ 50,000 2,085,000 31,468/281,032 1,312,935/9,682,065
Jan Loeber................ -0- -0- 0/150,000 -0-/4,500,000
William H. Seippel........ 50,000 2,064,750 169,375/313,125 7,162,950/11,353,950
Stewart P. Reich.......... -0- -0- 28,125/234,375 1,127,250/7,881,750
</TABLE>
- ---------------
(1) Based on the closing price of $55.75 on the Nasdaq Stock Market of the
Common Stock on December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES-HER STOCK OPTION PLAN
The following table provides information on the number and value of options
exercised by one of the Named Executive Officers, Jan Loeber, during 1998 under
the HER Stock Option Plan, and the number and value of unexercised options held
by Mr. Loeber as of December 31, 1998 under such Plan. Mr. Loeber was not
granted any options in the HER Stock Option Plan in 1998.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT FY-END (#) FY-END ($)(2)
NAME (1)(#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jan Loeber................ 3,209 $2,129,793 0/1,603 $0/$1,292,803
</TABLE>
- ---------------
(1) The shares are beneficially owned by Mr. Loeber and are held in trust by
Stichting Administratiekantoor HER Foundation, which in turn has issued
depositary receipts to him representing beneficial ownership in the shares.
(2) Based on a valuation price of $889.61 per share of HER common stock at
December 31, 1998. This valuation was determined by the valuation per common
share that a wholly owned subsidiary of GTS paid to AB Swed Carrier for
acquiring all of its minority interest in HER on October 31, 1998.
200
<PAGE> 208
CERTAIN RELATED PARTY TRANSACTIONS
Alan B. Slifka, the Chairman of the Board of Directors, owns an interest in
an office building in New York in which GTS leased office space until the
corporate headquarters were moved to McLean, Virginia on March 1, 1995. Until
April 1, 1998, GTS retained a small office space in New York City that it leased
from Mr. Slifka on a monthly basis, and the annual expense for 1997 was $30,690.
Mr. Slifka also has a consulting agreement with GTS pursuant to which he is paid
consulting fees of $100,000 per year.
Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 225,000 stock options
to purchase GTS Stock that were granted in 1991 pursuant to a stock option
agreement that is not subject to any stock option plan. The options have an
exercise price of $0.533 per share and are fully vested. Any of the stock
options that remain unexercised after November 30, 2001 shall lapse and become
void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination. The shares of GTS Stock underlying such
options have been registered under a registration statement that has been
declared effective by the SEC.
In addition, Joel Schatz, a director of GTS, was granted in 1991 stock
options to purchase GTS Stock pursuant to stock option agreements that are not
subject to any stock option plan. Mr. Schatz holds 50,250 of such stock options
to purchase GTS Stock with an exercise price of $0.533 per share. Mr. Schatz's
options are fully vested and any unexercised options he holds after November 4,
2001 shall lapse and become void. Generally, in the event that Mr. Schatz ceases
to be an employee or nonemployee director of GTS any of his unexercised stock
options shall lapse thirty days after such termination. The shares of GTS Stock
underlying such options have been registered under a registration statement that
has been declared effective by the SEC.
Bernard McFadden, Director, has a consulting agreement with GTS pursuant to
which he is paid $100,000 in consulting fees each year.
In August and September 1997, the Soros Associates and Mr. Slifka purchased
319,149 and 57,015 shares of GTS Stock, respectively, at a price of $15.67 per
share in GTS private stock offering. In addition, affiliates of Mr. Slifka
purchased $2.9 million of Convertible Bonds in September 1997. Pursuant to the
terms of the indenture related to the Convertible Bonds, the Convertible Bonds
will be convertible into such shares of GTS Stock as is equal to the principal
amount of such Convertible Bonds divided by the applicable conversion price,
which conversion price shall be equal to the public offering price of the GTS
Stock in the July 1998 Offerings. See "-- Principal GTS Stockholders."
The Soros Associates purchased $40 million of notes from GTS in 1996, which
notes bore interest at 10% per annum, in partial consideration of which (i) W.
James Peet was appointed to the Board of Directors and (ii) the affiliates
received warrants to purchase 4,444,443 shares of GTS Stock. Together with their
prior equity interests in GTS, these affiliates currently hold, on a fully
diluted basis (excluding shares underlying stock options), approximately 14% of
GTS Stock. In accordance with the terms of the warrant agreement, the exercise
price of the warrants was reduced from $10.27 per share to $9.33 per share as
the outstanding debt had not been repaid prior to December 31, 1996. In February
1998, GTS repaid the $40 million of notes, plus accrued interest, using part of
the proceeds of an offering of senior notes and the IPO completed at that time.
In addition, these affiliates collect a monitoring fee of $40,000 per month.
Under certain agreements, these affiliates have the right to co-invest with GTS
in all of its new ventures throughout Asia, excluding countries in the former
Soviet Union, and pursuant to this right, one of these affiliates holds a 25%
interest in GTS China Investments LLC. See "Certain Information Concerning
GTS -- Description of GTS -- Asia."
On January 20, 1999 GTS has filed a shelf registration statement covering
all of the affiliate shares owned by the affiliates of Mr. Slifka and the Soros
Associates that were not sold in the July 1998 Stock Offerings in consideration
of such shareholders' undertaking to be bound by certain restrictions. It is
GTS' belief, after consultation with its financial advisors, that this agreement
relating to the affiliate shares will contribute toward assuring the market of
an orderly manner for such affiliate shares to be sold over a period of time.
Under the restrictions, holders of affiliate shares will be prevented from
selling any such shares during the first six months after the closing date of
the July 1998 Offerings and will be able to sell (i) 50% of such shares after
201
<PAGE> 209
the six month anniversary of the closing date of the July 1998 Offerings, (ii)
75% of such shares after the nine month anniversary of the closing date of the
July 1998 Offerings and (iii) 100% of such shares after the twelve month
anniversary of the closing date of the July 1998 Offerings. In connection with
this agreement, GTS also has agreed to permit certain of the Soros Associates to
resell, immediately after the closing date of the July 1998 Stock Offerings, up
to 100,000 of any shares that they are unable to resell in the July 1998 Stock
Offerings as a result of any cut-back that may be imposed by the underwriters
(subject to a waiver by the underwriters in GTS' IPO of the lockup agreement
entered into by such affiliates to the extent of such 100,000 shares). Certain
limited partners of partnerships affiliated with Alan B. Slifka and currently in
dissolution may, upon advance notice to GTS, withdraw some or all of their
shares of GTS Stock from registration under the shelf registration statement and
from the restrictions. The number of shares of GTS Stock subject to this
withdrawal may not exceed the total of 726,953 shares of GTS Stock minus the
number of shares sold by such limited partners in the July 1998 Stock Offerings.
See "Risk Factors -- Risks Specific to GTS -- Shares Eligible for Future Sale;
Registration Rights; Potential Adverse Impact on Market Price from Sales of GTS
Stock."
Jean Salmona, a director of GTS, is the former Chairman and Chief Executive
Officer of CESIA. CESIA also provides consultancy services for CDI and for HER.
GTS paid $37,500 in 1997 to CESIA for consulting services related to CDI. In
addition, HER paid $405,893 in 1997 to CESIA for consulting services. Further,
GTS paid $5,843 to CESIA in 1997, pursuant to the purchase agreement with CESIA
related to the CDI business.
Pursuant to a 1995 purchase agreement, GTS received its interest in GTS-Vox
Limited, the intermediate holding company of TCM, in exchange for a note in the
principal amount of $693,380 issued to the sellers and certain additional
consideration to its partners payable in the form of either cash or GTS Stock
based upon its financial performance. GTS paid the note in 1996. On January 17,
1997, the agreement was amended such that the consideration would only be in the
form of the issuance of GTS Stock and as such, GTS is obligated under these
arrangements to issue up to a maximum of 1,121,640 shares of GTS Stock. In the
first quarter of 1997, pursuant to this agreement GTS issued 504,600 GTS Stock,
which was valued at GTS's current fair market value of $13.33 per share. In
addition, GTS was credited 37,480 shares of GTS Stock under the amended
agreement, for purposes of applying against the 1,121,640 maximum number of
shares of GTS Stock, for GTS' payment of its note to the sellers in 1996. In
April 1998, pursuant to this agreement, GTS issued 336,630 shares of GTS Stock,
which was valued at GTS's current fair market value of $40.25 per share. GTS
Stock issued pursuant to the agreement must be held for a minimum holding
period. In certain circumstances, if GTS's partners are unable to sell their
shares of GTS Stock, GTS is obligated to assist in locating a purchaser for the
GTS Stock, and, if unable to do so, to repurchase these shares. GTS's repurchase
obligations are at the following prices: (i) if shares of GTS Stock are then
being publicly traded, at the average trading price of such shares for the 10
trading days preceding such repurchase or (ii) if shares of GTS Stock are not
then publicly traded, at the price shares of GTS Stock were most recently
offered to individual investors in a private placement, or, if no such private
placement has occurred within the three months preceding the repurchase of such
shares, at a price determined by an independent financial institution to be
agreed upon by GTS and the seller. As a result of their receipt of shares of GTS
Stock in 1997, the sellers became shareholders of GTS. Subsequent to June 30,
1998, GTS purchased the remaining 47.36% interest in GTS-Vox Limited for $40.0
million, which will be paid in installments. In connection with this buyout, GTS
accelerated the issuance of 126,859 shares of GTS Stock under the 1995 purchase
agreement to the former GTS-Vox Limited partners.
Affiliates of Baring International Investment Management Limited
("Barings"), which affiliates consist primarily of investment funds and trusts,
are shareholders of GTS. In April 1996, GTS entered into an agreement with First
NIS Regional Fund SICAF, an affiliate of Barings, to organize GTS Ukrainian
TeleSystems, L.L.C. (the "LLC"), a Delaware limited liability company 60% owned
by GTS, which in turn entered into a stock purchase agreement to acquire 49% of
all the ownership interests in Golden Telecom, a Ukrainian limited liability
company. See "Certain Information Concerning GTS -- Description of GTS -- Russia
and the CIS." Such acquisition closed in May 1996. By contractual arrangement,
Barings designates one member of the board of directors of Golden Telecom.
Barings funded $4.5 million to be applied towards
202
<PAGE> 210
the LLC's purchase of the interest in Golden Telecom and for the LLC's $1.5
million contribution to the registered capital of Golden Telecom. Prior to March
1, 1999, Barings may exercise an option (the "Initial Option") to convert its
initial investment into 438,311 shares of GTS Stock at an exercise price of
$10.27. In June 1997 the agreement was amended, such that Barings funded an
additional $4.1 million to be applied toward Golden Telecom's capital
expenditure and operating capital requirements. On September 30, 2000, Barings
may exercise an option (the "2000 Option") to convert such additional investment
into 275,000 shares of GTS Stock at an exercise price of $15.00. In connection
with the restructuring of Golden Telecom, which has been completed, the
agreement was further amended in June 1998 to restructure the capital and
ownership of the LLC. See "Certain Information Concerning GTS -- Description of
GTS -- Russia and the CIS -- GTS Cellular -- Golden Telecom." Pursuant to such
amendment Barings exercised the Initial Option and the 2000 Option (the
exercisability of which was accelerated by GTS) and received 713,311 shares of
GTS Stock and made an additional investment of $5.75 million to be applied
toward Golden Telecom's capital expenditure and operating capital requirements.
Barings has no put right in connection with such additional investment. As a
result of the June 1998 amendment, GTS increased its ownership interest in the
LLC to 75% and in Golden Telecom to approximately 57%.
On March 26, 1998, Gerald W. Thames, GTS' Vice Chairman, President and
Chief Executive Officer, exercised non-qualified options to purchase 487,500
shares of GTS Stock at an exercise price of $2.75 per share. Mr. Thames borrowed
funds from a brokerage firm in order to pay the exercise price and the tax
liabilities resulting from such exercise (the "Margin Loan"). The shares of GTS
Stock resulting from such exercise served as collateral for the Margin Loan.
Subsequently, the market price of the GTS Stock declined and consequently the
brokerage firm required Mr. Thames to reduce the size of the Margin Loan or
increase the collateral securing the Margin Loan. Mr. Thames was unable to sell
any of the shares of GTS Stock collateralizing the Margin Loan (and thereby
reduce the Margin Loan) because of lock-up arrangements with the underwriters of
the July 1998 Stock Offerings. As a result, GTS loaned Mr. Thames $3.5 million
in September and October 1998, so he could use the proceeds of such loans to
repay a corresponding portion of the Margin Loan. These loans from GTS bear
interest at a rate of 7% per annum. Mr. Thames repaid the GTS loan in January
1999. GTS has agreed to lend Mr. Thames up to an aggregate of $4 million to meet
additional margin calls on his Margin Loan. Mr. Thames contemplates that he will
enter into a separate loan agreement with a commercial bank to meet any
subsequent margin calls in connection with the Margin Loan. GTS has agreed to
guarantee Mr. Thames' obligations under such bank loan.
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<PAGE> 211
PRINCIPAL GTS STOCKHOLDERS
The following table sets forth certain information regarding ownership of
the GTS Stock and rights to acquire GTS Stock by (i) GTS stockholders that
manage or own, either beneficially or of record, five percent or more of the GTS
Stock, (ii) each of the directors and executive officers of GTS and (iii) the
directors and officers of GTS as a group as of December 31, 1998. For the
purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares which such person or group has the right to
acquire within 60 days after such date, but such shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED TO BE BENEFICIALLY OWNED
PRIOR TO THE OFFER AFTER THE OFFER(3)
---------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) OWNED(1) OWNED OWNED
------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
George Soros Associates...................... 8,099,047(4) 12.51 8,099,047 9.84
c/o Soros Fund Management
888 Seventh Avenue, 31(st) Floor
New York, NY 10106
Mutuelles AXA/AXA-UAP/....................... 7,989,930(5) 12.34 7,989,930 9.71
The Equitable Companies Incorporated
9 Place Vendome
75001 Paris France
Fidelity Management and Research 7,145,670(6) 11.04 7,381,885 8.97
Corporation................................
82 Devonshire Street
Boston, MA 02109
Fidelity International Limited............... 23,640(7) * 1,165,259 1.42
P.O. Box H.M. 670
Hamilton, Bermuda
Alan B. Slifka and affiliates................ 3,752,112(8) 5.80 3,752,112 4.56
c/o Halcyon/Alan B. Slifka Management
Company, LLC
477 Madison Avenue, 8(th) Floor
New York, NY 10022
Apax Funds Nominees Limited.................. -- * 4,265,171(9) 5.18
62 Green Street
London W1Y 4BA
Gold & Appel Transfer S.A.................... -- * 4,148,277(9) 5.04
Omar Hodge Building
Wickams's Cay
Road Town
Tortola
British Virgin Islands
Winston Partners II LDC...................... 766,098(10) 1.18 766,098 *
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Winston Partners II LLC...................... 373,548(11) * 373,548 *
c/o Chatterjee Advisers L.L.C.
c/o The Chatterjee Group
888 Seventh Avenue, 30th Floor
New York, New York 10106
</TABLE>
204
<PAGE> 212
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED TO BE BENEFICIALLY OWNED
PRIOR TO THE OFFER AFTER THE OFFER(3)
---------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) OWNED(1) OWNED OWNED
------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Chatterjee Fund Management................... 555,555(12) * 555,555 *
888 Seventh Avenue, 30th Floor
New York, New York 10106
Robert Amman................................. 10,500 * 10,500 *
David Dey.................................... 7,900 * 7,900 *
Michael A. Greeley........................... 26,000 * 26,000 *
Roger Hale................................... 7,109 * 7,109 *
Bernard McFadden............................. 50,000 * 50,000 *
Stewart J. Paperin........................... 26,000 * 26,000 *
W. James Peet................................ 8,000 * 8,000 *
Jean Salmona................................. 26,000 * 26,000 *
Joel Schatz.................................. 512,750 * 512,750 *
Adam Solomon................................. 65,414 * 65,414 *
Gerald W. Thames............................. 863,722 1.33 863,722 1.07
Bruno d'Avanzo............................... 48,212 * 48,212 *
Jan Loeber................................... 20,000 * 20,000 *
Raymond I. Marks............................. 211,625 * 211,625 *
Louis T. Toth................................ 204,275 * 204,275 *
Other officers............................... 329,687 * 329,687 *
All Directors and Executive Officers as a 6,169,306 9.53 6,169,306 7.64
group (23 persons)......................
Total of above............................... 31,122,794 40,914,076
</TABLE>
- ---------------
* Less than 1%
(1) The percentage of ownership is based upon 64,744,221 shares of Common Stock
issued and outstanding at December 31, 1998. Excluded from the calculation
are: 4,444,443 shares of Common Stock that is subject to the exercise of
warrants in Common Stock; and 5,195,063 shares of Common Stock issued under
GTS' option plans. Subject to NetSource meeting certain performance targets
during the first two quarters of 1999, an additional 1.4 million shares of
common stock may be issued.
(2) Includes shares of Common Stock issuable upon the exercise of stock options
and stock warrants within 60 days of December 31, 1998.
(3) Reflects the additional 17,566,938 shares of Common Stock to be issued in
connection with the Offer of which 15,973,158 shares will be issued in
exchange for outstanding Esprit Telecom ordinary shares and ADS's and up to
1,593,780 shares that could be issued in connection with the exercise of
Esprit Telecom options.
(4) Comprised of 3,074,199 shares of Common Stock held by the Soros
Foundation-Hungary; 656,849 shares of Common Stock held by the Soros
Charitable Foundation; 37,718 shares of Common Stock held by Soros
Humanitarian Foundation and 996,948 shares and warrants to purchase
3,333,333 shares of Common Stock held by The Open Society Institute. The
inclusion of such shares shall not be deemed an admission that Mr. George
Soros is the beneficial owner of such shares. Information in the above
entry excludes 20,000 and 26,000 shares of, and options for the purchase
of, Common Stock held by Stewart J. Paperin and W. James Peet,
respectively, over which the George Soros associates disclaim ownership.
(5) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13G dated December 10, 1998, a copy
of which was furnished to GTS. Number of shares as to which such holder
has: sole voting power -- 2,329,558 shares; shared voting
power -- 5,651,676 shares; sole dispositive power -- 7,981,705 shares; and
shared dispositive power -- 8,225 shares. The shareholding disclosed
includes 1,774,405 shares receivable upon conversion of convertible bonds.
205
<PAGE> 213
(6) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13F-E dated as of September 30, 1998
that was filed with the SEC on November 6, 1998.
(7) Ownership information is based on a Schedule 13F-E dated as of September
30, 1998 that was filed with the SEC on November 3, 1998.
(8) Includes 2,530,562 shares of Common Stock owned by Mr. Slifka, 644,072
shares of Common Stock held in various trusts, options to purchase 8,000
shares of Common Stock owned by Mr. Slifka, 214,478 shares of Common Stock
held by various Halcyon partnerships which are managed by Halcyon/Alan B.
Slifka Management Company (over which Mr. Slifka disclaims beneficial
ownership), 130,000 shares of Common Stock issuable upon the conversion of
Convertible Bonds held by various Halcyon partnerships which are managed by
Halcyon/Alan B. Slifka Management Company (over which Mr. Slifka disclaims
beneficial ownership), and options to purchase 225,000 shares of Common
Stock held by Halcyon/Alan B. Slifka Management Company (over which Mr.
Slifka disclaims beneficial ownership). GTS has undertaken to file a shelf
registration statement covering such shares not previously registered by
GTS. See "Risk Factors -- Risk Specific to GTS -- Shares Eligible for
Future Sale; Registration Rights; Potential Adverse Impact on Market Price
from Sale of GTS Stock."
(9) Information was obtained from Esprit Telecom's Form 20-F filed with the SEC
on December 23, 1998.
(10) Comprised of 395,727 shares of Common Stock and warrants to purchase
370,371 shares of Common Stock. Information in the above entry excludes
20,000 and 26,000 shares of, and options for the purchase of, Common Stock
held by Stewart J. Paperin and W. James Peet, respectively, over which
Winston Partners II LDC disclaims ownership. On January 20, 1999 GTS filed
a shelf registration statement covering such shares. See "Risk
Factors -- Risk Specific to GTS -- Share Eligible for Future Sale;
Registration Rights; Potential Adverse Impact on Market Price from Sale of
GTS Stock."
(11) Comprised of 188,364 shares of Common Stock and warrants to purchase
185,184 shares of Common Stock. Information in the above entry excludes
20,000 and 26,000 shares of, and options for the purchase of, Common Stock
held by Stewart J. Paperin and W. James Peet, respectively, over which
Winston Partners II LLC disclaims ownership. On January 20, 1999 GTS filed
a shelf registration statement covering such shares. See "Risk
Factors -- Risk Specific to GTS -- Share; Eligible for Future Sale;
Registration Rights; Potential Adverse Impact on Market Price from Sale of
GTS Stock."
(12) Comprised of warrants to purchase 555,555 shares of Common Stock.
Information in the above entry excludes 20,000 and 26,000 shares of, and
options for the purchase of, Common Stock held by Stewart J. Paperin and W.
James Peet, respectively, over which Chatterjee Fund Management disclaims
ownership. On January 20, 1999 GTS filed a shelf registration statement
covering such shares. See "Risk Factors -- Risk Specific to GTS -- Shares
Eligible for Future Sale; Registration Rights; Potential Adverse Impact on
Market Price from Sale of GTS Stock."
206
<PAGE> 214
CERTAIN INFORMATION CONCERNING ESPRIT TELECOM
DESCRIPTION OF ESPRIT TELECOM
The following is a brief description of Esprit Telecom's business.
Additional information regarding Esprit Telecom is contained in its filings with
the SEC pursuant to the Exchange Act. See "Where You Can Find More Information"
(page 210).
Esprit Telecom is a rapidly growing European telecommunications company,
providing high quality, competitively priced, international and national long
distance telecommunications services. Esprit Telecom commenced operations in
June 1992 with the objective of competing in the liberalizing European
telecommunications market and established an early presence in several key
European markets. Today, Esprit Telecom provides telecommunications services in
the United Kingdom, Germany, The Netherlands, Spain, France, Belgium, Italy and
Ireland and has commenced construction of a broadband SDH fiber optic network
linking the key cities in which it operates. Esprit Telecom intends to continue
to focus on providing telecommunications services both within and across
national borders to a pan-European market.
Esprit Telecom's objective is to expand its service coverage throughout
Europe and to become one of the largest independent pan-European
telecommunications service providers by capitalizing on its established market
position, experience and strategic acquisitions. In July 1998, Esprit Telecom
acquired the switch-based telecommunications services business of Plusnet, which
at that date offered national and international long distance voice telephony
and enhanced services, such as toll free services, calling cards and switched
data services to approximately 700 business customers. Esprit Telecom's customer
base has grown from 625 customers at December 31, 1996 to 7,657 at September 30,
1998. On a pro forma basis after giving effect to the acquisition of the Plusnet
Business, Esprit Telecom would have had revenue of L95.3 million for the year
ended September 30, 1998.
Esprit Telecom currently offers a range of telecommunications services and
products to three targeted customer segments: (i) retail long distance voice and
fax services for corporate customers to all global destinations either directly,
via dedicated leased lines linked to its network or indirectly on a switched
basis using the PTO network by means of an access code; (ii) wholesale long
distance traffic termination services for other telecommunications carriers,
including PTOs, major telecommunications alliances and regional telephone
companies; and (iii) network management, access and termination services to
telecommunications service providers, such as calling card companies, and to
resellers. Esprit Telecom has recently introduced two new categories of service
to complement its established long distance telecommunications services and
products: (i) bandwidth services, consisting of providing telecommunications
transmission capacity to its customers from May 1998, as well as other
telecommunications companies and (ii) enhanced services, such as toll free
services, calling cards and switched data services.
Esprit Telecom provides both national and international long distance
telecommunication services to its customers. Esprit Telecom believes that
traffic volumes in Europe will increase and prices and costs will fall due to,
among other factors: (i) rapidly increasing demand for bandwidth-intensive
services across Europe, including Internet services and data transmission
services; (ii) continued growth in demand for existing long distance services;
(iii) increased competition from new market entrants; (iv) continuing
liberalization of the European telecommunications market; (v) emergence of new
service offerings; and (vi) continued increase in trade among European
countries.
Esprit Telecom has developed the Esprit Network linking 31 switches or
points of presence in eight European countries, as well as Washington D.C. and
New York through arrangements with US carriers. Esprit Telecom has initiated a
program to own and control the key elements of the Esprit Network
infrastructure, including building five resilient SDH broadband fiber rings in
Europe using advanced SDH technology and Esprit Telecom controlled dark fiber.
Esprit Telecom believes that the expansion of the Esprit Network is a key
component of its strategic objective and should enable Esprit Telecom to control
costs better, ensure access to bandwidth, offer a broader portfolio of services
and improve margins.
207
<PAGE> 215
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ESPRIT TELECOM
SELECTED HISTORICAL FINANCIAL DATA OF ESPRIT TELECOM
The table below sets forth selected historical consolidated financial data
for Esprit Telecom for each of the years in the five-year period ended September
30, 1998. The selected consolidated financial data set forth below for the years
ended September 30, 1994, 1995, 1996 and 1997 have been excerpted or derived
from, and are qualified by reference to, Esprit Telecom's historical
consolidated financial statements, which have been audited by Price Waterhouse,
independent public accountants. The selected consolidated financial data set
forth below for the year ended September 30, 1998 have been excerpted or derived
from, and are qualified by reference to, Esprit Telecom's historical
consolidated financial statements, which have been audited by
PricewaterhouseCoopers, independent public accountants. The historical
consolidated financial statements have been prepared in accordance with UK GAAP,
which differs in certain respects from US GAAP. The principal differences
between UK GAAP and US GAAP are summarized in Note 30 to Esprit Telecom's
audited historical consolidated financial statements included elsewhere in this
Offering Circular/Proxy Statement/Prospectus. The following information should
be read in conjunction with (i) "Management's Discussion and Analysis of
Financial Condition and Results of Operations", (ii) the historical consolidated
financial statements of Esprit Telecom and (iii) "Unaudited Pro Forma
Consolidated Financial Information" included elsewhere in this Registration
Statement.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1994 1995 1996 1997 1998 1998(1)
------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
[POUND [POUND [POUND POUND POUND
STERLING] STERLING] STERLING] STERLING] STERLING] $
<CAPTION>
(IN THOUSANDS, EXCEPT PER ORDINARY SHARE AND PER ADS
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED PROFIT AND LOSS ACCOUNT
DATA(2)
UK GAAP
Revenue.................................. 3,820 13,950 24,880 45,466 82,588 140,350
Cost of revenue.......................... (3,924) (10,640) (18,756) (37,949) (65,829) (111,870)
Gross margin........................... (104) 3,310 6,124 7,517 16,759 28,480
Other operating expenses:
Selling, general and administrative.... (2,833) (4,112) (7,509) (15,505) (35,178) (59,781)
Stock compensation costs(2)............ (187) (588) (2,035) (417) (112) (190)
Restructuring costs.................... -- -- -- (312) -- --
Depreciation and amortization.......... (447) (790) (1,471) (2,836) (10,382) (17,643)
European network amortization.......... -- -- -- -- (1,519) (2,581)
Operating loss before interest........... (3,571) (2,180) (4,891) (11,553) (30,432) (51,716)
Profits on sale of investments........... -- -- -- -- 200 340
Net interest (expense)/income............ (305) (222) (203) 695 (12,213) (20,755)
Loss on ordinary activities before
taxation............................... (3,876) (2,402) (5,094) (10,858) (42,445) (72,131)
Taxation on loss on ordinary
activities............................. -- -- -- (2) (2) (3)
Loss for the financial year.............. (3,876) (2,402) (5,094) (10,860) (42,447) (72,134)
Loss per Ordinary Share.................. (0.09) (0.05) (0.07) (0.10) (0.34) (0.58)
Loss per ADS(4).......................... (0.63) (0.35) (0.49) (0.70) (2.38) (4.04)
US GAAP
Net loss................................. -- (2,423) (5,325) (10,852) (42,447) (72,134)
Net loss per Ordinary Share(3)........... -- (0.05) (0.08) (0.10) (0.34) (0.58)
Net loss per ADS(4)...................... -- (0.35) (0.56) (0.70) (2.38) (4.04)
</TABLE>
208
<PAGE> 216
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1994 1995 1996 1997 1998 1998
------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
[POUND [POUND [POUND [POUND [POUND
STERLING] STERLING] STERLING] STERLING] STERLING] $
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
UK GAAP
Bank balances, cash, restricted
securities and short term deposits and
investments............................ 180 5,615 6,430 24,525 184,749 313,962
Net current (liabilities)/assets......... (1,677) 2,619 3,974 16,521 167,507 284,661
Fixed assets, net........................ 2,400 3,514 8,005 17,727 154,100 261,878
Total assets............................. 4,266 13,178 24,101 59,543 394,537 670,476
Creditors: amounts falling due within one
year................................... (3,543) (7,045) (12,122) (25,295) (72,930) 123,937
Creditors: amounts falling due in more
than one year.......................... (633) (631) (1,968) (2,874) (328,806) (558,773)
Total shareholders' funds................ 90 5,502 10,011 31,374 (7,199) (12,234)
US GAAP
Total assets............................. 13,178 24,101 59,543 394,537 670,476
Long term debt........................... (631) (1,968) (2,874) (328,806) (558,773)
Redeemable preference shares............. (673) (673) -- -- --
Shareholders equity...................... 4,829 9,338 31,374 (7,199) (12,234)
</TABLE>
FOOTNOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA -- ESPRIT TELECOM
- ---------------
(1) Solely for the convenience of the reader, pounds sterling amounts have been
translated into US dollars at the Noon Buying Rate on September 30, 1998 of
$1.6994 per Pound Sterling 1.00.
(2) Esprit Telecom's financial information has been restated from that published
prior to December 1997 in order to give effect to a change in UK GAAP
relating to the granting of employee stock options at a discount to the
market price. The financial value of such discounts are now reorganized as
employee compensation and charged against net income. As required by UK
GAAP, this accounting change has been effected by restating the results of
previous periods. This change in accounting has no impact on the US GAAP
financials.
(3) Previously reported loss per Ordinary Share and net loss per Ordinary Share
in accordance with US GAAP has been restated to reflect the adoption of
Financial Accounting Standard No. 128, "Earnings Per Share," for all periods
presented and as further adjusted to reflect the redesignation of the 'A'
ordinary shares as Ordinary Shares and the fifty for one share split that
occurred in March 1997.
(4) Loss per ADS and net loss per ADS are calculated by adjusting loss per
Ordinary Share and net loss per Ordinary Share, respectively for the ratio
of seven Ordinary Shares per ADS.
209
<PAGE> 217
WHERE YOU CAN FIND MORE INFORMATION
GTS and Esprit Telecom submit to or file reports, proxy statements and
other information with the SEC. You may read and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Regional Offices located at 7 World Trade Center, 13th floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may also obtain copies of such material at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, Washington, D.C. 20549.
You may obtain copies from the Public Reference Room by calling the SEC at (800)
732-0330. In addition, GTS is required to file electronic versions of such
material with the SEC through the SEC's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
GTS Stock and Esprit Telecom ADS are listed on Nasdaq and EASDAQ and reports and
other information concerning GTS and Esprit Telecom can also be inspected at the
offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20001-1500 U.S.A. and the EASDAQ Market
Authority, Rue des Colonies 56, Brussels 1000, Belgium.
GTS has filed with the SEC a Registration Statement on Form S-4 under the
Exchange Act with respect to the New GTS Stock to be issued pursuant to the
Offer and will be filing a Tender Offer Statement on Schedule 14D-1 (the
"Schedule 14D-1"). This Offering Circular/Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement or the
Schedule 14D-1. For further information with respect to GTS, Esprit Telecom and
the New GTS Stock, reference is hereby made to the Registration Statement
(including the exhibits and schedules thereto).
The SEC allows GTS to "incorporate by reference" information regarding
Esprit Telecom into this Offering Circular/Proxy Statement/Prospectus, which
means that GTS can disclose important information to you by referring you to
another document filed separately with the SEC. GTS is not permitted to
incorporate by reference information regarding GTS into this Offering
Circular/Proxy Statement/Prospectus. Accordingly, GTS has incorporated by
reference information regarding Esprit Telecom, but not information regarding
GTS. The information regarding Esprit Telecom incorporated by reference is
deemed to be part of this Offering Circular/Proxy Statement/Prospectus. This
Offering Circular/Proxy Statement/Prospectus incorporates by reference Esprit
Telecom's Annual Report on Form 20-F for the year ended September 30, 1998,
filed with the SEC on December 24, 1998 and its Report on Form 6-K filed with
the SEC on December 24, 1998. These documents contain important information
about Esprit Telecom and its finances.
All documents and reports filed by Esprit Telecom after the date of this
Offering Circular/Proxy Statement/Prospectus and prior to the termination of the
Offer (but excluding Esprit Telecom's Solicitation/ Recommendation Statement on
Schedule 14D-9 to be filed pursuant to Rules 14d-9 and 14e-2 under the Exchange
Act) shall be deemed to be incorporated by reference in this Offering
Circular/Proxy Statement/ Prospectus and to be a part hereof from the dates of
filing of such documentation reports.
Statements contained in this Offering Circular/Proxy Statement/Prospectus
or in any document incorporated by reference in this Offering Circular/Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document (if any) filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
In addition to the foregoing, copies of the following documents will be
available for inspection, during normal business hours on any weekday
(Saturdays, Sundays and public holidays excepted) at the offices of Simmons &
Simmons, 21 Wilson Street, London, EC2M 2TX while the Offer remains open for
acceptance:
(i) the GTS Certificate of Incorporation and By-laws;
(ii) the Memorandum and Articles of Association of Esprit Telecom;
210
<PAGE> 218
(iii) the audited consolidated accounts of GTS for the financial years
ended December 31, 1996 and December 31, 1997;
(iv) the audited consolidated accounts of Esprit Telecom for the
financial years ended September 30, 1997 and September 30, 1998;
(v) the Securityholder Irrevocables and the Director Irrevocables
referred to in "Agreements with Certain Securityholders and Directors";
(vi) the material contracts referred to in "Additional Information
Required Under UK Law";
(vii) the service contracts of the Directors of Esprit Telecom
referred to in "Additional Information Required Under UK Law";
(viii) the termination agreement with Mr. Potter referred to in
"Additional Information Required under UK Law";
(ix) the letters of consent referred to in "Additional Information
Required Under UK Law";
(x) this Offering Circular/Proxy Statement/Prospectus and the
Acceptance Forms;
(xi) the rules of the Esprit Telecom Share Option Schemes;
(xii) the letters from Ernst & Young and PricewaterhouseCoopers
regarding the financial statements;
(xiii) the opinion letters of Lehman Brothers referred to in "Opinion
of Lehman Brothers"; and
(xiv) the opinion letter of Bear Stearns referred to in "Opinion of
Bear Stearns".
211
<PAGE> 219
ADDITIONAL INFORMATION REQUIRED UNDER UK LAW
RESPONSIBILITY
The Directors of Esprit Telecom, whose names are set out below, accept
responsibility for the information contained in this document relating solely to
the Esprit Telecom Group, the Directors of Esprit Telecom and members of their
immediate families in the following documents or sections hereof:
- Esprit Telecom's Annual Report on Form 20-F for the year ended September
30, 1998 and Report on Form 6-K filed with the SEC on December 24, 1998
which are incorporated by reference in this Offering Circular/Proxy
Statement/Prospectus;
- Information provided by and/or relating to the Esprit Telecom Group
included in the following sections of this document:
- At page A-ii, the paragraph relating to Lehman Brothers International
(Europe);
- "Summary" insofar as it summarizes information specified below;
- "Selected Historical Financial Information on Esprit Telecom";
- "Comparative Market Price and Dividend Information";
- "Cautionary Statement Concerning Forward-Looking Statements";
- Information under the sub-heading "Risks Specific to Esprit Telecom" in
the section headed "Risk Factors";
- Information under the following sub-headings in the section headed
"Background of and Reasons For the Offer": "Background of the Offer";
"The Esprit Telecom Board's Reasons for Recommending the Offer,
Recommendation of Esprit Telecom Board"; and "Opinion of Lehman
Brothers";
- Information under the following sub-headings in the section headed "The
Offer": "Interests of Certain Persons in the Offer"; "Irrevocable
Undertakings" solely in relation to the "Director Irrevocables";
"Affiliate Transfer Restrictions"; the first paragraph of the
sub-section headed "Indemnification and Insurance"; the third and fourth
sentences in the sub-section headed "Esprit Telecom Share Option
Schemes"; "Certain Regulatory Approvals and Legal Matters"; and sub-
paragraph (ii) of the second paragraph of the sub-section headed
"Accounting Treatment";
- "The Offer Agreement" insofar as it relates to matters agreed to or
undertaken by Esprit Telecom;
- Information under the sub-heading "Directors" in the section headed
"Agreement with Certain Securityholders and Directors";
- "Comparative Rights of Shareholders" insofar as it relates to factual
matters set out or derived from the Esprit Telecom Certificate of
Incorporation, the Esprit Telecom Articles and the Esprit Telecom
Memorandum;
- "Experts" insofar as it relates to Price Waterhouse and
PricewaterhouseCoopers;
- "Certain Information Concerning Esprit Telecom";
- "Selected Historical Financial Data of Esprit Telecom";
- "Where You Can Find More Information";
- Information under the following headings in the section headed
"Additional Information Required Under UK Law": "Responsibility";
"Directors of Esprit Telecom"; "Service Contracts"; "Interests and
dealings in Securities in GTS"; "Interests and dealings in Securities in
Esprit Telecom"; "Material Contracts of Esprit Telecom"; and "Other
Information";
- "The Definitions";
212
<PAGE> 220
- "Financial Statements concerning Esprit Telecom" except for pages F-95
to F-107 (inclusive).
To the best of the knowledge and belief of the Directors of Esprit Telecom
(who have taken all reasonable care to ensure that such is the case), the
information contained in this document for which they are responsible (as
detailed above) is in accordance with the facts and does not omit anything
likely to affect the import of such information.
The Directors of GTS, whose names are set out below, accept responsibility
for the information contained in this document other than information for which
the Directors of Esprit Telecom accept responsibility for as set out above.
The Directors of GTS accept responsibility for the correct and fair
reproduction of the published audited historical financial statements of the
PLUSNET business as set out pages F-95 to F-107 (inclusive) of this document.
To the best of the knowledge and belief of the Directors of GTS (who have
taken all reasonable care to ensure that such is the case), the information
contained in this document for which they are responsible is in accordance with
the facts and does not omit anything likely to affect the import of such
information.
The statements set out above are included solely to comply with the
requirements of Rule 19.2 of the City Code, Article 29, 1/2 1 of the Belgian
Royal Decree No. 185 of July 9, 1935 and point 1.b of the Annex to the Belgian
Royal Decree of November 8, 1989 on Public Takeover Bids and on Changes in
Control of Companies and do not impose responsibilities on, or impair the
responsibilities of, the Directors of Esprit Telecom or the Directors of GTS
under the laws of the US or any state thereof.
DIRECTORS OF ESPRIT TELECOM
The Directors of Esprit Telecom as at the date of this document are:
Sir Robin Biggam
David L Oertle
Michael Potter
Roy Merritt
John McMonigall
Dominic Shorthouse
SERVICE CONTRACTS
Messrs Potter and Merritt entered into service agreements on January 31,
1997 and Mr. Oertle entered into a service agreement in April 1997 with Esprit
Telecom each of which are terminable upon six months written notice by either
party, save for Mr. Oertle who is entitled to terminate his service agreement
upon 90 days' prior notice. Pursuant to those service agreements the relevant
Directors are entitled to receive the following remuneration:
<TABLE>
<CAPTION>
ANNUAL PERFORMANCE BONUS(2)
NAME OF DIRECTOR SALARY [POUND STERLING]
- ---------------- -------- -------------------------
<S> <C> <C>
Roy Merritt.............................. [Pound Sterling] 125,000(3) Up to 40% of basic salary
David Oertle............................. [Pound Sterling] 200,000(1) Up to 40% of basic salary
Michael Potter........................... [Pound Sterling] 145,000 Up to 40% of basic salary
</TABLE>
- ---------------
1. As amended on May 1, 1998
2. Based on certain performance related criteria set by Esprit Telecom
3. As amended on January 1, 1999.
213
<PAGE> 221
The above-named Directors' service agreements entitle the Directors to
pension benefits as follows:
Esprit Telecom has agreed to pay 7% of Mr. Merritt's salary into a
personal pension scheme approved by the UK Inland Revenue. Mr. Potter is
entitled to a payment of 7% of salary into a personal pension scheme or a
cash equivalent payment.
Messrs. Merritt and Oertle would be entitled to contractual payments
outstanding should their contracts be terminated. In addition, Mr. Oertle
is entitled to the payment of a sum equal to 24 months' salary should he
leave the Company or should his contract be terminated in either case
following a change of control of the Company.
In addition, pursuant to a Board resolution passed on January 29,
1998, Mr. Oertle is entitled to exercise all share options granted pursuant
to his contract of employment should Esprit Telecom become subject to a
change of control. Pursuant to his Director Irrevocable, Mr. Oertle
confirmed that subject to the receipt of satisfactory tax advice, it was
his current intention to accept the Rollover Offer.
Except as disclosed in this document, there are no service agreements with
Esprit Telecom Directors which have been entered into or amended within six
months of this document.
Except as disclosed in this document, there are no service agreements with
Esprit Telecom Directors which have more than 12 months to run or which are
terminable on 12 or more months' notice.
On January 23, 1999, Esprit Telecom entered into a termination agreement
("Termination Agreement") with Mr. Potter which sets out the agreed terms of the
termination of Mr. Potter's employment with Esprit Telecom. The Termination
Agreement provides that Mr. Potter's employment with Esprit Telecom will end on
28 February 1999 and that Esprit Telecom will make a payment of L40,438 to Mr.
Potter as compensation for the early termination of his employment. In addition
the Termination Agreement entitles Mr. Potter to relocation costs up to a
maximum of L15,000. Following the termination of his employment 160,526 of the
share options currently held by him will lapse due to the fact that the relevant
vesting date of such options post-dates such termination. In terms of the
Termination Agreement Mr. Potter has agreed to remain as a director of Esprit
Telecom until the earlier of the next annual general meeting or the date the
Offer is declared unconditional as to acceptances.
Except as disclosed in this document it is not proposed to amend any of the
service agreements of Esprit Telecom Directors.
Interests and dealings in Securities in GTS.
Except for the exercise of options as set forth in the tables below, the
interests of the directors of GTS, their immediate (as defined under The
Companies Act) families and persons connected with them (all of which are
beneficial, unless otherwise stated on page 205) as of the close of business on
the Disclosure Date are as set out on page 205.
The following table sets forth the details, as of the close of business on
the Disclosure Date, of the options over GTS Stock which have been granted to
Directors of GTS and which remain outstanding.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
DATE OF GTS STOCK OPTION EXERCISE
NAME GRANT UNDER OPTION PRICE PERIOD
---- ------- ------------ ------ --------
<S> <C> <C> <C> <C>
Robert J. Amman.............. 5/20/98 11,250 $37.94 11/20/98 - 5/20/08
5/20/98 5,625 $37.94 1999* - 5/20/08
5/20/98 5,625 $37.94 2000* - 5/20/08
David Dey.................... 5/20/98 11,250 $37.94 11/20/98 - 5/20/08
5/20/98 5,625 $37.94 1999* - 5/20/08
5/20/98 5,625 $37.94 2000* - 5/20/08
Michael A. Greeley........... 9/16/96 9,000 $13.33 3/16/97 - 9/16/06
9/16/96 4,500 $13.33 7/16/97 - 9/16/06
9/16/96 4,500 $13.33 11/20/98 - 9/16/06
</TABLE>
214
<PAGE> 222
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
DATE OF GTS STOCK OPTION EXERCISE
NAME GRANT UNDER OPTION PRICE PERIOD
---- ------- ------------ ------ --------
<S> <C> <C> <C> <C>
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Roger W. Hale................ 5/20/98 10,559 $37.94 11/20/98 - 5/20/08
5/20/98 5,625 $37.94 1999* - 5/20/08
5/20/98 5,625 $37.94 2000* - 5/20/08
Bernard J. McFadden.......... 11/14/94 9,000 $ 6.67 5/14/95 - 11/14/04
11/14/94 4,500 $ 6.67 5/15/95 - 11/14/04
11/14/94 4,500 $ 6.67 6/12/96 - 11/14/04
1/16/97 4,500 $13.33 7/16/97 - 1/16/07
1/16/97 4,500 $13.33 11/20/98 - 1/16/07
1/16/97 4,500 $13.33 1999* - 1/16/07
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Stewart J. Paperin........... 3/20/97 9,000 $13.33 9/20/97 - 3/20/07
3/20/97 4,500 $13.33 11/20/98 - 3/20/07
3/20/97 4,500 $13.33 1999* - 3/20/07
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
W. James Peet................ 2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Jean Salmona................. 3/1/96 9,000 $13.33 9/1/96 - 3/1/06
3/1/96 4,500 $13.33 7/16/97 - 3/1/06
3/1/96 4,500 $13.33 11/20/98 - 3/1/06
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Joel Schatz.................. 12/31/91 16,750 $ 0.53 12/31/91 - 12/30/01**
12/31/91 16,750 $ 0.53 12/31/92 - 12/30/01**
12/31/91 16,750 $ 0.53 12/31/93 - 12/30/01**
11/14/94 9,000 $ 6.67 5/14/95 - 11/14/04
11/14/94 4,500 $ 6.67 5/15/95 - 11/14/04
11/14/94 4,500 $ 6.67 6/12/96 - 11/14/04
1/16/97 4,500 $13.33 7/16/97 - 1/16/07
</TABLE>
215
<PAGE> 223
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
DATE OF GTS STOCK OPTION EXERCISE
NAME GRANT UNDER OPTION PRICE PERIOD
---- ------- ------------ ------ --------
<S> <C> <C> <C> <C>
1/16/97 4,500 $13.33 11/20/98 - 1/16/07
1/16/97 4,500 $13.33 1999* - 1/16/07
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Alan B. Slifka............... 2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/00
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Adam Solomon................. 6/13/95 9,000 $ 9.00 12/13/95 - 6/13/05
6/13/95 4,500 $ 9.00 6/12/96 - 6/13/05
6/13/95 4,500 $ 9.00 7/16/97 - 6/13/05
2/27/98 5,000 $20.00 8/27/98 - 2/28/08
2/27/98 5,000 $20.00 8/27/99 - 2/28/08
2/27/98 5,000 $20.00 8/27/00 - 2/28/08
5/20/98 3,000 $37.94 11/20/98 - 5/20/08
5/20/98 3,000 $37.94 1999* - 5/20/08
5/20/98 3,000 $37.94 2000* - 5/20/08
Gerald W. Thames***.......... 6/13/95 87,500 $ 9.00 6/13/96 - 6/14/05
6/13/95 87,500 $ 9.00 6/13/97 - 6/14/05
6/13/95 87,500 $ 9.00 6/13/98 - 6/14/05
4/1/96 14,062.50 $10.27 4/1/97 - 4/2/06
4/1/96 14,062.50 $10.27 4/1/98 - 4/2/06
4/1/96 14,062.50 $10.27 4/1/99 - 4/2/06
4/1/96 14,062.50 $10.27 4/1/00 - 4/2/06
4/1/96 21,093.75 $10.27 3/13/98 - 4/2/06
4/1/96 7,031.25 $10.27 3/25/98 - 4/2/06
4/1/96 28,125 $10.27 **** - 4/2/06
2/3/97 22,173.75 $13.33 2/3/98 - 2/4/07
2/3/97 22,173.75 $13.33 2/3/99 - 2/4/07
2/3/97 22,173.75 $13.33 2/3/00 - 2/4/07
2/3/97 22,173.75 $13.33 2/3/01 - 2/4/07
10/10/97 13,125 $15.67 10/10/98 - 10/11/07
10/10/97 13,125 $15.67 10/10/99 - 10/11/07
10/10/97 13,125 $15.67 10/10/00 - 10/11/07
10/10/97 13,125 $15.67 10/10/01 - 10/11/07
10/13/98 350,000 $25.75 *****
</TABLE>
- ---------------
* Vesting occurs 6 months after annual shareholder meeting in such year.
** Joel Schatz received these options as an employee of the company.
*** Gerald W. Thames received options under the Fourth Amended and Restated
1992 Stock Option Plan for employees, and not under the GTS Amended and
Restated Non-Employee Directors Stock Option Plan.
**** Vesting is tied to revenue performance, with cliff vesting in 5 years.
***** Cliff vesting after 6 years, with possibility of acceleration to 3 years
if performance targets met.
216
<PAGE> 224
The following dealings for value in shares in GTS by Directors of GTS and
their immediate families have taken place during the Disclosure Period:
<TABLE>
<CAPTION>
PRICE
NUMBER OF PER SHARE
SHARES OF OF
NAME OF NATURE OF GTS GTS STOCK
DIRECTOR TRANSACTION DATE STOCK (US$)
-------- ----------- ------- --------- ---------
<S> <C> <C> <C> <C>
Robert J. Amman..................... Purchase 5/5/98 3,000 $ 46.50
David Dey........................... Purchase 4/16/98 400 $ 40.625
Roger W. Hale....................... Purchase 5/4/98 300 $ 47.25
Exercise Option 1/7/99 691 $ 37.94
Sale 1/7/99 441 $ 59.625
Exercise
W. James Peet....................... Option......... 1/8/99 18,000 $ 10.27
Sale 1/8/99 18,000 $ 61.875
Joel Schatz......................... Sale 1/7/99 87,500 $59.5829
Gerald W. Thames.................... Exercise Option 3/26/98 487,500 $ 2.75
Sale 1/4/99 45,000 $56.6667
</TABLE>
Interests and dealings in Securities in Esprit Telecom. The following table
sets forth the details, as of the close of business on the Disclosure Date, of
the interests of the Directors of Esprit Telecom and their immediate families in
shares in Esprit Telecom as well as the details of the options over such Esprit
Telecom shares granted to Directors of Esprit Telecom. Such information has been
reported to Esprit Telecom pursuant to section 324 and section 328 of the
Companies Act of 1985 and is shown in the register required to be kept under the
provisions of that Act.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF ESPRIT TELECOM
ESPRIT TELECOM NUMBER OF ORDINARY
NAME OF ORDINARY ESPRIT TELECOM SHARES
DIRECTOR SHARES ADSs UNDER OPTION
- -------- -------------- --------------- --------------
<S> <C> <C> <C>
Sir Robin Biggam............................................ None None None
David Oertle................................................ None 100 3,172,762
Roy Merritt................................................. None None 1,459,758
Michael Potter.............................................. None None 656,645
John McMonigall............................................. None None None
Dominic Shorthouse.......................................... None None None
</TABLE>
- ---------------
1. Although Michael Potter has 656,645 Esprit Telecom Ordinary Shares under
option as at January 29, 1999 on termination of his employment on February
28, 1999 only 496,119 of those options will have vested. The options over the
balance of 160,526 Esprit Telecom Ordinary Shares will lapse on termination
of his employment.
2. As part of the general incentive plans for the directors of Apax Partners &
Co. Ventures Limited, and Warburg, Pincus Ventures, L.P. John McMonigall and
Dominic Shorthouse have an indirect interest in the profits of the funds
administered by Apax Partners and Ventures Limited and Warburg, Pincus
Ventures L.P. respectively.
3. 3,985,000 ordinary shares in Esprit Telecom are owned by Abacus (C.I.)
Limited ("Abacus") following a sale by Michael Potter in 1996. Pursuant to
the agreement effecting this sale Michael Potter is entitled to require
Abacus to retransfer the shares to him should it fail to make scheduled
payments.
217
<PAGE> 225
The following table sets forth the details, as of the close of business on
the Disclosure Date, of the options over Esprit Telecom Ordinary Shares which
have been granted to Directors of Esprit Telecom and which remain outstanding.
<TABLE>
<CAPTION>
NUMBER OF
ESPRIT TELECOM
NAME OF DATE OF ORDINARY SHARES OPTION EXERCISE
DIRECTOR GRANT UNDER OPTION PRICE ($/[POUND PERIOD
STERLING]
-------- ------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Sir Robin Biggam...................... N/A None N/A N/A
David Oertle.......................... 04/10/97 78,750 L0.01 6/1/97 - 6/1/02
04/10/97 78,750 L0.01 12/1/97 - 12/1/02
04/10/97 78,750 L0.01 6/1/98 - 6/1/03
04/10/97 78,750 L0.01 12/1/98 - 12/1/03
04/10/97 78,750 L0.01 6/1/99 - 6/1/04
04/10/97 78,750 L0.01 12/1/99 - 12/1/04
04/10/97 78,750 L0.01 6/1/00 - 6/1/05
04/10/97 78,750 L0.01 12/1/00 - 12/1/05
04/10/97 227,500 $1.089 6/1/97 - 6/1/02
04/10/97 227,500 $0.893 12/1/97 - 12/1/02
04/10/97 227,500 $1.714 6/1/98 - 6/1/03
04/10/97 227,500 $1.714 12/1/98 - 12/1/03
04/10/97 227,500 $1.714 6/1/99 - 6/1/04
04/10/97 227,500 $1.714 12/1/99 - 12/1/04
04/10/97 227,500 $1.714 6/1/00 - 6/1/05
04/10/97 227,500 $1.714 12/1/00 - 12/1/05
07/07/98 700,000 $2.25 5/1/98 - 5/1/03
06/26/97 665 $0.68 6/26/98 - 6/26/03
02/09/98 6,160 $1.839 2/9/99 - 2/9/04
07/23/98 3,850 $4.00 7/23/99 - 7/23/04
02/09/98 12,087 $1.554 2/9/01 - 2/9/06
Michael Potter........................ Various (from
02/13/95-07/23/98) 486,650 $0.01 2/26/97 - 3/31/00
04/27/98 140,000 $2.304 2/26/01 - 2/26/06
06/26/97 4,284 $0.68 6/26/98 - 7/26/03
02/09/98 5,285 $1.839 2/9/99 - 3/10/04
07/23/98 3,388 $4.00 7/23/99 - 9/11/04
01/07/97 17,138 $0.669 7/1/00 - 7/1/05
Roy Merritt........................... Various (from
02/13/95-07/23/98) 1,189,150 L0.01 2/26/97 - 3/31/00
04/27/98 140,000 $2.304 2/26/01 - 2/26/06
06/26/97 2,702 $0.68 6/26/98 - 7/26/03
02/09/98 3,514 $1.839 2/9/99 - 3/10/04
07/23/98 2,254 $4.00 7/23/99 - 9/11/04
01/07/97 17,138 $0.669 7/1/00 - 7/1/05
10/02/98 105,000 $0.892 1/29/98 - 2/29/04
John McMonigall....................... N/A None None None
Dominic Shorthouse.................... N/A None None None
</TABLE>
The following dealings for value in Esprit Telecom Ordinary Shares and
Esprit Telecom ADSs by Directors of Esprit Telecom and their immediate families
have taken place during the Disclosure Period:
<TABLE>
<CAPTION>
NUMBER OF ESPRIT PRICE PER ESPRIT NUMBER OF PRICE PER
NAME OF NATURE OF TELECOM TELECOM ESPRIT TELECOM ESPRIT TELECOM
DIRECTOR TRANSACTION DATE ORDINARY SHARES SHARE($) ADSs ADSs($)
- -------- ----------- ---- ---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sir Robin Biggam..... None N/A N/A N/A N/A N/A
David Oertle......... Sale 02/26/98 None N/A 2,500 $16.875
Purchase 09/02/98 None N/A 500 $ 18.50
Sale 09/02/98 None N/A 500 $21.625
Roy Merritt.......... None N/A N/A N/A N/A N/A
Michael Potter....... None N/A N/A N/A N/A N/A
John McMonigall...... None N/A N/A N/A N/A N/A
Dominic Shorthouse... None N/A N/A N/A N/A N/A
</TABLE>
218
<PAGE> 226
Except as disclosed in this document, neither:
(a) GTS nor any of its Directors nor any member of their immediate
families;
(b) any subsidiary of GTS, any bank, stockbroker, financial or other
professional adviser (other than an exempt market-maker) to GTS or any
subsidiary or any associated company of GTS, nor any person controlling or
controlled by, or under the same control as such bank, stockbroker,
financial or other professional adviser, nor any pension fund of GTS or any
of its subsidiaries; nor
(c) any person acting in concert with GTS; nor
(d) any person whose investments are managed on a discretionary basis
by fund managers (other than exempt fund managers) connected with GTS;
owns or controls or is interested, directly or indirectly, in any relevant
securities nor has any such person dealt for value therein during the Disclosure
Period.
Except as disclosed in this document, neither:
(a) any of the Directors of Esprit Telecom nor any member of their
immediate families; nor
(b) any subsidiary of Esprit Telecom, any bank, stockbroker, financial
or other professional adviser (other than an exempt market-maker) to Esprit
Telecom or any subsidiary or any associated company of Esprit Telecom, nor
any person controlling, controlled by, or under the same control as such
bank, stockbroker, financial or other professional adviser, nor any pension
fund of Esprit Telecom or any of its subsidiaries;
(c) any of the Principal Securityholders of Esprit Telecom; nor
(d) any person whose investments are managed on a discretionary basis
by fund managers (other than exempt fund managers) connected with Esprit
Telecom;
owns, controls or is interested, directly or indirectly, in any relevant
securities nor has any such person dealt for value therein during the
Disclosure Period.
References in this section to:
(i) "associate" of a company mean:
(a) the company's parent, its subsidiaries and fellow subsidiaries
and the company's parent, its associated companies and companies of
which such companies are associated companies ("relevant companies");
(b) banks, financial and other professional advisers (including
stockbrokers) to the company or any relevant company, including persons
controlling, controlled by or under the same control as such banks,
financial or other professional advisers;
(c) the directors (together in each case with their close relatives
and related trusts) of the company and of any relevant company; and
(d) the pension funds of the company or any relevant company.
(ii) "bank" does not apply to a bank whose sole relationship with
Esprit Telecom, or a company which is an associate, is the provision of
normal commercial banking services or such activities in connection with
the Offer as handling acceptances and other registration work;
(iii) "Disclosure Date" means January 29, 1999, being the latest
practicable date prior to the mailing of this document;
(iv) "Disclosure Period" means the period commencing on December 8,
1997 (being the date 12 months prior to the commencement of the Offer
Period) and ending on the Disclosure Date;
219
<PAGE> 227
(v) ownership or control of 20% or more of the equity share capital of
a company is regarded as the test of associated company status and
"control" means a holding, or aggregate holdings of shares carrying 30% or
more of the voting rights attributable to the share capital of GTS which
are currently exercisable at a general meeting, irrespective of whether the
holding or holdings gives de facto control; and
(vi) "relevant securities" means relevant securities defined in the
City Code which includes Esprit Telecom Ordinary Shares, Esprit Telecom
ADSs, the equity share capital of GTS or any securities convertible into,
rights to subscribe for or options (including traded options) in respect
of, or derivatives referenced, to any of the foregoing.
Other information. Except as disclosed in this document, neither GTS nor
any person acting in concert with GTS, nor Esprit Telecom nor any associate of
Esprit Telecom has any arrangement in relation to relevant securities. For this
purpose, an "arrangement" includes any indemnity or option arrangements, and any
agreement or understanding, formal or informal, of whatever nature, relating to
relevant securities which may be an inducement to deal or refrain from dealing.
Except as referred to in this document, there is no agreement, arrangement
or understanding (including any compensation arrangement) between GTS or any
person acting in concert with it for the purposes of the Offer and any of the
Directors, recent Directors, shareholders or recent shareholders of Esprit
Telecom having any connection with, or dependence upon, or which is conditional
on, the outcome of the Offer.
There is no agreement, arrangement or understanding whereby the beneficial
ownership of any of the Esprit Telecom Securities to be acquired pursuant to the
Offer will be transferred to any other person, except that GTS reserves the
right to transfer such shares to any other member of the GTS Group.
MANAGEMENT AND EMPLOYEES
Existing employment rights, including pension rights, of the management and
employees of the members of the Esprit Telecom Group will be fully safeguarded.
David Oertle, CEO of Esprit Telecom, will remain with Esprit Telecom
through the transition. He will continue to work with Esprit Telecom towards its
successful integration within the GTS Group. At the same time, Mr. Oertle will
assume a senior advisory role working directly with Gerald W. Thames, GTS's
President and CEO, as a key contributor to the development of the corporation's
strategic vision and goals. Roy Merritt, CFO of Esprit Telecom, Hans-Peter
Kohlhammer, Group Managing Director -- Sales and Marketing, Jim Reynolds, Chief
Operations Officer, David Reibel, General Counsel and Director of Corporate
Affairs, Nicholas Pellew, Chief Marketing Officer, and Carlos Riera, Group
Financial Controller, will continue in their current roles within Esprit
Telecom. Walter Anderson, the former Chairman of Esprit Telecom, has agreed to
serve as a special consultant to the GTS board of directors. Michael Potter's
employment and service agreement with Esprit Telecom is to be terminated
effective as of February 28, 1999. See "-- Service Contracts" page (213).
The following is the biographical information of each director and
executive officer of Esprit Telecom who will continue with Esprit Telecom after
consummation of the Offer.
Dr. Hans-Peter Kohlhammer joined Esprit Telecom as Group Managing
Director -- Sales & Marketing on October 1, 1998. Dr. Kohlhammer is the
President of Germany's leading telecommunications industry body, (VATM The
Association of Providers of Telecom and Value Added Services). Dr. Kohlhammer
joined Esprit Telecom from Thyssen Telecom AG, where he was Chairman of the
Board. Prior to his role with Thyssen, Dr. Kohlhammer held a board level
position with Loewe Opta and Industry positions with companies such as Digital
Equipment and Nixdorf Computer. Dr. Kohlhammer holds a degree in mathematics and
physics and a doctorate in mathematics from the University of Bonn.
Roy Merritt has served as Group Finance Director and Chief Financial
Officer of Esprit Telecom since April 1995 and has been a Director of Esprit
Telecom since February 1997. Prior to joining the Company, he was an Investment
Executive with Apax Partners from 1992 to 1995. He also serves as an Associate
within the Acquisition Finance Group of Security Pacific Hoare Govett between
1989 and 1991. From 1987 to 1989,
220
<PAGE> 228
Mr. Merritt worked for the strategy consultancy firm McKinsey & Company, Inc. in
London. He received his MBA from INSEAD in France. He graduated with B.A. and
M.A. degrees in Chemical Engineering from Cambridge University.
David Oertle joined Esprit Telecom as Chief Executive Officer in May 1997
and became a Director of Esprit Telecom in August 1997. Mr. Oertle has over 30
years of experience in the telecommunications industry. His telecommunications
experience began in 1967 with Wisconsin Telephone. Between 1973 and 1976 and
between 1980 and 1987, Mr. Oertle served in various capacities at AT&T,
including Divisions Manager, Director Corporate Staff and Director Data Systems
Operator. From 1988 to 1990, Mr. Oertle served as Executive Vice President at
Sprint responsible for the residential, small business and federal systems
segments. He joined Telstra (Australia) in 1990 as Executive General Manager and
Chief Information Officer. From 1993 thorough 1994, Mr. Oertle was Chief
Operating Officer at Telstra, responsible for the Commercial and Consumer
divisions. He most recently was Managing Director and Chief Executive Officer of
Tech Comm Group Limited, an Australian systems integrator in the IT,
telecommunications and power industries, serving in this capacity from 1994
until April 1997. Mr. Oertle received his B.S. degree in Economics and Political
Science from the University of Wisconsin.
Nicholas Pellew joined Esprit Telecom as Chief Marketing Officer in
September 1997 with responsibility for further developing telecoms solutions and
value added products. Prior to joining the Company he served as Marketing
Director -- Telecoms for Videotron Holdings Plc from 1991 to 1997. Mr. Pellew
also was Sales and Marketing Manager of Cable Telecom, a division of the Cable
Corporation, from 1988 to 1991. Prior to this he was Product Marketing Manager
for Northern Telecom ("Nortel") between 1986-88, with responsibility for
Customer Premises Equipment. Mr. Pellew was also an Applications Engineer with
Watkins Johnson from 1984 to 1986, prior to which he was an electrical engineer
with English Electric Valve. Mr. Pellew has a management degree from Cambridge
University and a BSC Honours in Engineering Science from Exeter University.
David Reibel has been General Counsel of Esprit Telecom since February
1994. Mr. Reibel was an Associate at the law firms of Skadden, Arps, Slate,
Meagher & Flom in Washington, D.C. from 1992 to 1994 and McKenna & Cuneo in
Washington, D.C. from 1991 to 1992. Mr. Reibel also worked as Legislative
Assistant to a member of the U.S. House of Representatives where he was
responsible for the Committees on Ways and Means, Judiciary, and Education and
Labor. Mr. Reibel received his J.D. degree from Stanford Law School and his B.A.
in Social Sciences from the University of Michigan. Mr. Reibel also completed
the Erasmus program in international and European Community law at Leiden
University, the Netherlands.
Jim Reynolds, Chief Operations Officer, joined Esprit Telecom in February
1998. His experience and track record extends over 27 years in the information
technology and telecommunications field. Previously director of products and
services at Mercury Communications, Mr. Reynolds was responsible for the
rationalization and development of the Mercury service portfolio during the
period when Mercury was focusing on making major improvements to service
delivery and profit. As part of this role he managed the Mercury Enterprise
businesses disposing of a number of these and integrating others into the main
company. Before joining Mercury in 1992 he led the first Digital Equipment
product group outside the US and spent 15 years with ITT Corporation.
Carlos Riera joined the Company in November 1995 as controller of Esprit
Telecom's Spanish operations. He was subsequently promoted to Group Financial
Controller in October 1997. Prior to joining Esprit Telecom, Mr. Riera worked
with Ernst & Young in the United Kingdom and Barcelona. Mr. Riera holds a degree
in economics from the University of Barcelona and a post-graduate degree from
Copenhagen Business School.
It is contemplated, that following the consummation of the Offer, the
entire Esprit Telecom Board will be replaced by GTS management. Currently, it is
anticipated that the following members of GTS management will be nominated to
serve on the Esprit Telecom Board: Gerald W. Thames, Bruno D'Avanzo, William
Seippel and Grier Raclin. See "Directors and Executive Officers of GTS" (page
190) for biographical information regarding these individuals.
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MATERIAL CONTRACTS OF GTS
The following contracts, not being contracts entered into in the ordinary
course of business, have been entered into by members of the GTS Group since
December 8, 1996 (the date two years prior to the announcement of the proposed
offer) and are, or may be, material:
- Two indentures among HER and The Bank of New York as trustee, both dated
January 4, 1999, pursuant to which HER issued the New HER Notes, a
summary of which is set out in "Description of Certain GTS
Indebtedness -- New HER Notes" at page 104.
- The Offer Agreement, a summary of which is set out in "The Offer
Agreement" at page 84.
- The Registration Rights Agreement, a summary of which is set out in "The
Offer -- Interests of Certain Persons in the Offer -- Registration Rights
Agreement" at page 70.
- The NetSource Acquisition agreement, a summary of which is set out in
"Certain Information Concerning GTS -- Description of GTS -- Recent
Developments" at page 120.
- A share purchase agreement, between SFMT-CIS, Inc. ("SFMT") and Swinton
Limited, dated July 16, 1998, whereby SFMT acquired 47.36% of the
ordinary shares of GTS-Vox Limited from Swinton Limited. SFMT is a wholly
owned subsidiary of GTS. The total consideration payable by SFMT under
this agreement was $37 million and an additional $3 million distributed
by a dividend.
- An indenture between GTS and The Bank of New York, as trustee, dated July
8, 1998, whereby GTS issued the Debentures a summary of which is set out
in "Description of Certain GTS Indebtedness -- Debentures due 2010" at
page 103.
- A master agreement, among Ebone Holdings Association ("EHA"), Ebone, HER
and Hermes Europe Railtel (Ireland) Limited, dated June 24, 1998, whereby
the parties described the following agreements, which would be executed,
and transactions, which would take place: (i) a share subscription
agreement, describing the issuance of 51,000 shares of Ebone to be sold
to HER and the sale of 75% of the Ebone shares to HER for ECU 90 million;
(ii) a transmission capacity agreement, delineating HER's supply of
telecommunications transmission capacity of a value equivalent to ECU 90
million to Ebone; (iii) the revision of the Ebone Articles of
Association, whereby a new holding company was formed which would own
100% of the shares of Ebone and HER and EHA would swap their Ebone shares
for shares of the new holding company; and (iv) the offer of up to 32% of
the shares of the new holding company to EHA on the condition that HER's
shares of the new holding company not fall below 51%.
- An indenture between GTS and The Bank of New York, as trustee, dated
February 10, 1998, whereby GTS issued the 9 7/8% Notes a summary of which
is set out in "Description of Certain GTS Indebtedness -- Senior Notes
due 2005" at page 102.
- An indenture, among HER, GTS and The Bank of New York as trustee, dated
August 19, 1997, whereby HER issued the HER Notes a summary of which is
set out in "Description of Certain GTS Indebtedness -- HER Notes" at page
104.
- An indenture, between GTS and The Bank of New York as trustee, dated July
14, 1997, whereby GTS issued the Convertible Bonds a summary of which is
set out in "Description of Certain GTS Indebtedness -- The Convertible
Bonds" at page 103.
- A registration rights agreement dated July 14, 1997 between GTS, Union
Bank of Switzerland and The Bank of New York, as trustee, pursuant to
which GTS agreed: (i) to use its best efforts to file and cause to become
effective prior to the first date upon which the Convertible Bonds become
convertible, a registration statement covering the issuance of shares of
common stock issued upon conversion;
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<PAGE> 230
(ii) to use its best efforts to keep such registration statement
continuously effective until all Convertible Bonds have been converted or
redeemed; (iii) to in certain defined circumstances file a shelf
registration statement and use its bet efforts to cause such to be
declared effective by the SEC prior to the first conversion date; and
(iv) to use its best efforts to keep the shelf registration statement
continuously effective for as long as any of the shares covered thereby
shall constitute registrable securities (as defined) and to supplement or
amend the shelf registration statement as required by applicable rules,
regulations and instructions. Under the terms of the agreement a manager
(as defined in the subscription agreement dated July 9, 1997) owning any
Convertible Bonds or registrable securities and each of their successors,
assignees and transferees who became registered owners of Convertible
Bonds or registrable securities, whose registrable securities are covered
by a shelf registration statement may sell such registrable securities in
an underwritten offering. Certain terms and conditions relating to such
an offering are set out in the agreement. Additionally, the agreement
provides for the payment of registration expenses, the registration
expenses, the registration procedure and for indemnification.
- An amended and restated shareholders' agreement dated July 1997, between
(i) HIT Rail B.V., (ii) GTS-Hermes, Inc., (iii) Nationale Maatschappij
Der Belgische Spoorwegen, (iv) AB Swed Carrier, and (v) HER recording the
terms and conditions of the relationship between the parties to the
agreement and certain aspects of the business and management of HER. The
agreement sets out the business to be engaged in by HER and deals with
the conduct and governance of the activities of HER. Additionally, the
agreement deals with the issue of new shares in HER. Covenants entered
into under this agreement include those governing further funding, non
competition, employee share options, waiver of statutory forced sale
rights, dividends, commercial agreements and licenses.
MATERIAL CONTRACTS OF ESPRIT TELECOM
The following contracts, not being contracts entered into in the ordinary
course of business, which are or may be material, have been entered into by the
Esprit Telecom Group within the two years immediately preceding the commencement
of the Offer Period:
- The Offer Agreement, a summary of which is set out in "The Offer Agreement"
(page 84).
- On December 1, 1998 Esprit Telecom UK Limited (as Borrower) and Esprit
Telecom (as Parent) entered into an agreement with Ericsson IFS (as Arranger
and Lender) pursuant to which Ericsson agreed to make available to Esprit
Telecom UK Limited a multi currency credit facility of up to L9,000,000
("Credit Facility").
The Credit Facility is to be used by Esprit Telecom to fund purchases of
equipment, software and associated services by Esprit Telecom group companies
from Ericsson group companies pursuant to a Supply Contract dated August 14,
1997.
Pursuant to an existing guarantee dated October 28, 1997, Esprit guarantees
payment and performance of all obligations of Esprit Telecom UK Limited in
respect of the Credit Facility. Each other Esprit Telecom group company to
whom an advance is made available is required to guarantee repayment of the
advance together with interest and charges and performance of certain
obligations under the Credit Facility in respect of the equipment purchased
by it.
Drawdown of each advance under the Credit Facility is subject to conditions
precedent. Interest is payable in respect of each advance at the rate of 3.5%
per annum above LIBOR. The Credit Facility contains provisions for
alternative interest rates in certain circumstances. Advances are repayable
by 10 equal installments due half yearly.
Esprit Telecom UK Limited also gave certain representations, warranties,
undertakings and indemnities to Ericsson IFS pursuant to the Credit Facility.
As security for its obligations under the Credit Facility Esprit Telecom UK
Limited has granted a charge to Ericsson IFS over the equipment and software
to be purchased by it from Ericsson. Each other Esprit
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<PAGE> 231
Telecom group company to whom an advance is made available is required to
grant a charge to Ericsson IFS over the equipment and software to be
purchased by it from Ericsson.
- On October 7, 1998 Esprit Telecom entered into an agreement with Nortel Plc
("Nortel") ("the Agreement"), for a renewable two year period, for the
purchase of SDH and WDM equipment. In addition, Nortel agreed to provide
related services (namely site preparation services, maintenance and support
services) to Esprit Telecom. The Agreement is contingent on the successful
conclusion of a financing agreement for which heads of terms ("Financing
Terms") were entered into on November 17, 1998. Pursuant to the Financing
Terms Nortel is to make available to one of Esprit Telecom's subsidiaries a
senior secured amortising loan to finance the supply of the equipment and
related software and services under the Agreement.
THE AGREEMENT
The fixed price to be paid by Esprit Telecom and its affiliates (being any
subsidiary or parent company or subsidiary of such parent company) for the
project management, design of the network (excluding site preparation
services which are priced on a case by case basis depending upon the
workforce, and the number of cabins, shelters and surveys required), product
engineering, installation and commissioning of the equipment and software
products amounts to DM 30,020,753. The payments are to be made in three
instalments payable following specified triggering events.
Esprit Telecom is entitled to assign the Agreement to any of its affiliates
(as defined above) on prior notification to Nortel.
The Agreement contains customary representations and warranties, which are
limited to a period of between 12 and 30 months depending on the triggering
event by Nortel.
Under the Agreement, Esprit grants Nortel and its affiliates exclusivity of
supply to Esprit Telecom and its affiliates of equipment and related software
products in the event of expansion by Esprit Telecom of its
telecommunications network beyond the countries listed in the Agreement.
However, Esprit Telecom retains the right to waive such sole supplier
provision upon written notice.
In addition the Agreement contains a provision which limits Nortel's
aggregate liability to DM 8,500,000 in respect of Esprit Telecom's tangible
property and to 20% of the total amount of the consideration under the
Agreement in respect of all other liability. In the event of material breach
of the agreement by Nortel, Esprit Telecom is entitled to terminate the
agreement upon 30 days prior written notice.
THE FINANCING TERMS
Nortel is to make available to one of Esprit Telecom's subsidiaries funds for
an aggregate maximum value not to exceed the lesser of DM 37,000,000 and the
total value of the Agreement from the date of execution of the Financing
Terms until a stated date ("Availability Period"). During this period funds
can be drawn down in minimum amounts subject to satisfaction of all
conditions precedent. An interest rate of three month London Interbank
Borrowing Rate ("LIBOR") plus 3.90% per annum is payable for the Availability
Period, and from the end of the Availability Period, an interest rate of
three month LIBOR plus 3.90% per annum or a market interest rate plus 3.90%
per annum can be selected by the Esprit Telecom subsidiary. A commitment fee
of 0.25% per annum on any undisbursed amount of the facility, is payable
quarterly in arrears. The funds are repayable by nine quarterly instalments.
Esprit Telecom also gave certain representations, warranties and undertakings
to Nortel pursuant to the Financing Terms.
As security for its obligations under the Financing Terms Esprit Telecom is
to grant a charge over all the assets purchased under the Agreement and
Esprit Telecom and each of its subsidiaries which purchases equipment funded
by the Financing Terms are to act as guarantors.
- In June 1998 Esprit Telecom entered into an Indenture (the "1998 Indenture")
with the Bank of New York, as trustee, relating to its issuance of
$150,000,000 principal amount of 10.875% Senior Notes due 2008 (the "Dollar
Notes") and DM 150,000,000 principal amount of 11.000% Senior Notes due 2008
(the
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"DM Notes"; collectively with the Dollar Notes, the "1998 December Notes").
Interest on the 1998 Notes is paid semi-annually on June 15 and December 15,
beginning in 1998. The 1998 Notes are redeemable at the option of Esprit
Telecom, in whole or in part at any time on or after June 15, 2003, at
105.438% (in the case of the Dollar Notes) and 105.500% (in the case of the
DM Notes) of their principal amount at maturity, plus accrued interest,
declining to 100% of their principal amount at maturity, plus accrued
interest, on or after June 2006. In addition, up to an aggregate of 35% of
the principal amount of each series of the 1997 Notes may be redeemed from
time to time prior to June 15, 2001 at the option of Esprit Telecom at
redemption prices equal to 110.875% (in the case of the Dollar Notes) and
111.50% (in the case of the DM Notes) of the aggregate principal amount
thereof, plus accrued and unpaid interest and Additional Amounts (as defined
in the 1998 Indenture), if any, to the redemption date with the net proceeds
received after the issuance of the 1998 Notes of one or more (i) Public
Equity Offerings (as defined in the 1998 Indenture) (ii) Strategic Equity
Investments (as defined in the 1998 Indenture) resulting in aggregate gross
proceeds to Esprit of at least $50.0 million or the equivalent amount in a
different currency; provided that in each case, at least 65% of the aggregate
original principle amount of such series of 1998 Notes remains outstanding
after each such redemption. The 1998 Notes may also be redeemed if such
series of 1998 Notes remains outstanding after each such redemption. The 1998
Notes may also be redeemed at the option of Esprit Telecom, in whole but not
in part, at any time at a redemption price equal to the principal amount
thereof plus accrued and unpaid interest to the redemption date and all
Additional Amounts then due and which will become due as a result of the
redemption or otherwise in the event of certain changes affecting UK
withholding taxes or, under certain circumstances, in the event Definitive
Notes are issued. The 1998 Notes rank, and upon issuance of the Notes will
rank pari passu in right of payment with the 1997 Notes and all other senior
Indebtedness (as defined in the 1998 Indenture) of Esprit Telecom and will be
senior in right of payment in any future subordinated Indebtedness of Esprit
Telecom.
The 1998 Indenture contains covering applicable to Esprit Telecom and its
subsidiaries, including limitations on or prohibited certain indebtedness,
restricted payments, dividends and other payments affecting restricted
subsidiaries, the issuance and sale of capital stock of restricted
subsidiaries, transactions with stockholders and affiliates, liens, asset
sales, issuances of guarantees of Indebtedness by restricted subsidiaries,
sale lease-back transactions, consolidations and mergers and provision of
financial statements and reports. The 1998 Indenture also requires Esprit
Telecom to commence and consummate an offer to purchase the 1998 Notes upon
certain events constituting or which may constitute a change of control of
Esprit Telecom, although Esprit Telecom is currently seeking waivers of the
foregoing provisions to the context of the proposed acquisition. In addition
under certain circumstances, Esprit Telecom is required by the 1998 Indenture
to offer to purchase the 1998 Notes with the proceeds of certain Asset Sales
(as defined in the 1998 Indenture). The 1998 Indenture provides for events of
default which, if any of them occurs, would permit or require the principal
of, premium, if any, interest and any other monetary obligations on the 1998
Notes to become or to be declared to be immediately due and payable. Holders
of 1998 Notes may under certain circumstances be entitled to receive
additional payments in respect of taxes and similar charges in respect of
payments on the 1998 Notes. The material terms of such covenants, such
required offers to purchase, such events of default and their consequences
and such additional payments, as well as related definitions, set forth in
the 1998 Indenture are substantially the same as (or in certain respects
relating to indebtedness, similar but less restrictive than) those applicable
to the 1997 Notes. The 1998 Indenture is subject to, and governed by, the
Trust Indenture Act.
- On May 8, 1998, Esprit Telecom entered into an agreement (the "Acquisition
Agreement") with Plusnet Gesellschaft fur Netzwerk Services mbH, Thyssen
Telecom AG ("Thyssen") and others, to acquire from Thyssen the switch-based
telecommunications services business of Plusnet, a German telecommunications
service provider. The transaction completed during July 1998.
Pursuant to the Acquisition Agreement Esprit has agreed to purchase the
Plusnet Business from Plusnet, a subsidiary of Thyssen, for a total
consideration of DM 307.7 million (approximately L103.8 million based on the
exchange rate as at the date of the acquisition) (the "Purchase Price"),
subject to adjustment of the Purchase Price based on performance criteria.
Pursuant to the Acquisition Agreement this considera-
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tion has since been recalculated at approximately L90.0 million (or
approximately DM267million, based upon the exchange rates ruling as at the
date of the acquisition) based upon a final determination of the revenues of
the Plusnet Business for the year ended September 30, 1998. The transaction
was structured to enable Esprit Telecom to acquire only the operations and
assets related to the Plusnet Business, and not certain liabilities including
interest-bearing financial debts of, and the shareholders loans granted to
Plusnet.
The Acquisition Agreement contains customary representations and warranties
by Plusnet relating to certain corporate matters and the Plusnet Business's
operations, as well as representations and warranties which are specific to
the transaction. However, these warranties are subject to specified limits.
All of Plusnet's obligations under the Acquisition Agreement are fully
guaranteed by Thyssen.
- In December 1997, Esprit Telecom entered into an Indenture (the "1997
Indenture") with the Bank of New York, as trustee, relating to its issuance
of $230,000,000 principal amount of 11.50% Senior Notes due 2007 and DM
125,000,000 principal amount of 11.50% Senior Notes due 2007 (collectively,
the "1997 Notes"). Interest on the 1997 Notes is paid semi-annually on June
15 and December 15, beginning June 15, 1998. A portion of the proceeds of the
offering of the 1997 Notes was used to purchase a portfolio of US government
securities which are being used to fund the first six interest payments on
the 1997 Notes. The 1997 Notes are redeemable at the option of Esprit
Telecom, in whole or in part, at any time on or after December 15, 2002, at
105.75% of their principal amount at maturity, plus accrued interest,
declining to 100% of their principal amount at maturity, plus accrued
interest on or after December 2005. In addition, up to an aggregate of 35%
the principal amount of each series of the 1997 Notes may be redeemed from
time to time prior to December 15, 2000 at the option of Esprit Telecom at
redemption prices equal to 111.50% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Additional Amounts (as defined in the
1997 Indenture), if any, to the redemption time with the net proceeds
received after the issuance of the 1997 Notes of one or more (i) Public
Equity Offerings (as defined in the 1997 Indenture) or (ii) Strategic Equity
Investments (as defined in the 1997 Indenture) resulting in aggregate gross
proceeds to Esprit Telecom of at least $50.00 million or the equivalent
amount in a different currency; provided that, in each case at least 65% of
the aggregate original principal amount of such series of 1997 Notes remains
outstanding after each such redemption. The 1997 Notes may also be redeemed
at the option of Esprit Telecom, in whole but not in part, at any time at a
redemption price equal to the principal amount thereof plus accrued and
unpaid interest to the redemption date and all Additional Amounts then due
and which will become due as a result of the redemption or otherwise, in the
event of certain changes affecting UK withholding taxes or, under certain
circumstances, in the event Definitive Notes are issued. The 1997 Notes rank
pari passu in right of payment with the 1998 Notes and all other senior
Indebtedness (as defined in the 1997 Indenture) of Esprit Telecom and will be
senior rights of payment in any future subordinated indebtedness of Esprit
Telecom.
The 1997 Indenture contains covenants applicable to Esprit Telecom and its
subsidiaries, including limitations on or prohibitions of certain
indebtedness, restricted payments, dividends and other payments affecting
restricted subsidiaries, the issuance and sale of capital stock of restricted
subsidiaries, transactions with stockholders and affiliates, liens, asset
sales, issuances of guarantees of Indebtedness by restricted subsidiaries,
sale-leaseback transactions, consolidations and mergers and provision of
financial statements and reports. The 1997 Indenture also requires Esprit
Telecom to commence and consummate an offer to purchase the 1997 Notes upon
certain events constituting or which may constitute a change of control of
Esprit Telecom, although Esprit Telecom is currently seeking waivers of the
foregoing provisions in the context of the proposed acquisition. In addition,
under certain circumstances, Esprit Telecom is required by the 1997 Indenture
to offer to purchase the 1997 Notes with the proceeds of certain Asset Sales
(as defined in the 1997 Indenture). The 1997 Indenture provides for events of
default which, if any of them occurs, would permit or require the principal
of, premium, if any, interest and any other monetary obligations on the 1997
Notes to become or to be declared to be immediately due and payable. Holders
of 1997 Notes may under certain circumstances be entitled to receive
additional payments in respect of taxes and similar charges in respect of
payments on the 1997 Notes. The material terms of such covenants, such
required offers to purchase, such events of default and their consequences
and such additional payments,
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as well as related definitions, set forth in the 1997 Indenture are
substantially the same as (or in certain respects relating to indebtedness,
similar but more restrictive than) those applicable to the 1998 Notes. The 1997
Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as
amended ("Trust Indenture Act").
- On November 18, 1997 Esprit Telecom entered into an agreement with Tasman
Holdings BV and Marius Blom (the "Vendors") for the purchase of IMS
Interaktieve Media Services BV, a telecoms services company operating in The
Netherlands. The minimum aggregate consideration payable by Esprit Telecom
for the acquisition is approximately L6.8 million over the two years to
September 30, 1999. Esprit Telecom has also agreed to pay additional amounts
in respect of the acquisition over the said two year period in part upon
achievement of certain financial and performance targets. These additional
amounts may increase Esprit Telecom's total investment to a maximum of
approximately L10.8 million. The Agreement contains customary representations
and warranties in favour of Esprit Telecom.
- On July 15, 1997 Esprit Telecom entered into an agreement with Erwin Vrede,
Cornelius Zitman, CH Zitman BV, Leon Roberts and Wilwo Investments BV to
acquire the whole of the issued share capital of the Swift Global Netherlands
B.V. for an estimated total consideration before costs of L884,000 satisfied
by cash of approximately L324,000 and deferred consideration of approximately
L560,000, which payment is subject to adjustment based on performance
criteria. The Agreement stipulates that approximately L354,000 of the
deferred consideration may either be paid at the discretion of the Esprit
Telecom in cash or shares depending on the share price on the payment date.
The deferred consideration payable under the Agreement, has now been
calculated at NLG1,350,000 (approximately L428,667), NLG965,000
(approximately L306,417) of which will be satisfied by the issue of Esprit
Telecom Ordinary Shares at the contractually agreed price of NLG 14.47 per
Esprit Telecom Ordinary Share.
- On 27 June 1997 Esprit Telecom entered into an agreement with Neil Twogood
and John Morris to acquire the whole of the issued share capital of Telecom
Europa Limited for a consideration of L2,084,949.20 satisfied as to
L1,141,857.89 by the issue of 1,109,696 ordinary shares together with cash of
L443,091.36. The deferred consideration of L499,999.95 was also satisfied by
the issue of Esprit Telecom Ordinary Shares.
FINANCIAL EFFECTS OF ACCEPTANCE OF THE OFFER
The following tables show, for illustrative purposes only and on the bases
and assumptions set out in the notes below, the financial effects of acceptance
on capital value for a holder of Esprit Telecom Ordinary Shares and a holder of
Esprit Telecom ADSs accepting the terms of the Offer, if the Offer becomes or is
declared unconditional in all respects:
<TABLE>
<CAPTION>
ESPRIT TELECOM ADSS NOTES
- ------------------- -----
<S> <C> <C>
Market Value of 0.89 share of New GTS Stock................. (i) $55.74
Market Value of one Esprit Telecom ADS...................... (ii) $30.25
------
Increase.................................................... $25.49
------
This represents an increase of.............................. 84.25%
------
</TABLE>
<TABLE>
<CAPTION>
ESPRIT TELECOM ORDINARY SHARES
- ------------------------------
<S> <C> <C>
Market Value of 0.1271 share of New GTS Stock............... (i) $ 7.96
Value of one Esprit Telecom Ordinary Share.................. (iii) $ 4.32
------
Increase.................................................... $ 3.64
------
This represents an increase of.............................. 84.25%
------
</TABLE>
NOTES
(i) The market value of shares of New GTS Stock is based on the closing price
of $62.63 on NASDAQ for a share of GTS Stock on January 29, 1999, the last
practicable trading day prior to the publication of this document.
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<PAGE> 235
(ii) The market value of Esprit Telecom ADSs is based on the closing price of
$30.25 on NASDAQ for an Esprit Telecom ADS on December 7, 1998, the last
practicable trading day prior to the announcement of the Offer.
(iii)The value of Esprit Telecom Ordinary Shares is based upon one seventh of
the market value of an Esprit Telecom ADS.
(iv) No account has been taken of any liability to taxation.
OTHER INFORMATION
The principal place of business and registered office of GTS is at 1751
Pinnacle Drive, North Tower, 12th Floor, McLean, Virginia 22101, USA.
The principal place of business and registered office of Esprit Telecom is
at Minerva House, Valpy Street, Reading RG1 1AR, UK.
Bear Stearns and Lehman Brothers are each regulated by The Securities and
Futures Authority Limited.
Bear Stearns and Lehman Brothers each have given and not withdrawn their
respective written consents to the issue of the document with the references to
their respective names in the form and context in which they appear.
Except as disclosed in this document, the total remuneration receivable by
the Directors of GTS will not be varied as a consequence of the proposed
acquisition of Esprit Telecom or by any other associated transaction.
Neither the payment of interest on, nor the repayment of, nor the security
for, any liability (contingent or otherwise) of GTS will depend to any
significant extent on the business of Esprit Telecom. The right is reserved,
however, to utilize the resources of Esprit Telecom in financing or refinancing
the borrowing requirements of the combined group.
Except as disclosed in this document, so far as the Directors of GTS are
aware, there have been no material changes in the financial or trading position
of GTS since December 31, 1997 the date to which its last published audited
accounts were prepared.
Except as disclosed in this document, so far as the Director of Esprit
Telecom are aware, there have been no material changes in the financial or
trading position of Esprit Telecom since September 30, 1998, the date to which
its last published audited accounts were prepared.
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SUPPLEMENTAL INFORMATION REQUIRED BY BELGIAN REGULATIONS
APPROVAL BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE, EASDAQ AND THE
MINISTRY OF FINANCE
Belgian law requires in relation to both the Offer and the admission of the
New GTS Stock to trading on EASDAQ that this document be approved by the Belgian
Banking and Finance Commission ("Commissie voor het Bank-en
Financiewezen/Commission Bancaire et Financiere") ("BFC").
This document has been approved by the BFC on January 19, 1999 in
accordance with Article 29ter. sec. 1. Par. 1 of Royal Decree No. 185 of July 9,
1935 and Article 17 of the Royal Decree of November 8, 1989 relating to Public
Takeover Bids and on Changes in Control of Companies. The approval of this
document by the BFC does not imply any judgement as to the appropriateness of
the quality of the Offer or the issue of the New GTS Stock nor of the situation
of GTS.
The notice prescribed by Article 29, sec. 1 of the Royal Decree No. 185 of
July 9, 1935 and Article 21 of the Royal Decree of November 8, 1989 relating to
Public Takeover Bids and on Changes in Control of Companies will appear in the
financial press on February 2, 1999. The notice prescribed by Article 27 of the
Royal Decree of November 8, 1989 relating to Takeover Bids and on Changes in
Control of Companies will appear in the financial press before April 30, 1999.
The admission of the New GTS Stock to trading on EASDAQ requires approval
by the EASDAQ Market Authority and the Belgian Minister of Finance. On January
26, 1999, the Market Authority of EASDAQ approved the admission to trading of
the New GTS Stock on EASDAQ. Admission to EASDAQ is subject to certain adequacy
and liquidity requirements determined by the EASDAQ Market Authority. Companies
traded on EASDAQ are required to publish relevant financial and other
information regularly and to keep the public informed on all events likely to
affect the market price of their securities. Price sensitive information is made
available to investors in Europe through the EASDAQ Reuters Regulatory Company
Reporting System and international information vendors.
On February 1, 1999, the issue and listing of the New GTS Stock on EASDAQ
was approved by the Belgian Minister of Finance in accordance with Article 4 of
the Act of December 4, 1990 relating to Financial Transactions and the Financial
Markets.
The documents referred to on pages 210 and 211 of this document will also
be made available to Belgian investors upon prior written request addressed to
the Belgian Receiving Agent.
PERSONS RESPONSIBLE FOR THIS OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS
The Directors of GTS and Esprit Telecom, whose identity is mentioned on
pages 190 through 193 and 213, respectively, take responsibility for this
document in accordance with the terms of the responsibility statements set out
at pages 212 through 213.
THE CLEARING SYSTEMS
EUROCLEAR
On October 2, 1998, EASDAQ resolved to appoint Euroclear as it settlement
provider. This appointment is expected to be extended to include Cedel Bank,
once some remaining formalities have been concluded. The settlement services
provided by Euroclear and Cedel are expected to become operational early in the
second quarter of 1999.
Investors should inquire with the financial intermediary with whom the
investor has opened a securities account for the purpose of holding and trading
New GTS Stock, as to the cost of such trading as well as the terms and
conditions on which the financial service of the New GTS Stock will be delivered
by such financial intermediary.
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The GTS Stock has the following identification number:
CUSIP 379 36 U104, ISIN US379 36 U1043
Neither the US Depositary nor the Receiving Agents will charge holders of
Esprit Telecom ADSs or Esprit Telecom Ordinary Shares a fee for accepting the
Offer and tendering such Esprit Telecom ADSs or Esprit Telecom Ordinary Shares.
POSSIBILITY OF SHARE REPURCHASES
The GTS Certificate, GTS By-laws and the DGCL does not prohibit GTS from
repurchasing or otherwise acquiring outstanding shares of GTS Stock and,
accordingly, GTS may exercise its right to repurchase GTS Stock.
AUTHORIZED AND ISSUED CAPITAL OF GTS
Effective December 1, 1997, the GTS Board and stockholders approved
amendments to the GTS Certificate which (i) increased the authorized number of
shares of capital stock to 145,000,000 (of which 135,000,000 shares are GTS
Stock and 10,000,000 shares are Preferred Stock) and (ii) effected a 3-for-2
stock split of all then-outstanding shares of the GTS Stock. In addition, the
GTS Board has adopted a resolution approving the offering and issuance of
12,765,000 shares of GTS Stock in the IPO and 2,801,000 shares of GTS Stock in
the July 1998 Stock Offerings. As of December 31, 1998, 64,577,715 shares of GTS
Stock were issued and outstanding.
ADDITIONAL INFORMATION REGARDING THE GTS CONSOLIDATED FINANCIAL STATEMENTS
The GTS Consolidated Financial Statements are prepared in accordance with
US GAAP, which does not differ significantly from IAS GAAP. However, under IAS
GAAP the financial position and results of operations of some of GTS' ventures
may be presented on a consolidated basis rather than under the equity method of
accounting.
TAXATION OF BELGIAN INVESTORS
The following generally summarizes the material Belgian income and stamp
tax consequences of the acquisition, direct ownership and disposal of New GTS
Stock. It is based on the tax law in force in Belgium as at the date of this
Offering Circular/Proxy Statement/Prospectus, and is subject to changes in
Belgian law, including changes that could have retroactive effect. The following
summary does not take into account or discuss the tax laws of any country other
than Belgium nor does take it into account the individual circumstances of each
investor. The summary uses the term "Eligible Belgian Holders" to refer to the
owners of New GTS Stock, not being US citizens, who hold directly less than 10%
of the share capital of the Company (voting stock) and whose ownership of such
New GTS Stock is not attributable to a permanent establishment or a fixed base
in the US, who are considered residents of Belgium for purposes of the income
tax convention between Belgium and the US dated July 9, 1970 as amended by the
December 31, 1987 Protocol (the "Belgian-US Treaty") and who are fully entitled
to benefits under the Belgian-US Treaty, including under article 12A.
Prospective Belgian Investors in New GTS Stock are advised to consult their
own tax advisers as to the Belgian and other tax consequences of the
acquisition, ownership and disposal of GTS Stock. GTS is not aware of any
position taken by the Belgian Income Tax Administration as to the tax regime of
the ADSs.
TAXATION OF DIVIDENDS ON GTS STOCK
Relevant United States Federal Income Tax Considerations
Dividends paid to non-residents of the US are generally subject to US
withholding tax at the rate of 30%. However, under the Belgian-US Treaty,
Eligible Belgian Holders benefit from a reduced withholding tax rate on
dividends of 15%. The procedures for Eligible Belgian Holders to obtain the
reduced withholding tax rate
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are described in "Tax Consequences of the Offer and Compulsory
Acquisition -- United States Federal Income Tax Consequences -- Non-US Holders",
at page 90 of this document.
Belgian withholding tax
Gross dividends distributed on New GTS Stock, after deduction of US
withholding tax, are subject in Belgium to a withholding tax at the rate of 25%,
when paid or attributed through a financial intermediary in Belgium. However, no
Belgian dividend withholding tax is due if the Eligible Belgian Holder is a
company subject to Belgian corporate income tax.
Where GTS dividends are attributed or paid to the Eligible Belgian Holder
outside Belgium, without the intervention of a paying agent or any other
financial intermediary in Belgium, no Belgian dividend withholding tax is due.
However, where the Eligible Belgian Holder is a Belgian resident entity subject
to the legal entities tax (e.g. a pension fund), the Holder itself has to pay
the dividend withholding tax.
In certain cases the above-mentioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies in particular to (i) dividends
distributed on shares publicly issued after January 1, 1994 and (ii) dividends
distributed on shares that have been privately issued after January 1, 1994 in
exchange for cash contributions, provided the shares are registered or bearer
shares placed in open custody with a financial institution in Belgium as of the
date of their issuance.
Since the New GTS Stock will be a public issue of shares the reduced 15%
rate should in principle apply to dividends on the New GTS Stock. GTS may
however irrevocably reject the application of the reduced withholding tax rate.
Income tax for Belgian resident individuals
In the hands of an Eligible Belgian Holder who is an individual holding New
GTS Stock as a private investment, the Belgian dividend withholding tax is a
final tax and the dividends need not be reported in the individual's annual
income tax return. If no withholding tax has been levied ( i.e. in the event of
payment or attribution outside Belgium), the individual has to report the
dividends in his tax return. Such holder of GTS Stock will be taxed at the
separate rate of 25% (or more likely 15%), to be increased by a municipal
surcharge (varying, as a rule, from 6% to 9% of the tax due).
In the hands of an individual Eligible Belgian Holder whose holding of New
GTS Stock is effectively connected with a business, the dividends are taxable at
the ordinary rates for business income (i.e. varying from 25% to 55% to be
increased by the municipal surcharge and a crisis contribution of 3% of the tax
due). Any Belgian withholding tax is creditable against the final income tax
due, provided that the holder of New GTS Stock has the full ownership of the New
GTS Stock at the time of attribution or payment of the dividends and provided
also that the dividend distribution does not entail a reduction in value of or a
capital loss on the shares.
Corporate income tax for Belgian Resident Companies
Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40,17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due). Lower
rates may be applicable to Belgian Resident Companies which, among other
conditions, are not 50% or more owned by another company and which derive
taxable income below certain thresholds fixed by law.
However, provided that the dividends benefit from the so-called
"dividend-received-deduction" ("DRD"), only 5% of the dividends received will be
taxable. In order to benefit from the deduction, GTS must not fall within one of
the categories which are expressly excluded from the "dividend received
deduction". DRD entitlement is to be judged on a case by case basis at the time
of attribution and by reference to the origin of the GTS revenue that
constitutes the dividend (so-called "look through clause"). Due to the fact that
GTS is quoted on Nasdaq, and taking into account the active business of GTS, a
denial of DRD is highly unlikely. Furthermore, at the time of attribution or
payment of the dividends, the Eligible
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Belgian Holder should meet a minimum participation requirement in GTS of at
least 5% or an acquisition value of at least BEF 50 million.
Income tax for Belgian resident entities subject to the Belgian legal entities
tax (pension funds, etc.).
The Belgian dividend withholding tax of 25% (or more likely 15%) is a final
tax.
CAPITAL GAINS TAXATION
Income tax for Belgian resident individuals
Individual Eligible Belgian Holders holding the New GTS Stock as a private
investment are not subject to Belgian capital gains taxation on the disposal of
New GTS Stock. Individual Eligible Belgian Holders may, however, be subject to a
33% tax (to be increased by the municipal surcharge and the crisis contribution)
if the capital gain is deemed to be "speculative".
Capital gains on Esprit Telecom shares due to the Public Offer by GTS are
subject to a similar tax treatment.
Individual Eligible Belgian Holders whose holding of New GTS Stock is
effectively connected with a business are taxable at the ordinary rates on any
capital gains realized on the disposal of New GTS Stock if they have held this
stock for five years or less. If, however, this stock has been held for more
than five years before disposing of it they will be taxed at the reduced rate of
16.5% (to be increased by a 3% crisis surcharge and by a municipal surcharge).
Capital gains realized due to the Offer in exchange for shares of New GTS
Stock, by individual Esprit Telecom Securityholders whose holding of Esprit
Telecom Securities is effectively connected with a business, are also taxable at
the ordinary rates. The acquisition value of one share of New GTS Stock for the
former Esprit Telecom Securityholders will be equal to the fair market value of
the relevant number of Esprit Telecom Securities delivered to GTS in exchange
for the shares of New GTS Stock. If that value would be difficult to determine,
the acquisition value will be equal to the market value of the shares of New GTS
Stock. Based on the Offer, however, both valuations will lead to an identical
result.
Corporate income tax for Belgian Resident Companies
Capital gains realized by Belgian resident companies on shares of New GTS
Stock are exempt, assuming that GTS dividends qualify for DRD. The minimum
holding requirement does not have to be met.
The capital gains realized by corporate Esprit Telecom Securityholders in
exchange for shares of GTS Stock, due to the Offer, are tax-free. The
acquisition value of one share of New GTS Stock for the former Esprit Telecom
Securityholders will be equal to the fair market value of the relevant number of
Esprit Telecom Securities delivered to GTS in exchange for shares of New GTS
Stock. If that value would be difficult to determine, the acquisition value will
be equal to the market value of the shares of New GTS Stock. Based on the Offer,
however, both valuations will lead to an identical result.
Capital losses are only tax-deductible upon liquidation and distribution of
all the assets and liabilities of a company, to the extent that the loss
represents fully paid-in capital. Any capital losses arising out of the Public
Offer will therefore not be tax deductible.
Income tax for Belgian resident entities subject to the Belgian "legal
entities tax" (pension funds, etc.).
Entities subject to the "legal entities tax" holding New GTS Stock are not
subject to the Belgian capital gains taxation on the disposal of New GTS Stock.
BELGIAN INDIRECT TAXES
Stamp tax on securities transactions
In principle, a stamp tax is levied upon the subscription of shares of New
GTS Stock and the purchase and sale in Belgium of New GTS Stock through a
professional intermediary. The rate applicable to
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subscriptions of new shares of GTS Stock is 0.35% but there is a limit of BEF
10,000 per transaction. The rate applicable to secondary sales and purchases in
Belgium of New GTS Stock through a professional intermediary is 0.17% but there
is a limit of BEF 10.000 per transaction.
An exemption is available to professional intermediaries (e.g. credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident holder of GTS
Stock who is acting for his own account will also be entitled to an exemption
from this stamp tax provided that he delivers to the issuer or the professional
intermediary in Belgium, as the case may be, an affidavit confirming his
non-resident status in Belgium.
Tax on delivery of bearer securities
A tax is levied upon the physical delivery of New GTS Stock pursuant to
their subscription or their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of GTS Stock pursuant to a
withdrawal of these New GTS Stock from "open custody".
The tax is due, at the rate of 0.2%, on the sums payable by the subscriber
or the acquiror in case of subscription or acquisition or the sales value of the
GTS Stock, as estimated by the custodian, in case of withdrawal from "open
custody".
An exemption is available for deliveries to recognized professional
intermediaries (such as credit institutions) acting for their own account. An
exemption is also available for delivery of GTS Stock, which are held in "open
custody", to a non-resident.
However, since securities listed on EASDAQ are always in book entry form,
the tax on the delivery of bearer securities will not apply to the GTS Stock.
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DEFINITIONS
The following definitions apply throughout this document, unless the
context requires otherwise:
"Acceptance Condition" - the Condition as to acceptances set out in
paragraph 2A of Part A of Annex A.
"Acceptance Forms" - the Form of Acceptance with respect to holders of
Esprit Telecom Ordinary Shares and the Letter of Transmittal and Notice of
Guaranteed Delivery with respect to holders of Esprit Telecom ADSs, in each
case, accompanying this Offering Circular/Proxy Statement/Prospectus pursuant to
the Offer.
"Accounting Principles Board Opinion No. 16" - Accounting Board Opinion No.
16, "Business Combinations," and the related published interpretations of the
American Institute of Certified Public Accountants, the Financial Accounting
Standards Board, and the published rules and regulations of the Securities and
Exchange Commission or its staff.
"ACT" - Advance Corporation Tax of the United Kingdom.
"ADMs" - Add-Drop Multiplexers.
"AMPS" - Advanced Mobile Phone System, a recognized standard for mobile
telephony.
"Annual Report" - the annual report and audited accounts of Esprit Telecom
for the year ended September 30, 1997.
"ATM" - Asynchronous Transfer Mode , a switching and transmission
technology that is one of a general class of packet technologies that relay
traffic by way of an address contained within the first five bits of a standard
fifty-three bit-long packet or cell. ATM switching was specifically developed to
allow switching and transmission of mixed voice, data and video (sometimes
referred to as "multimedia" information) at varying rates. The ATM format can be
used by many different information systems, including local area networks.
"Authorizations" - all filings, applications, authorizations, orders,
recognitions, grants, consents, licences, confirmations, clearances, permissions
and approvals under any applicable legislation or regulations of any
jurisdiction.
"bandwidth" - the range of frequencies that can be passed through a medium
such as glass fibers, without distortion and a measure of the communication
capacity or the data transmission rate of a telecommunications circuit. The
greater the bandwith, the greater the information-carrying capacity of such
medium.
"Bear Stearns" - Bear, Stearns International Limited and to the extent that
the Offer relates to the US, Bear, Stearns & Co. Inc.
"Belgian Receiving Agent" - The Bank of New York-Brussels.
"Book-Entry Transfer Facility" - each of the Depositary Trust Company and
the Philadelphia Depositary Trust Company, who are collectively referred to as
the "Book-Entry Transfer Facilities."
"Business Day" - a day on which banks in the City of London are generally
open for trading other than a Saturday or Sunday and shall consist of the time
period from 12.01 a.m. through 12.00 midnight (London time).
"CIENA" - Ciena Corporation.
"CIS" - the Commonwealth of Independent States.
"City Code" - the City Code on Takeovers and Mergers of the United Kingdom.
"CLEC" - competitive local exchange carrier , a category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company. A CLEC may also provide other types of
telecommunications services (long distance, etc.).
"Companies Act" - the UK Companies Act 1985 (as amended).
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"Compulsory Acquisition" - compulsory acquisition of all Esprit Telecom
Securities to which the Offer relates by GTS pursuant to sections 428 through
430F of the Companies Act.
"Conditions" - the conditions of the Offer described in Part A(2) of Annex
A and "Condition" means any one of them.
"Convertible Bonds" - the US$135 million aggregate principal amount of
8.75% Senior Subordinated Convertible Bonds of GTS due 2000.
"D-AMPS" - Digital Advanced Mobile Phone System, a recognized standard for
mobile telephony.
"dark fiber" - unmanaged fiber infrastructure where the equipment to
"light" (power) the fiber is provided by the customer or the carrier that leases
such fiber.
"Debentures" - the US$450 million aggregate principal amount of 5 3/4%
Convertible Senior Subordinated Debentures of GTS due 2010, and the offering of
the Debentures is the "Debenture Offering." The Debenture Offering together with
the July 1998 Stock Offering are the "July 1998 Offerings."
"DCS" - Digital Cellular System, a recognized standard for mobile
telephony.
"DGCL" - the General Corporation Law of the State of Delaware.
"digital" - a method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal.
"Director Irrevocables" - the irrevocable undertakings executed by each
member of the Esprit Board on December 8, 1998.
"DWDM" - Dense Wavelength Division Multiplexing.
"EASDAQ" - the computerized pan-European quotation system sponsored by the
European Association of Securities Dealers Automated Quotation.
"EBITDA" - earnings before interest, taxes, depreciation and amortization.
"Ebone" - Ebone A/S, a Tier 1 Internet backbone provider in Europe.
"EC" - the European Community, the predecessor of the European Union,
established by the Treaty of Rome.
"11.5% Notes" - the US$265 million aggregate principal amount of 11.5%
Senior Notes of HER due 2007.
"Eligible Institution" - a financial institution that is a member of the
Securities Transfer Agents Medallion Program (STAMP), the Stock Exchange
Medallion Program (SEMP) or the New York Stock Exchange, Inc. Medallion
Signature Program (MSP).
"Esprit Network" - Esprit Telecom's communication network linking 31
switches or points of presence in eight European countries, as well as
Washington, D.C. and New York through arrangements with US carriers.
"Esprit Telecom" - Esprit Telecom Group plc.
"Esprit Telecom ADSs" - the American Depositary Shares of Esprit Telecom
now in issue and any further such securities which are issued after the date of
this Offering Circular/Proxy Statement/Prospectus and while the Offer remains
open for acceptance or before such earlier date as GTS may, subject to the City
Code, decide. One Esprit Telecom American Depositary Share represents seven
Esprit Telecom Ordinary Shares.
"Esprit Telecom ADRs" - American Depositary Receipts evidencing Esprit
Telecom ADSs.
"Esprit Telecom Articles" - the articles of association of Esprit Telecom.
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"Esprit Telecom Board" - the board of directors of Esprit Telecom.
"Esprit Telecom Bonds" - The US$230,000,000 11.5% Senior Notes due 2007,
the DM125,000,000 11.5% Senior Notes due 2007, the US$150,000,000 10.875% Senior
Notes due 2008, the DM150,000,000 11% Senior Notes due 2008.
"Esprit Telecom Bondholders" - holders of Esprit Telecom Bonds.
"Esprit Telecom Bond Offer" - the proposed offer to be made to holders of
Esprit Telecom Bonds.
"Esprit Telecom Group" - Esprit Telecom and its subsidiary undertakings and
associated undertakings, as those respective terms are defined in the Companies
Act 1985.
"Esprit Telecom Memorandum" - the memorandum of association of Esprit
Telecom.
"Esprit Telecom Options" - any options granted under the Esprit Telecom
Share Option Schemes.
"Esprit Telecom Ordinary Shares" - the existing issued and fully paid
ordinary shares of 1p each in the capital of Esprit Telecom and any further such
shares which are unconditionally allotted or issued on or before the date on
which the Offer closes (or such earlier date as GTS may, subject to the City
Code, decide).
"Esprit Telecom Securities" - Esprit Telecom Ordinary Shares, together with
Esprit Telecom ADSs.
"Esprit Telecom Securityholders" - holders of Esprit Telecom Securities.
"Esprit Telecom Share Option Schemes" - the Esprit Telecom Employee Share
Option Program Number 1, and the Esprit Telecom Group plc Global Share Option
Plan 1997 in terms of which awards may be made under: (i) the Esprit Telecom
Executive and Employee Share Option Plan 1997 (including its sub-plan, the
Esprit Telecom Management Share Option Plan); (ii) the Esprit Telecom
Savings-Related Share Option Scheme 1997; (iii) the Esprit Telecom Group plc
Company Share Option Plan 1997; (iv) the Esprit Telecom Group plc Profit Sharing
Scheme 1997; (v) the Esprit Telecom Group plc Contributory Share Scheme 1997;
(vi) the Esprit Telecom Group Monthly Share Scheme 1997.
"EU" - the European Union established by the Treaty of Maastricht and
developed from the EC comprising 15 member states being Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the UK.
"European Services Strategy" - GTS' plan to enter the business end-user
market in Western Europe through the development of competitive local exchange
carriers in up to 12 metropolitan markets and through the development of
reseller activities in up to 50 metropolitan markets.
"Exchange Act" - the United States Securities Exchange Act of 1934, as
amended, and the rules thereunder.
"Exchange Ratio" - the exchange ratios under the Offer being 0.1271 of a
share of GTS Stock for each Esprit Telecom Ordinary Share and 0.89 of a share of
GTS Stock for each Esprit Telecom ADS.
"FCC" - the US Federal Communications Commission.
"fiber optics" - technology which involves sending signals as laser light
pulses across glass strands in order to transmit digital information.
"fiber optic ring" - a network configuration to provide redundancy where if
one segment of the network is damaged or cut, the traffic is capable of being
re-routed and sent to its destination in the opposite direction.
"First Closing Date" - 3.00 p.m. (London time), 10.00 a.m. (New York City
time), on March 4, 1999, unless and until GTS, in its discretion, shall have
extended the Offer in accordance with the provisions of the City Code, in which
case the term "First Closing Date" shall mean the latest time and date at which
the Offer, as so extended by GTS, will expire or, if earlier, the time at which
the Offer becomes or is declared unconditional in all respects.
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"Form of Acceptance" - the form of acceptance, election and authority
relating to the Offer for use by all holders of Esprit Telecom Ordinary Shares
but not holders of Esprit Telecom ADSs accompanying this document.
"Full Competition Directive" - the directive adopted by the European
Commission in March 1996 that required full liberalization of all
telecommunications services in most EU member states by January 1, 1998.
"GSM" - Global System for Mobile Communication, a recognized standard for
mobile telephony.
"GTS" - Global TeleSystems Group, Inc.
"GTS Board" - the board of directors of GTS.
"GTS By-laws" - the by-laws of GTS.
"GTS Certificate" - the certificate of incorporation of GTS, as amended.
"GTS Group" - GTS, its subsidiary undertakings and associated undertakings,
as those respective terms are defined in the Companies Act 1985.
"GTS Stock" - GTS common stock, par value $0.10, per share.
"Gold & Appel" - Gold & Appel Transfer S.A.
"Goskomsvyaz" - the successor to the Russian Ministry of Communications.
"Guaranteed Delivery Procedures" - the guaranteed delivery procedures
described under "The Offer -- Procedures for Accepting the Offer -- All Holders
of Esprit Telecom Securities".
"HER" - Hermes Europe Railtel B.V., a wholly owned subsidiary of GTS.
"HER Notes" - US$265 million aggregate principal amount of 11 1/2% senior
notes of HER due 2007, sold in August 1997.
"IAS" - Institute for Automated Systems
"ILEC" - Independent Local Exchange Carrier.
"Indemnity Agreement" - the agreement entered into among GTS, David Reibel
and each member of the Esprit Board on December 8, 1998.
"Initial Closing Date" -- 3:00 p.m. (London time) and 10:00 a.m. (New York
City time) on March 4, 1999 unless GTS, in its discretion shall have extended
the Offer in which case the term shall mean the latest time and date at which
the Offer as so extended by GTS will expire or, if earlier, the time at which
the Conditions are satisfied or, to the extent permitted, waived.
"Initial Offer Period" - the period from the date of this document up to
and including the time and date the Offer becomes or is declared unconditional
in all respects or lapses.
"Information Agent" - Georgeson & Company, Inc.
"Inland Revenue" - the UK government department responsible for assessing
and collecting taxes and revenues.
"Institutional Securityholders" - Apax Funds Nominees Limited and Warburg,
Pincus Ventures, L.P.
"ISPS" or "Internet service provider" - provides customers with access to
the Internet, normally for dial access customers, by linking its network
directly or through other providers to the Internet backbone network.
"IP" an Internet Protocol - a compilation of network and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
"IPLCs" - International Private Leased Circuits.
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"IPO" - the initial public offering of common stock of GTS completed on
February 10, 1998.
"IRU" - Indefeasible Right of Use - the right to use capacity in a
telecommunication system, usually an undersea cable, with most of the rights and
interests of ownership for the life of the cable with a liability to pay
maintenance charges.
"ISDN" - Integrated Services Digital Network - an internationally agreed
upon standard which, through special equipment transmits simultaneous voice and
data transmission in digital formats over the same transmission line.
"ITU" - International Telecommunications Union, an inter-governmental
organization based in Geneva that, among other things, agrees and publishes
International Technical Standards for telecommunications services and networks.
"July 1998 Stock Offering" - the follow-on public offering of common stock
of GTS in July 1998.
"July 1998 Offerings" - the July 1998 Stock Offering and the Debenture
Offering.
"leased line" - point-to-point fixed line connections leased from another
operator.
"Lehman Brothers" - Lehman Brothers International (Europe).
"Letter of Transmittal" - the letter of transmittal relating to the Offer
for use by holders of Esprit Telecom ADSs.
"LANs" - Local Access Network Suppliers.
"MGTS" - Moscow City Telephone Network Company.
"MIU" - Minimum Investment Unit - a unit of capacity in a
telecommunications system, usually an undersea cable.
"MOC" - the Russian Ministry of Communications, succeeded by Goskomsvyaz.
"Nasdaq" - the computerized quotation system sponsored by the National
Association of Securities Dealers.
"NetSource" - NetSource Europe ASA, a Norwegian company.
"New Entrants" - new entrants to the telecommunications market, such as
alternative carriers, global consortia of telecommunications operators,
international carriers, Internet backbone networks, resellers, value-added
networks and other service providers
"New Euro HER Notes" - Euro 85 million aggregate principal amount of
10 3/8% Senior Notes of HER due 2006, sold on December 21, 1998, which
transaction closed on January 4, 1999.
"New GTS Stock" - new shares of GTS Stock proposed to be issued, credited
as fully paid, pursuant to the Offer.
"New HER Notes" - US dollar New HER Notes and Euro denominated New HER
Notes.
"New HER Notes Offering" - the offering of the New HER Notes.
"9 7/8% Notes" - the US$105 million aggregate principal amount of 9 7/8%
Senior Notes of GTS due 2005.
"1990 Directive" - a directive issued on June 28, 1990 by the European
Commission requiring EU member states to liberalize by January 1, 1998 all
telecommunications services with the exception of voice telephony to the general
public.
"NMT" - Nordic Mobile Telephone System, a recognized standard for mobile
telephony.
"node" - an individual point of origination and termination of data on the
network transported using frame relay or similar technology.
238
<PAGE> 246
"Non-US Holder" - any beneficial owner of Esprit Telecom Securities or New
GTS Stock that is not a US Holder.
"Noon Buying Rate" - the noon buying rate in New York City for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York.
"Notice of Guaranteed Delivery" - the notice of guaranteed delivery
relating to the Offer for use by holders of Esprit Telecom ADSs.
"Offer" - the recommended offer by Bear Stearns, on behalf of GTS, to
acquire all of the Esprit Telecom Securities subject to the terms and the
conditions set out in this document, the Letter of Transmittal and the
Acceptance Forms and, where the context admits, any subsequent revision,
variation, extension or renewal thereof.
"Offer Agreement" - the offer agreement between GTS and Esprit Telecom
dated December 8, 1998.
"Offer Period" - the period from the time the announcement of the proposed
Offer was made, being December 8, 1998 until the date when the Offer becomes or
is declared unconditional as to acceptances or lapses.
"Offering Circular/Proxy Statement/Prospectus" - this document dated
February 2, 1999 and first being mailed to stockholders of GTS and Esprit
Telecom Securityholders on or about February 2, 1999, including the Annexes
hereto.
"ONP" - Open Network Provision, the principles established by European
Council Directive 90/387/EEC.
"PABX" - Private Automatic Branch Exchange - a switch on customer premises
used to connect customer telephones (and related equipment) to the PSTN and to
switch internal calls within the customer's telephone system.
"Panel" - The Panel on Takeovers and Mergers of the United Kingdom.
"PKGCN" - Primorsky Krai branch of the Gossvyaznadzor, the local authority
in Vladivostok responsible for monitoring compliance with regulatory and
technical norms of the telecommunications industry.
"PKGCN Letters" - three letters issued by the PKGCN to PrimTelefone
concerning certain compliance irregularities.
"PKMIA" - Primorsky Krai branch of the Ministry for Internal Affairs.
"PKMIA Investigation" - a criminal investigation opened by the PKMIA under
Article 327 of the Russian Federation Criminal Code against certain employees of
PrimTelefone concerning the use of forged state documents in connection with an
application for a frequency plan submitted (and subsequently abandoned) by
PrimTelefone.
"Plusnet" - Plusnet Gesellschaft Fur Netzwerk Service mbh.
"points of presence" - physical access locations where a long distance
carrier has installed transmission equipment in a service area that serves as,
or relays calls to, a network switching center of that long distance carrier.
"Preferred Stock" - all shares of preferred stock, par value $0.0001 per
share, of GTS.
"Press Announcement" - the Press Announcement dated December 8, 1998 by GTS
announcing the Offer.
"Principal Securityholders" - Institutional Securityholders, Gold & Appel
and Walter Anderson.
"PSTN" - Public Switched Telephone Network refers to the telephone networks
accessible by the public at large through private lines, wireless systems and
pay phones.
239
<PAGE> 247
"PTO" - public telecommunications operator; the former monopolist operator
in a liberalized state or the monopolist operator in a state yet to be
liberalized. In liberalized states a number of smaller operators now have so
called PTO licenses.
"PTT" - Post, Telephone and Telegraph, the former monopolist operator that
at one stage provided all the three services listed.
"Receiving Agents" - the UK Receiving Agent and the Belgian Receiving
Agent.
"Record Date" - 5.00 p.m. (New York City time) on January 29, 1999, the
record date set for the determination of holders of GTS Stock entitled to vote
at the GTS Special Meeting.
"Registration Rights Agreement" - the registration rights agreement entered
into and executed by the Institutional Shareholders and GTS on December 8, 1998.
"Registration Statement" - the Registration Statement on Form S-4 relating
to the Offer, filed by GTS with the SEC under the Securities Act, of which this
document and each form a part.
"Relevant Authority" - any governmental or governmental or
quasi-governmental authority (whether, supra-national, national, regional, local
or otherwise) or statutory or regulatory or investigative body or other
authority (including any anti-trust or merger control authority), court, trade
agency, association, institution or professional or environmental body or
(without prejudice to the generality of all the foregoing) any other person or
body in any jurisdiction.
"Right" - the right attached to each share of GTS Stock, that gives the
holder of GTS Stock the right to purchase shares of Series A Preferred Stock.
"Rollover Offer" - the offer to be made by GTS to Esprit Telecom Option
holders whereby such Esprit Telecom Option holders may roll over their Esprit
Telecom Options into GTS Stock options substantially on the same terms as the
existing Esprit Telecom Options and on the same Exchange Ratio as the Offer.
"route kilometer" - the number of kilometer of the telecommunications path
in which fiber optic cables are installed as it would appear on a network map.
"RPOA" - Recognized Private Operating Agency
"SDH" - Synchronous Digital Hierarchy, a method of telephony transmission
using digital techniques where data is packed in containers which are
synchronized in time enabling relatively simple modulation and demodulation at
the transmitting and receiving ends. Used to carry high capacity voice circuits
over long distances.
"SEC" - the US Securities and Exchange Commission.
"Securities Act" - the United States Securities Act of 1933, as amended,
and the rules thereunder.
"Securityholder Irrevocables" - the irrevocable undertakings to accept the
Offer, executed by the Principal Securityholders on December 8, 1998.
"Series A Preferred Stock" - shares of Series A junior participating
preferred stock, par value $0.0001 per share, authorized by GTS.
"SNCB/NMBS" - Societe Nationale des Chemins de Fer Belges S.A. de Droit
Public Nationale Maatschappij der Belgische Spoorwegen N.V. Van Publiek Recht,
the Belgian national railway.
"Soros Associates" - certain entities associated with George Soros,
collectively.
"Special Meeting" - the special meeting of GTS to be held on March 3, 1999
at which resolutions will be proposed, among other things, to approve the
issuance of new common stock to acquire all of the issued Esprit Telecom
Ordinary Shares and Esprit Telecom ADSs in connection with the Offer.
"STM" - Synchronous Transfer Mode V , a transport and switching method that
depends upon information occurring in regular and fixed patterns with respect to
a reference such as a frame pattern. A time division
240
<PAGE> 248
multiplex and switching technique to be used across the user's network interface
for a broadband ISDN. It gives each user up to 50 million bits per second
simultaneously, regardless of the number of users.
"Subsequent Offer Period" - the period following the expiration of the
Initial Offering Period during which the Offer remains open for acceptance.
"switch" - a sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits and
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers
terminating calls to connect calls directly to their destinations, while
providing advanced features and recording connections information.
"Thyssen" - Thyssen Telecom AG.
"UK" - the United Kingdom of Great Britain and Northern Ireland.
"UK Receiving Agent" - IRG plc.
"UK GAAP" - UK generally accepted accounting principles.
"United States" or "US" - the United States of America, its territories and
possessions, any state of the United States of America and the District of
Columbia.
"Units" - one-thousandth of a share of Series A Preferred Stock that may be
acquired upon the exercise of one Right.
"US Business Day" - any day other than Saturday or Sunday or a US federal
holiday and shall consist of the time period from 12.01 a.m. through 12.00
midnight (New York City time).
"US Depositary" - The Bank of New York, in its capacity as US Depositary.
"US dollar New HER Notes" - US$265 million aggregate principal amount of
10 3/8% Senior Notes due 2009, sold on December 21, 1998, which transaction
closed in January 1999.
"US GAAP" - US generally accepted accounting principles.
"US Holder" - any beneficial owner of Esprit Telecom Securities and New GTS
Stock that is (i) a citizen or resident of the United States, (ii) a corporation
or partnership created or organized in the United States or under the laws of
United States or of any state, (iii) an estate whose income is includable in
gross income for United States federal income tax purposes regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust.
"US Person" - a US person as defined in Regulation S of the United States
Securities Act 1933 as amended.
"VANs" - Value-Added Networks, a communication network that provides
features other than transmission of information, such as transmission of one
type of computer signal to another type of computer signal.
"VAT" - Value-Added Tax.
"VSAT" - Very Small Aperture Terminal.
"Wider GTS Group" - GTS or any of its subsidiaries or subsidiary
undertakings or any joint venture, partnership, firm or company in which any of
them has a substantial interest.
"Wider Esprit Telecom Group" - Esprit Telecom or any of its subsidiary
undertakings and associated undertakings or any joint venture, partnership, firm
or company in which any of them has a substantial interest.
For the purposes of this document, "subsidiary," "subsidiary undertaking,"
"holding company" and "associated undertaking" have the respective meanings
given by the Companies Act.
241
<PAGE> 249
INDEX TO
FINANCIAL INFORMATION CONCERNING GTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996,
and 1997............................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996,
and 1997............................................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995,
1996, and 1997......................................... F-6
Notes to Consolidated Financial Statements................ F-7
THIRD QUARTER FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheets as of December 31,
1997 and September 30, 1998............................ F-27
Condensed, Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 1997 and
1998................................................... F-28
Condensed, Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1997 and
1998................................................... F-29
Notes to Condensed, Consolidated Financial Statements..... F-30
EDN SOVINTEL
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-36
Balance Sheets as of December 31, 1997 and 1996........... F-37
Statements of Income and Retained Earnings for the years
ended December 31, 1997, 1996, and 1995................ F-38
Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995................................... F-39
Notes to Financial Statements............................. F-40
THIRD QUARTER FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1997 and
September 30, 1998..................................... F-49
Condensed Statements of Operations for the Three and Nine
Months ended September 30, 1997 and 1998............... F-50
Condensed Statements of Cash Flows for the Three and Nine
Months ended September 30, 1997 and 1998............... F-51
Notes to Condensed Financial Statements................... F-52
</TABLE>
F-1
<PAGE> 250
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Global TeleSystems Group, Inc.
We have audited the accompanying consolidated balance sheets of Global
TeleSystems Group, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global
TeleSystems Group, Inc. at December 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with United States generally
accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
February 26, 1998, except for
Note 17, as to which the date
is November 12, 1998
F-2
<PAGE> 251
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 57,874 $ 318,766
Accounts receivable, net.................................. 8,920 17,079
Restricted cash........................................... 13,627 30,486
Prepaid expenses.......................................... 2,537 14,101
Other assets.............................................. 2,396 6,707
--------- ---------
TOTAL CURRENT ASSETS.............................. 85,354 387,139
Property and equipment, net................................. 35,463 236,897
Investments in and advances to ventures..................... 104,459 76,730
Goodwill and intangible assets, net of accumulated
amortization of $3,916 and $10,184 at December 31, 1996
and 1997, respectively.................................... 9,548 43,284
Restricted cash............................................. 2,554 36,411
--------- ---------
TOTAL ASSETS...................................... $ 237,378 $ 780,461
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 15,211 $ 61,984
Debt maturing within one year............................. 16,261 6,390
Current portion of capital lease obligations.............. -- 21,490
Related party debt maturing within one year............... 4,947 5,708
Other current liabilities................................. 2,040 6,301
--------- ---------
TOTAL CURRENT LIABILITIES......................... 38,459 101,873
Long-term debt, less current portion........................ 5,260 408,330
Long-term portion of capital lease obligations.............. -- 117,645
Related party long-term debt, less current portion.......... 59,079 79,796
Taxes and other non-current liabilities..................... 14,664 14,595
--------- ---------
TOTAL LIABILITIES................................. 117,462 722,239
COMMITMENTS AND CONTINGENCIES
Minority interest......................................... 1,915 18,766
Common stock, subject to repurchase (325,000 shares and
797,100 shares outstanding at December 31, 1996 and 1997,
respectively)............................................. 4,333 12,489
SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding)............... -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 34,589,106, and 37,606,814 shares issued
and outstanding, net of 116,639 and 195,528 shares of
treasury stock at December 31, 1996 and 1997,
respectively).......................................... 3,459 3,761
Additional paid-in capital................................ 238,268 274,359
Cumulative translation adjustment......................... (2,161) (8,269)
Accumulated deficit....................................... (125,898) (242,884)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................ 113,668 26,967
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 237,378 $ 780,461
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 252
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services.................... $ 5,979 $ 19,210 $ 41,300
Equipment sales......................................... 2,433 4,907 5,798
-------- -------- ---------
8,412 24,117 47,098
-------- -------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services................. 8,150 14,741 37,206
Equipment sales...................................... 246 4,200 5,513
Selling, general and administrative..................... 37,291 47,940 68,425
Depreciation and amortization........................... 3,491 4,165 6,227
Non-income taxes........................................ 234 850 2,085
-------- -------- ---------
49,412 71,896 119,456
Write-off of venture-related assets..................... -- -- 1,673
Equity in losses of ventures............................ 7,871 10,150 14,599
-------- -------- ---------
Loss from operations...................................... (48,871) (57,929) (88,630)
OTHER INCOME/(EXPENSE):
Other non-operating income.............................. 10,270 -- --
Interest income......................................... 2,177 3,569 11,361
Interest expense........................................ (728) (11,122) (39,086)
Foreign currency losses................................. (685) (1,176) (1,826)
-------- -------- ---------
11,034 (8,729) (29,551)
-------- -------- ---------
Net loss before income taxes and minority interest........ (37,837) (66,658) (118,181)
Income taxes.............................................. 2,565 1,360 2,482
-------- -------- ---------
Net loss before minority interest......................... (40,402) (68,018) (120,663)
Minority interest......................................... 2 27 3,677
-------- -------- ---------
Net loss.................................................. $(40,400) $(67,991) $(116,986)
======== ======== =========
Net loss per share........................................ $ (1.70) $ (2.33) $ (3.26)
======== ======== =========
Weighted average common shares outstanding................ 23,707 29,157 35,833
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 253
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(40,400) $(67,991) $(116,986)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation and amortization........................... 3,721 7,444 14,843
Amortization of discount on note payable................ -- 3,598 5,023
Equity in losses of ventures, net of dividends
received............................................. 7,871 11,123 17,474
Deferred interest....................................... -- 6,583 12,970
Write-off of venture related assets..................... -- -- 1,673
Non-cash compensation................................... -- -- 4,571
Minority interest....................................... (2) (27) (3,677)
Other................................................... 2,577 1,342 2,985
Changes in assets and liabilities, excluding effects of
acquisitions and ventures:
Accounts receivable.................................. (1,557) (6,996) (10,900)
Prepaid expenses..................................... (438) (605) (7,522)
Accounts payable and accrued expenses................ 12,820 (1,694) 34,925
Other changes in assets and liabilities.............. 9,474 8,207 (3,984)
-------- -------- ---------
NET CASH USED IN OPERATING ACTIVITIES........... (5,934) (39,016) (48,605)
INVESTING ACTIVITIES Investments in and advances to
ventures, net of repayments............................. (45,102) (54,932) 5,943
Purchases of property and equipment..................... (24,324) (12,195) (45,148)
Restricted cash......................................... (2,543) (13,138) (62,924)
Acquisitions, net of cash acquired...................... (1,871) -- 1,050
Goodwill and other intangibles.......................... (6,181) (487) (2,196)
Other investing activities.............................. 2,069 (125) (149)
-------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES........... (77,952) (80,877) (103,424)
FINANCING ACTIVITIES
Proceeds from debt...................................... 23,325 63,599 409,817
Payment of debt issue costs............................. (779) (2,777) (24,927)
Net proceeds from issuance of common stock.............. 42,175 107,775 36,432
Other financing activities.............................. (750) -- (536)
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 63,971 168,597 420,786
Effect of exchange rate changes on cash and cash
equivalents............................................. (676) 126 (7,865)
-------- -------- ---------
Net (decrease) increase in cash and cash equivalents...... (20,591) 48,830 260,892
Cash and cash equivalents at beginning of year............ 29,635 9,044 57,874
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 9,044 $ 57,874 $ 318,766
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 254
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
--------------- PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
------ ------ ---------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.................... 20,781 $2,078 $ 70,359 $ (246) $ (17,507) $ 54,684
Proceeds from the sale of common stock, net of
expenses of $3,680.......................... 5,091 509 41,629 -- -- 42,138
Translation adjustment........................ -- -- -- (1,289) -- (1,289)
Net loss...................................... -- -- -- -- (40,400) (40,400)
Other......................................... 333 33 156 -- -- 189
------ ------ -------- ------- --------- ---------
BALANCE AT DECEMBER 31, 1995.................... 26,205 2,620 112,144 (1,535) (57,907) 55,322
Proceeds from the sale of common stock, net of
expenses of $3,567.......................... 8,349 835 106,909 -- -- 107,744
Issuance of 7,223 warrants in connection with
debt financing.............................. -- -- 20,184 -- -- 20,184
Translation adjustment........................ -- -- -- (626) -- (626)
Net loss...................................... -- -- -- -- (67,991) (67,991)
Other......................................... 35 4 (969) -- -- (965)
------ ------ -------- ------- --------- ---------
BALANCE AT DECEMBER 31, 1996.................... 34,589 3,459 238,268 (2,161) (125,898) 113,668
Proceeds from the sale of common stock, net of
expenses of $2,777.......................... 2,503 250 36,182 -- -- 36,432
Translation adjustment........................ -- -- -- (6,108) -- (6,108)
Net loss...................................... -- -- -- -- (116,986) (116,986)
Other......................................... 515 52 (91) -- -- (39)
------ ------ -------- ------- --------- ---------
BALANCE AT DECEMBER 31, 1997.................... 37,607 $3,761 $274,359 $(8,269) $(242,884) $ 26,967
====== ====== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 255
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS OPERATIONS
Global TeleSystems Group, Inc. ("GTS" or "the Company"), is a provider of a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers through its operation of
voice and data networks, international gateways, local access and cellular
networks and the provision of various value-added services in the Commonwealth
of Independent States ("CIS"), primarily Russia, Central Europe, and India and
China ("Asia"). The Company, through two of its ventures, is also building a new
infrastructure for transporting international voice, data and video traffic for
other carriers throughout Western Europe and for worldwide international voice,
data and video traffic that either originates or terminates in, or transits
through, Western Europe. See further discussion of the Company's business
operations within Note 3, "Investments In and Advances to Ventures," and Note
14, "Segment Information and Certain Geographical Data."
Certain of the Company's ventures are in the early stages of operations in
the telecommunications industry. The Company's businesses are developing
rapidly; some are in countries with an emerging economy, which by nature have an
uncertain economic, political and regulatory environment. The general risks of
operating businesses in the CIS and other developing countries include the
possibility for rapid change in government policies, economic conditions, the
tax regime and foreign currency regulations.
The ultimate recoverability of the Company's investments in and advances to
ventures is dependent on many factors including, but not limited to, the
economies of the countries in which it does business; the ability of the Company
to maintain the necessary telecommunications licenses; and the ability of the
Company to obtain sufficient financing to continue to meet its capital and
operational commitments.
On December 1, 1997, the Company filed an amendment to its Certificate of
Incorporation to effect an increase in the authorized common shares from
60,000,000 to 135,000,000; a 3 for 2 common share stock split, 1 1/2 common
shares for every common share issued and outstanding; and an increase in the par
value of its authorized common shares from $0.0001 to $0.10 on a post-split
basis. Accordingly, the Company has presented share and per share data for
issued and outstanding shares as well as options and warrants on a restated
basis to give effect to the increase in authorized common shares, the stock
split and the increase in par value for its capital stock.
Subsequent to year end, the Company completed an initial public offering of
12.8 million shares of common stock at $20 per common share (the "Stock
Offering"). The Company also issued aggregate principal amount $105.0 million of
9.875% senior notes due 2005 (the "Notes Offering" and together with the Stock
Offering, the "Offerings"). See Note 15, "Subsequent Events."
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of minority shareholder rights, super majority
voting conditions or other governmentally imposed uncertainties so severe that
they prevent the Company from exercising unilateral control of the venture. If
the Company has little ability to exercise significant influence over a venture,
the venture is accounted for by the cost method. All significant intercompany
accounts and transactions are eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become
F-7
<PAGE> 256
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
profitable, the Company recognizes 100% of the profits until such time as the
excess losses previously recognized have been recovered.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements in order to conform to the 1997 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The Company
had $16.2 million and $66.9 million of restricted cash at December 31, 1996 and
1997, respectively. The restricted cash is primarily related to cash held in
escrow for interest payments associated with the Company's debt obligations.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment and telecommunications equipment not
yet placed into service. Maintenance and repairs are charged to expense as
incurred.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company intends to capitalize
material interest costs associated with the construction of capital assets for
business operations and amortize the costs over the assets' useful lives. The
Company has not capitalized any interest costs through December 31, 1997.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses and is being amortized on a
straight-line basis over their estimated useful lives ranging from three to ten
years. Intangible assets, principally telecommunications service contracts,
licenses and deferred financing costs, are amortized on a straight-line basis
over the lesser of their estimated useful lives, generally three to fifteen
years, or their contractual term. In accordance with Accounting Principles Board
("APB") Opinion No. 17, "Intangible Assets," the Company continues to evaluate
the amortization period to determine whether events or circumstances warrant
revised amortization periods. Additionally, the Company considers whether the
carrying value of such assets should be reduced based on the future benefits of
its intangible assets.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," long-lived
assets to be held and used by the Company are reviewed to determine whether any
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. For long-lived assets to be held and used, the
Company bases its evaluation on such impairment indicators as the nature of the
assets, the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If an
F-8
<PAGE> 257
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset. The fair value
of the asset is measured using quoted market prices or, in the absence of quoted
market prices, fair value is based on an estimate of discounted cash flow
analysis. During the year ended December 31, 1996, the Company's analyses
indicated that there was not an impairment of its long-lived assets. During the
year ended December 31, 1997, the Company's analyses indicated that there was an
impairment of its long-lived assets. Accordingly, the Company recorded a
write-down of long-lived assets associated with its investments in the Asia and
Central Europe regions (see Note 3, "Investments in and Advances to Ventures").
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
permanently reinvested in those operations.
FOREIGN CURRENCY TRANSLATION
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation." In most instances, the local currency is
considered the functional currency for the Company's subsidiaries and ventures,
except for operations in the CIS, where the U.S. dollar has been designated as
the functional currency. Assets and liabilities of these subsidiaries and
ventures are translated at the rates of exchange at the balance sheet date.
Income and expense accounts are translated at average monthly rates of exchange.
The resultant translation adjustments are included in the cumulative translation
adjustment, a separate component of shareholders' equity. Gains and losses from
foreign currency transactions of these subsidiaries and ventures are included in
the operations of the subsidiary or venture.
For those ventures operating in the CIS, the temporal method for
translating assets and liabilities is used. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the operations of the subsidiaries and
ventures.
REVENUE RECOGNITION
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that will be neither billed nor collected.
Revenue from service or consulting contracts is accounted for when the services
are provided. Equipment sales revenue is generally recognized upon shipment of
the equipment. Billings received in advance of service being performed are
deferred and recognized as revenue as the service is performed.
NET LOSS PER SHARE
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share for
all years presented. The Company's net loss per share calculation (basic and
fully diluted) is based upon the weighted average common shares issued. There
are no reconciling items in the numerator or denominator of the Company's net
loss per share calculation. Employee stock options, warrants, and convertible
debt instruments have been excluded from the net loss per share calculation
because their effect would be anti-dilutive (see Note 5, "Debt Obligations,"
Note 6, Shareholders' Equity and Note 7, "Stock Option Plans").
F-9
<PAGE> 258
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of its financial instruments
reported in the balance sheets approximates their fair value.
OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts and
notes receivable. The Company maintains most of its cash and cash equivalents in
one high-quality U.S. financial institution. The Company extends credit to
various customers and establishes an allowance for doubtful accounts for
specific customers that it determines to have significant credit risk. The
Company provides allowances for potential credit losses when necessary.
The Company does not currently hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results of operations could be adversely affected by
fluctuations in foreign currency exchange rates.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." The Company has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and presents pro forma disclosures of net loss as if the fair value
method had been adopted.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two new standards which
become effective for reporting periods beginning after December 15, 1997. SFAS
No. 130, "Reporting Comprehensive Income," requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires financial and descriptive
information with respect to "operating segments" of an entity based on the way
management disaggregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES
The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 49% to 80%. The Company has no investments in ventures
that are accounted for by the cost method.
F-10
<PAGE> 259
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's investments in and advances to ventures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Equity in net assets acquired............................... $ 41,105 $31,183
Excess of investment cost over equity in net assets acquired
net of amortization of $4,347 and $4,851 at December 31,
1996 and 1997, respectively............................... 11,288 7,582
Accumulated (losses) earnings recognized.................... (13,840) 14,659
Dividends................................................... (973) (3,848)
Cash advances and other..................................... 66,879 27,154
-------- -------
Total investments in and advances to ventures..... $104,459 $76,730
======== =======
</TABLE>
In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."
The Company has financed the operating and investing cash flow requirements
of several of its ventures in the form of cash advances. The Company anticipates
that these ventures will generate sufficient cash inflows for the repayment of
the cash advances as their businesses mature. Also, due to the long-term nature
of the anticipated repayment period and the potential risk associated with the
repatriation of the cash advances, the Company has aggregated its investments in
and cash advances to the ventures.
The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.
INVESTMENT RECOVERABILITY
The Company periodically evaluates the recoverability of its equity
investments, in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures, which is the lowest
level of cash flow information available. As of December 31, 1997, the Company
recorded a write-off of approximately $5.4 million, which represented the net
balance of certain investments in and advances to ventures located in Asia
(primarily Beijing Tianmu and V-Tech) and Central Europe (Eurohivo) which were
stated in excess of their net realizable value. The entire net balance of these
investments in and advances to ventures was written-off based on the fact that
these ventures project overall negative cash flows for the foreseeable future.
The ventures projected future operations deteriorated during 1997 as a result of
problems dealing with one of its partners, the inability of the
F-11
<PAGE> 260
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ventures to develop markets for its services, and technical problems. The
components of the charge, which was classified as equity in losses of ventures,
were as follows:
<TABLE>
<S> <C>
Equity in net assets acquired............................... $ 17,093
Excess of investment cost over equity in net assets
acquired.................................................. 593
Accumulated (losses) earnings recognized.................... (23,253)
Dividends................................................... --
Cash advances and other..................................... 10,921
--------
Net write-off as of December 31, 1997....................... $ 5,354
========
</TABLE>
Prior to the write-off detailed above, the Company included approximately
$14.4 million in its accumulated losses (of the $14.4 million, approximately
$13.5 million related to the write-off of advances to several Chinese owned
operating telecommunications companies to which the Company provides technical
and financial assistance and $0.9 million related to the write-off of
inventories, receivables, and other assets) which represented the Company's
share of asset write-offs recorded by certain of the Company's equity method
investments in Asia during the year ended December 31, 1997. Such write-offs,
for the same reasons mentioned in the previous paragraph, were recorded by the
Company's equity method investments pursuant to SFAS No. 121 and are included in
the $(23.3) million accumulated (losses) detailed above. Additionally, during
the year ended December 31, 1997 the Company recorded a charge of $1.7 million
in order to write off certain holding company assets associated with the
ventures located in Asia and Central Europe. This charge has been included as a
separate line item in the Company's statement of operations.
HERMES EUROPE RAILTEL B.V. ("HER") RECAPITALIZATION
During the year ended December 31, 1997, HER recapitalized its equity
structure and amended its existing shareholder agreement. In connection with the
HER recapitalization the Company contributed approximately $51.8 million and
converted existing note receivables of approximately $28.4 million in exchange
for an additional 29% equity interest in HER. As a result of the
recapitalization and amended shareholder agreement, the Company obtained
unilateral control over HER. As such, HER has been consolidated into the
Company's financial statements effective July 6, 1997, the effective date of the
recapitalization. The Company recognized approximately $8.7 million of goodwill
in connection with the recapitalization. As a result of the Company's loss
recognition policy, the consolidation of HER would not have a material impact on
the Company's historical financial position or operating results and thus no pro
forma information is disclosed herein.
As of December 31, 1997, the consolidation of HER resulted in reductions of
$72.9 million, $10.0 million, and $4.6 million in the equity in net assets
acquired, excess of investment cost over equity in net assets acquired, and cash
advances and other, respectively. Additionally, as of December 31, 1997 the
consolidation of HER had a $21.4 million favorable impact on the accumulated
(losses) earnings recognized.
F-12
<PAGE> 261
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN THE INVESTMENTS IN AND ADVANCES TO VENTURES
The changes in the investments in and advances to ventures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance, at beginning of period............................. $ 56,153 $104,459
Equity in net assets acquired............................... 22,441 80,054
Excess of investment cost over equity in net assets
acquired.................................................. 5,288 10,187
Dividends................................................... (973) (2,875)
Cash advances (repayments) and other........................ 31,700 (24,171)
Effect of consolidating equity method company............... -- (76,325)
-------- --------
58,456 (13,130)
Equity ownership in losses.................................. (3,122) (5,552)
Excess losses recognized over amount attributable to
ownership
interest.................................................. (4,451) (10,610)
Amortization of excess of investment cost over equity in net
assets acquired........................................... (2,577) (3,313)
Loss in value that is other than temporary.................. -- (5,354)
Effect of consolidating equity method company............... -- 10,230
-------- --------
(10,150) (14,599)
-------- --------
Balance, at end of period................................... $104,459 $ 76,730
======== ========
</TABLE>
As of December 31, 1997, the significant investments accounted for under
the equity method and the percentage interest owned consist of the following:
<TABLE>
<CAPTION>
EQUITY OWNED SUBSIDIARIES OWNERSHIP %
- ------------------------- -----------
<S> <C>
EDN Sovintel................................................ 50%
Sovam Teleport.............................................. 67%
GTS Ukrainian TeleSystems, L.L.C. (holds a 49% interest in
Golden Telecom)........................................... 60%
GTS-Vox Limited (holds a 95% interest in TeleCommunications
of Moscow)................................................ 52.64%
TeleRoss Ventures -- 13 joint ventures in various regions in
the CIS................................................... 50%
Vostok Ventures -- 12 joint ventures in various regions in
the CIS................................................... 50-70%
PrimTelefone................................................ 50%
GTS Monaco Access S.A.M..................................... 50%
</TABLE>
In connection with a purchase of a venture during 1995, the Company is
required to pay additional consideration through 1998, in shares of the
Company's common stock, based on the actual earnings of the venture. The
Company's maximum obligation pursuant to this agreement is to issue 1,121,640
shares of common stock. The Company will recognize any additional consideration
paid under this agreement as goodwill. During the first quarter of 1998, the
Company will issue additional shares based on the venture's 1997 earnings (see
Note 15, "Subsequent Events").
During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or by
exchange for 713,311 shares of the Company's common stock. Subsequent to the
Stock Offering, repayment of this financing is due on demand and must be in
exchange for the Company's common stock. This amount has been included in "Other
financing agreements" (see Note 5, "Debt Obligations").
F-13
<PAGE> 262
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year end, the Company purchased the remaining interest in
Sovam Teleport, one of its equity method investments in the CIS.
The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1996 and 1997.
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
- ---------------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue.......................................... $36,202 $107,270 $143,472
Gross margin..................................... 17,109 45,937 63,046
Net income (loss)................................ 3,240 (8,460) (5,220)
Equity in net losses............................. (1,091) (6,482) (7,573)
Current assets................................... 27,293 50,689 77,982
Total assets..................................... 48,174 146,483 194,657
Current liabilities.............................. 19,416 68,474 87,890
Total liabilities................................ 24,987 102,332 127,319
Net assets....................................... 23,187 44,151 67,338
Ownership interest in equity in net assets....... 14,912 19,513 34,425
</TABLE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
EQUITY METHOD ENTITIES VENTURES OWNED VENTURES METHOD VENTURES
- ---------------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue.......................................... $47,986 $178,174 $226,160
Gross margin..................................... 29,292 69,136 98,428
Net (loss) income................................ (10,370) 14,700 4,330
Equity in net (losses) earnings.................. (11,538) 5,131 (6,407)
Current assets................................... 20,841 59,959 80,800
Total assets..................................... 35,090 176,117 211,207
Current liabilities.............................. 18,719 68,503 87,222
Total liabilities................................ 27,653 102,758 130,411
Net assets....................................... 7,438 73,359 80,797
Ownership interest in equity in net assets....... 9,541 45,638 55,179
</TABLE>
F-14
<PAGE> 263
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts Receivable Consists Of:
Trade accounts receivable................................. $ 6,769 $ 15,725
Value added taxes receivable.............................. 1,971 3,350
Other receivables......................................... 962 2,089
------- --------
9,702 21,164
Less: allowance for doubtful accounts................... 782 4,085
------- --------
Total accounts receivable, net...................... $ 8,920 $ 17,079
======= ========
Property And Equipment Consists Of:
Telecommunications equipment.............................. $28,302 $231,996
Furniture, fixtures and equipment......................... 5,877 9,760
Other property............................................ 837 3,470
Construction in process................................... 7,009 7,799
------- --------
42,025 253,025
Less: accumulated depreciation.......................... 6,562 16,128
------- --------
Total property and equipment, net................... $35,463 $236,897
======= ========
Accounts Payable And Accrued Expenses Consists Of:
Accounts payable.......................................... $ 6,761 $ 25,005
Interest payable.......................................... 213 17,483
Accrued compensation...................................... 3,151 6,165
Other accrued expenses.................................... 5,086 13,331
------- --------
Total accounts payable and accrued expenses......... $15,211 $ 61,984
======= ========
</TABLE>
NOTE 5: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes of HER, due August 15, 2007 at 11.5% interest
payable semiannually...................................... $ -- $265,000
Senior subordinated convertible bonds, due June 30, 2000 at
an effective interest rate of 15%, and a stated rate of
8.75%-9.75% payable semiannually.......................... -- 144,787
Related party debt obligations, with principal payments
beginning April 1, 1998 and maturing on March 31, 2001 at
10% interest, net of unamortized discount for warrants to
purchase 7,778 common shares.............................. 59,079 72,233
Other financing agreements.................................. 26,468 18,204
------- --------
85,547 500,224
Less: debt maturing within one year....................... 21,208 12,098
------- --------
Total long-term debt.............................. $64,339 $488,126
======= ========
</TABLE>
In the third quarter of 1997, HER issued $265.0 million aggregate principal
amount of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes are general unsecured obligations of the subsidiary with interest payable
semiannually at a rate of 11.5%. Approximately $56.6 million of the net proceeds
of the offering of the Senior Notes is being held in escrow for the first four
semiannual interest payments commencing in 1998. HER may redeem the Senior
Notes, in whole or in part, any time on or after August 15,
F-15
<PAGE> 264
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 at specific redemption prices. HER may also redeem a portion of the Senior
Notes at a price equal to 111.5% of the principal amount prior to August 15,
2000 with net cash proceeds of a public equity offering of HER with gross
proceeds of at least $75 million or in certain other circumstances specified in
the indenture for the Senior Notes, provided, however, that at least two-thirds
of the principal amount of the Senior Notes originally issued remain outstanding
after each such redemption.
In July 1997, the Company issued $144.8 million aggregate principal amount
of senior subordinated convertible bonds (the "Bonds") due June 30, 2000. The
Bonds constitute direct, unsecured senior subordinated indebtedness after
existing debt of $82.7 million. Upon completion of a complying public equity
offering as defined in the Bond agreement (an "Offering") or in certain other
circumstances as defined in the Bond agreement, the Bonds may be converted at
the option of the holders from time to time, in whole or in part, prior to the
close of business on June 30, 2000, into shares of the Company's common stock,
par value $0.10 per share. The Bonds will be convertible into such number of
shares of the Company's common stock as is equal to the principal amount of such
Bonds divided by the applicable conversion price as defined in the Bond
Agreement. The Bonds bear interest payable semiannually at a stated rate of
8.75% for the first year, 9.25% for the second year and 9.75% for the final
year. In the event of an Offering, the interest rate will remain at the interest
rate prevailing at the time of the Offering until maturity. In the event that an
Offering has not occurred by the maturity date, the Bonds will be redeemed at
121% of their principal amount. As a result of the redemption feature, interest
expense is being accrued and accreted at a 15% annual rate. (Subsequent to year
end, the Company completed the Stock Offering at $20.00 per common share which
will result in the Bonds being convertible into approximately 7.2 million shares
of the Company's common stock. In addition, due to the completion of the Stock
Offering, the interest rate will remain at 8.75% until maturity (see Note 15,
"Subsequent Events").)
In 1996, the Company entered into long-term obligations ("Debt
Obligations"), totaling $70.0 million, with lenders (the "Lenders"). The Lenders
are affiliated with and are considered related parties to the Company, as a
result of their ownership of the Company's common stock (see Note 12, "Related
Party Transactions"). The Debt Obligations require principal payments beginning
in the third year, to maturity in the fifth year. The Debt Obligations bear an
interest rate of 10.0% and require interest payments beginning in the first
fiscal quarter subsequent to the date of issuance. At the Company's discretion,
the initial interest accrued until the first principal payment can be deferred
until maturity. Upon commencement of principal payments, the Company is
obligated to make concurrent interest payments. Further, in connection with the
Debt Obligations, the Company issued warrants to purchase 7,777,776 common
shares, valued at $20.7 million. In accordance with the terms of the warrant
agreement, the exercise price of the warrants was reduced from $10.27 per share
to $9.33 per share, as the outstanding debt had not been repaid prior to
December 31, 1996. The warrants may be exercised up to six years after the date
of the relevant agreements. The Company is subject to certain restrictive
covenants pursuant to these Debt Obligations, including restrictions on the
payment of dividends and indebtedness to affiliated ventures. As of December 31,
1997, the Debt Obligations have been classified within "Related party long-term
debt, less current portion" on the balance sheet. Subsequent to year end the
Company repaid the Debt Obligations by using a portion of the proceeds from the
Offerings (see Note 15, "Subsequent Events").
Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at prevailing negotiated market rates.
Aggregate maturities of long-term debt, as of December 31, 1997, are as
follows: 1998 -- $12.1 million, 1999 -- $1.1 million, 2000 -- $149.4 million,
2001 -- $0.2 million and $349.5 million thereafter.
The Company paid interest of $0.7 million, $0.2 million and $2.0 million in
1995, 1996 and 1997, respectively. The Company incurred interest expense of
$39.1 million in 1997 and would have recorded $33.1 million in additional
interest expense in 1997 had the Senior Notes and Bonds been outstanding on
January 1, 1997.
F-16
<PAGE> 265
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: SHAREHOLDERS' EQUITY
COMMON STOCK
The following table summarizes the Company's equity private placements for
the periods ending:
<TABLE>
<CAPTION>
SHARES ISSUED SHARE PRICE NET PROCEEDS
------------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
December 31, 1995.................................. 5,090,876 $ 9.00 $42,138
December 31, 1996.................................. 8,348,532 13.33 107,744
December 31, 1997.................................. 2,502,686 15.67 36,432
</TABLE>
During 1995, the Company issued 400,000 shares of common stock to an
independent third party in connection with the purchase of an interest in a
venture within the CIS region. At the discretion of the holder of these shares,
the Company is obligated to repurchase these shares at the prevailing fair
market value of the Company's common stock on the date of repurchase. During
1995, the Company repurchased 75,000 shares at $10.00 per share and the
repurchased shares became treasury stock. In March 1997, the Company repurchased
32,500 shares at $13.33 per share, and these shares became treasury stock. The
Company will be required to repurchase the remaining shares over the next three
years. During 1997, the Company issued 504,600 shares of common stock pursuant
to a purchase agreement with a seller for a portion of their interest in a
venture within the CIS region. Pursuant to the purchase agreement, the Company
is obligated to assist the seller in locating a purchaser for the common stock,
and if unable to do so, to repurchase the issued common stock. The Company has
accreted the value of the outstanding common stock subject to repurchase
(325,000 shares at December 31, 1996 and 797,100 shares at December 31, 1997),
to the fair value of the Company's common stock as of December 31, 1996 and 1997
($13.33 and $15.67 per share, respectively).
During 1996, the Company entered into the Debt Obligations totaling $70.0
million with the Lenders. In connection with the Debt Obligations, the Company
issued warrants to purchase 7,777,776 common shares at $10.27 per share. The
exercise price of the warrants was automatically reduced to $9.33 per share as
of December 31, 1996, because the Debt Obligations remained outstanding. The
warrants expire during the first and second quarters of 2002.
The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.
The Company has reserved 15,572,260 shares of common stock for issuance
upon conversion of the exercise of outstanding and future stock options,
warrants and similar rights.
PREFERRED STOCK
As of December 31, 1996 and 1997, there were 10,000,000 shares of $0.0001
par value preferred stock authorized, with rights and preferences to be
determined by the Board of Directors. As of December 31, 1996 and 1997, no
shares of preferred stock had been issued.
NOTE 7: STOCK OPTION PLANS
The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the years ended December 31, 1995, 1996 and 1997 would have been
approximately $40.9 million, $69.4 million and $123.4 million, respectively. The
fair value of options
F-17
<PAGE> 266
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted during 1995 and 1996 are estimated as $2.19 and $2.93 per common share,
respectively, on the date of grant using the minimum value option pricing model
with the following assumptions: dividend yield 0%, risk free interest rate of
5.50% for 1995 and 6.13% for 1996, and an expected life of five years. The fair
value of options granted during 1997 are estimated as $7.35 per common share, on
the date of grant using the Black Scholes option valuation model with the
following assumptions: dividend yield 0%, risk free interest rate of 5.74%, an
expected life of five years, and an expected volatility of .50. The Company
determined its volatility factor with the assistance of an investment banker,
based on peer group public companies.
The Company maintains the 1992 Stock Option Plan, the Non-Employee
Directors Stock Option Plan and the GTS Equity Compensation Plan (the "Option
Plans"). As of December 31, 1997, the maximum number of shares of common stock
available for grant under the Option Plans was 8,836,534. All options granted
under the Option Plans are at exercise prices that were at least equal to the
fair market value of common stock at the date of grant. Generally, all options
granted under the Option Plans vest over a three-year period from the date of
grant and expire ten years from the date of grant.
Additional information with respect to stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 2,431,800 $3.65 3,422,399 $ 5.56 4,869,360 $ 7.31
Options granted............. 1,210,800 9.04 1,612,962 11.10 2,215,296 14.53
Options exercised........... (28,001) 4.46 (56,498) 6.70 (89,312) 6.34
Options canceled or
expired................... (192,200) 3.57 (109,503) 8.73 (433,173) 7.38
--------- --------- ---------
Outstanding at end of
year...................... 3,422,399 5.56 4,869,360 7.31 6,562,171 9.75
========= ========= =========
Options exercisable at year
end....................... 995,617 $3.59 1,992,236 $ 4.65 2,962,110 $ 6.06
</TABLE>
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 1997: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.42 to $2.75....................... 1,446,000 6 $ 2.69 1,371,000 $ 2.68
$4.67 to $9.00....................... 1,270,650 7 7.88 986,679 7.66
$10.00 to $15.67..................... 3,845,521 8 13.03 604,431 11.13
--------- ---------
6,562,171 7 $ 9.75 2,962,110 $ 6.06
========= =========
</TABLE>
In addition, prior to the establishment of the Option Plans, certain
options were granted in 1991 to certain key employees and former employees to
purchase 1,172,250 shares of the Company's common stock at an exercise price of
$0.53 per share. All options were granted at an exercise price equal to the fair
value of the underlying common stock at the date of grant. The options vested in
equal increments over a three-year period. During 1993, 603,000 of the options
were canceled and in 1994, 50,250 options were exercised, leaving 519,000 fully
vested options outstanding at December 31, 1995, 1996 and 1997.
F-18
<PAGE> 267
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company implemented the GTS 1996 Top Talent Retention
Program (the "Program"), which granted options to certain employees under the
1992 Stock Option Plan. The Program was offered to 28 employees, who had an
aggregate of 339,524 options, and provided for an altered vesting period based
on certain revenue levels achieved and certain stock price levels maintained. If
these performance-based achievements are not attained, the options vest in April
2001. As of December 31, 1997 no performance levels were met.
In the fourth quarter of 1997, HER implemented a stock option plan for its
key officers and employees (the "HER Plan"). The ownership dilution caused by
the HER Plan is not expected to be significant. As a result of issuing options
under the HER Plan, HER will incur a non-cash charge of approximately $3.7
million, of which $2.6 million was recorded during the fourth quarter and the
remaining $1.1 million will be recognized in 1998.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such, participants may defer pretax
income in accordance with federal income tax limitations. The Company provides a
50% matching contribution on the first 5% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest 100% after three
years of service. The Company's expense under the Savings Plan was approximately
$0.1 million, $0.2 million and $0.2 million for the years ended December 31,
1995, 1996 and 1997, respectively. The Company made no discretionary
(non-matching) contributions for the years ended December 31, 1995, 1996 or
1997.
HER established a pension plan in 1995 that covers all HER employees upon
twenty-five years of age and at least one year of service. HER has entered into
an insurance arrangement (an annuity contract) whereby an insurance provider has
undertaken a legal obligation to provide specific benefits to participants in
return for a fixed premium. As such, HER does not bear significant financial
risk for its pension plan. HER's expense under the pension plan was $0.05
million, $0.4 million and $0.7 million for the years ended December 31, 1995,
1996 and 1997, respectively.
NOTE 9: OTHER NON-OPERATING INCOME
Favorably affecting the 1995 results was the non-recurring $10.3 million
gain the Company recognized as a result of its cash settlement of certain claims
with a third party in 1995.
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax loss:
Domestic......................................... $(22,398) $(41,554) $(64,920)
Foreign.......................................... (15,437) (25,077) (53,261)
-------- -------- --------
$(37,835) $(66,631) $(118,181)
======== ======== ========
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, the Company recorded
$2.6 million, $1.4 million and $2.5 million, respectively, in income tax expense
that related exclusively to its current provision for foreign taxes.
F-19
<PAGE> 268
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the U.S. statutory federal tax rate of 34.0% to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes at U.S. statutory
rates...................... $(12,865) 34.0% $(22,655) 34.0% $(40,181) 34.0%
Foreign operating losses
generating no tax
benefit.................... 6,550 (17.3) 8,526 (12.8) 18,108 (15.3)
Domestic operating losses
generating no tax
benefit.................... 6,315 (16.7) 14,129 (21.2) 22,073 (18.7)
Other -- net................. 2,565 (6.8) 1,360 (2.1) 2,482 (2.1)
-------- ----- -------- ----- -------- -----
$ 2,565 (6.8)% $ 1,360 (2.1)% $ 2,482 (2.1)%
======== ===== ======== ===== ======== =====
</TABLE>
Deferred tax assets and liabilities are recorded based on temporary
differences between earnings as reported in the financial statements and
earnings for income tax purposes. The following table summarizes major
components of the Company's deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $ 20,720 $ 38,029
Other deferred tax assets................................. 1,326 3,912
-------- --------
Total deferred tax asset.................................... 22,046 41,941
Deferred Tax Liability...................................... 1,161 2,292
-------- --------
Net deferred tax asset...................................... 20,885 39,649
Less: valuation allowance................................. (20,885) (39,649)
-------- --------
Total............................................. $ -- $ --
======== ========
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $110 million expiring in
fiscal years 2003 through 2012. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carry-forwards will be subject to an annual limitation.
The Company's investment in EDN Sovintel is treated for U.S. tax purposes
as a partnership and, therefore, the Company's share of EDN Sovintel's income or
loss flows through to the Company's consolidated federal income tax return on a
current basis. Undistributed earnings of the Company's other foreign investments
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes, or foreign withholding taxes has been made.
Upon distribution of those earnings, the Company would be subject to foreign
withholding taxes and U.S. income taxes (subject to reduction for foreign tax
credits).
Certain of the Company's foreign ventures have foreign tax loss
carryforwards in excess of $60 million. The Company's financial statements do
not reflect any provision for benefits that might be associated with such loss
carryforwards.
F-20
<PAGE> 269
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES
LEASES
The Company has various lease agreements for office space, equipment and
fiber. The obligations extend through 2018. Most of the leases contain renewal
options of one to twelve years. Assets under capital leases are included in the
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
----- --------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications equipment................................ $ -- $150,787
Less: accumulated amortization.............................. -- 482
----- --------
$ -- $150,305
===== ========
</TABLE>
Rental expense aggregated $2.0 million, $2.2 million, and $3.1 million for
the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum payments, by year and in the aggregate, under the capital
leases and other non-cancellable operating leases with initial or remaining
terms in excess of one year as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1998....................................... $ 26,679 $ 3,311
1999...................................... 14,217 2,982
2000...................................... 15,300 1,604
2001...................................... 16,465 1,143
2002...................................... 16,630 933
Thereafter.............................................. 152,016 1,155
-------- -------
Total minimum lease payments............................ 241,307 $11,128
=======
Less amount representing interest....................... 102,172
--------
Present value of net minimum lease payments............. 139,135
Less current portion of capital lease obligations....... 21,490
--------
Long-term portion of capital lease obligations.......... $117,645
========
</TABLE>
OTHER COMMITMENTS AND CONTINGENCIES
In September 1997, the Company purchased the remaining interest in one of
its subsidiaries, which owns interests in cellular ventures within the CIS
region, for $5.2 million, which was paid in October 1997. Furthermore, the
Company is required to pay additional consideration of a minimum of $2.4 million
when certain revenue levels are met, certain other events occur or, if neither
has occurred, on April 1, 1999. The purchase price and consideration have been
allocated to net assets based on the fair value at the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired was
$5.9 million, which has been recorded as goodwill and is being amortized on a
straight-line basis over five years.
The Company's consolidated and non-consolidated ventures have future
purchase commitments amounting to $2.7 million and $1.1 million, respectively,
as of December 31, 1997.
In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its
non-consolidated ventures. The total amount guaranteed at December 31, 1997 was
approximately $29.0 million.
F-21
<PAGE> 270
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAJOR CUSTOMERS
In 1995, the Company had one major customer, a foreign governmental agency
in Central Europe, representing $2.7 million, or 32.1%, of total revenue. In
1996, the Company had two major customers, a foreign governmental agency in
Central Europe and a customer in the CIS, representing $3.8 million, or 15.8%,
of total revenue and $2.6 million, or 10.8%, of total revenue, respectively.
There were no major customers in 1997.
TAX MATTERS
The taxation system in Russia ("Russian Taxes") is evolving as the central
government transforms itself from a command to a market oriented economy. The
Russian Federation has introduced and continues to introduce new tax and royalty
laws and related regulations. These laws and regulations are not always clearly
written and their interpretation is subject to the opinions of the local tax
inspectors, Central Bank officials and the Ministry of Finance. Instances of
inconsistent opinions between local, regional and federal tax authorities and
between the Central Bank and Ministry of Finance are not unusual.
The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
Russian Taxes, the Company's Russian Taxes may be in excess of the estimated
amount expensed to date and accrued at December 31, 1996 and 1997. It is the
opinion of management that the ultimate resolution of the Company's Russian Tax
liability, to the extent not previously provided for, will not have a material
effect on the financial condition of the Company. However, depending on the
amount and timing of an unfavorable resolution of this contingency, it is
possible that the Company's future results of operations or cash flows could be
materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
OTHER MATTERS
In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matter other than
what is discussed above, will not have a material effect upon the financial
condition, results of operations or liquidity of the Company.
NOTE 12: RELATED PARTY TRANSACTIONS
As discussed within Note 5, "Debt Obligations," the Company entered into
the Debt Obligations during 1996 with the Lenders. The Lenders are shareholders
of the Company. As part of these transactions, the Company provided one of the
Lenders with the opportunity, at its discretion, to co-invest with the Company
in all of the Company's new ventures within the Asia region. The Company repaid
the Debt Obligations subsequent to year end (see Note 15, "Subsequent Events").
During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or
713,311 shares of the Company's common stock. Subsequent to the Stock Offering,
repayment of this financing must be in
F-22
<PAGE> 271
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange for the Company's common stock. This amount has been included in "Other
financing agreements" (see Note 5, "Debt Obligations").
During 1997, the Company issued 504,600 shares of common stock pursuant to
a purchase agreement with a seller for a portion of their interest in a venture
within the CIS region. As a result of the issuance of the common shares, the
seller became a shareholder of the Company (see Note 3, "Investments in and
Advances to Ventures," and Note 6, "Shareholders' Equity").
The Company has entered into certain consulting agreements with directors
of the Company and paid $0.2 million, $0.2 million and $0.4 million in 1995,
1996, and 1997, respectively, pursuant to those agreements.
The Company had notes receivable due from employees aggregating $0.1
million and less than $0.1 million as of December 31, 1996 and 1997,
respectively, with no single amount due from any individual in excess of $0.1
million.
The Company derived revenue from affiliates of $3.3 million and $4.4
million in 1996 and 1997, respectively. There was no significant revenue earned
from affiliate sales in 1995.
NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------ --------
(IN THOUSANDS)
<S> <C> <C>
Purchase of additional interest in Western Europe region
subsidiary with conversion of debt to equity.............. $ -- $ 9,139
Line of credit issued as payment on note payable and
reclassification of restricted cash....................... -- 7,887
Conversion of a note payable to stock as additional
consideration in relation to purchase of interest in a CIS
region subsidiary......................................... 4,497 4,250
Note payable issued for additional capital infusion in CIS
region subsidiary......................................... 4,500 4,125
Capitalization of leases.................................... -- 139,136
</TABLE>
No significant non-cash investing activities were incurred for the year
ended December 31, 1995.
NOTE 14: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA
The Company operates predominantly in a single industry segment, the
telecommunications industry. The industry consists of a wide range of
telecommunications services to international business customers, including long
distance voice and data services and electronic messaging services. The
following tables present
F-23
<PAGE> 272
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial information by geographic area for 1995, 1996 and 1997.
Transfers between geographic areas were not considered material for disclosure
purposes.
<TABLE>
<CAPTION>
CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Total revenue................................... $ 179 $ 3,838 $ 4,361 $ 140 $ (106) $ 8,412
Gross margin.................................... (318) (949) 1,380 9 (106) 16
Operating loss.................................. (5,469) (16,681) (6,312) (4,831) (15,578) (48,871)
Net loss........................................ (5,452) (19,415) (7,091) (4,771) (3,671) (40,400)
Identifiable assets............................. 5,898 73,816 15,639 9,167 11,101 115,621
Liabilities..................................... 11,766 78,440 26,834 13,936 (75,950) 55,026
Net (liabilities)/assets........................ (5,868) (4,624) (11,195) (4,769) 87,051 60,595
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Total revenue................................... $ -- $ 12,696 $ 9,355 $ 1,561 $ 505 $ 24,117
Gross margin.................................... -- 811 3,292 652 421 5,176
Operating loss.................................. (10,679) (14,608) (4,651) (5,057) (22,934) (57,929)
Net loss........................................ (10,700) (15,572) (5,295) (4,951) (31,473) (67,991)
Identifiable assets............................. 19,607 96,773 17,339 14,973 88,686 237,378
Liabilities..................................... 35,728 116,961 33,826 24,753 (93,806) 117,462
Net (liabilities)/assets........................ (16,121) (20,188) (16,487) (9,780) 182,492 119,916
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
WESTERN CENTRAL OFFICE &
EUROPE CIS EUROPE ASIA ELIMINATIONS TOTAL
-------- -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Total revenue................................... $ 5,373 $ 27,045 $ 13,513 $ 1,016 $ 151 $ 47,098
Gross margin.................................... (4,599) 3,940 4,985 (99) 152 4,379
Operating loss.................................. (25,926) (7,088) (5,076) (28,066) (22,474) (88,630)
Net loss........................................ (29,064) (9,505) (6,882) (28,043) (43,492) (116,986)
Identifiable assets............................. 505,593 99,926 23,840 (6,544) 157,646 780,461
Liabilities..................................... 451,171 62,862 40,465 19,161 148,580 722,239
Net (liabilities)/assets........................ 54,422 37,064 (16,625) (25,705) 9,066 58,222
</TABLE>
NOTE 15: SUBSEQUENT EVENTS
THE OFFERINGS
In February 1998, the Company completed the Stock Offering in which the
Company raised $255.3 million in gross proceeds, including $33.3 million
attributable to the sale of shares resulting from the exercise by the
underwriters of an over-allotment option, from the sale of 12.8 million shares
of common stock at an issue price of $20.00 per share. The Stock Offering
resulted in the Company's common stock being listed in the United States on the
National Association of Securities Dealers Automated Quotation Market and
internationally on the European Association of Securities Dealers Automated
Quotation Market. Also in February 1998, the Company completed the Notes
Offering and issued $105.0 million aggregate principal amount of senior notes,
due February 15, 2005. Interest at 9.875% on the Notes will be payable in cash
semiannually on February 15 and August 15 of each year, commencing August 15,
1998. Net proceeds from the Offerings were approximately $336.7 million.
Approximately $19.6 million of the net proceeds of the Notes Offering is being
held in escrow for the first four semiannual interest payments commencing in
1998.
F-24
<PAGE> 273
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $85.2 million of the net proceeds of the Offerings has been used
to repay the related party Debt Obligations (see Note 5, "Debt Obligations") of
$70.0 million plus accrued interest that were due March 31, 2001. In addition,
approximately $13.2 million in unamortized discount and debt issuance costs on
the Debt Obligations was written off at the time of repayment. The remaining net
proceeds from the Offerings will primarily be used to provide working capital
for existing ventures, particularly in Russia and the CIS, to expand the
Company's operations and for general corporate purposes, including strategic
acquisitions.
As a result of the completion of the Stock Offering, the interest rate for
the Bonds will remain at 8.75% until maturity (see Note 5, "Debt Obligations")
and the 6.25% additional interest that was previously accrued, $4.2 million, has
been reflected as an increase to additional paid-in capital. The Bonds are
convertible into approximately 7.2 million common shares at a conversion price
of $20.00 per share.
The following unaudited pro forma condensed balance sheet and results of
operations of the Company give effect to the Offerings as though the
transactions had occurred on December 31, 1997. The pro forma shares and per
share data have been calculated assuming the Stock Offering occurred on January
1, 1997. The pro forma results are presented for informational purposes only and
do not purport to be indicative of the results of operations which actually
would have been obtained if the transactions had occurred in such periods, or
which may exist or be obtained in the future.
<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE
CONDENSED BALANCE SHEET (UNAUDITED) REPORTED ADJUSTMENTS OFFERINGS
----------------------------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 318,766 $ 232,875 $ 551,641
Other assets................................................ 461,695 23,064 484,759
--------- --------- ----------
Total Assets........................................ $ 780,461 $ 255,939 $1,036,400
========= ========= ==========
Long-term debt, less current portion........................ $ 408,330 $ 105,000 $ 513,330
Related party debt.......................................... 85,504 (72,140) 13,364
Other liabilities........................................... 228,405 (4,171) 224,234
--------- --------- ----------
Total Liabilities................................... 722,239 28,689 750,928
Minority interest........................................... 18,766 -- 18,766
Common stock subject to repurchase.......................... 12,489 (12,489) --
Common stock and additional paid-in capital................. 278,120 252,952 531,072
Cumulative translation adjustment........................... (8,269) -- (8,269)
Accumulated deficit......................................... (242,884) (13,213) (256,097)
--------- --------- ----------
Total Shareholders' Equity.......................... 26,967 239,739 266,706
--------- --------- ----------
Total Liabilities and Shareholders' Equity.......... $ 780,461 $ 255,939 $1,036,400
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE LOSS
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) REPORTED ADJUSTMENTS OFFERINGS PER SHARE
--------------------------------------------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Loss before extraordinary item.............................. $(116,986) $ -- $(116,986) $(2.41)
Extraordinary item.......................................... -- (13,213) (13,213) (0.27)
--------- -------- --------- ------
Net loss............................................ $(116,986) $(13,213) $(130,199) $(2.68)
========= ======== ========= ======
Weighted average common shares outstanding.................. 35,833 12,765 48,598
</TABLE>
OTHER SUBSEQUENT EVENT TRANSACTIONS
Pursuant to a purchase agreement that the Company has with a venture's
partner in the CIS region (see Note 3, "Investments in and Advances to
Ventures," Note 6, "Shareholders' Equity," and Note 12, "Related Party
Transactions") the Company is obligated to pay additional consideration, via
shares of common stock,
F-25
<PAGE> 274
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on the subsidiary's earnings performance. Based on the 1997 results, the
Company is obligated to issue 336,630 shares of common stock during the first
quarter of 1998.
Subsequent to December 31, 1997, HER entered into contractual commitments
to lease fiber pairs, including facilities and maintenance and utilizing the
partial routes for laying fiber optic cable. Based on the contract provisions,
these commitments are currently estimated to aggregate approximately $12.9
million. The commitments have expected lease terms of ten to twenty-one years
with options for renewal rights of one and one-half to five additional years.
The Company entered into a rights agreement (the "Rights Agreement") on
February 2, 1998, and accordingly, the Company authorized the distribution of
one right (a "Right") for each common share outstanding from February 2, 1998
through the distribution date (the "Distribution Date"). Each Right entitles the
registered holder, subject to the terms of the Rights Agreement, to purchase
from the Company one one-thousandth of a share (a "Unit") of Series A Preferred
Stock at an exercise price of $75 per Unit, subject to adjustment. The
Distribution Date, as defined in further detail within the Rights Agreement, is
triggered when a person acquires 15% of the outstanding common stock of the
Company, or a tender or exchange offer is commenced for 15% of such outstanding
stock, except in the case of two related party shareholders in which case the
acquisition threshold that applies is 20% of such outstanding stock. Under
certain circumstances thereafter, certain Rightholders may have the right to
purchase common stock of the Company, or of an Acquiring Person, as defined in
the Rights Agreement, having a value equal to two times the exercise price of
the Rights. In addition, the Rights are redeemable or exchangeable under certain
circumstances.
NOTE 16: EVENTS OCCURRING SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
In March 1998, the Company purchased an additional 10% interest in HER from
an existing shareholder of HER for ECU 13.5 million (approximately $14.6
million). As a result of the purchase, the Company owns approximately 89% of
HER.
NOTE 17: RECENT DEVELOPMENTS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/US dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 was 16.0645 rubles per US
dollar. The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
F-26
<PAGE> 275
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 318,766 $ 993,928
Accounts receivable, net.................................. 17,079 59,822
Restricted cash........................................... 30,486 42,047
Prepaid expenses.......................................... 14,101 22,122
Other assets.............................................. 6,707 12,539
--------- ----------
TOTAL CURRENT ASSETS.............................. 387,139 1,130,458
Property and equipment, net................................. 236,897 436,019
Investments in and advances to ventures..................... 76,730 61,705
Goodwill and intangible assets, net......................... 43,284 161,893
Restricted cash and other noncurrent assets................. 36,411 24,818
--------- ----------
TOTAL ASSETS...................................... $ 780,461 $1,814,893
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 61,984 $ 135,565
Debt maturing within one year............................. 6,390 23,741
Current portion of capital lease obligations.............. 21,490 31,130
Related party debt maturing within one year............... 5,708 --
Other current liabilities................................. 6,301 32,408
--------- ----------
TOTAL CURRENT LIABILITIES......................... 101,873 222,844
Long-term debt, less current portion........................ 408,330 962,232
Long-term portion of capital lease obligations.............. 117,645 187,900
Related party long-term debt, less current portion.......... 79,796 3,530
Taxes and other non-current liabilities..................... 14,595 27,378
--------- ----------
TOTAL LIABILITIES................................. 722,239 1,403,884
COMMITMENTS AND CONTINGENCIES
Minority interest......................................... 18,766 43,957
Common stock, subject to repurchase (797,100 and 463,489
shares outstanding at December 31, 1997 and September
30, 1998, respectively)................................ 12,489 15,643
SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding)............... -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 37,606,814 and 60,495,446 shares issued and
outstanding, net of 195,528 and 96,375 shares of
treasury stock at December 31, 1997 and September 30,
1998, respectively).................................... 3,761 6,050
Additional paid-in capital................................ 274,359 696,574
Accumulated other comprehensive loss...................... (8,269) (7,496)
Accumulated deficit....................................... (242,884) (343,719)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 26,967 351,409
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 780,461 $1,814,893
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 276
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services............ $ 10,691 $ 61,405 $ 26,547 $ 111,195
Equipment sales................................. 2,230 2,429 3,669 6,104
-------- -------- -------- ---------
12,921 63,834 30,216 117,299
-------- -------- -------- ---------
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Telecommunication and other services......... 13,361 37,045 25,169 77,525
Equipment sales.............................. 2,028 1,804 3,183 4,542
Selling, general and administrative............. 22,441 30,645 46,203 75,150
Depreciation and amortization................... 2,078 8,368 4,404 13,953
Non-income taxes................................ 452 3,820 1,452 5,140
-------- -------- -------- ---------
40,360 81,682 80,411 176,310
Write-off of venture-related assets............... 1,673 -- 1,673 --
Equity in losses/(earnings) of ventures........... 8,067 3,485 18,234 (4,142)
-------- -------- -------- ---------
LOSS FROM OPERATIONS.............................. (37,179) (21,333) (70,102) (54,869)
OTHER INCOME (EXPENSE):
Interest income................................. 3,116 13,858 5,278 28,110
Interest expense................................ (13,923) (22,009) (21,086) (52,603)
Foreign currency losses......................... (135) (7,333) (1,094) (10,364)
-------- -------- -------- ---------
(10,942) (15,484) (16,902) (34,857)
-------- -------- -------- ---------
Net loss before income taxes, minority interest
and extraordinary loss.......................... (48,121) (36,817) (87,004) (89,726)
Income taxes...................................... 1,021 770 1,838 2,151
-------- -------- -------- ---------
Net loss before minority interest and
extraordinary loss.............................. (49,142) (37,587) (88,842) (91,877)
Minority interest................................. 957 109 970 3,746
-------- -------- -------- ---------
Net loss before extraordinary loss................ (48,185) (37,478) (87,872) (88,131)
Extraordinary loss -- extinguishment of debt...... -- -- -- (12,704)
-------- -------- -------- ---------
NET LOSS.......................................... $(48,185) $(37,478) $(87,872) $(100,835)
======== ======== ======== =========
Loss per share before extraordinary loss.......... $ (1.34) $ (0.62) $ (2.49) $ (1.65)
Extraordinary loss per share...................... -- -- -- (0.24)
-------- -------- -------- ---------
Net loss per share................................ $ (1.34) $ (0.62) $ (2.49) $ (1.89)
======== ======== ======== =========
Weighted average common shares outstanding........ 35,928 60,182 35,242 53,253
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 277
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................. $(48,185) $(37,478) $(87,872) $(100,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED
IN) PROVIDED BY OPERATING ACTIVITIES:
Extraordinary loss.................................. -- -- -- 12,704
Depreciation and amortization....................... 4,695 17,060 9,173 33,544
Amortization of discount on note payable............ 1,288 -- 3,665 477
Equity in losses (earnings) of ventures, net of
dividends received............................... 8,067 3,485 18,234 (4,142)
Deferred interest................................... 4,273 -- 8,142 1,826
Fair value adjustment for foreign currency
instruments...................................... -- 18,016 -- 21,240
Write-off of venture-related assets................. 1,673 -- 1,673 --
Non-cash compensation............................... 3,390 493 3,390 493
Minority interest................................... (949) (79) (970) (7,924)
Other............................................... 1,741 6,779 2,325 9,684
Changes in assets and liabilities, excluding effects
of acquisitions and ventures:
Accounts receivable.............................. (2,843) (6,826) (5,723) (27,959)
Prepaid expenses................................. 5,005 (2,417) 4,387 (9,155)
Accounts payable and accrued expenses............ 10,710 16,473 7,386 35,594
Other changes in assets and liabilities.......... (4,546) 13,743 (2,743) 29,029
-------- -------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES................................ (15,681) 29,249 (38,933) (5,424)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of
repayments....................................... 10,716 8,120 (2,157) 15,055
Purchases of property and equipment................. (10,734) (71,892) (13,861) (111,734)
Restricted cash..................................... (56,128) 16,815 (55,813) 832
Goodwill and other intangibles...................... (798) (42,743) (2,226) (60,362)
Acquisitions -- cash acquired....................... 1,050 -- 1,050 13,352
-------- -------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES....... (55,894) (89,700) (73,007) (142,857)
FINANCING ACTIVITIES
Proceeds from debt.................................. 415,678 470,134 416,161 575,434
Repayments of debt.................................. (6,013) (175) (104,028)
Payment of debt issue costs......................... (24,178) (16,014) (24,178) (21,257)
Common stock repurchased for treasury............... -- -- (433) --
Net proceeds from issuance of common stock.......... 36,527 127,109 36,527 362,729
Other financing activities.......................... (25) -- (124) 9,471
-------- -------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 428,002 575,216 427,778 822,349
Effect of exchange rate changes on cash and cash
equivalents......................................... (4,173) 1,167 (6,871) 1,094
-------- -------- -------- ---------
Net increase in cash and cash equivalents............. 352,254 515,932 308,967 675,162
Cash and cash equivalents at beginning of period...... 14,587 477,996 57,874 318,766
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $366,841 $993,928 $366,841 $ 993,928
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 278
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
The financial statements of Global TeleSystems Group, Inc. (the "Company"
or "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 1997 audited
consolidated financial statements and the notes related thereto. The results of
operations for the three and nine months ended September 30, 1998 may not be
indicative of the operating results for the full year.
The Company's operations are carried out through alliances with strategic
local partners in the form of venture arrangements. Wholly-owned subsidiaries
and majority-owned ventures where the Company has unilateral operating and
financial control are consolidated within the Company's financial results and
operations. Those ventures where the Company exercises significant influence,
but does not exercise unilateral operating and financial control, are accounted
for by the equity method. The Company has certain majority-owned investments
that are accounted for by the equity method as a result of minority shareholder
rights, super-majority voting conditions or other governmentally imposed
uncertainties so severe that they prevent the Company from exercising unilateral
control of the venture. If the Company has little ability to exercise
significant influence over the ventures, those ventures are accounted for by the
cost method. All significant intercompany accounts and transactions are
eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recorded have been recovered.
2. RUSSIAN ECONOMIC CRISIS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/US dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 and December 18, 1998 was
16.0645 and 20.7 rubles per US dollar, respectively. The last official exchange
rate prior to the suspension of trading on August 17, 1998 was 6.2725 rubles per
US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net
F-30
<PAGE> 279
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks.
3. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from nonowner sources. Comprehensive loss was $50.3 million and $92.7
million for the three and nine months ended September 30, 1997, respectively,
and was comprised of net losses of $48.2 million and $87.9 million and foreign
currency translation adjustments of $2.2 million and $4.9 million for the three
and nine months ended September 30, 1997, respectively. Comprehensive loss was
$35.5 million and $100.1 million for the three and nine months ended September
30, 1998, respectively, and was comprised of net losses of $37.5 million and
$100.8 million and foreign currency translation income of $2.0 million for the
three months ended September 30, 1998 and foreign currency transaction income of
$0.8 million for the nine months ended September 30, 1998.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
periods presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options, warrants, and convertible debt
instruments have been excluded from the net loss per share calculation because
their effect would be anti-dilutive.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
required to be adopted by January 1, 2000. This statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company is currently assessing the impact of this new statement on its
consolidated financial position and results of operations.
Certain reclassifications have been made to the September 1997 condensed,
consolidated financial statements in order to conform to the 1998 presentation.
4. SHAREHOLDERS' EQUITY
In February 1998, the Company completed an initial public offering of 12.8
million shares of common stock at $20.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed, under the symbol "GTSG," in the United States on the National
Association of Securities Dealers Automated Quotation Market and internationally
on the European Association of Securities Dealers Automated Quotation Market.
Net proceeds from the Stock Offering were approximately $235.6 million. As a
result of the Stock Offering, the Company no longer has an obligation to
repurchase the 797,100 shares of common stock that were subject to repurchase at
December 31, 1997.
In July 1998, the Company completed a secondary public offering of 2.8
million shares of common stock at $45.50 per common share. Net proceeds from the
offering were approximately $119.9 million. In addition, in conjunction with
such offering, shareholders of the Company sold 11.7 million shares of the
Company's common stock. The Company did not realize any of the proceeds of such
sale.
Pursuant to a purchase agreement that the Company has with a venture
partner, the Company issued 336,630 and 126,859 shares of common stock to the
partner in April 1998 and July 1998, respectively. In
F-31
<PAGE> 280
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with the purchase agreement, if such entity is unable to sell these
shares, the Company is obligated to assist the seller in locating a purchaser
for the Common Stock, and if the Company is unable to do so, to repurchase the
issued common stock. The shares issued are restricted and therefore, have been
classified as common stock subject to repurchase as of September 30, 1998.
In June 1998, pursuant to the Debt Obligation described below, 3,333,333
warrants were exercised at an exercise price of $9.33 per common share. An
additional 4,444,444 warrants to purchase the Company's common stock expire in
the first and second quarters of 2002.
5. DEBT OBLIGATIONS
In February 1998, the Company issued aggregate principal amount of $105.0
million of 9.875% senior notes due 2005 (the "Notes Offering" and together with
the Stock Offering, the "Offerings"). Net proceeds from the Notes Offering were
approximately $100.5 million. Approximately $19.6 million of the net proceeds
were placed in escrow for the first four semi-annual interest payments,
commencing August 15, 1998.
As a result of the completion of the Stock Offering, the interest rate on
the $144.8 million aggregate principal amount of 8.75% senior subordinated
convertible bonds due 2000, which were issued in July 1997 (the "Bonds") will
remain at 8.75% until maturity and the approximately $5.1 million of the 6.25%
additional interest that was previously accrued through the date of the Stock
Offering has been reflected as an increase to additional paid-in capital. Upon
completion of the Stock Offering, the Bonds became convertible into 7.2 million
common shares at a conversion price of $20.00 per share. During the nine-month
period ended September 30, 1998, a total of $25.4 million of the Bonds were
converted into approximately 1.3 million common shares of the Company's common
stock.
In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Debentures")
that mature July 1, 2010 and will be redeemable from July 1, 2001 at the option
of the Company, at redemption prices as set forth in the Debentures agreement.
Net proceeds from the Debentures offering were approximately $452.1 million. The
Debentures are convertible into 8.5 million common shares at any time prior to
maturity or redemption at a conversion price of $55.05 per common share.
Interest on the Debentures will be payable semi-annually on January 1 and July
1, commencing January 1, 1999. The Debentures are subordinated to all existing
and future indebtedness of the Company, except for the Bonds, with which they
rank pari passu in right of payment.
In 1996, the Company entered into long-term obligations ("Debt
Obligations") totaling $70.0 million with lenders that are affiliated with and
are considered related parties to the Company as a result of their ownership of
the Company's common stock. In February 1998, approximately $85.2 million of the
net proceeds of the Offerings were used to repay the Debt Obligations plus
accrued interest. In addition, the unamortized discount costs and debt issuance
costs on the Debt Obligations were written off at the time of repayment,
resulting in the Company recording an extraordinary loss of $12.7 million.
6. OTHER TRANSACTIONS
In July 1998, a wholly-owned subsidiary of the Company purchased the
remaining 47.36% interest in GTS Vox Limited, which resulted in the Company's
beneficial ownership in TCM increasing from 50% to 95%. The total consideration
paid for the additional interest in GTS Vox Limited was $40.5 million. In
connection with this buy-out, a modification was made to the original stock
purchase agreement with the Company's partner in GTS Vox, in which the Company's
obligation to issue 126,859 shares of common stock to such partner was
accelerated to July 1998. Under the stock purchase agreement, the Company is
also obligated to assist the former partner in locating a buyer for these shares
of common stock and if unable to do so, the Company will repurchase the shares
of common stock. In addition to the above payments, the purchase agreement
includes guarantees of certain cash flow assumptions for GTS Vox Limited's
consolidated subsidiary. As a result of the purchase of the remaining 47.36% of
GTS Vox Limited, the Company accounts
F-32
<PAGE> 281
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for GTS Vox Limited and TCM by the consolidation as opposed to the equity method
of accounting. The purchase price has been allocated to the net assets based on
the fair value at the date of acquisition. The excess purchase price over the
fair value of the net assets acquired was approximately $33.4 million, which has
been recorded as goodwill and is being amortized, on a straight-line basis, over
ten years.
In June 1998, the Company completed the restructuring of the capital and
ownership of Golden Telecom, one of its equity method investees, which resulted
in the Company's beneficial ownership increasing from approximately 25% to
approximately 57%. Prior to the restructuring, Golden Telecom was 49% owned by
GTS Ukrainian TeleSystems LLC ("UTS"), another equity method investee which was
60% owned by the Company and 40% owned by a shareholder of the Company (the
"Shareholder"). The total consideration paid for the additional interest in
Golden Telecom was $11.4 million. In conjunction with this restructuring, the
Shareholder exercised its right to receive 0.7 million shares of the Company's
common stock in lieu of their ownership interest in UTS, and as a result, the
Company reclassified an $8.6 million short-term obligation as additional paid-in
capital. Further, the Shareholder contributed an additional $5.8 million for a
25% interest in UTS. As a result of the restructuring, as of June 30, 1998, UTS
and Golden Telecom are accounted for by the consolidation as opposed to the
equity method of accounting. The purchase price has been allocated to the net
assets based on the fair value at the date of acquisition. The excess purchase
price over the fair value of the net assets acquired was $1.2 million, which has
been recorded as goodwill and is being amortized, on a straight-line basis over
five years.
In June 1998, Hermes Europe Railtel B.V. ("HER") completed the acquisition
for ECU 90 million (approximately $99.5 million) from Ebone Holding Association
(the "Association") of a 75% interest in Ebone A/S ("Ebone"), a Tier 1 Internet
backbone provider, principally serving as a carriers' carrier for European
internet service providers. As part of the transaction, Ebone will purchase,
under a transmission capacity agreement, long-term rights on HER's network
valued at ECU 90 million. The purchase price has been allocated to the net
assets based on the fair value at the date of acquisition. The excess purchase
price over the fair value of the net assets acquired was $17.2 million, which
has been recorded as goodwill and is being amortized, on a straight-line basis
over five years. The members of the Association were offered the right to buy
shares of Ebone in the third quarter of 1998; however, HER's ownership interest
in Ebone was not reduced as a result of the offer.
In March 1998, the Company purchased an additional 10.3% interest in HER
from an existing shareholder of HER for ECU 13.5 million (approximately $14.6
million). As a result of the purchase, the Company owns approximately 89.4% of
HER. The purchase price has been allocated to the net assets based on the fair
value at the date of acquisition. The excess purchase price over the fair value
of the net assets acquired was $10.2 million, which has been recorded as
goodwill and is being amortized, on a straight-line basis over five years.
In February 1998, the Company acquired the remaining 33% interest in Sovam
Teleport from its minority partner and as a result Sovam became a wholly-owned
subsidiary of the Company and in 1998 is accounted for by the consolidation as
opposed to the equity method of accounting. The Company paid a nominal amount
for the 33% interest.
7. FOREIGN CURRENCY TRANSACTIONS
On April 19, 1998, HER entered into a foreign currency swap transaction
agreement (the "Swap") with Rabobank International ("Rabo") in order to minimize
the foreign currency exposure resulting from the issuance in August 1997 of $265
million aggregate principal amount 11.5% Senior Notes due 2007 (the "Notes").
HER has marked the Swap to its fair value as of September 30, 1998 and the
resulting adverse change in the fair value of $20.4 million has been recorded as
a Noncurrent Liability on the balance sheet and recognized as a foreign currency
loss in the statement of operations. In addition, in July 1998, HER entered into
several forward exchange contracts, with terms ranging from thirty to ninety
days, to limit HER's
F-33
<PAGE> 282
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exposure to foreign currency transactions. HER has marked the outstanding
contracts to their fair value as of September 30, 1998 and the resulting adverse
change in the fair value of $2.1 million has been recorded as an Other Current
Liability on the balance sheet and recognized as a foreign currency loss in the
statement of operations.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Capitalization of leases.................................. $42,950 $93,188
Exercise of warrants...................................... -- 31,110
Conversion of the Bonds into common stock................. -- 25,385
Additional consideration in relation to purchase of
interest in a CIS region subsidiary..................... 5,973 19,522
Reclassification of common stock subject to repurchase.... -- 12,489
Conversion of note payable into common stock.............. -- 8,635
Reclassification of accrued interest on the Bonds......... -- 5,052
</TABLE>
No significant non-cash activities were incurred for the three and nine
months ended September 30, 1997.
9. SUBSEQUENT EVENTS
On October 16, 1998, the Company initiated an offer (the "Offer") to
acquire the outstanding shares of NetSource Europe ASA ("NetSource Europe"), a
limited liability company organized under the laws of Norway for aggregate
consideration consisting of (i) 4,037,500 shares of Company common stock and
(ii) cash consisting of (A) $15 million and (B) the value in cash of 712,500
shares of Company common stock on the closing date of the Offer. An additional
$35 million (in cash or Company common stock, at the Company's election) may be
paid to the NetSource Europe shareholders and certain NetSource Europe managers
if NetSource Europe meets or exceeds certain quarterly and annual revenue,
operating margin and cashflow targets in calendar year 1999.
The boards of directors of both the Company and NetSource Europe have
approved the transaction and the NetSource Europe board of directors has
recommended to its shareholders that they accept the Offer. The Company's
consummation of the Offer is subject to acceptance of the Offer by holders of
not less than 67 percent of NetSource Europe's shares on a fully diluted basis,
completion of due diligence by the Company and NetSource Europe, receipt of
applicable regulatory approvals, and satisfaction of certain other conditions.
As of the end of the acceptance period, October 31, 1998, 90.2% (on a fully
diluted basis) of the shareholders of NetSource Europe had accepted the offer.
The Offer may be terminated by the Company or the above-referenced holders of
NetSource Europe stock if the Offer has not been consummated by November 30,
1998. During the course of the Company's due diligence investigation, which is
ongoing, the Company has identified certain issues which are being discussed
with NetSource Europe and certain of its shareholders and which must be resolved
to the parties satisfaction prior to the consummation of the transaction.
NetSource Europe is a European telecommunications services company engaged
primarily in the business of reselling voice communications services with
executive offices in Birmingham, England and sales and operating offices in
seven European countries.
F-34
<PAGE> 283
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The shares of Company common stock offered to NetSource Europe's
shareholders will not be registered under the Securities Act; however, GTS has
agreed to register, as soon as reasonably practicable, the shares of Company
common stock that will be issued as consideration to the NetSource Europe
shareholders.
On October 16, 1998, 6,248 shares of common stock were issued as a result
of certain employees exercising vested options under the Company's stock option
plan. On October 31, 1998, GTS Hermes, Inc. acquired AB Swed Carrier's ownership
interest of 6,551 common shares in the Company for approximately $5.8 million.
In connection with this purchase, GTS Hermes, Inc. paid approximately $5.3
million to a company, which is affiliated with a board member, for negotiating
with AB Swed Carrier and SNCB/NMBS on behalf of GTS Hermes, Inc., to purchase
their respective ownership interest in the Company. Further, on October 26,
1998, the name of GTS Hermes, Inc. was changed to GTS Carrier Services, Inc.
The ownership of the Company as a result of the subsequent events is as
follows:
<TABLE>
<CAPTION>
SHARES OWNERSHIP %
------- -----------
<S> <C> <C>
GTS Carrier Services, Inc. ................................. 176,858 89.9
NMBS........................................................ 13,610 6.9
Employees................................................... 6,248 3.2
------- -----
196,716 100.0%
======= =====
</TABLE>
F-35
<PAGE> 284
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EDN Sovintel
We have audited the accompanying balance sheets of EDN Sovintel as of
December 31, 1997 and 1996, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EDN Sovintel at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited the financial statements of the Company at December
31, 1997 and 1996 and for each of the three years ended December 31, 1997, not
presented herewith, prepared in compliance with the regulations for bookkeeping
and accounting for income tax and statutory reporting purposes in the Russian
Federation on which we expect to report separately for the 1997 audited
financial statements and have reported separately for the 1996 and 1995
financial statements. The significant differences between the accounting
principles applied in preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2.
/s/ Ernst & Young (CIS) Ltd.
Moscow, Russia
February 16, 1998
except for Note 12,
as to which the date is
November 12, 1998
F-36
<PAGE> 285
EDN SOVINTEL
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,620 $ 3,606
Cash deposit with related party........................... 485 476
Accounts receivable, net of allowances.................... 16,223 15,329
Due from affiliates....................................... 1,586 1,879
Inventories............................................... 1,697 1,749
Prepaid expenses and other assets......................... 1,630 1,171
VAT receivable, net....................................... 3,688 1,157
Deferred income taxes..................................... 186
------- -------
Total current assets.............................. 31,115 25,367
Property and equipment, net................................. 38,709 27,709
Deferred expenses........................................... 945 1,080
------- -------
Total assets...................................... $70,769 $54,156
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note due shareholder...................................... $ 39 $ 5,700
Trade payables............................................ 5,725 8,382
Accrued liabilities and other payables.................... 3,194 1,661
Taxes accrued or payable.................................. 1,088 555
Amounts due to shareholder and affiliates................. 10,104 5,703
Amount due to partner in commercial venture............... 1,350 1,350
------- -------
Total current liabilities......................... 21,500 23,351
Commitments and contingencies
Shareholders' equity:
Capital contributions..................................... 2,000 2,000
Retained earnings......................................... 47,269 28,805
------- -------
Total shareholders' equity........................ 49,269 30,805
------- -------
Total liabilities and shareholders' equity........ $70,769 $54,156
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 286
EDN SOVINTEL
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues, net:
Service revenues.......................................... $105,288 $63,488 $29,920
Installation revenues..................................... 5,241 9,312 12,981
Product sales............................................. 3,433 2,240 1,391
-------- ------- -------
113,962 75,040 44,292
Cost of revenues:
Service costs............................................. 67,174 37,884 18,545
Cost of installation...................................... 2,621 4,656 6,491
Cost of products.......................................... 2,834 1,370 1,211
-------- ------- -------
72,629 43,910 26,247
-------- ------- -------
Gross profit................................................ 41,333 31,130 18,045
Selling, general and administrative expenses................ 17,020 10,291 7,145
Interest expense............................................ 503 638 703
Interest income............................................. (392) (87) (59)
Other (income) loss......................................... (57) 120 (98)
Foreign exchange loss on net monetary items................. 131 252 112
-------- ------- -------
Income before taxes......................................... 24,128 19,916 10,242
Income taxes................................................ 5,664 5,154 2,594
-------- ------- -------
Net income.................................................. 18,464 14,762 7,648
Retained earnings, beginning of year........................ 28,805 14,043 6,395
-------- ------- -------
Retained earnings, end of year.............................. $ 47,269 $28,805 $14,043
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 287
EDN SOVINTEL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 18,464 $ 14,762 $ 7,648
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 5,312 3,638 2,448
Provision for deferred income taxes.................... (186)
Provision for doubtful accounts........................ 345 678 132
Write-off of accounts receivable....................... (602) (147) (492)
Write-down of network equipment and inventories........ 100 196
Foreign exchange loss.................................. 131 252 112
Changes in operating assets and liabilities:
Accounts receivable.................................... (637) (8,460) (2,759)
Due from affiliates.................................... 293 (683) (1,011)
Inventories............................................ 52 (911) (309)
Prepaid expenses and other assets...................... (538) (1,108) 599
VAT receivable, net.................................... (2,609) 54 (906)
Trade payables......................................... (2,491) (193) 2,983
Accrued liabilities and other payables................. 1,533 310 1,233
Taxes accrued or payable............................... 570 326 229
Amounts due to shareholder and affiliates.............. 4,401 3,039 2,165
-------- -------- -------
Net cash provided by operating activities......... 24,038 11,657 12,268
INVESTING ACTIVITIES -- purchases of and advances for
property and equipment.................................... (16,177) (9,863) (9,259)
FINANCING ACTIVITIES
Borrowings from shareholder............................... 10,760 11,300 11,888
Repayments to shareholder................................. (16,421) (11,100) (9,271)
Repayments of long-term debt.............................. (694) (3,979)
Cash deposited with related party......................... (41) (476)
-------- -------- -------
Net cash used in financing activities....................... (5,702) (970) (1,362)
Effect of exchange rate changes on cash and cash
equivalents............................................... (145) (312)
-------- -------- -------
Net increase in cash and cash equivalents................... 2,014 512 1,647
Cash and cash equivalents at beginning of year.............. 3,606 3,094 1,447
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 5,620 $ 3,606 $ 3,094
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 288
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN TABLES EXPRESSED IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
EDN Sovintel (the "Company") was created in August 1990 to design,
construct, and operate a telecommunications network in Moscow. This network
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies. Telecommunications services
are subject to local licensing. The Company's license for international,
intercity and local calls was most recently renewed on November 4, 1996 and is
valid until May 1, 2000. The Company received a license for leased lines on
September 20, 1996 valid for 5 years. The Company began operating in December
1991, providing services under long-term contracts payable in US dollars.
The Company initially registered as a Soviet-American joint venture. The
venture re-registered as a Russian limited liability partnership in November
1992. The Company is 50% owned by Open Joint Stock Company "Rostelecom", an
intercity and long-distance carrier which is 38% owned by Svyazinvest, and 50%
owned by Sovinet, a US general partnership, owned by two wholly-owned Global
TeleSystems Group, Inc. ("GTS") subsidiaries.
2. BASIS OF PRESENTATION
The Company maintains its records and prepares its financial statements in
Russian rubles in accordance with the requirements of Russian accounting and tax
legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). The principal adjustments are related to certain accrued
revenue and expenses, foreign currency translation, deferred taxation, and
depreciation and valuation of property and equipment.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements, in conformity with US GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Accordingly, transactions and balances not already measured in US
dollars (primarily Russian rubles) have been remeasured into US dollars in
accordance with the relevant provisions of US Financial Accounting Standard
("FAS") No. 52, "Foreign Currency Translation".
Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
The ruble is not a convertible currency outside the territory of Russia.
Official exchange rates are determined daily by the Central Bank of Russia
("CBR") and are generally considered to be a reasonable approximation of market
rates. The translation of ruble denominated assets and liabilities into US
dollars for the purpose of these financial statements does not indicate that the
Company could realize or settle in
F-40
<PAGE> 289
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
US dollars the reported values of the assets and liabilities. Likewise, it does
not indicate that the Company could return or distribute the reported US dollar
values of capital and retained earnings to its shareholders.
The exchange rates at December 31, 1997, 1996 and 1995 for one US dollar
were RUR 5,960, RUR 5,560 and RUR 4,640 respectively. At February 16, 1998, the
CBR rate had changed to RUR 6,050. The effect of this devaluation of the ruble
on monetary assets and liabilities has not been determined.
On January 1, 1998, the CBR introduced a new ruble to replace existing
rubles. The new ruble has been redenominated so that one new ruble is equivalent
to one thousand old rubles. The old ruble will continue in circulation until
December 31, 1998 and will be accepted as legal tender until December 31, 2002.
All ruble amounts reflected in these financial statements are stated in old
rubles.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in the bank.
ACCOUNTS RECEIVABLE
Accounts receivable are shown at their net realizable value which
approximates fair value. Accounts receivable are shown in the balance sheet net
of an allowance for uncollectible accounts of $643,000 and $900,000 at December
31, 1997 and 1996, respectively.
INVENTORIES
Inventories consist of telecommunications equipment held for resale and are
stated at the lower of cost or market. Cost is computed on a weighted average
basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at their historical cost. Depreciation
is provided on the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Network equipment........................................... 10 years
Other property and equipment................................ 3-5 years
</TABLE>
There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
DEFERRED EXPENSES
Deferred expenses represent the Company's interest in the historical cost
of network equipment owned by MTU Inform, a partner in a commercial venture
(Note 8). These expenses are amortized over the equipment's useful life of 10
years.
REVENUE RECOGNITION AND TAXES ON REVENUE
Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues from product sales, connection fees, and
other services are recognized in the period in which the products are shipped,
connections made, and services rendered. Taxes on certain revenues were charged
at rates ranging from 1.5% to 4.0% over the three years ended December 31, 1997,
1996 and 1995 and amounted to $4,458,000, $2,792,000 and $1,166,000,
respectively, and are charged to selling general and administrative expenses.
F-41
<PAGE> 290
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
The Company expenses the cost of advertising as incurred. Advertising
expenses for the years ended December 31, 1997, 1996 and 1995 were $671,000,
$512,000 and $395,000, respectively, and are included in selling, general and
administrative expenses.
INVESTMENT INCENTIVE DEDUCTIONS
Russian legislation allows for certain additional tax deductions related to
new asset investments. These deductions are accounted for as a reduction to
current income taxes in the year in which they arise.
INCOME TAXES
The Company computes and records income taxes in accordance with FAS No.
109, "Accounting for Income Taxes".
GOVERNMENT PENSION FUNDS
The Company contributes to the Russian Federation state pension fund,
social fund, medical insurance fund, unemployment fund and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 40.5% and 41.0%
from base payroll for 1997, 1996 and 1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments included in current assets and
liabilities is considered to be the carrying value.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets. The
adoption of SFAS No. 121 had no impact on the Company's financial position or
results of operations.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS No. 130 in fiscal 1998. SFAS No. 130
expands or modifies disclosures and, accordingly, will have no impact on the
Company's reported financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain 1996 and 1995 comparative figures have been reclassified to conform
to the presentation adopted in the current year.
F-42
<PAGE> 291
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Network equipment........................................... $ 43,876 $31,251
Other property and equipment................................ 4,527 3,108
-------- -------
48,403 34,359
Accumulated depreciation.................................... (14,557) (9,380)
Construction-in-progress.................................... 4,409 1,796
Network equipment and advances for network equipment not yet
in service................................................ 454 934
-------- -------
Net book value.............................................. $ 38,709 $27,709
======== =======
</TABLE>
Total depreciation expense on property and equipment for 1997, 1996 and
1995 was $5,177,000, $3,503,000 and $2,253,000, respectively.
5. INCOME TAXES
The Russian Federation was the only tax jurisdiction in which the Company's
income was taxed. The income tax expense reported in the accompanying statements
of income and retained earnings for the years ended December 31, 1997, 1996 and
1995 represents the provision for current and deferred taxes.
Significant components of the provision for income taxes for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current tax expense...................................... $5,850 $5,154 $2,594
Deferred tax benefit..................................... (186)
------ ------ ------
Provision for income taxes............................... $5,664 $5,154 $2,594
====== ====== ======
</TABLE>
F-43
<PAGE> 292
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the tax basis and book basis of the
taxable income reported in the Russian statutory financial statements to the
income before taxes reported in the accompanying financial statements presented
in accordance with US GAAP for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Taxable income reported for Russian tax purposes...... $16,184 $14,726 $ 7,411
Investment incentive deductions..................... 12,337 9,030 7,220
Tax loss carry-forwards utilized.................... 97 113
Net permanent difference related to revenues and (2,455)
expenses incurred in the ordinary course of
business which are not assessable or deductible
for Russian tax purposes......................... (1,174) (2,595)
------- ------- -------
Russian income before taxes........................... 26,163 22,695 12,036
Adjustments to present financial statements in
accordance with US GAAP:
Reversal of excess depreciation due to statutory (2,101)
revaluations..................................... (1,497) (293)
Depreciation rate differences....................... (279) (424) (236)
Allowances for uncollectible accounts............... 35 369 (132)
Inventory write-downs............................... (100) (249)
Accrual of deductible expenses...................... (3,234) (2,437) (1,339)
Accrual of revenue.................................. 2,704 1,093 19
Foreign exchange differences........................ 236 280 1,425
Other............................................... 604 (63) (989)
------- ------- -------
Income before taxes under US GAAP..................... $24,128 $19,916 $10,242
======= ======= =======
</TABLE>
A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income tax expense computed on financial income before
taxes at statutory tax rate of 35%.................. $ 8,445 $ 6,970 $ 3,585
Tax effect of permanent differences:
Investment incentive deductions..................... (4,318) (3,161) (2,594)
Tax loss carryforwards utilized..................... (34) (40)
Other permanent differences......................... 859 411 805
Adjustments made to compute income before taxes for
US GAAP financial reporting...................... 1,142 813 555
Increase (decrease) in the valuation allowance for
deferred tax assets................................. (430) 161 243
------- ------- -------
Income tax expense reported in the financial
statements.......................................... $ 5,664 $ 5,154 $ 2,594
======= ======= =======
</TABLE>
F-44
<PAGE> 293
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -----
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciation........................................... $ 398 $ 300 $ 151
Inventory write-downs and allowances................... 235 235 147
Accrual of expenses.................................... 1,132 898 469
Accrual of revenue..................................... (946) (383) (7)
Allowance for uncollectible accounts................... (13) 129
------ ------- -----
Deferred tax assets...................................... 806 1,050 889
Valuation allowance for deferred tax assets.............. (620) (1,050) (889)
------ ------- -----
Net deferred tax assets........................ $ 186 $ -- $ --
====== ======= =====
</TABLE>
For financial reporting purposes, a valuation allowance has been recognised
to reflect management's estimate of the deferred tax assets that are less likely
than not to be realized.
The Company paid Russian profits tax of $4,302,000, $5,849,000 and
$2,660,000 in 1997, 1996 and 1995, respectively.
6. NOTE DUE TO SHAREHOLDER AND LONG-TERM DEBT
In October 1995, the Company entered into a $5,000,000 credit facility with
Sovinet, one of the Company's shareholders. It was subsequently increased to
$7,000,000. In January 1997, this facility was repaid and on January 16, 1997, a
new six-month facility was established with GTS Finance, Inc. for $7,000,000
which was then extended to December 19, 1997. The loan was repaid prior to
December 31, 1997 except for withholding taxes on interest. The loan carried
interest at a rate equal to the then current six month LIBOR rate (5.6%) plus
5.0 percent per annum. As of December 31, 1997, 1996 and 1995, the outstanding
borrowings under this agreement were $39,000, $5,700,000 and $5,500,000,
respectively.
The Company believes that the carrying value of the above loans
approximates fair values.
The Company paid interest of $697,000, $542,000 and $576,000 in 1997, 1996
and 1995, respectively.
7. SHAREHOLDERS' EQUITY
The Company's capital structure as specified in the charter capital
document is as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Registered capital in Russian rubles:
Rostelecom................................................ 600,000 600,000
Sovinet................................................... 600,000 600,000
---------- ----------
1,200,000 1,200,000
========== ==========
Historical value of the Company's capital in US dollars..... $ 2,000 $ 2,000
========== ==========
</TABLE>
As a Russian limited liability company, the Company has no capital stock;
rather, it has only contributed and locally registered capital in accordance
with its charter. As such, no earnings per share data are presented in these
financial statements.
F-45
<PAGE> 294
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Retained earnings available for distribution at December 31, 1997 amounted
to 256 billion rubles or approximately $42,953,000 at applicable year-end
exchange rates.
8. RELATED PARTY TRANSACTIONS
Transactions and balances with Rostelecom (one of the Company's
shareholders) and its affiliates were as follows, as of and for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Sales................................................... $ 2,310 $1,525 $ 62
Telecommunication lease and traffic costs............... 11,183 4,586 1,506
Amounts due to shareholder and affiliates............... 4,184 656 460
Cash deposit with related party......................... 485 476
</TABLE>
At the request of Rostelecom, a shareholder, the Company placed a deposit
of 2.65 billion rubles in August 1996 with a Russian bank related to this
shareholder. The bank deposit agreement states a deposit term of one year, which
was rolled over for an additional year during 1997. The deposit earns interest
quarterly at a rate of 15% per annum plus any devaluation losses against the US
dollar up to a maximum of 4.8% per quarter. Management is aware that the
deposited amount collateralizes certain obligations of the shareholder.
Transactions and balances with Sovinet (one of the Company's shareholders),
GTS and affiliates were as follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales.................................................... $4,974 $3,115 $1,041
Management service fees and reimbursements of expenses of
expatriate staff....................................... 1,318 927 2,062
Balances due under credit facility....................... 39 5,700 5,500
Interest expense......................................... 503 626 461
Amounts due from affiliates.............................. 1,586 1,879 1,196
Amounts due to shareholder and affiliates................ 5,919 5,047 2,204
</TABLE>
Transactions and balances with MTU Inform, an entity with which the Company
entered into a commercial agreement to co-develop and operate a "258" phone
exchange were as follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Telecommunication settlement and rent expense....... $19,003 $15,889 $10,491
Balances in trade payables.......................... 1,237 2,184
Balances in accounts receivable..................... 487
Amount due to partner in commercial venture......... 1,350 1,350 1,350
Balances in prepaid expenses and other assets....... 800
</TABLE>
The Company also has an interest in the cost of the related network
equipment owned by MTU Inform, which is reflected in the balance sheet, net of
related amortization, as deferred expenses. In 1997 the Company prepaid $800 of
1998 rent to MTU-Inform for additional office space to be occupied during 1998.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash deposits and trade accounts
receivables. The Company deposits its available cash with several Russian
financial institutions. The Company's sales and accounts receivable are made to
and due
F-46
<PAGE> 295
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
from a variety of international and Russian business customers. As of December
31, 1997, two customers accounted for 16% and 11% of revenues and 11% and 7% of
accounts receivable, respectively. As of December 31, 1996, these same two
customers accounted for 17% and 16% of revenues and 25% and 10% of accounts
receivable, respectively. As of December 31, 1995, these two customers accounted
for 1% and 14% of revenues and 10% and 11% of accounts receivable, respectively.
The Company has no other significant concentrations of credit risk.
10. COMMITMENTS
The Company has several cancelable operating leases for office and
warehouse space and telecommunications lines with terms ranging from one to five
years.
Total rent expense for 1997, 1996 and 1995 was $2,794,000, $2,137,000 and
$1,234,000, respectively.
11. CONTINGENCIES
Legislation and regulations regarding taxation, foreign currency
transactions and licensing of foreign currency loans in the Russian Federation
continues to evolve as the central government manages the transformation from a
command to a market-oriented economy. The various legislation and regulations
are not always clearly written and their interpretation is subject to the
opinions of the tax inspectors, Central Bank officials and the Ministry of
Finance. Instances of inconsistent opinions between local, regional and national
tax authorities and between the Central Bank and Ministry of Finance are not
unusual.
The Company believes that it has paid or accrued all taxes that are
applicable. Where practice concerning the provision of taxes is unclear, the
Company has accrued tax liabilities based on management's best estimate. The
Company's policy is to accrue contingencies in the accounting period in which a
loss is deemed probable and the amount is reasonably determinable.
Because of the uncertainties associated with the Russian tax and legal
systems, the ultimate amount of taxes, penalties and interest, if any, assessed
may be in excess of the amount expensed to date and accrued at December 31,
1997. It is the opinion of the Company's management that any material amounts
are either not probable, not reasonably determinable, or both.
The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. The Company does not
believe that these contingencies, as related to its operations, are any more
significant than those of similar enterprises in Russia.
12. SUBSEQUENT EVENTS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/US dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 was 16.0645 rubles per US
dollar. The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.2725 rubles per US dollar.
F-47
<PAGE> 296
EDN SOVINTEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $7.4 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
F-48
<PAGE> 297
EDN SOVINTEL
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 5,620 $ 2,012
Accounts receivable, less allowance for doubtful accounts
of $643 and $1,927 at December 31, 1997 and September
30, 1998............................................... 16,223 23,108
Restricted cash........................................... 485 205
Due from affiliated companies............................. 1,586 2,210
Inventory................................................. 1,697 1,906
Deferred tax asset........................................ 186 186
Prepaid expenses and other assets......................... 5,318 10,149
------- -------
Total Current Assets.............................. 31,115 39,776
Property and equipment, net of accumulated depreciation of
$14,557 and $19,361 at December 31, 1997 and September 30,
1998...................................................... 38,709 48,919
Deferred expenses........................................... 945 844
------- -------
TOTAL ASSETS...................................... $70,769 $89,539
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 5,725 $ 9,770
Accrued expenses.......................................... 3,194 4,318
Due to affiliated companies............................... 10,104 17,312
Note payable to shareholder............................... 39
Taxes and other liabilities............................... 2,438 1,979
------- -------
TOTAL LIABILITIES................................. 21,500 33,379
------- -------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Contributed capital....................................... 2,000 2,000
Retained earnings......................................... 47,269 54,160
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 49,269 56,160
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $70,769 $89,539
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 298
EDN SOVINTEL
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1998 1997 1998
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES, NET:......................................... $27,890 $32,391 $82,029 $99,498
COST OF REVENUES:...................................... 18,212 21,176 51,048 65,779
------- ------- ------- -------
Gross margin........................................... 9,678 11,215 30,981 33,719
OPERATING EXPENSES:
Selling, general and administrative.................. 2,740 5,731 8,175 12,093
Depreciation and amortization........................ 239 467 452 858
Non-income taxes..................................... 1,230 1,667 3,697 4,702
------- ------- ------- -------
Total operating expenses..................... 4,209 7,865 12,324 17,653
Income from operations................................. 5,469 3,350 18,657 16,066
OTHER (EXPENSE) INCOME:
Interest income...................................... 72 59 176 157
Interest expense..................................... (173) -- (447) --
Foreign currency losses.............................. (18) (5,197) (87) (5,490)
------- ------- ------- -------
(119) (5,138) (358) (5,333)
------- ------- ------- -------
Net income (loss) before taxes......................... 5,350 (1,788) 18,299 10,733
Income taxes........................................... 864 960 4,084 3,842
------- ------- ------- -------
Net income (loss)............................ $ 4,486 $(2,748) $14,215 $ 6,891
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 299
EDN SOVINTEL
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 4,486 $(2,748) $ 14,215 $ 6,891
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,590 1,995 3,817 4,905
Provision for doubtful accounts.................... (225) 1,511 (577) 1,284
Income tax benefit................................. (665) -- (665) --
Changes in assets and liabilities:
Accounts receivable............................. 7,845 (3,185) 1,126 (8,169)
Inventory....................................... (965) (563) (1,087) (209)
Prepaid expenses and other assets.................. (687) 1,740 (2,216) (5,455)
Accounts payable and accrued expenses.............. (2,186) 538 1,937 4,710
------- ------- -------- --------
Net cash provided by (used in) operating
activities............................... 9,193 (712) 16,550 3,957
INVESTING ACTIVITIES
Purchases of property and equipment................ (2,773) (7,893) (11,329) (15,014)
Restricted cash.................................... 6 263 (16) 280
------- ------- -------- --------
Net cash used in investing activities...... (2,767) (7,630) (11,345) (14,734)
FINANCING ACTIVITIES
Repayment of shareholder note...................... (1,523) -- (2,251) (39)
Due to affiliated companies........................ (2,022) 7,089 (519) 7,208
------- ------- -------- --------
Net cash (used in) provided by financing
activities......................................... (3,545) 7,089 (2,770) 7,169
------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 2,881 (1,253) 2,435 (3,608)
Cash and cash equivalents at beginning of period..... 3,160 3,265 3,606 5,620
------- ------- -------- --------
Cash and cash equivalents at end of period........... $ 6,041 $ 2,012 $ 6,041 $ 2,012
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 300
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel (the "Company") contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's financial position as of December 31, 1997 and September 30, 1998, and
the results of operations and cash flows for the periods indicated.
The Company was established as a competitive local exchange carrier (CLEC)
in August 1990. Through the design, construction, and operation of a
telecommunications network in Moscow, the Company provides its customers,
principally major hotels, business offices and mobile communications companies,
with an alternative to the local telephone company for worldwide communications
services. Telecommunications services are subject to local licensing. The
Company's license for international, intercity and local calls was most recently
renewed on November 4, 1996 and is valid until May 1, 2000. The Company received
a license for leased lines on September 20, 1996 valid for 5 years. The Company
began operating in December 1991, providing services under long-term contracts
payable in US dollars. Currently, customers have the option of being billed in
rubles or dollars. All payments from Russian companies are made in rubles.
The venture is a Russian limited liability partnership. The Company is 50%
owned by Open Joint Stock Company "Rostelecom," an intercity and long distance
carrier which is 38% owned by Svyazinvest, and 50% owned by Sovinet, a US
general partnership, which is owned by two wholly-owned Global TeleSystems
Group, Inc. ("GTS") subsidiaries.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded; however,
other adjustments may have been required had an audit been performed. It is
suggested that these financial statements be read in conjunction with the
Company's 1997 audited financial statements and the notes related thereto. The
results of operations for the three and nine months ended September 30, 1998 may
not be indicative of the operating results for the full year.
The Company also maintains its records and prepares its financial
statements in Russian rubles in accordance with the requirements of Russian
accounting and tax legislation. The accompanying financial statements differ
from the financial statements used for statutory purposes in Russia in that they
reflect certain adjustments, not recorded on the Company's Russian statutory
books, which are appropriate to present the financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The principal
adjustments are related to certain accrued revenue and expenses, foreign
currency translation, deferred taxation, and depreciation and valuation of
property and equipment. The preparation of financial statements, in conformity
with US GAAP, requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
2. RUSSIAN ECONOMIC CRISIS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/US dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing
F-52
<PAGE> 301
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
risk that many Russian banks may be declared bankrupt. Deposits held at Russian
banks, other than Sberbank, are not insured. The official exchange rate as of
September 30, 1998 and December 18, 1998 was 16.0645 and 20.7 rubles per US
dollar, respectively. The last official exchange rate prior to the suspension of
trading on August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $7.4 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
3. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
nonowner sources. For the three and nine months ended September 30, 1997 and
1998, comprehensive income for the Company is equal to net income (loss).
4. CONTINGENCIES
Legislation and regulations regarding taxation, foreign currency
transactions and licensing of foreign currency loans in the Russian Federation
continues to evolve as the central government manages the transformation from a
command to a market-oriented economy. The various legislation and regulations
are not always clearly written and their interpretation is subject to the
opinions of the tax inspectors, Central Bank officials and the Ministry of
Finance. Instances of inconsistent opinions between local, regional and national
tax authorities and between the Central Bank and Ministry of Finance are not
unusual.
The Company believes that it has paid or accrued all taxes that are
applicable. Where practice concerning the provision of taxes is unclear, the
Company has accrued tax liabilities based on management's best estimate. The
Company's policy is to accrue contingencies in the accounting period in which a
loss is deemed probable and the amount is reasonably determinable.
Because of the uncertainties associated with the Russian tax and legal
systems, the ultimate amount of taxes, penalties and interest, if any, assessed
may be in excess of the amount expensed to date and accrued at December 31, 1997
and September 30, 1998.
The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. The Company does not
believe that these contingencies, as related to its operations, are any more
significant than those of similar enterprises in Russia.
F-53
<PAGE> 302
INDEX TO FINANCIAL STATEMENTS CONCERNING ESPRIT TELECOM
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ESPRIT TELECOM GROUP PLC
AUDITED HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants.......................... F-55
Consolidated Profit and Loss Accounts for the three years
ended September 30, 1996, 1997 and 1998................... F-57
Consolidated Balance Sheet as of September 30, 1996, 1997
and 1998.................................................. F-58
Consolidated Cash Flow Statements for the three years ended
September 30, 1996, 1997 and 1998......................... F-59
Statement of Total Recognized Gains and Losses for the three
years ended September 30, 1996, 1997 and 1998............. F-60
Reconciliations of Movements in Shareholders' Funds for the
three years ended September 30, 1996, 1997 and 1998....... F-61
Notes to the Consolidated Financial Statements.............. F-62
PLUSNET BUSINESS
AUDITED HISTORICAL FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-95
Profit and Loss Accounts for the three years ended September
30, 1995, 1996 and 1997................................... F-96
Balance Sheets as of September 30, 1996 and 1997............ F-97
Cash Flow Statements for the three years ended September 30,
1995, 1996 and 1997....................................... F-98
Statement of Total Recognized Gains and Losses and
Reconciliations of Movements in Invested Equity for the
three years ended September 30, 1995, 1996 and 1997....... F-98
Notes to the Financial Statements........................... F-99
</TABLE>
F-54
<PAGE> 303
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Esprit Telecom Group plc
We have audited the accompanying consolidated balance sheets of Esprit
Telecom Group plc and its subsidiaries ("Company") as of September 30, 1996 and
1997 and the related consolidated profit and loss accounts, cash flow
statements, statements of total recognized gains and losses and reconciliations
of movements in shareholders' funds for each of the two years in the period
ended September 30, 1997 all expressed in pounds sterling. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom generally
accepted auditing standards which do not differ in any material respect from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1996 and 1997 and the results of the Company's operations
and its cash flows for each of the two years in the period ended September 30,
1997 in conformity with generally accepted accounting principles in the United
Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated loss expressed in pounds sterling for each of
the two years in the period ended September 30, 1997 and the determination of
consolidated shareholders' funds and consolidated financial position also
expressed in pounds sterling as of September 30, 1996 and 1997. Note 30 to the
consolidated financial statements summarizes this effect for each of the two
years in the period ended September 30, 1997 and as of September 30, 1996 and
1997.
Price Waterhouse
London, England
December 10, 1997
F-55
<PAGE> 304
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Esprit Telecom Group plc
We have audited the accompanying consolidated balance sheet of Esprit
Telecom Group plc and its subsidiaries ("Company") as of September 30, 1998 and
the related consolidated profit and loss account, cash flow statement, statement
of total recognized gains and losses and reconciliation of movements in
shareholders' funds for the year ended September 30, 1998 all expressed in
pounds sterling. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with United Kingdom generally accepted
auditing standards which do not differ in any material respect from auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1998 and the results of the Company's operations and its
cash flows for the period ended 30 September 30, 1998 in conformity with
generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated loss expressed in pounds sterling for the year
ended September 30, 1998 and the determination of consolidated shareholders'
funds and consolidated financial position also expressed in pounds sterling as
of September 30, 1998. Note 30 to the consolidated financial statements
summarizes this effect for the year ended September 30, 1998 and as of September
30, 1998.
PricewaterhouseCoopers
London, England
December 21, 1998
F-56
<PAGE> 305
ESPRIT TELECOM GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
CONTINUING 1998
NOTES 1996 1997 OPERATIONS ACQUISITIONS TOTAL
----- ------- ------- ---------- ------------ -------
(IN THOUSANDS, EXCEPT PER ORDINARY SHARE)
L L L L L
<S> <C> <C> <C> <C> <C> <C>
TURNOVER............................ 1,2 24,880 45,466 62,876 19,712 82,588
COST OF SALES....................... (18,756) (37,949) (52,351) (13,478) (65,829)
------- ------- ------- ------- -------
GROSS PROFIT........................ 6,124 7,517 10,525 6,234 16,759
OTHER OPERATING EXPENSES:
Selling, general and
administrative.................... (7,509) (15,505) (29,873) (5,305) (35,178)
Stock compensation costs............ 6 (2,035) (417) (112) -- (112)
Restructuring costs................. 8 -- (312) -- -- --
Depreciation and amortisation....... (1,471) (2,836) (8,477) (1,905) (10,382)
European network amortisation....... (1,519) -- (1,519)
Operating loss...................... 3 (4,891) (11,553) (29,456) (976) (30,432)
Profit on sale of investment........ 9 -- -- 200 -- 200
Interest receivable................. 10 142 1,152 11,821
Interest payable and similar
charges........................... 11 (345) (457) (24,034)
Loss on ordinary activities before
taxation.......................... (5,094) (10,858) (42,445)
------- ------- -------
Taxation on loss on ordinary
activities........................ 12 -- (2) (2)
------- ------- -------
LOSS FOR THE FINANCIAL YEAR......... (5,094) (10,860) (42,447)
======= ======= =======
LOSS PER ORDINARY SHARE............. 13 (0.07) (0.10) (0.34)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-57
<PAGE> 306
ESPRIT TELECOM GROUP PLC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
---------------------------------
NOTES 1996 1997 1998
----- --------- --------- ---------
(IN THOUSANDS)
L L L
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets..................................... 14 600 3,312 99,029
Tangible assets....................................... 15 7,374 14,284 55,071
Investments........................................... 16 31 131 --
--------- --------- ---------
8,005 17,727 154,100
CURRENT ASSETS
Stock................................................. 5 -- --
Trade debtors......................................... 7,309 15,395 29,444
Other debtors, prepayments and accrued income......... 17 2,352 1,896 26,244
Restricted Securities................................. 23 -- -- 48,969
Short term cash deposits.............................. 2,335 22,876 131,547
Bank balances and cash................................ 4,095 1,649 4,233
--------- --------- ---------
16,096 41,816 240,437
Creditors: Amounts falling due within one year........ 18 (12,122) (25,295) (72,930)
--------- --------- ---------
Net current assets.................................... 3,974 16,521 167,507
--------- --------- ---------
Total assets less current liabilities................. 11,979 34,248 321,607
Creditors: Amounts falling due in more than one
year................................................ 19 (1,968) (2,874) (328,806)
--------- --------- ---------
Net assets/(liabilities).............................. 10,011 31,374 (7,199)
========= ========= =========
CAPITAL AND RESERVES
Called up share capital............................... 20 1,487 1,219 1,255
Other capital reserves................................ 20 18,182 50,108 53,411
Shares to be issued................................... 20 -- -- 2,168
Other reserves........................................ 20 2,810 3,295 1,542
Profit and Loss account............................... 20 (12,468) (23,248) (65,575)
--------- --------- ---------
Total shareholders' funds/(deficit)................... 20 10,011 31,374 (7,199)
--------- --------- ---------
TOTAL SHAREHOLDERS' FUNDS/(DEFICIT) REPRESENT
Equity interest..................................... 9,338 31,374 (7,199)
Non-equity interest................................. 673 -- --
--------- --------- ---------
10,011 31,374 (7,199)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-58
<PAGE> 307
ESPRIT TELECOM GROUP PLC
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
NOTES 1996 1997 1998
----- ------ ------- --------
(IN THOUSANDS)
L L L
<S> <C> <C> <C> <C>
Cash (outflow) from operating activities (see table
below).................................................. (2,245) (2,999) (29,133)
Returns on investments and servicing of finance........... 23 (203) 695 (4,834)
Taxation.................................................. -- (2) (2)
Capital expenditure and financial investment.............. 23 (3,594) (7,919) (22,478)
Acquisitions and disposals................................ -- (852) (91,643)
------ ------- --------
Cash outflow before financing............................. (6,042) (11,077) (148,090)
Management of liquid resources............................ 23 (2,335) (20,541) (158,058)
Financing................................................. 23 6,541 29,799 308,309
------ ------- --------
(Decrease) / Increase in cash in the period............... (1,836) (1,819) 2,161
------ ------- --------
RECONCILIATION OF CASH FLOW MOVEMENT IN NET FUNDS/(DEBT)
(Decrease) / Increase in cash in the period............... 24 (1,836) (1,819) 2,161
Cash (inflow) / outflow from decrease / (increase) in debt
and lease financing..................................... 24 970 594 (308,002)
Cash outflow from the increase in liquid resources........ 2,335 20,541 158,058
------ ------- --------
Changes in net (funds/(debt)) resulting from cash flows... 1,469 19,316 (147,783)
Amortisation of Senior Notes Issue Costs.................. -- -- (658)
Loans and finance leases acquired with subsidiary......... -- (135) --
New finance leases........................................ 24 (2,595) (2,003) (18,346)
Translation differences................................... 24 71 (64) 842
------ ------- --------
Movement in net funds / (debt) in the period.............. (1,055) 17,114 (165,945)
Net funds at start of period.............................. 4,387 3,332 20,446
------ ------- --------
NET FUNDS / (DEBT) AT END OF PERIOD....................... 3,332 20,446 (145,499)
====== ======= ========
RECONCILIATION OF OPERATING LOSS TO CASH FLOWS
Operating loss............................................ (4,891) (11,553) (30,432)
Depreciation.............................................. 1,419 2,737 8,782
Provision for stock option compensation................... 2,035 417 112
Amortisation of goodwill.................................. 52 99 3,119
Loss on sale of fixed assets.............................. 18 4 85
Decrease in stocks........................................ (2) 5 --
Increase in debtors....................................... (5,615) (6,979) (35,279)
Increase in creditors..................................... 4,544 11,681 25,222
Unrealised exchange loss / (profit)....................... 195 590 (742)
------ ------- --------
NET CASH (OUTFLOW) FROM OPERATING ACTIVITIES.............. (2,245) (2,999) (29,133)
====== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-59
<PAGE> 308
ESPRIT TELECOM GROUP PLC
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
NOTES 1996 1997 1998
----- ------ ------- -------
(IN THOUSANDS)
L L L
<S> <C> <C> <C> <C>
Loss for the financial year.......................... 20 (5,094) (10,860) (42,447)
Differences on exchange.............................. 203 148 120
------ ------- -------
Total losses recognised in the year.................. (4,891) (10,712) (42,327)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-60
<PAGE> 309
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
NOTES 1996 1997 1998
----- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
GROUP
Loss for the financial year.......................... (5,094) (10,860) (42,447)
Net proceeds from issue/redemption of shares......... 7,365 -- --
Redemption of preference shares...................... -- (673) --
Shares issued under warrants......................... -- 437 --
Net proceeds of initial public offering.............. -- 32,054 --
Other costs associated with the initial public
offering........................................... -- (1,072) --
Net proceeds of options exercised in the period...... -- 158 307
Nominal value of shares issued for acquisitions...... -- 11 8
Satisfaction of deferred consideration on prior year
acquisitions:
Nominal value of shares......................... -- -- 5
Share Premium................................... -- -- 772
Estimated fair value of shares to be issued to
satisfy deferred consideration of current year
acquisitions:...................................... -- -- 2,168
Movement in merger reserve........................... -- 743 381
Movement in other reserves........................... 2,035 417 113
Exchange differences................................. 203 148 120
------ ------- -------
Net increase/(decrease) in shareholders' funds....... 4,509 21,363 (38,573)
Opening shareholders' funds.......................... 5,502 10,011 31,374
------ ------- -------
Closing shareholders' funds/(deficit)................ 10,011 31,374 (7,199)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-61
<PAGE> 310
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company have been prepared
under the historical cost convention as modified by the revaluation of certain
forward currency contracts and in accordance with accounting principles
generally accepted in the United Kingdom ("UK GAAP").
The directors consider that the accounting policies set out below are
suitable, have been consistently applied and are supported by reasonable and
prudent judgements and estimates.
As described in Note 30, these principles differ in certain significant
respects from those that the Company would have followed had its consolidated
financial statements been prepared in accordance with accounting principles
generally accepted in the United States ("US GAAP").
The directors believe that cash from operations, together with the
borrowings under Senior Notes 2007 and 2008 and the credit facilities currently
available, will be sufficient to settle the Company's projected liabilities as
they fall due. Accordingly these statements have been prepared on a going
concern basis.
The significant accounting policies adopted in arriving at the consolidated
financial statements are summarised below.
A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements
of the Company and its subsidiary undertakings. Intercompany transactions and
balances have been eliminated. The accounts include the results of subsidiary
undertakings acquired from the relevant date of acquisition, or incorporation.
B) TURNOVER
Turnover in respect of telecommunications services is recorded on the basis
of minutes of traffic processed. Turnover represents the invoiced value of goods
and services supplied by the Company, net of Value Added Tax. Turnover is
recorded when the traffic is processed and the communications services are
rendered.
C) COST OF SALES
Network expenses are charged to income in the period in which the related
turnover is recognised.
D) TANGIBLE FIXED ASSETS
Tangible fixed assets comprising computers, telecommunications equipment
(including installation costs), furniture and office equipment are stated at
historical cost less accumulated depreciation. Installation costs consist of
third party preparation costs at client premises related to the installation of
telecommunications equipment.
Except for infrastructure assets depreciation is calculated using the
straight line method to write off the cost of each asset over its estimated
useful economic life according to the following lives:
<TABLE>
<S> <C>
Computer equipment 3 years
Telecom and switching equipment 5-10 years
Installation costs 3 years
Furniture and office equipment 3 years
</TABLE>
For infrastructure assets, depreciation is calculated using an accelerated
method to write off the cost of each asset over a 10 year period.
F-62
<PAGE> 311
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Ongoing maintenance and other network costs are expensed as incurred.
Assets under construction relate to an Indefeasible Right of Use "IRU"
cable which will be transferred to telecom and switching equipment once
operational.
E) LEASED ASSETS
Fixed tangible assets financed by leasing agreements which give rights
approximating to ownership, are treated as if they had been purchased outright.
The amount capitalised is the present value of the minimum lease payments
payable during the lease term. The corresponding leasing commitments are shown
as obligations to the lessor. Depreciation is charged to the profit and loss
account. Lease payments are treated as consisting of capital and interest
elements and the interest is charged to the profit and loss account using the
annuity method.
Rental costs associated with operating leases are charged to the profit and
loss account as they arise over the lease term.
F) GOODWILL
Goodwill, being the excess of the purchase price over the fair values of
the net identifiable assets of businesses acquired, is capitalised as an
intangible asset. These amounts are being amortised by the use of the straight
line method over fifteen years. Where management considers that there has been a
permanent impairment in the value of goodwill, this element of goodwill is
charged to the profit and loss account immediately.
G) DEFERRED TAXATION
Provision is made for taxation deferred as a result of material timing
differences between the incidence of income/expenditure for taxation and
accounts purposes, using the liability method, only to the extent that, in the
opinion of the directors, there is a reasonable probability that a liability or
asset will arise in the near future.
H) FOREIGN CURRENCIES
Transactions in foreign currencies are translated into sterling at the
rates of exchange ruling at the date of the transaction. Differences arising
from changes in exchange rates on transactions denominated in foreign currencies
are taken into the profit and loss account in the year in which they arise.
Differences on exchange arising from the translation of the net investments
of foreign subsidiaries denominated in foreign currency, together with the
differences between profit and loss accounts translated at rates ruling at the
period end and average rates, respectively, are taken directly to reserves.
Where net investments are matched in whole or in part by foreign currency
borrowings the exchange differences arising on the re-translation of such
borrowings are also recorded within reserves and any excess taken to the Profit
and Loss Account.
I) PENSION AND OTHER POST RETIREMENT BENEFITS
The Company has no defined benefit pension plan for its employees. With
respect to certain Esprit Telecom UK employees, the Company contributes a fixed
percentage, based upon the salary earned, to the employees' nominated pension
insurance policy or other pension arrangements.
F-63
<PAGE> 312
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J) INCENTIVE OPTION AND SHARE AWARDS
The Company awards options and shares to employees under its employee share
option plans or as approved by the directors. Such awards are accounted for in
accordance with the Urgent Issue Task Force Abstract 17.
Under the requirements of Abstract 17, any difference between the quoted
market price and the price at which shares or options are awarded to employees,
is regarded as employee compensation and recorded as a charge against net income
at the date of grant. This requirement does not apply to the 15% discount
permitted in respect of awards under the Company's Savings Related Share Option
Scheme.
K) CASHFLOW STATEMENTS
The consolidated cashflow statements are presented in accordance with
Financial Reporting Standard 1 (Revised 1996).
2 SEGMENTAL ANALYSIS
TURNOVER
The Company is primarily engaged in providing international and national
long distance telecommunications services mainly to businesses, government
agencies, and other organisations located principally in Europe.
The Company's turnover analysed by geographical source is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
U.K......................................................... 17,846 31,088 39,411
Netherlands................................................. 5,229 8,825 16,289
Germany..................................................... -- 215 15,950
Rest of Europe(1)........................................... 1,805 5,338 10,938
------ ------ ------
Total....................................................... 24,880 45,466 82,588
====== ====== ======
</TABLE>
The company's turnover analysed by class of business is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Retail...................................................... 12,460 18,926 51,616
Wholesale................................................... 10,870 19,425 14,869
Service provider/reseller................................... 1,550 7,115 16,103
------ ------ ------
24,880 45,466 82,588
====== ====== ======
</TABLE>
F-64
<PAGE> 313
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOSS ON ORDINARY ACTIVITIES
Loss on ordinary activities before taxation analysed by location of
operating entity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1997 1998
------ ------- -------
L L L
<S> <C> <C> <C>
U.K......................................................... (1,670) (3,463) (21,332)
Netherlands................................................. (962) (2,067) (3,824)
Germany..................................................... (85) (829) (10,216)
Rest of Europe(1)........................................... (2,098) (4,031) (6,829)
Other(2).................................................... (279) (468) (244)
------ ------- -------
Total....................................................... (5,094) (10,858) (42,445)
====== ======= =======
</TABLE>
NET ASSETS/(LIABILITIES)
Net assets/(liabilities) are located in the following territories:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1996 1997 1998
------ ------- --------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
U.K......................................................... 14,765 29,809 (139,329)
Netherlands................................................. (1,560) 484 18,576
Germany..................................................... (61) (866) 108,393
Rest of Europe(1)........................................... (1,777) 1,970 5,161
Other(2).................................................... (1,356) (23) --
------ ------- --------
Total....................................................... 10,011 (31,374) (7,199)
====== ======= ========
</TABLE>
TOTAL ASSETS
Total assets are located in the following territories:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
------ ------ -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
U.K......................................................... 18,070 37,993 219,968
Netherlands................................................. 2,673 7,041 27,101
Germany..................................................... 35 1,007 128,744
Rest of Europe(1)........................................... 2,791 11,713 18,724
Other(2).................................................... 532 1,789 --
------ ------ -------
Total....................................................... 24,101 59,543 394,537
====== ====== =======
</TABLE>
- ---------------
(1) Includes Belgium, Spain, France and Italy
(2) Icomnet SA
F-65
<PAGE> 314
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 OPERATING LOSS
The operating loss is stated after charging:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER, 30
------------------------
1996 1997 1998
----- ----- ------
[POUND [POUND [POUND
STERLING] STERLING] STERLING]
(IN THOUSANDS)
<S> <C> <C> <C>
Employee costs (including stock compensation costs)......... 6,718 7,992 22,460
Depreciation of tangible fixed assets:
Owned....................................................... 1,280 2,454 6,481
Leased -- Infrastructure.................................... -- -- 1,519
Leased -- Other............................................. 139 283 782
Amortisation of intangible fixed assets..................... 52 99 3,119
Operating Lease rentals:
Buildings................................................... 478 651 1,494
Telephone lines............................................. 3,949 4,663 10,587
Other....................................................... 361 282 422
Rent and utilities.......................................... 812 1,184 2,587
Remuneration of group auditors:
Audit services.............................................. 50 100 169
Non-audit services.......................................... 187 423 259
Exchange losses/(gains) (other than on the retranslation of
Senior Notes)............................................. 163 960 (1,115)
===== ===== ======
</TABLE>
4 EMPLOYEE NUMBERS AND COSTS
Average number of employees including executive directors employed by the
Company during the period.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER, 30
-------------------------
1996 1997 1998
----- ----- -----
NO. NO. NO.
<S> <C> <C> <C>
U.K......................................................... 43 117 215
Netherlands................................................. 26 41 135
Germany..................................................... 4 5 104
Rest of Europe(1)........................................... 30 65 100
Other(2).................................................... 2 2 --
--- --- ---
Total....................................................... 105 230 554
=== === ===
</TABLE>
- ---------------
(1) Includes Belgium, Spain, France and Italy
(2) Icomnet SA
F-66
<PAGE> 315
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate payroll costs for those persons amounted to:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER, 30
------------------------
1996 1997 1998
----- ----- ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Wages and salaries.......................................... 4,206 6,720 19,866
Social security costs....................................... 384 648 2,120
Other pension costs......................................... 93 207 362
Stock compensation costs.................................... 2,035 417 112
----- ----- ------
Total....................................................... 6,718 7,992 22,460
===== ===== ======
</TABLE>
5 DIRECTORS EMOLUMENTS
Amounts paid and accrued for the services of directors were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
-----------------------
1996 1997 1998
----- ----- -----
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Remuneration as executives.................................. 587 701 786
Pension contributions....................................... 4 27 17
--- --- ---
Total....................................................... 591 728 803
=== === ===
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
-----------------------
1996 1997 1998
----- ----- -----
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Chairman.................................................... 192 191 182
Highest paid director....................................... 192 165 250
</TABLE>
The Company purchased the services of the outgoing Chairman Walter Anderson
from Entree International.
The beneficial interests of the directors and their families in the options
over the ordinary shares of the Company as at September 30, 1998 were:
<TABLE>
<CAPTION>
AS AT AS AT AS AT
1 OCTOBER GRANTED 1 OCTOBER GRANTED LAPSED EXERCISED 30 SEPTEMBER
1996 IN YEAR 1997 IN YEAR IN YEAR IN YEAR 1998
--------- --------- --------- ------- ------- --------- ------------
NO. NO. NO. NO. NO. NO. NO.
<S> <C> <C> <C> <C> <C> <C> <C>
Walter Anderson..................... 327,550 15,420 342,970 -- -- -- 342,970
David Oertle........................ -- 2,450,665 2,450,665 722,097 -- -- 3,172,762
Michael Potter...................... 475,850 32,120 507,970 145,342 -- -- 653,312
Roy Merritt......................... 1,181,900 27,088 1,208,988 250,770 -- -- 1,459,758
John McMonigall..................... -- -- -- -- -- -- --
Dominic Shorthouse.................. -- -- -- -- -- -- --
William Johnston.................... -- -- -- -- -- -- --
Jonathan Hudson..................... 813,850 15,638 829,488 -- (4,438) (825,050)
</TABLE>
F-67
<PAGE> 316
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No options were exercised during the twelve month period ended September
30, 1997.
The following table sets forth certain information with respect to the
directors' interest in the Company's ordinary shares at September 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES
----------------------------------------
AS AT AS AT
NOTE SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
---- ------------------ ------------------
<S> <C> <C> <C>
Walter Anderson.................................. a 20,073,600 32,968,520
John McMonigall.................................. b 32,294,100 33,557,600
Dominic Shorthouse............................... c 15,442,150 15,442,150
William Johnston................................. d 10,131,400 --
Michael Potter................................... e 3,985,000 3,985,000
Jonathan Hudson.................................. 1,051,850 827,053
Roy Merritt...................................... -- --
David Oertle..................................... -- --
</TABLE>
- ---------------
(a) Includes 32,637,901 Ordinary Shares beneficially held by Gold & Appel
Transfer S.A. ("Gold & Appel") and 330,619 Ordinary Shares held by Mr.
Anderson personally. Mr. Anderson disclaims "beneficial ownership" of the
shares held by Gold & Appel within the Rule of 13d-3 under the Exchange Act.
Excludes 1,515,900 Ordinary Shares held by the Foundation for the
International Non-Governmental Development of Space ("FINDS"). Mr. Anderson
disclaims "beneficial ownership" of the shares held by FINDS within the Rule
of 13d-3 under the Exchanges Act.
(b) All of the Ordinary Shares are owned directly by Apax Funds Nominees Limited
("Apax Nominees"). Apax Nominees is the nominee shareholder for Apax
Ventures IV International Partners LP, Apax Ventures IV, Apax UK V-A, LP and
Apax UK V-B, investment funds managed by Apax Partners & Co. Ventures Ltd.
("Apax Partners") on behalf of investors comprising mainly pension funds,
insurance companies and endowment funds principally in the United States and
the United Kingdom. Mr. McMonigall is a Director of Apax Partners. The
Ordinary Shares shown are included because of Mr. McMonigall's affiliation
with Apax Partners.
(c) The sole general partner of Warburg, Pincus Ventures LP ("Warburg Pincus")
is Warburg, Pincus & Co. a New York general partnership ("WP"). EM
Warburg,Pincus & Co. LLC a New York limited liability company ("EMW
LLC")manages Warburg Pincus. The members of EMW LLC are substantially the
same as the partners of WP. Lionel I. Pincus is the managing partner of WP
and the managing member of EMW LLC and may be deemed to control both WP and
EMC LLC. WP has a 15% interest in the profits of Warburg Pincus as the
general partner and also owns approximately 1.5% of the limited partnership
interests in Warburg Pincus. Mr. Shorthouse is a Managing Director and
member of EMW LLC and a general partner of WP. The Ordinary Shares are owned
by Warburg Pincus and are included because of Mr. Shorthouse's affiliation
with Warburg Pincus.
(d) The sole general partner of Hancock International Private Equity Partners II
-- Direct Fund LP ("Hancock") is Back Bay Partners XVI LP, the managing
partner of which is HarbourVest Partners LLC. Mr. Johnston is one of the
general partners of Hancock. All the Ordinary Shares are owned by Hancock
and are disclosed as a result of Mr. Johnston's affiliation with Hancock.
(e) The Ordinary Shares are held by Abacus (F.T.) Limited but included because
Mr. Potter was the settlor of the Trust.
F-68
<PAGE> 317
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 EMPLOYEE SHARE OPTION PLANS
Share options issued or granted were as follows:
<TABLE>
<CAPTION>
SERVICE AND PURCHASE AND
BONUS AWARDS INVESTMENT OPTIONS
------------ ------------------
<S> <C> <C>
Balance granted at October 1, 1996.......................... 3,693,500 2,647,150
Granted in the year......................................... 548,500 77,350
Cancelled or repurchased.................................... (17,950) (89,200)
Exercised in the year....................................... (146,850) (563,650)
---------- ---------
Balance granted at September 30, 1997....................... 4,077,200 2,071,650
Granted in the year......................................... 60,000 --
Exercised in the year....................................... (1,492,550) (859,750)
---------- ---------
Balance granted at October 1, 1998.......................... 2,644,650 1,211,900
---------- ---------
</TABLE>
(i) Company Share Option Plan 1997 ("CSOP")
Under this UK Inland Revenue approved plan, the Board of Directors may, at
their discretion, grant options to any UK based employee, including full-time
directors, that are employed by the Company or a subsidiary and work at least 25
hours or more per week.
The Company grants one option over 7 ordinary shares for each L125 of gross
salary (including base salary, commissions and annual bonus). The options are
accrued on a monthly basis and are granted formally by the Company on a
bi-annual basis. The exercise price of the options is approved by the UK Inland
Revenue based on the market price of the shares on or about the date of grant.
Participants who leave the Company may only exercise their options if they
leave because of ill health, redundancy, retirement, or if their employing
company ceases to be a participating company under the terms of the Plan.
Options in these circumstances may be exercised up to six months after the date
the employee leaves the Company. Participants whose employment with the Company
terminates for any other reason may only exercise their options after the date
their employment terminates at the Board's discretion.
In all cases, options do not vest until one year after grant, and
favourable tax treatment is only available if options are not exercised until at
least three years after grant.
(ii) Savings Related Share Option Scheme 1997 ("SAYE Scheme")
Under this UK Inland Revenue approved plan all UK based employees of the
Company (including directors who work 25 hours or more per week employed by the
Company) or a subsidiary are eligible to participate in the SAYE Scheme.
Any employee with at least six months' continuous service with the Company,
when invitations are made to participate in the Plan, will be eligible to
participate.
Participants may choose to save a fixed amount of between L5-L250 a month
for a period of three years (the "Savings Contract") with the Company's
nominated Building Society. The number of options that participants will be
entitled to, will be based on the monthly savings amount and will be made at the
commencement of the Savings Contract. Options will be granted with an exercise
price approved by the UK Inland Revenue that is at a discount of 15% to the
market price of the shares on or about the date of grant.
Any options granted will be exercisable for six months after the end of the
Savings Contract. Participants who leave the Company may only exercise their
options early if they leave because of ill health, redundancy, retirement or if
the employing company ceases to be a participating company under the terms of
the Plan.
F-69
<PAGE> 318
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options in these circumstances may be exercised up to six months after the date
the employee leaves the company.
Options granted will lapse if a participant's employment with the Company
terminates for any other reason and the participant's savings with the Building
Society will be returned when requested. Options will be valid for six months
following the end of the Savings Contract and following this time they will
lapse.
Participants may either choose to exercise their option or receive their
saved amount from the Building Society. An amount of interest equivalent to
three months' savings will be paid (provided that participant has completed the
Savings Contract).
(iii) Executive and Employee Share Option Plan 1997 ("Executive Plan")
The Executive and Employee Share Option Plan 1997 is not approved by the UK
Inland Revenue. This plan is used to provide non-UK based employees options on
substantially the same terms as the Company Share Option Plan and the Savings
Related Share Option Scheme. It is also used to provide discretionary incentive
schemes to management. The timing of option grants, the number of shares for
which options are granted, and the exercise price of the options are determined
at the sole discretion of the Board of Directors. Specifically, the exercise
price could range from the nominal value of the shares to amounts in excess of
the share price at the date of grant. The Executive Plan will not be submitted
for Inland Revenue approval.
On February 26, 1998, the Remuneration Committee of the Board of Directors
approved a new sub-plan under the Executive and Employee Share Option Plan, the
Management Share Option Plan ("MSOP"). Eligibility only extends to specified
persons who are employed by an Esprit Telecom group company before February 26,
1999.
Options shall vest three years from February 26, 1998 or three years from
the date of employment, whichever is later, on the following two conditions: (i)
the specified employees must still be employed by an Esprit Telecom group
company, and (ii) the in the case of those persons already employed on February
26, 1998, the market price is at least US$24.1875 per seven ordinary shares (50%
higher than the exercise price) or in the case of those persons employed after
February 26, 1998, the market price is at least 50% higher than it was on the
date of commencement of employment. All other terms shall be governed by the
rules of the Executive and Employee Share Option Plan 1997.
<TABLE>
<CAPTION>
SAYE EXECUTIVE
CSOP SCHEME PLAN
-------- -------- ----------
<S> <C> <C> <C>
Balance at September 30, 1997........................... 146,482 528,526 3,148,250
Granted in the year..................................... 532,455 403,342 4,375,000
Lapsed.................................................. (69,755) (16,646) (498,750)
Exercised in the year................................... (22,176) (1,843) (42,000)
Balance at September 30, 1998........................... 586,466 913,379 6,982,500
</TABLE>
The following options were vested during the year:
<TABLE>
<CAPTION>
SAYE EXECUTIVE
CSOP SCHEME PLAN
-------- ------ ----------
<S> <C> <C> <C>
Balance at September 30, 1997............................. -- -- 409,500
Vested in year............................................ 148,344 1,843 1,027,500
Exercised in the year..................................... (2,725) (1,843) (42,000)
Balance at September 30, 1998............................. 145,619 -- 1,395,000
</TABLE>
F-70
<PAGE> 319
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 STOCK INCENTIVE SCHEME
The Company maintained a stock incentive scheme for executives and
employees. Under the scheme, the directors periodically awarded shares to
employees based upon contract and/or performance. The scheme was terminated
during 1997 and no additional shares will be awarded. The number of ordinary
shares issued during 1995, 1996 and 1997 (which represents the total of the
shares issued through September 30, 1997), is as follows:
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY SHARES
ISSUED
---------------
<S> <C>
1995........................................................ 1,206,500
1996........................................................ 640,000
1997........................................................ 70,000
1998........................................................ --
</TABLE>
8 RESTRUCTURING COSTS
During the year ended September 30, 1997, the Company incurred
restructuring costs of approximately L312,000 relating to the reorganisation and
reincorporation of the Group, and the redesign of its stock ownership programs
prior to the Company's Initial Public Offering in February 1997. Restructuring
costs were not incurred in the twelve month period ended September 30, 1998.
9 PROFIT ON SALE OF INVESTMENT
Profit on disposal of fixed asset investments arose on the disposal of the
20% shareholding in Long Distance International Limited, as described in Note
16.
10 INTEREST RECEIVABLE AND SIMILAR INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
----- ------ -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Receivable......................................... 142 1,152 8,264
Net foreign exchange gain................................... -- -- 3,557
--- ----- ------
142 1,152 11,821
=== ===== ======
</TABLE>
F-71
<PAGE> 320
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ----- -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Payable on loans and other borrowings wholly
repayable
within 5 years:
Bank loans and overdrafts................................... 149 142 1,606
Obligations under finance leases............................ 196 315 1,205
Interest on Senior Notes.................................... -- -- 20,565
--- --- ------
Amortisation of Senior Notes issue costs.................... -- -- 658
--- --- ------
Total 345 457 24,034
=== === ======
</TABLE>
12 TAXATION ON LOSS ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ----- -----
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Corporation tax............................................. -- 2 2
== == ==
</TABLE>
As of September 30, 1998 the Company has unrecognised tax losses carried
forward, which can be used to offset future taxable income of the Company. These
amount to approximately L54,955,000 (1997: L16,005,000 and 1996: L7,684,000) and
are available to reduce future tax liabilities. The tax losses have the expiry
dates shown below.
The expiry date of the losses which would have been available as at
September 30, 1997 and September 30, 1996 are respectively shown below for
comparative purposes only; those losses which have not since expired are
included within the 1998 analysis.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
1999........................................................ 315 263 66
2000........................................................ 338 284 63
2001........................................................ 785 512 428
2002........................................................ 449 859 521
2003........................................................ 763 580 856
2004........................................................ -- 1,274 1,908
2005........................................................ -- -- 6,539
----- ------ ------
Indefinite carry forward.................................... 5,034 12,233 44,574
----- ------ ------
7,684 16,005 54,955
===== ====== ======
</TABLE>
F-72
<PAGE> 321
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 LOSS PER SHARE
The loss per share represents the loss attributable to shareholders in each
year divided by the weighted average number of Ordinary Shares outstanding
during each year.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1997 1998
-------- -------- --------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Loss for the year....................................... (5,094) (10,860) (42,447)
-------- -------- --------
Weighted average number of shares (thousands)........... 68,397 104,900 124,095
-------- -------- --------
Loss per share.......................................... L (0.07) L (0.10) (0.34)
-------- -------- --------
</TABLE>
14 INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1997 1998
-------- -------- --------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
GOODWILL
Cost
At October 1............................................ 775 775 3,586
Acquisitions............................................ -- 2,811 95,274
Currency translation adjustment......................... -- -- 3,660
-------- -------- --------
Balance at September 30................................. 775 3,586 102,520
======== ======== ========
Accumulated Amortization
At October 1............................................ 123 175 274
Amortization............................................ 52 99 3,119
Currency translation adjustment......................... -- -- 98
-------- -------- --------
Balance at September 30................................. 175 274 3,491
-------- -------- --------
Net book value at September 30.......................... 600 3,312 99,029
======== ======== ========
</TABLE>
Goodwill arose on (i) the purchase of Interaktieve Media Services BV with
the total consideration before expenses expected to be L7,131,000, (ii) the
purchase of Plusnet GmbH & Co KG with the total consideration before expenses of
L90,068,000 (iii) the purchase of the trade assets and liabilities of Budget
Phone Card BV with a total consideration before expenses of L586,000.
The following movements occurred on the consideration in respect of prior
year acquisitions: (a) L46,000 is due as contingent consideration for Swift
Global Nederlands BV (b) the value of the deferred share consideration due in
respect of Telecom Europa Limited increased by L277,000 during the year.
F-73
<PAGE> 322
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
TELECOM- TELECOM- OFFICE COMPUTER ASSETS UNDER
EQUIPMENT INFRASTRUCTURE FIXTURES EQUIPMENT CONSTRUCTION TOTAL
L'000 L'000 L'000 L'000 L'000 L'000
<S> <C> <C> <C> <C> <C> <C>
COST
At September 30, 1995......... 2,912 154 310 353 -- 3,729
Capital additions............. 5,433 9 162 357 -- 5,961
Disposals..................... (41) -- -- -- -- (41)
Currency translation
adjustment.................. (35) (6) (5) (11) -- (57)
------ ------ ----- ------ ---- ------
At October 1, 1996............ 8,269 157 467 699 -- 9,592
Capital additions............. 7,063 35 530 1,215 999 9,842
Acquired with subsidiaries.... 196 -- 102 -- -- 298
Disposals..................... (71) (1) (12) (24) -- (108)
Currency translation
adjustment.................. (428) (19) (42) (95) -- (584)
------ ------ ----- ------ ---- ------
At October 1, 1997............ 15,029 172 1,045 1,795 999 19,040
Capital additions............. 19,080 16,335 2,243 3,213 284 41,155
Transfers..................... 999 -- -- -- (999) --
Acquired with subsidiaries.... 10,682 795 1,972 401 -- 13,850
Disposals..................... (1) (220) (8) (83) -- (312)
Currency translation
adjustment.................. 263 174 (267) (75) -- 95
------ ------ ----- ------ ---- ------
At September 30, 1998......... 46,052 17,256 4,985 5,251 284 73,828
------ ------ ----- ------ ---- ------
ACCUMULATED DEPRECIATION
At September 30, 1995......... 634 46 58 129 -- 867
Depreciation.................. 1,080 30 147 162 1,419
Disposals..................... (24) -- -- -- -- (24)
Currency translation
adjustment.................. (38) (2) (1) (3) -- (44)
------ ------ ----- ------ ---- ------
At October 1, 1996............ 1,652 74 204 288 -- 2,218
Depreciation.................. 2,087 1 243 406 -- 2,737
Acquired with subsidiaries.... 59 -- 32 -- -- 91
Disposals..................... (50) (1) (12) (21) -- (84)
Currency translation
adjustment.................. (124) (9) (21) (52) -- (206)
------ ------ ----- ------ ---- ------
At October 1, 1997............ 3,624 65 446 621 -- 4,756
Depreciation.................. 6,044 1,519 362 857 -- 8,782
Acquired with subsidiaries.... 4,049 306 926 89 -- 5,370
Disposals..................... (179) -- (48) -- -- (227)
Currency translation
adjustment.................. 205 68 (138) (59) -- 76
------ ------ ----- ------ ---- ------
At September 30, 1998......... 13,743 1,958 1,548 1,508 -- 18,757
------ ------ ----- ------ ---- ------
NET BOOK VALUE
At September 30, 1996......... 6,617 83 263 411 -- 7,374
------ ------ ----- ------ ---- ------
At September 30, 1997......... 11,405 107 599 1,174 999 14,284
------ ------ ----- ------ ---- ------
At September 30, 1998......... 32,309 15,298 3,437 3,743 284 55,071
------ ------ ----- ------ ---- ------
</TABLE>
Telecom equipment includes installation costs and customer software
upgrades primarily in the UK, with a net book value of L5,276,000 (L1,416,000 at
September 30, 1997, L594,000 at September 30, 1996).
The net book value of telecom equipment includes L23,467,213, L3,134,036
and L2,322,399 in respect of assets held under finance leases as at September
30, 1998, 1997, and 1996 respectively.
F-74
<PAGE> 323
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16 INVESTMENTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1997 1998
----- ----- ----
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Investments................................................. 31 131 --
-- --- ---
</TABLE>
This amount represented a 20% investment in Long Distance International Ltd
("LDI")-a company incorporated in the UK.
This investment was sold during the year resulting in a gain of L200,000.
The Company's co-investor in LDI benefited from a controlling shareholding.
Consequently, in view of the disposition of the shareholdings in LDI, the Board
does not believe that the Company was able to exercise a significant influence
over LDI's financial and operating policies. Accordingly, the Board does not
believe that it is appropriate for the Company to account for its share of
losses of LDI on an equity basis. During the prior year, the Company made an
unsecured loan advance to LDI of L100,000 repayable after two years, at a
commercial rate of interest. This loan was repaid during the year.
17 OTHER DEBTORS: AMOUNTS DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Other debtors............................................... 86 78 17,174
Prepayments and accrued income.............................. 2,266 1,818 9,070
----- ------ ------
2,352 1,896 26,244
----- ------ ------
</TABLE>
Trade debtors is reflected net of allowances for uncollectible accounts of
L2,200,000, L1,296,500, and L165,000 as of September 30, 1998, 1997 and 1996,
respectively.
Included within other debtors is L14,568,000 relating to monies recoverable
from Thyssen Telecom TG as part of the Plusnet acquisition.
18 CREDITORS: AMOUNTS DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Bank loans and overdrafts................................... 666 101 516
Trade creditors............................................. 7,741 19,678 42,132
Social security and other taxation.......................... 818 388 2,097
Accruals.................................................... 2,433 4,024 24,956
Obligations under finance leases............................ 464 1,104 3,229
------ ------ ------
12,122 25,295 72,930
====== ====== ======
</TABLE>
The Company has two secured bank financing facilities through its UK and
Dutch subsidiaries as at September 30, 1998. These are set out below:
F-75
<PAGE> 324
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ESPRIT TELECOM UK LTD -- L1,000,000 credit facility repayable on demand
with Lloyds TSB plc in the UK, agreed on December 21, 1995. As the facility is
secured by the receivables of the Company, the amount of the facility that is
available at any time varies directly in relation to the Company's pledged
receivables (70% thereof), subject to the L1 million facility limit. As at
September 30, 1998, LNil of this facility had been utilized. This facility bears
interest on outstanding borrowings at LIBOR plus 2.25% per annum (9.75% at
September 30, 1998) and remains in effect until notice of termination is given
by the Company or Lloyds TSB plc.
ESPRIT TELECOM BENELUX BV -- NLG 1,200,000 credit facility repayable on
demand with ABN Amro in the Netherlands, dated August 23, 1996, which is subject
to a credit limit representing 69% of the total amount of pledged receivables.
As at September 30, 1998, NLG Nil of this facility had been utilized. This
facility bears interest on outstanding borrowings of the promissory note
discount rate plus a debit interest sub-charge of a minimum of 5%, plus 2.5%,
enhanced for certain facility fees (7.5% at September 30, 1998), and remains in
effect until notice of termination by the Company or ABN Amro.
19 CREDITORS: AMOUNTS DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ----- -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Obligations under finance leases
repayable between one and two years....................... 642 1,257 3,610
repayable between two and five years...................... 1,326 1,571 8,988
repayable after five years................................ -- -- 4,166
Bank loans and other debt:
repayable between one and two years....................... -- 46 2,303
Senior Notes due 2007 and 2008.............................. -- -- 309,739
----- ----- -------
1,968 2,874 328,806
===== ===== =======
</TABLE>
At September 30, 1998, the Company has the following obligations under a
finance lease:
A lease agreement with Ericsson in respect of telecommunication equipment,
against which the obligations are secured. A lease agreement with GE
capital in respect of telecommunication equipment. A lease agreement with
GPT in respect of telecommunication equipment.
In connection with the London/Paris SDH fibre infrastructure, the Company
has entered into three lease agreements with suppliers. Maturity for these
leases is 2007 and the effective interest rate applicable under these
agreements is 11.50%.
The Senior Notes 2007 comprise US$230 million and DM 125 million. The
coupon on both transactions is payable bi-annually at 11.50%. These Notes
rank pari-passu with other ordinary creditors.
The Senior Notes 2008 comprise US$150 million and DM 150 million. The
coupon on both transactions is payable bi-annually at 10.875% and 11.00%
respectively. These Notes rank pari-passu with other ordinary creditors.
F-76
<PAGE> 325
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20 SHARE CAPITAL AND RESERVES
<TABLE>
<CAPTION>
ORDINARY AND 'A' PREFERENCE SHARE SHARES PROFIT AND
ORDINARY SHARES SHARES MERGER PREMIUM TO BE OTHER LOSS
----------------- ------------- RESERVE (1) ACCOUNT ISSUED RESERVES (2) ACCOUNT
NUMBER L NUMBER L L L L L L
-------- ------ ------ ---- ----------- ------- ------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At October 1, 1995............... 65,700 657 673 673 10,974 -- -- 775 (7,577)
Retained loss for the year....... -- -- -- -- -- -- -- -- (5,094)
Issue of new shares.............. 20,800 208 -- -- 7,208 -- -- -- --
Repurchase of shares............. (5,100) (51) -- -- -- -- -- -- --
Net differences on exchange...... -- -- -- -- -- -- -- -- 203
Issue of new options............. -- -- -- -- -- -- -- 2,035 --
------- ----- ---- ---- ------ ------ ----- ----- -------
At October 1, 1996............... 81,400 814 673 673 18,182 -- -- 2,810 (12,468)
Retained loss for the year....... -- -- -- -- -- -- -- -- (10,860)
Redemption of preference
shares......................... -- -- (673) (673) -- -- -- -- --
Issue of new shares.............. 40,471 405 -- -- 1,126 30,800 -- -- --
Merger reserve arising from
reorganisation................. -- -- -- -- -- -- -- 68 (68)
Net differences on exchange...... -- -- -- -- -- -- -- -- 148
Issue of new options............. -- -- -- -- -- -- -- 417 --
------- ----- ---- ---- ------ ------ ----- ----- -------
At October 1, 1997............... 121,871 1,219 -- -- 19,308 30,800 -- 3,295 (23,248)
Retained loss for the year....... -- -- -- -- -- -- -- 113 (42,447)
Issue of new shares.............. 3,658 36 -- -- 381 2,014 -- (958) --
Other movements.................. -- -- -- -- 908 -- -- (908) --
Net differences on exchange...... -- -- -- -- -- -- -- -- 120
Deferred share consideration..... -- -- -- -- -- -- 2,168 -- --
------- ----- ---- ---- ------ ------ ----- ----- -------
At September 30, 1998............ 125,529 1,255 -- -- 20,597 32,814 2,168 1,542 (65,575)
======= ===== ==== ==== ====== ====== ===== ===== =======
</TABLE>
- ---------------
(1) The merger reserve represents contributed capital in excess of the nominal
value of the shares issued by predecessor companies.
(2) Other reserves primarily represent the capital element relating to the issue
of options at a discount to the fair value at the date of grant.
AUTHORIZED SHARE CAPITAL
On January 31, 1997, the Company effected a share for share exchange to
acquire all of the outstanding share capital of Esprit Telecom (Jersey) Limited,
the Company's predecessor. Differences in the nominal value of shares exchanged
have been reflected in the table above on a pro forma basis from October 1,
1995.
After giving retroactive effect to the above, and prior to the February
1997 fifty for one share split explained below, (i) the authorised share capital
of the Company consisted of L1,791,719 divided into 2,123,438 Ordinary and "A"
ordinary shares of 50p each, and 730,000 preference shares of L1 each, and (ii)
the issued and paid-in share capital of the Company at September 30, 1996
consisted of L1,487,448 divided into 1,628,097 ordinary and "A" ordinary shares
and 673,400 preference shares.
At the time of the Company's February 1997 Offering: (i) the Company's "A"
ordinary shares were converted into ordinary shares of 50p to provide a single
class of ordinary share, (ii) each of the Company's authorized and unissued
ordinary shares of 50p were split into fifty Ordinary Shares of 1p each, and
(iii) each of the Company's authorized and unissued preference shares were split
into 100 preference shares of 1p each and redesignated as Ordinary Shares of 1p
each.
F-77
<PAGE> 326
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PURCHASE OF OWN SHARES AND CHANGE IN CAPITAL STRUCTURE
On or immediately prior to the Company's initial public offering, on March
4, 1997 the Company (1) redeemed and cancelled all outstanding issued Preference
Shares of L1 each; (2) redesigned each "A" Ordinary Share of L0.50 each as an
Ordinary Share of L0.50 each; (3) subdivided each Ordinary Share of L0.50 into
fifty Ordinary Shares of one pence each; (4) subdivided each Preference Share of
L1 each into one hundred Preference Shares of one pence each; (5) redesignated
each Preference Share of one pence each as Ordinary Share of one pence each; and
(6) increased the Company's share capital and amended Article 6 of the
Memorandum and Articles of Association to read: "The share capital of the
Company is 2,000,000 divided into 200,000,000 Ordinary Shares of one pence
each".
PREFERENCE SHARES
The non-voting, non-dividend bearing preference shares were redeemable at
their face value (which equals carrying value) by the Company in whole or in
part at the Company's option on or before February 25, 1998. The Company was
obliged to redeem the preference shares upon (i) the listing of the ordinary
share capital of the Company on any recognized investment exchange or stock
exchange, or (ii) the unconditional acquisition by a buyer of more than 50% of
the Ordinary Shares of the Company.
On January 31, 1997, the Company redeemed 437,337 preference shares for
L437,337 and the remaining preference shares were redeemed on March 4, 1997 out
of the proceeds of the Offering.
WARRANTS
On February 25, 1994, concurrent with a subscription for "A" ordinary
shares the Company also issued to its "A" ordinary shareholder (i) class "A"
share warrants that entitled the holder to purchase 56,518 "A" ordinary shares
of Esprit Telecom (Jersey) Limited for an exercise price of $1.00 per share and
(ii) class "B" share warrants that entitled the holder to purchase an additional
50,000 "A" ordinary shares of Esprit Telecom (Jersey) Limited for issuance at an
exercise price of $13.00 per share. The warrants were exercisable up to the date
that the preference shares were redeemed in full or cancelled.
Effective January 31, 1997, the warrants were exercised for a total
consideration amount of $706,518 (L437,337) which was applied against the
partial redemption of outstanding preference shares.
F-78
<PAGE> 327
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21 PURCHASE OF SUBSIDIARY UNDERTAKINGS
With effect from May 1, 1998, the group acquired whole of the issue Share
capital of Thyssen Festnetz Management GmbH and the whole limited partnership
interest in Thyssen Festnetz GmbH & Co. KG for an estimated cash consideration
of L90,068,000 before expenses. This has been accounted for as an acquisition.
Goodwill arising has been capitalized in the balance sheet and amortised over 15
years as this is the period over which the directors estimate that the value of
the underlying business acquired is expected to exceed the value of the
underlying assets. Following the completion of the 1998 financial year the total
consideration has been adjusted downwards by approximately DM 40 million, based
upon the billed revenues of the business, as prescribed in the agreed
contractual terms of the acquisition.
The loss after tax of the Plusnet business for the years ended September
30, 1997 was DM 30,596,000. The loss after tax of the Plusnet business for the
period to acquisition on May 1, 1998 was DM 8,309,000.
The assets and liabilities acquired at that date were as follows:
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE TO
BOOK VALUE ADJUSTMENTS COMPANY
---------- ----------- -------------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Tangible fixed assets.................................. 7,440 -- 7,440
Debtors................................................ 4,135 -- 4,135
Cash at Bank and in Hand............................... 1 -- 1
------ ------
Total assets........................................... 11,576 -- 11,576
Creditors due within one year.......................... (7,624) -- (7,624)
Creditors due after more than one year................. (40) -- (40)
------ ------
Total Liabilities...................................... (7,664) -- (7,664)
Net assets............................................. 3,912 -- 3,912
Goodwill arising on acquisition........................ -- 87,151
------
91,063
======
Represented by:
Cash paid.............................................. 90,068
Cost associated with the acquisition................... 995
------
91,063
======
</TABLE>
On November 18, 1997, the Company acquired the whole share capital of IMS
Interaktieve Media Services BV for an estimated consideration before costs of
L7,131,000 satisfied by the issue of 752,804 ordinary shares, cash of L1,518,000
and deferred consideration of L5,085,000. This has been accounted for as an
acquisition.
Goodwill has been capitalised in the balance sheet and amortised over 15
years as this is the period over which the directors estimate that the value of
the underlying business acquired is expected to exceed the value of the
underlying assets.
The profit after tax of IMS in the year ended December 31, 1996 was NLG
542,476. The loss after tax of IMS in the period ended November 17, 1997 was NLG
450,463.
F-79
<PAGE> 328
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assets and liabilities acquired at that date were as follows.
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE TO
BOOK VALUE ADJUSTMENTS COMPANY
---------- ----------- -------------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Tangible Fixed Assets.................................. 1,041 -- 1,041
Debtors................................................ 493 -- 493
------ ------
Total Assets........................................... 1,534 -- 1,534
Overdrafts............................................. (118) -- (118)
Creditors due within one year.......................... (1,174) -- (1,174)
Creditors due after one year........................... (336) -- (336)
------ ------
Total Liabilities...................................... (1,628) -- (1,628)
Net Liabilities........................................ (94) -- (94)
Goodwill arising on acquisition........................ 7,225
------
7,131
======
Represented by:
Cash consideration..................................... 1,518
Estimated deferred cash consideration.................. 3,339
Fair Value of shares issued............................ 389
Estimated fair value of deferred share consideration... 1,746
Cost associated with the acquisition................... 139
------
7,131
======
</TABLE>
With effect from 1 February 1998, the Group acquired the trade, assets and
liability to the curator-in-bankruptcy of Budget Phone Card BV, a customer in
liquidation. The Company regards the amount receivable from Budget Phone Card BV
at the time of acquisition as the fair value of the purchase consideration.
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE TO
BOOK VALUE ADJUSTMENTS COMPANY
---------- ----------- -------------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Cash................................................... 60 -- 60
Debtors................................................ 109 (38) 71
--- --- ---
Total Assets........................................... 169 (38) 131
Creditors due within one year.......................... (50) (49) (99)
Creditors due after one year........................... -- -- --
--- --- ---
Total Liabilities...................................... (50) (49) (99)
Net Assets............................................. 119 (87) 32
Goodwill arising on acquisition........................ 575
---
607
===
Represented by:
Net debt receivable at liquidation..................... 586
Costs associated with acquisition...................... 21
---
607
===
</TABLE>
Fair value adjustments represent revaluations of the acquired amounts,
principally providing against certain debtors and recognizing other unrecorded
liabilities.
F-80
<PAGE> 329
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADJUSTMENT TO PRIOR YEAR ACQUISITIONS.
No adjustment has been necessary to the fair value acquisition adjustments
in respect of all the prior years' acquisitions.
22 FINANCIAL AND CAPITAL COMMITMENTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditure authorized and contracted for........... -- 3,159 64,302
Capital expenditure authorized and not contracted for....... 2,200 2,747 5,797
</TABLE>
The Company and its subsidiaries are party to various operating leases for
dedicated switch access lines, dedicated national and international lines,
office space, furniture and office equipment which expire at various times
through to the year 2002.
Operating lease payments payable within one year of the balance sheet date
were in respect of operation leases expiring:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996
-----------------------------
LAND AND
BUILDINGS OTHER TOTAL
--------- ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Operating leases which expire:
within one year............................................. 20 391 411
between one and five years.................................. 260 2,333 2,593
after five years............................................ 162 -- 162
--- ----- -----
442 2,724 3,166
=== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
-----------------------------
LAND AND
BUILDINGS OTHER TOTAL
--------- ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Operating leases which expire:
within one year............................................. 93 5,528 5,621
between one and five years.................................. 409 235 644
after five years............................................ 275 -- 275
--- ----- -----
777 5,763 6,540
=== ===== =====
</TABLE>
F-81
<PAGE> 330
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------
LAND AND
BUILDINGS OTHER TOTAL
--------- ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Operating leases which expire:
within one year............................................. 154 3,819 3,973
between one and five years.................................. 885 909 1,794
after five years............................................ 482 155 637
----- ----- -----
1,521 4,883 6,404
===== ===== =====
</TABLE>
The future minimum lease payments under non-cancellable leases as of
September 30, 1998 are:
<TABLE>
<CAPTION>
FINANCE LEASES
------------------------------------------
PAYABLE IN THE YEAR ENDED SEPTEMBER 30, OPERATING CAPITAL INTEREST TOTAL
- --------------------------------------- --------- ------- -------- ------
L L L L
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999................................................. 6,404 3,230 1,993 11,627
2000................................................. 2,418 3,610 1,633 7,661
2001................................................. 2,162 2,548 1,286 5,996
2002................................................. 1,734 1,575 1,118 4,427
2003................................................. 1,398 1,628 975 3,996
Thereafter........................................... 351 7,408 2,135 9,894
------ ------ ----- ------
14,467 19,999 9,140 43,601
====== ====== ===== ======
</TABLE>
F-82
<PAGE> 331
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23 ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
------ ------ -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received........................................... 142 1,152 8,264
Interest paid............................................... (149) (142) (1,606)
Interest element of finance lease rental payments........... (196) (315) (1,205)
Interest paid on Senior Notes............................... -- -- (10,287)
------ ------ -------
Net cash (outflow)/inflow for returns on investments and
servicing of finance...................................... (203) 695 (4,834)
====== ====== =======
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
(Purchase)/Sale of investment............................... (31) (100) 331
Purchase of tangible fixed assets........................... (3,563) (7,819) (22,809)
------ ------ -------
Net cash outflow from capital expenditure and financial
investment................................................ (3,594) (7,919) (22,478)
====== ====== =======
ACQUISITIONS
Net overdrafts acquired with subsidiary (Note 25)........... -- (85) (118)
Cash acquired with subsidiary............................... -- -- 61
Purchase of subsidiary undertaking (Note 25)................ -- (767) (91,586)
------ ------ -------
Net cash outflow for acquisitions........................... -- (852) (91,643)
====== ====== =======
FINANCING
Issue of ordinary share capital............................. 7,365 30,629 307
Redemption of preference shares............................. -- (673) --
Proceeds from warrants exercised............................ -- 437 --
Proceeds from bridging loans................................ -- -- 25,000
Repayment of bridging loans................................. -- -- (25,000)
Proceeds from Senior Notes 2007 and 2008.................... -- -- 311,036
Repayments of short-term borrowings......................... -- -- --
Proceeds from long-term borrowings.......................... -- -- --
Repayment of long-term borrowings........................... (631) (91) (46)
Capital element of finance lease repayments................. (193) (503) (2,988)
------ ------ -------
Net cash inflow from financing.............................. 6,541 29,799 308,309
====== ====== =======
</TABLE>
Management of liquid resources represents the movement on both short term
cash deposits and restricted securities. Restricted securities represent escrow
funds that are used to finance a proportion of the interest payments on Senior
Notes 2007.
F-83
<PAGE> 332
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24 ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
ACQUISITIONS
(EXCLUDING OTHER
AT CASH AND NON CASH EXCHANGE AT
OCTOBER 1, CASH FLOW OVERDRAFTS) CHANGES(1) MOVEMENTS SEPTEMBER 30,
---------- --------- ------------ ---------- --------- -------------
L L L L L L
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Bank balances and cash............... 5,615 (1,574) -- -- 54 4,095
Overdrafts........................... (404) (262) -- -- -- (666)
------ -------- ---- ------- ------ --------
5,211 (1,836) -- -- 54 3,429
Debt due after one year.............. (631) 614 -- -- 17 --
Debt due within one year............. -- -- -- -- -- --
Finance leases....................... (193) 356 -- (2,595) -- (2,432)
------ -------- ---- ------- ------ --------
4,387 (866) -- (2,595) 71 997
Short term cash deposits............. -- 2,335 -- -- 2,335
------ -------- ---- ------- ------ --------
Total................................ 4,387 1,469 -- (2,595) 71 3,332
====== ======== ==== ======= ====== ========
1997
Bank balances and cash............... 4,095 (2,383) -- -- (63) 1,649
Overdrafts........................... (666) 564 -- -- 1 (101)
------ -------- ---- ------- ------ --------
3,429 (1,819) -- -- (62) 1,548
Debt due after one year.............. -- 12 (12) -- -- --
Debt due within one year............. -- 79 (123) -- (2) (46)
Finance leases....................... (2,432) 503 -- (2,003) -- (3,932)
------ -------- ---- ------- ------ --------
997 (1,225) (135) (2,003) (64) (2,430)
Current assets Short term cash
deposits........................... 2,335 20,541 -- -- -- 22,876
------ -------- ---- ------- ------ --------
Total................................ 3,332 19,316 (135) (2,003) (64) 20,446
====== ======== ==== ======= ====== ========
1998
Bank balances and cash............... 1,649 2,575 -- -- 9 4,233
Overdrafts........................... (101) (414) -- -- (1) (516)
------ -------- ---- ------- ------ --------
1,548 2,161 -- -- 8 3,717
Debt due within one year............. (46) 46 -- -- -- --
Senior Notes due 2007 and 2008....... -- (311,036) -- (658) 1,955 (309,739)
Finance leases....................... (3,932) 2,988 -- (18,346) (703) (19,993)
------ -------- ---- ------- ------ --------
(2,430) (305,841) -- (19,004) (1,260) (326,015)
Current assets
Short term cash deposits............. 22,876 108,573 -- -- 98 131,547
------ -------- ---- ------- ------ --------
Restricted securities................ -- 49,485 -- -- (516) 48,969
Total................................ 20,446 (147,783) -- (19,004) 842 (145,499)
====== ======== ==== ======= ====== ========
</TABLE>
- ---------------
(1) Other non cash changes, see note 26.
(2) Restricted securities are those securities held to pay the first three years
of interest on the Senior Notes 2007 as required under the covenants of the
Senior Notes 2007.
F-84
<PAGE> 333
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25 PURCHASE OF SUBSIDIARY UNDERTAKINGS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998
-------------
L'000
<S> <C>
Net assets acquired:
Tangible fixed assets....................................... 8,481
Debtors..................................................... 4,699
Cash at bank and in hand.................................... 61
Creditors................................................... (9,275)
Bank overdrafts............................................. (118)
------
Net assets.................................................. 3,848
Goodwill.................................................... 94,953
------
98,801
======
Satisfied by:
Shares allotted............................................. 389
Cash paid................................................... 91,586
Cash payable................................................ 1,746
Estimated deferred cash consideration....................... 3,339
Net debt receivable at liquidation.......................... 586
Costs associated with the acquisition....................... 1,155
------
98,801
======
</TABLE>
The subsidiary undertakings acquired during the year contributed L5,888,000
to the Company's net operating cash flows and utilised L6,392,000 for capital
expenditure.
26 OTHER NON-CASH CHANGES
Other non-cash changes represent finance leases entered into by the
Company. At the start of 1995, the Company entered into a finance lease with
COLT Telecom for the purchase of equipment. This was repaid in full during 1996.
On October 13, 1995, the Company entered into a five-year finance lease with
Ericsson to acquire a telecommunications switch. During the year the Company
entered into an additional finance lease with Ericsson to acquire a second
telecommunications switch. Additional amounts were also spent on capital
additions from Ericsson to upgrade their existing switch which has been
capitalised as part of the first lease.
Other non-cash changes to the Senior Notes 2007 and 2008 of L658,000
represent the year's amortisation of the issue costs. Other non cash charges for
finance represent additional lease facilities and accounts for the
infrastructure. During the year the Company utilized additional finance lease
facilities with Ericsson to acquisition additional telecommunications switching
equipment.
27 SUBSEQUENT EVENTS
In the period since September 30, 1998 the following additional subsequent
events occurred:
a) Under the Executive Plan, between October, 5 and November, 2 1998. October,
the Board approved the granting of share options to key employees as
follows:
F-85
<PAGE> 334
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF SHARE OPTIONS ISSUED ADS EQUIVALENT EXERCISE PRICE PER ADS
<S> <C> <C>
245,000 35,000 US$16.125
140,000 20,000 US$17.25
140,000 20,000 US$17.25
</TABLE>
b) SPANISH LICENSE:
Esprit Telecom de Espana has class B1 licences for Madrid, Barcelona and
Gerona. These permit the provision of public telephony services and the
operation of a network in the named cities. A B1 licence for Bilbao has been
applied for and is expected to be issued before the end of December. A class C1
licence (allowing the running of a national network, but not the provision of
public telephony services) was granted on December 17, 1998.
c) NEW LEASES IN READING:
The Company has contracted in November 1998 additional office space at its
Reading offices (UK) through a 5 year lease that expires in March 2008, with a
tenant only option to break in March 2003, for a total consideration of
L850,777. Additionally, the Company has committed to a leases at its Reading
offices (UK) starting in December 98 and starting in April 99 for a total
consideration of L938,920 expiring in 2008 and 2009 respectively, with a tenant
only option to break in 2003.
d) APPOINTMENT OF SIR ROBIN BIGGAM
On October 5, 1998 the Board of Directors elected Sir Robin Biggam as
Director, and appointed him Chairman of the Company in place of Walter Anderson.
Subsequently, on November 23, 1998 at an Extraordinary General Meeting, the
Members of the Company voted to remove Walter Anderson as a Director.
e) PROPOSED MERGER WITH GLOBAL TELESYSTEMS GROUP, INC.
The Boards of GTS and Esprit Telecom announced on December 8, 1998 that
agreement has been reached on the terms of a proposed recommended offer (to be
made by Bear Stearns, on behalf of GTS), to acquire all the issued and to be
issued share capital of Esprit Telecom including those shares represented by
Esprit Telecom ADSs.
Subject to the satisfaction or, to the extent permitted, waiver of the
pre-conditions referred to below, the Offer will be made on the following basis:
FOR EVERY ESPRIT TELECOM SHARE, 0.1271 NEW GTS SHARE
FOR EVERY ESPRIT TELECOM ADS, 0.89 NEW GTS SHARE
Based on the NASDAQ closing price of $41.75 per GTS Share on December 7,
1998, the Offer values each Esprit Telecom Share at $5.31 (L3.21) and each
Esprit Telecom ADS at $37.16 (L22.48).
The Offer represents a premium of approximately 22.8% over the middle
market price of an Esprit Telecom ADS on NASDAQ at the close of business on
December 7, 1998, being the last dealing day before the announcement of the
Offer.
The Offer values the entire issued share capital of Esprit Telecom, fully
diluted for the exercise of all outstanding options, at approximately $757.3
million (L458.2 million).
F-86
<PAGE> 335
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The New GTS Shares to be issued under the Offer will be validly issued and
fully paid and non-assessable and will rank pari passu in all respects with the
existing issued GTS Shares.
The Board of Esprit Telecom intends unanimously to recommend the Offer.
The posting of the Offer Document to Esprit Telecom Security holders is
pre-conditional on:
- GTS obtaining requisite consents from Esprit Telecom Bondholders to the
change in control of Esprit Telecom resulting from the Offer; and
- The necessary registration statement with respect to the Offer becoming
effective under US Securities Law and the relevant approvals being
obtained from EASDAQ and the Commission Banque et Financier in Belgium.
The Offer will be conditional, inter alia, on the approval of GTSs
shareholders and the announcement by NASDAQ and EASDAQ of their decision to
admit the New GTS Shares for quotation.
f) NORTEL EQUIPMENT FINANCING AGREEMENT
On November 17, 1998 the Company entered into a senior secured amortising
loan facility with Northern Telecom to manufacture, install and commission
SDH/DWDM equipment in five separate rings within Western Europe. The total
consideration is DM 37 million with the final maturity being December 31, 2002.
g) ERICSSON EQUIPMENT FINANCING AGREEMENT
On December 1, 1998 the Company entered into a senior secured amortising
loan facility with Ericsson to manufacture, install and commission
telecommunication switches and equipment. Total consideration is L9 million
pounds sterling, with the final maturity being December 31, 2002.
28 RELATED PARTY TRANSACTIONS
The Company purchased the services of the outgoing Chairman Walt Anderson
from Entree International.
During the year, the Company acquired Plusnet, IMS and the trade and assets
of Budget Phone Card. (see Note 21). The Company did not trade with IMS prior to
the acquisition.
Until October 13, 1997, Gold and Appel owned 17% of the capital stock of
Telco Communications Group, Inc. ("Telco"), a long distance telecommunications
company. The Company purchased certain long distance telecommunications services
from, and sells certain services to, Telco. In addition the Company engages Tel
Labs Inc., a wholly owned subsidiary of Telco ("Tel Labs"), for the final
processing of its customer billing records.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Sales to Plusnet...................................... -- 180 267
Purchases from Plusnet................................ -- 71 185
Sales to Budget Phone Card............................ 83 997 430
Purchases from Entree International................... -- -- 250
Sales to Telco........................................ 1,958 593 476
Purchases from Telco.................................. 1,947 4,007 1,419
Purchases from Tel Labs............................... 311 402 45
</TABLE>
F-87
<PAGE> 336
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balances receivable and payable in respect of the above related parties,
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
----- ----- -----
L'000 L'000 L'000
<S> <C> <C> <C>
Net receivable from Plusnet.............................. -- 3 --
Net receivable from Budget Phone Card.................... 65 440 586
Net payable to Entree International...................... -- -- 4
Net payable/(receivable) to/from Telco................... 158 114 (94)
Payable to Tel Labs...................................... 29 38 --
</TABLE>
29 SUBSIDIARY UNDERTAKINGS
The following companies were the principal subsidiary undertakings as at
September 30, 1998.
<TABLE>
<CAPTION>
CLASS AND
COUNTRY OF PERCENTAGE OF
NAME LEGAL SEAT INCORPORATION OWNERSHIP
- ---- ----------- ---------------------- -------------
<S> <C> <C> <C>
Esprit Telecom (Jersey) Limited.............. St Helier Jersey 100% ordinary
Esprit Jersey Management Limited (including
its Dutch branch).......................... St Helier Jersey 100% ordinary
Esprit Telecom UK Limited.................... London United Kingdom 100% ordinary
Telecom Europa Limited....................... London United Kingdom 100% ordinary
Esprit Telecom Holdings Limited.............. London United Kingdom 100% ordinary
Esprit Telecom Europe BV..................... Amsterdam The Netherlands 100% ordinary
Esprit Telecom Benelux BV (including its
Belgian branch)............................ Amsterdam The Netherlands 100% ordinary
Swift Global Netherlands BV.................. Zoeterwoude The Netherlands 100% ordinary
Esprit Telecom France SA..................... Paris France 100% ordinary
Esprit Telecom de Espana SA.................. Madrid Spain 100% ordinary
Icomnet SA (including its Washington, DC, US
branch).................................... Tortola British Virgin Islands 100% ordinary
Esprit Telecom Deutschland GmbH.............. Frankfurt Germany 100% ordinary
Esprit Telecom Italia Srl.................... Milan Italy 100% ordinary
IMS Interaktieve Media Services BV........... Amsterdam The Netherlands 100% ordinary
IMS Plus BV.................................. Amsterdam The Netherlands 100% ordinary
Plusnet Management GmbH...................... Dusseldorf Germany 100% ordinary
Plusnet GmbH & Co. KG........................ Dusseldorf Germany 100% ordinary
Esprit Telecom Netzwerk GmbH................. Dusseldorf Germany 100% ordinary
Esprit Telecom Deutschland Holding GmbH...... Dusseldorf Germany 100% ordinary
Plusnet Telecom GmbH Company KG.............. Dusseldorf Germany 100% ordinary
</TABLE>
F-88
<PAGE> 337
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP")
The Company's financial statements have been prepared in accordance with UK
GAAP which differ in certain respects from US GAAP. The material differences as
they apply to the Company are summarized below:
(a) SHARE OPTION AWARDS
As required under Urgent Issue Task Force Abstract 17 (UITF 17), under UK
GAAP, share options granted to employees are recognized in the Company's
financial statements when the share options have been granted. Such grants give
rise to compensation expense measured by reference to the fair value of shares
only on date of grant, and at no subsequent date even for variable plans. Under
US GAAP, Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," compensation expense resulting from awards under variable
plans measures compensation costs as the difference between the quoted market
price at the date when the number of shares of stock are known (the date the
performance conditions are satisfied) and the exercise price; the cost is
recognised over the period the employee performs related services. Since the
ultimate compensation cost is unknown until the performance conditions are
satisfied, estimates of compensation cost are recorded before the measurement
date based on the quoted market price of the stock at intervening dates in
situations where it is probable that the performance conditions will be
attained. The Company deemed that the performance conditions were likely to be
satisfied at September 30, 1998, however the compensation cost as of September
30, 1998 was immaterial to the Company.
In October 1995, the US Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (FAS 123) which provides companies with a fair value method of
recognising stock-based compensation expense in the financial statement, but
permits the use of the recognition principles previously prescribed by APB
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) as long as
disclosure of the effects of the fair-value method are included in the notes to
the financial statements. The Company adopted FAS 123 in 1997 but has continued
to use the recognition principles of APB 25.
If the Company had elected to recognise compensation expense based upon the
fair value at the grant date for awards under its various option plans,
consistent with the methodology prescribed by FAS 123, the Company's US GAAP net
loss and loss per share would be altered to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1997 1998
------ ------- -------
L L L
(THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
US GAAP Net loss:
As reported............................................... (5,325) (10,852) (42,447)
Pro forma................................................. (5,053) (11,362) (44,135)
US GAAP loss per ordinary share:
As reported............................................... (0.08) (0.10) (0.34)
Pro forma................................................. (0.07) (0.11) (0.36)
US GAAP loss per ADS:
As reported............................................... (0.56) (0.70) (2.38)
Pro forma................................................. (0.49) (0.77) (2.52)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option-
F-89
<PAGE> 338
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pricing model with the following assumptions for the years ended September 30,
1996, 1997 and 1998: dividend yields of 0.0%; expected volatility of 150% for
1996 and 1997 and 100% for 1998; risk-free interest rate of 7.3% for 1996 and
1997 and a weighted average interest rate 5.4% for 1998; expected lives for
options exercisable at L0.01 from 3 years to 5 years; expected lives for options
exercisable between LNil and L1.05 from 5 to 8.5 years; and expected lives for
options exercisable at L0.57 and L0.68 of 3 and 4 years respectively for 1996
and 1997. In 1998, the expected life for MSOP options exercisable at $2.30 and
$2.40 of 3.5 years and expected lives for options exercisable ranging from L0.54
- -- L2.45 of 3 to 3.5 years.
The weighted average fair value of options granted during the years ended
September 30, 1997 and 1996 for which the exercise price is L0.01 was L0.79 and
L0.31 respectively. The weighted average fair value of options granted during
the year ended September 30, 1997 for which the exercise price is between LNil
and L1.05 was L0.60. The weighted average fair value of options granted during
the year ended September 30, 1998 was L0.94.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock option plans have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock option plans.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK EXERCISE PRICE
OPTIONS OF OPTIONS
DESCRIPTION OUTSTANDING OUTSTANDING
- ----------- ----------- --------------
L
<S> <C> <C>
Balance, September 30, 1995................................. 883,250 0.01
Granted................................................... 5,515,650 0.01
Exercised................................................. (58,250) 0.01
Cancelled................................................. -- --
---------- ----
Balance, September 30, 1996................................. 6,340,650 0.01
Granted................................................... 4,449,108 0.31
Exercised................................................. (710,500) 0.01
Cancelled................................................. (107,150) 0.01
---------- ----
Balance, September 30, 1997................................. 9,972,108 0.06
Granted................................................... 5,370,797 1.37
Exercised................................................. (2,418,859) 0.12
Cancelled................................................. (585,151) 1.14
---------- ----
Balance, September 30, 1998................................. 12,338,895 0.78
========== ====
</TABLE>
(b) REDEEMABLE PREFERENCE SHARES
Under UK GAAP, redeemable preference shares are included in shareholders'
funds. Under US GAAP, because these shares have a mandatory redemption feature,
they are not classified as shareholders' equity.
F-90
<PAGE> 339
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) DEFERRED TAXATION
Under UK GAAP, deferred income taxes are accounted for to the extent that
it is probable that a liability or asset will arise in the foreseeable future as
a result of reversing timing differences. Under US GAAP, deferred taxes are
accounted for on all temporary differences, and a valuation allowance is
established to reduce deferred tax assets to the amount which "more likely than
not" will be realized in future tax returns. The deferred tax asset under UK
GAAP can be reconciled to the deferred tax asset under US GAAP as follows:
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
---------------------------
1996 1997 1998
------ ------ -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax asset under UK GAAP............................ -- -- --
Tax effects of timing differences
Tax losses................................................ 2,764 5,122 18,296
Capital allowances........................................ -- -- --
Other timing differences deferred......................... -- -- --
------ ------ -------
Gross deferred tax assets in accordance with US GAAP........ 2,764 5,122 18,296
Valuation allowance......................................... (2,764) (5,122) (18,296)
Net deferred tax assets in accordance with US GAAP.......... -- -- --
====== ====== =======
</TABLE>
A valuation allowance has been provided against the full amount of the
deferred tax assets arising from tax loss carry forwards as, in light of the
Company's start-up nature and lack of profitable operations to date, management
believes it is conservative to consider it more likely than not that sufficient
taxable income will not be generated to utilize these loss carry forwards.
(d) EFFECT ON NET LOSS OF DIFFERENCES BETWEEN UK GAAP AND US GAAP
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
----------------------------
1996 1997 1998
------ ------- -------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Loss for the financial year in accordance with UK GAAP...... (5,094) (10,860) (42,447)
US GAAP adjustments:
Share option awards......................................... (231) 8 --
------ ------- -------
Loss for the financial year in accordance with US GAAP(2)... (5,325) (10,852) (42,447)
====== ======= =======
Basic and diluted loss per Ordinary Share in accordance with
US GAAP(1)................................................ (0.08) (0.10) (0.34)
====== ======= =======
Number of Ordinary Shares used for calculating US GAAP basic
loss per Ordinary Share (in thousands).................... 68,397 104,900 124,095
====== ======= =======
</TABLE>
- ---------------
(1) Previously reported basic loss per Ordinary Share in accordance with US GAAP
has been restated to reflect the adoption of Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" and re-determination of the
number of Ordinary Shares used for calculating US GAAP loss per Ordinary
Share for all periods presented.
(2) No adjustment has been reflected as at September 30, 1997 or 1998 in respect
of contingent purchase consideration related to the acquisitions, which is
accrued as a liability under UK GAAP but not under US GAAP, as this
difference is not material to the loss or net shareholders' funds/(deficit)
for the periods and dates presented.
F-91
<PAGE> 340
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(e) EFFECT ON SHAREHOLDERS' FUNDS/(DEFICIT) OF DIFFERENCES BETWEEN UK GAAP AND
US GAAP
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Shareholders' funds (deficit) in accordance with UK GAAP.... 10,011 31,374 (7,199)
US GAAP adjustments
Share option awards....................................... (252) (244) (244)
Cumulative increase in share premium from share
incentive.............................................. 252 244 244
Redeemable preference shares.............................. (673) -- --
------ ------ ------
Shareholders' funds/(deficit) in accordance with US GAAP.... 9,338 31,374 (7,199)
====== ====== ======
</TABLE>
(f) CONSOLIDATED STATEMENT OF CASH FLOWS
The Company's consolidated cash flow statement is prepared in accordance
with Financial Reporting Standard No. 1 (Revised 1996), "Cash Flow Statements,"
and presents substantially the same information as that required under Statement
of Financial Accounting Standards No. 95. However, there are certain differences
in classification of items within the cash flow statement and with regard to the
definition of cash equivalents between UK and US GAAP.
Cash flows from (i) operating activities; (ii) returns on investments and
servicing of finance; (iii) taxation; (iv) capital expenditure and financial
investment; (v) management of liquid resources; and (vi) financing activities
are presented separately under UK GAAP. However, US GAAP only requires
presentation of cash flows from three activities: operating, investing and
financing.
Cash and cash equivalents under UK GAAP include cash in hand and deposits
repayable on demand less any bank loans and overdrafts repayable on demand.
Under US GAAP overdrafts are included in financing activities.
Cash flows from taxation and returns on investments and servicing of
finance are, included as operating activities under US GAAP. The payment of
dividends is included under financing activities and capitalized interest is
included under investing activities for US GAAP purposes.
F-92
<PAGE> 341
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the statement of cash flows for the Company
as if they had been presented in accordance with US GAAP and include the
adjustments which reconcile cash and cash equivalents under US GAAP to cash and
cash equivalents under UK GAAP.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1996 1997 1998
------ ------- --------
L L L
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash outflow from operating activities.................. (2,448) (2,306) (33,969)
Net cash used in investing activities....................... (3,594) (8,686) (114,003)
Net cash provided by financing activities................... 6,803 29,150 259,218
------ ------- --------
Net increase in cash and cash equivalents under US GAAP..... 761 18,158 111,246
Effects of exchange rates on cash and cash equivalents...... 54 (63) 9
Cash and cash equivalents under US GAAP at beginning of
year...................................................... 5,615 6,430 24,525
------ ------- --------
Cash and cash equivalents under US GAAP at end of year...... 6,430 24,525 135,780
Short term cash deposits.................................... (2,335) (22,876) (131,547)
------ ------- --------
Bank balances and cash under UK GAAP at end of year......... 4,095 1,649 4,233
====== ======= ========
</TABLE>
(g) OTHER US GAAP DISCLOSURES
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable and
cash and equivalents. Management believes the concentration of credit risk
associated with accounts receivable is minimal due to the dispersion over many
customers and different industries. Cash and liquid resources are invested in
short-term money market instruments with two U.K. commercial banks. The risk
associated with the Company's cash and liquid resources is mitigated by the fact
that these amounts are placed in what it believes to be high quality financial
institutions. The Company has not experienced any losses to date on its
deposited cash.
Fair value of financial instruments
The Company enters into foreign currency forward contracts (principally
Deutsche mark and US dollar) to eliminate foreign exchange risk. The Company
utilizes foreign currency forward contracts which are short-term in duration
(generally one week or less), accordingly, the fair value of the forward
contracts at September 30, 1998 approximated to contract value.
F-93
<PAGE> 342
ESPRIT TELECOM GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Acquisitions
The following unaudited pro forma consolidated results of operations for
the years ended September 30, 1997 and 1998 assumes the acquisitions had
occurred on October 1 of each year:
<TABLE>
<CAPTION>
PRO FORMA INFORMATION 1997 1998
- --------------------- -------- --------
UNAUDITED (IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenues.................................................... 70,054 106,905
Income (loss) for the financial year........................ (21,749) (45,372)
-------- --------
Loss per ordinary share..................................... (0.21) (0.36)
======== ========
</TABLE>
Recently issued accounting standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosure about
Segments of an Enterprise and Related Information". FAS 130 and 131 are required
to be adopted by the Company during the 1999 financial year.
FAS 130 establishes standards for presenting other comprehensive income,
which is conceptually similar to the Statement of Total Recognised Gains and
Losses presented under UK GAAP. FAS 130 does not prescribe any new measurement
standards. As such, the Company does not believe that the adoption of FAS 130
will have a material impact on the reported results of operations or financial
position of the Company.
FAS 131 prescribes a management approach to the determination of reportable
segments and supersedes FAS 14. The Company is currently evaluating the impact
of FAS 131 on its segment disclosures but does not expect the adoption of the
standard to have a material impact on its reported results of operations and
financial position.
In February 1999, the FASB issued FAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an amendment of FASB Statements
No. 87, 88, and 106." FAS 132 is required to be adopted in the Company's 1998
financial year, and attempts to streamline the disclosure requirements for
pension and post retirement benefit plans. Since the Company operates only a
defined contribution pension scheme, the adoption of this standard will not have
a material impact on the results of operation or financial position of the
Company.
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
31 COMPANIES ACT 1985
The Consolidated Financial Statements do not constitute "statutory
accounts" within the meaning of the United Kingdom Companies Act 1985 for any of
the periods presented. These Consolidated Financial Statements exclude certain
parent company statements and other information required by the Companies Act
1985. However, they include all material disclosures required by generally
accepted accounting principles in the United Kingdom including those Companies
Act 1985 disclosures relating to the profit and loss account and balance sheet
items.
F-94
<PAGE> 343
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Esprit Telecom Group plc
We have audited the accompanying balance sheets of the switch-based
telecommunications services business operated by Plusnet Gesellschaft fur
Netzwerk Services mbH. Dusseldorf, (the "Plusnet Business") as of September 30,
1996 and 1997 and the related profit and loss accounts, cash flow statements,
statements of total recognized gains and losses and reconciliations of movements
in invested equity for each of the years in the three-year period ended
September 30, 1997. These financial statements are the responsibility of the
Plusnet Business's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Plusnet Business as of
September 30, 1996 and 1997 and the results of the Plusnet Business's operations
and its cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with accounting principles generally accepted
in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States. Application of accounting principles generally accepted in
the United States would have affected the determination of the loss for each of
the years in the three-year period ended September 30, 1997 and the
determination of invested equity as of September 30, 1996 and 1997 to the extent
summarized in note 16 to the financial statements.
Dusseldorf, June 10, 1998
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
F-95
<PAGE> 344
PLUSNET BUSINESS
PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
NOTES 1995 1996 1997 1997
----- ------ ------- ------- -------
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C> <C>
Turnover........................................ 2 8,782 31,451 45,521 24,614
Cost of sales................................... 2 (9,609) (35,481) (48,426) (26,185)
------ ------- ------- -------
Gross margin.................................... (827) (4,030) (2,905) (1,571)
Other operating expenses:
Selling, general and administrative........... 3,4 (6,574) (18,022) (13,402) (7,247)
Depreciation and amortization................. 3 (1,482) (4,900) (10,118) (5,471)
Restructuring costs........................... 5 -- -- (4,490) (2,428)
Other operating income.......................... 52 574 319 173
------ ------- ------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION..... (8,831) (26,378) (30,596) (16,544)
Extraordinary income............................ 6 -- 6,000 -- --
------ ------- ------- -------
Loss before taxation............................ (8,831) (20,378) (30,596) (16,544)
Taxation........................................ 7 -- -- -- --
------ ------- ------- -------
LOSS FOR THE FINANCIAL YEAR..................... (8,831) (20,378) (30,596) (16,544)
====== ======= ======= =======
</TABLE>
The entire turnover and loss for the three years ended September 30, 1997
arose from continuing operations.
The accompanying notes are an integral part of the financial statements.
F-96
<PAGE> 345
PLUSNET BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
--------------------------
NOTES 1996 1997 1997
----- ------- ------- ------
DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
FIXED ASSETS
Tangible fixed assets..................................... 8 21,934 22,519 12,176
-- ------- ------- ------
CURRENT ASSETS
Debtors................................................... 9 7,201 7,432 4,019
Cash at bank and in hand.................................. -- -- --
------- ------- ------
7,201 7,432 4,019
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR............ 10 (15,656) (15,374) (8,313)
------- ------- ------
NET CURRENT LIABILITIES................................... (8,455) (7,942) (4,294)
------- ------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES..................... 13,479 14,577 7,882
PROVISIONS FOR LIABILITIES AND CHARGES.................... 11 (1,468) (1,424) (770)
------- ------- ------
NET ASSETS................................................ 12,011 13,153 7,112
======= ======= ======
INVESTED EQUITY........................................... 12,011 13,153 7,112
======= ======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-97
<PAGE> 346
PLUSNET BUSINESS
CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
NOTES 1995 1996 1997 1997
----- ------- ------- ------- -------
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES
(SEE NOTE BELOW)........................... (381) (19,520) (22,804) (12,330)
CAPITAL EXPENDITURE.......................... 14 (10,634) (11,024) (8,934) (4,831)
-- ------- ------- ------- -------
CASH OUTFLOW BEFORE FINANCING................ (11,015) (30,544) (31,738) (17,161)
FINANCING.................................... 14 11,014 30,540 31,738 17,161
-- ------- ------- ------- -------
DECREASE IN CASH IN THE PERIOD............... 15 (1) (4) -- --
== ======= ======= ======= =======
</TABLE>
RECONCILIATION OF OPERATING LOSS TO CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1995 1996 1997 1997
------ ------- ------- -------
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
Operating loss...................................... (8,831) (26,378) (30,596) (16,544)
Depreciation charge................................. 1,482 4,900 10,118 5,471
Profit on disposal of fixed assets.................. (1) (24) (1,769) (956)
Increase in debtors................................. (4,695) (2,301) (231) (125)
Increase/(decrease) in creditors.................... 11,664 4,283 (326) (176)
------ ------- ------- -------
Net cash outflow from operating activities.......... (381) (19,520) (22,804) (12,330)
====== ======= ======= =======
</TABLE>
RECONCILIATIONS OF MOVEMENTS IN INVESTED EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1995 1996 1997 1997
------ ------- ------- -------
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
Loss for the financial year......................... (8,831) (20,378) (30,596) (16,544)
Net equity contributions............................ 11,014 30,540 31,738 17,161
------ ------- ------- -------
Net increase in invested equity..................... 2,183 10,162 1,142 617
Opening invested equity............................. (334) 1,849 12,011 6,495
------ ------- ------- -------
Closing invested equity............................. 1,849 12,011 13,153 7,112
====== ======= ======= =======
</TABLE>
STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Total gains and losses recognized during the period are fully reflected in
the profit and loss accounts.
The accompanying notes are an integral part of the financial statements.
F-98
<PAGE> 347
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
1. THE BUSINESS
The Plusnet Business has been operated during the period covered by these
financial statements by Plusnet Gesellschaft fur Netzwerk Services mbH, a
subsidiary of the Thyssen AG group. Plusnet Gesellschaft fur Netzwerk Services
mbH transferred (with retrospective effect from April 30, 1998) to Thyssen
Netzwerk GmbH & Co. KG its business operations and substantially all its assets
and liabilities but excluding any financial liabilities to the Thyssen AG group.
These financial statements reflect the financing provided to the business
by the Thyssen AG group in the past as a component of invested equity and
exclude certain other non-operating assets and liabilities of Plusnet
Gesellschaft fur Netzwerk Services mbH which are not reflected in the business
transfer to Thyssen Netzwerk GmbH & Co. KG.
The Plusnet Business is engaged in the provision of telecommunications
services in the Republic of Germany. All assets are located in Germany and
substantially all revenue arises from customers located in Germany.
2. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Plusnet Business have been prepared under
the historical cost convention and in accordance with accounting principles
generally accepted in the United Kingdom.
The Plusnet Business has been financed in the past by capital
contributions, loans and a "cash pool" facility made available by the Thyssen AG
group which are reflected in the enclosed financial statements as part of
invested equity. Net cash inflows to the Plusnet Business from the Thyssen AG
group are reported in these financial statements under "net equity
contributions".
Solely for the convenience of the reader, certain German Mark amounts in
these financial statements have been translated into US dollars at the rate of
1.8493 German Marks to the US dollar, which was the noon buying rate in the City
of New York for cable transfers in German Marks as certified for customs
purposes by the Federal Reserve Bank of New York ("DM Noon Buying Rate") on
March 31,1998. Such translations should not be construed as representations that
the German Mark amounts could have been or could be converted into US dollars at
that or any other rate.
The following principal accounting policies have been applied consistently
in dealing with items which are considered material in relation to the Plusnet
Business's results.
(a) Turnover
Turnover for telecommunications services is recorded on the basis of
minutes of traffic processed. Turnover represents the invoiced value of goods
and services supplied by the Plusnet Business, net of value added tax. Turnover
is recorded when the traffic is processed and the communications services are
rendered.
(b) Cost of sales
Network expenses are charged to income in the period in which the related
revenue is recognized.
(c) Fixed assets and depreciation
Tangible fixed assets comprising land and buildings, telecommunications
equipment, computers, furniture and office equipment are stated at historical
costs less accumulated depreciation.
F-99
<PAGE> 348
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is calculated using the straight line method to write off the
cost less estimated residual value of each asset over the following estimated
useful economic lives:
<TABLE>
<S> <C>
Freehold building........................................... 25 years
Telecommunications equipment................................ 5 years
Furniture and office equipment.............................. 3-10 years
</TABLE>
Improvements to leasehold property are depreciated over the term of the
lease. Freehold land is not depreciated.
Software is amortized over its estimated useful economic life of between 3
and 5 years using the straight line method.
(d) Leased assets
Operating lease rentals are charged to the profit and loss account as they
arise over the period of the lease.
(e) Foreign currencies
Transactions in foreign currencies are recorded in deutschmarks at the
exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currency are translated into deutschmarks at
the exchange rate ruling at the balance sheet date, or at the forward exchange
rate where appropriate. Exchange gains and losses arising have been recorded in
the profit and loss account.
(f) Pension benefits
The Plusnet Business does not provide general pension benefits to its
employees. However, one current senior manager (in prior years two managers) has
been granted pension benefits under a defined benefit plan which is unfunded. A
balance sheet provision for the estimated future liability under this scheme is
established by the Plusnet Business on the basis of annual actuarial valuations.
The actuarial valuations of the future liability are made following assumptions
and methods prescribed by German tax regulations, which do not differ materially
in their impact on the financial statements from those prescribed by UK GAAP.
3. LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
The loss on ordinary activities before taxation is stated after charging:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997 1997
------ ------ ------ -----
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
Depreciation of tangible fixed assets.............. 1,482 4,900 10,118 5,471
Net profit on disposal of tangible fixed assets.... (1) (24) (1,769) (956)
Operating lease rentals
Telecommunications equipment..................... 1,477 1,826 1,443 780
Cars............................................. 33 28 33 18
Rent of premises and utilities..................... 530 1,753 2,919 1,578
</TABLE>
F-100
<PAGE> 349
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. STAFF NUMBERS AND COSTS
The average numbers of persons (including executive directors) employed by
the Plusnet Business during the year, analyzed by category were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sales and distribution...................................... 10 29 25
Technical support........................................... 11 29 26
Administration.............................................. 4 8 8
-- -- --
25 66 59
== == ==
</TABLE>
The aggregate payroll costs for these persons were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997 1997
------ ------ ------ -----
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
Wages and salaries................................. 2,711 7,206 6,396 3,458
Social security costs.............................. 360 1,039 1,003 542
Other pension costs................................ 28 29 17 10
----- ----- ----- -----
3,099 8,274 7,416 4,010
===== ===== ===== =====
</TABLE>
5. RESTRUCTURING COSTS
The restructuring costs in 1996/97 mainly comprise costs incurred in
connection with the fundamental restructuring of the Plusnet Business's network
technology. In this connection the Plusnet Business also incurred exceptional
depreciation charges on telecommunications equipment totalling DM 3,141,000
(included in the depreciation charge for the year).
6. EXTRAORDINARY INCOME
The Plusnet Business originally traded under the name T-Net Gesellschaft
fur Netzwerk Services GmbH. The rights to the name "T-Net" were sold to Deutsche
Telekom AG in 1996 resulting in extraordinary income of DM 6 million.
7. TAXATION
The Plusnet Business has incurred trading losses in the three years ended
September 30, 1997 and no charges to German income taxation have arisen.
No deferred taxation has been recognized on the tax loss carry-forwards as
the Plusnet Business has a history of trading losses and these will not be able
to be utilized following the transfer of the Plusnet Business to Thyssen
Netzwerk GmbH & Co. KG.
F-101
<PAGE> 350
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1997 1997
------ ------ ------
DM'000 DM'000 $'000
<S> <C> <C> <C>
LAND AND BUILDINGS
COST
At October 1, ............................................ 183 1,504 812
Additions................................................. 1,321 689 373
Disposals................................................. -- (59) (32)
----- ----- -----
At September 30, ......................................... 1,504 2,134 1,153
----- ----- -----
DEPRECIATION
At October 1, ............................................ 7 105 56
Charge for the year....................................... 98 792 428
Disposals................................................. -- (3) (1)
----- ----- -----
At September 30, ......................................... 105 894 483
----- ----- -----
NET BOOK VALUE AT SEPTEMBER 30, .......................... 1,399 1,240 670
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1997 1997
------ ------ ------
DM'000 DM'000 $'000
<S> <C> <C> <C>
TELECOMMUNICATIONS EQUIPMENT
COST
At October 1, ............................................. -- 21,139 11,431
Additions.................................................. 11,972 12,153 6,571
Disposals.................................................. (136) (5,796) (3,134)
Transfers.................................................. 9,303 -- --
------ ------ ------
At September 30, .......................................... 21,139 27,496 14,868
------ ------ ------
DEPRECIATION
At October 1, ............................................. -- 4,775 2,582
Charge for year............................................ 3,670 7,877 4,259
Disposals.................................................. (30) (3,328) (1,799)
Transfers.................................................. 1,135 -- --
------ ------ ------
At September 30, .......................................... 4,775 9,324 5,042
------ ------ ------
NET BOOK VALUE AT SEPTEMBER 30, ........................... 16,364 18,172 9,826
====== ====== ======
</TABLE>
F-102
<PAGE> 351
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1997
------- ------- ------
DM'000 DM'000 $'000
<S> <C> <C> <C>
SOFTWARE
COST
At October 1, .............................................. 121 269 145
Additions................................................... 148 144 78
Disposals................................................... -- (8) (4)
------ ----- -----
At September 30, ........................................... 269 405 219
------ ----- -----
DEPRECIATION
At October 1, .............................................. 35 104 56
Charged in year............................................. 69 115 62
Disposals................................................... -- (8) (4)
------ ----- -----
At September 30, ........................................... 104 211 114
------ ----- -----
NET BOOK VALUE AT SEPTEMBER 30, ............................ 165 194 105
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1997
------- ------- ------
DM'000 DM'000 $'000
<S> <C> <C> <C>
FIXTURES, FITTINGS, TOOLS AND EQUIPMENT
COST
At October 1,............................................... 10,962 5,086 2,750
Additions................................................... 3,749 290 157
Disposals................................................... (322) (104) (56)
Transfers................................................... (9,303) -- --
------ ----- -----
At September 30,............................................ 5,086 5,272 2,851
------ ----- -----
DEPRECIATION
At October 1,............................................... 1,438 1,080 584
Charge for year............................................. 1,063 1,334 722
Disposals................................................... (286) (55) (30)
Transfers................................................... (1,135) -- --
------ ----- -----
At September 30,............................................ 1,080 2,359 1,276
------ ----- -----
NET BOOK VALUE AT SEPTEMBER 30,............................. 4,006 2,913 1,575
====== ===== =====
</TABLE>
9. DEBTORS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1997 1997
------ ------ -----
DM'000 DM'000 $'000
<S> <C> <C> <C>
Trade debtors............................................... 3,548 5,188 2,805
Amounts owed by related parties (note 13)................... 3,423 2,177 1,177
Other debtors............................................... 192 60 33
Prepayments and accrued income.............................. 38 7 4
----- ----- -----
7,201 7,432 4,019
===== ===== =====
</TABLE>
All amounts are due within one year.
F-103
<PAGE> 352
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Trade debtors are stated net of allowances for specifically identified
doubtful accounts of DM 111,000 at September 30, 1996 (no allowances made at
September 30, 1997).
10. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1997 1997
------ ------ -----
DM'000 DM'000 $'000
<S> <C> <C> <C>
Trade creditors............................................. 13,718 11,424 6,177
Amounts owed to related parties (note 13)................... 17 86 47
Other creditors including taxation and social security...... 1,475 1,284 694
Accruals and deferred income................................ 446 2,580 1,395
------ ------ -----
15,656 15,374 8,313
====== ====== =====
</TABLE>
11. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1997 1997
------ ------ -----
DM'000 DM'000 $'000
<S> <C> <C> <C>
Pensions.................................................... 226 111 60
Other provisions............................................ 1,242 1,313 710
----- ----- ---
1,468 1,424 770
===== ===== ===
</TABLE>
Other provisions mainly comprise losses incurred on sales contracts to
customers, where the contracted revenue is lower than the cost of sales.
12. COMMITMENTS
Operating lease payments payable within one year of the balance sheet date
where in respect of operating leases expiring as follows:
<TABLE>
<CAPTION>
LAND &
BUILDINGS OTHERS TOTAL TOTAL
--------- ------ ------ -----
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
At September 30, 1996
-- expiring within one year...................... 859 803 1,662 899
-- expiring between one year and five years...... 1,102 1,300 2,402 1,299
-- expiring after five years..................... 47 -- 47 25
----- ----- ----- -----
2,008 2,103 4,111 2,223
===== ===== ===== =====
At September 30, 1997
-- expiring within one year...................... 1,186 1,965 3,151 1,704
-- expiring between one and five years........... 218 -- 218 118
-- expiring after five years..................... 84 -- 84 45
----- ----- ----- -----
1,488 1,965 3,453 1,867
===== ===== ===== =====
</TABLE>
F-104
<PAGE> 353
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments under non-cancellable operating leases as
of September 30, 1997 are:
<TABLE>
<CAPTION>
PAYABLE IN THE YEARS ENDING SEPTEMBER 30, DM'000 $'000
- ----------------------------------------- ------ -----
<S> <C> <C>
1998........................................................ 3,453 1,867
1999 to 2002................................................ 407 220
2003 and thereafter......................................... 447 242
----- -----
4,307 2,329
===== =====
</TABLE>
At September 30, 1997, the Plusnet Business had contractual commitments for
capital expenditure totalling approximately DM 2 million.
13. RELATED PARTY TRANSACTIONS
The Plusnet Business was operated up until April 30, 1998 by Plusnet
Gesellschaft fur Netzwerk Services mbH, a wholly owned subsidiary of Thyssen
Telecom AG and part of the Thyssen AG group.
The Plusnet Business's transactions with respect of the above related
parties were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997 1997
------ ------ ------ -----
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
Sales to Thyssen group companies..................... 8,149 18,434 16,662 9,009
Services purchased from Thyssen group companies...... 1,529 3,229 3,315 1,792
</TABLE>
Balances receivable from and payable to the above related parties are
analyzed under notes 9 and 10 above.
14. ANALYSIS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1995 1996 1997 1997
------- ------- ------- ------
DM'000 DM'000 DM'000 $'000
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURE
Purchase of tangible fixed assets................ (10,635) (17,190) (13,276) (7,179)
Sale of brand name............................... -- 6,000 -- --
Sale of fixed assets............................. 1 166 4,342 2,348
------- ------- ------- ------
Net cash outflow from capital expenditure........ (10,634) (11,024) (8,934) (4,831)
======= ======= ======= ======
FINANCING
Net equity contributions......................... 11,014 30,540 31,738 17,161
======= ======= ======= ======
</TABLE>
F-105
<PAGE> 354
PLUSNET BUSINESS
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
15. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
Net funds are represented by the balance of cash at bank and in hand which
has developed as follows:
<TABLE>
<CAPTION>
NET
OPENING CASH CLOSING
BALANCE OUTFLOW BALANCE
------- ------- -------
DM'000 DM'000 DM'000
<S> <C> <C> <C>
Year ended September 30,
1995..................................................... 5 (1) 4
1996..................................................... 4 (4) --
1997..................................................... -- -- --
== == ==
</TABLE>
16. MATERIAL DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
(a) Impact on net income and invested equity
The Plusnet Business's financial statements have been prepared in
accordance with UK GAAP which differ in certain respect from US GAAP. In
relation to the Plusnet Business, these differences would not materially affect
the Plusnet Business's loss or invested equity reported as at and for the years
ended September 30, 1995, 1996 and 1997.
(b) Impact on statement of cash flows
The Plusnet Business's cash flow statement is prepared in accordance with
Financial Reporting Standard No. 1 (Revised 1996), "Cash Flow Statements", and
presents substantially the same information as that required under Statement of
Financial Accounting Standards No. 95. However, there are certain differences in
classification of items within the cash flow statement and with regard to the
definition of cash equivalents between UK and US GAAP.
(c) Extraordinary item
Certain items of income and expense which are classified as extraordinary
under UK GAAP may not meet the criteria for this classification under US GAAP.
(d) Depreciation
If at any time there is a permanent diminution in the value of a fixed
asset, UK GAAP requires that the net book value should be written down
immediately to the estimated recoverable amount. Such exceptional writedowns are
recorded in these financial statements as part of the depreciation charge. Under
US GAAP these circumstances may require the recognition of an impairment loss.
There may be circumstances which require write-downs under UK GAAP but which
would not require the recognition of an impairment loss under US GAAP.
17. COMPANIES ACT 1985
The financial statements do not constitute "statutory accounts" within the
meaning of the United Kingdom Companies Act 1985 for any periods presented and,
therefore, omit certain disclosures which would be required by the Companies Act
1985. However, they include all material disclosures required by generally
accepted accounting principles in the United Kingdom including those Companies
Act 1985 disclosures relating to the profit and loss accounts and balance sheet
items.
F-106
<PAGE> 355
ANNEX A
CONDITIONS AND FURTHER TERMS OF THE OFFER
PART A -- CONDITIONS OF THE OFFER
The Offer will comply with the US federal securities laws (except to the
extent that any exemptive relief has been granted by the SEC) and the applicable
rules and regulations of the Nasdaq and EASDAQ markets and any other relevant
regulatory bodies and the City Code (except to the extent of any dispensation,
waiver or exemption granted by the appropriate body or (as the case may be) the
Panel). The Offer will be governed by English law and will be subject to the
jurisdiction of the courts of England and to the terms and conditions set out
below, in this Offering Circular/Proxy Statement/Prospectus and the related
Acceptance Forms.
The Offer will be subject to the following conditions:
(A) valid acceptances being received (and not, where permitted,
withdrawn) by not later than the Initial Closing Date in respect of not
less than 90% (or such lesser percentage as GTS may decide) in nominal
value of Esprit Telecom Securities to which the Offer relates, provided
that this condition will not be satisfied unless GTS (and/or any of its
wholly-owned subsidiaries) shall have acquired, or agreed to acquire,
whether pursuant to the Offer or otherwise, Esprit Telecom Securities
carrying, in aggregate, more than 50% of the voting rights then normally
exercisable at general meetings of Esprit Telecom and provided further that
this condition may only be treated as satisfied at a time when all of the
conditions (B) to (K) have either been satisfied or, to the extent
permitted, waived.
For the purposes of this condition:
(i) Esprit Telecom Securities which have been unconditionally
allotted shall be deemed to carry the voting rights they will carry upon
being entered in the register of members of Esprit Telecom; and
(ii) the expression "Esprit Telecom Securities to which the Offer
relates" means (i) Esprit Telecom Securities unconditionally allotted or
issued on or before the date the Offer is made and (ii) Esprit Telecom
Securities unconditionally allotted or issued after that date but before
the time at which the Offer ceases to be open for acceptance (or such
earlier date, not being earlier than the date on which the Offer becomes
unconditional as to acceptances or, if later, the Initial Closing Date,
as GTS may, subject to the City Code, decide) but excluding any Esprit
Telecom Securities which, on the date the Offer is made, are held or
(otherwise than under such a contract as is described in section 428(5)
Companies Act 1985) contracted to be acquired by GTS and/or its
associates (within the meaning of section 430 E Companies Act 1985);
(B) the approval by holders of a majority of GTS Stock of such
resolution(s) as may be necessary or desirable to approve, effect and
implement the issue of New GTS Stock for the purposes of the Offer and the
acquisition by GTS of Esprit Telecom;
(C) the New GTS Stock to be issued pursuant to the Offer having been
approved for listing on Nasdaq and EASDAQ subject to official notice of
issuance of such New GTS Stock;
(D) no stop order suspending the effectiveness of the registration
statement with respect to the New GTS Stock having been issued and no
proceeding for that purpose having been initiated or threatened by the SEC;
(E) no Relevant Authority having decided to take, institute, implement
or threaten any action, proceedings, suit, investigation, enquiry or
reference, or made, proposed or enacted any statute, regulation, order or
decision, or taken any other steps which would or could reasonably be
expected to:
(i) make the Offer, or its implementation, or the proposed
acquisition of any Esprit Telecom Securities by any member of the Wider
GTS Group or any matter arising therefrom or relating thereto, void,
illegal or unenforceable under the laws of any relevant jurisdiction or
otherwise
A-1
<PAGE> 356
materially, directly or indirectly, restrain, prohibit, restrict or
delay the Offer, its implementation or such proposed acquisition by any
member of the Wider GTS Group or any matter arising therefrom or
relating thereto or impose additional conditions or obligations with
respect thereto, or otherwise challenge or interfere therewith in any
such case to a materially adverse extent;
(ii) result in a material delay in the ability of any member of the
Wider GTS Group, or render any member of the Wider GTS Group unable, to
acquire all or some of the Esprit Telecom Securities or other securities
in Esprit Telecom or require, prevent or materially delay a divestiture
by any member of the Wider GTS Group of any such shares or securities;
(iii) require the divestiture by GTS or any member of the Wider GTS
Group or any member of the Wider Esprit Telecom Group of all or any
material portion of their respective businesses, assets or properties or
impose any material limitation on the ability of any of them to conduct
all or any material portion of their respective businesses or own all or
any material portion of their respective assets or properties;
(iv) impose any material limitation on the ability of GTS or any
other member of the Wider GTS Group or of the Wider Esprit Telecom Group
to acquire, or to hold or exercise effectively, directly or indirectly,
any rights of ownership in respect of shares or other securities in any
member of the Wider Esprit Telecom Group or to exercise management
control over Esprit Telecom or any other member of the Wider Esprit
Telecom Group which in any case is material in the context of the Esprit
Telecom Group taken as a whole;
(v) otherwise materially adversely affect the business, profits or
prospects of any members of the Wider Esprit Telecom Group or, as a
consequence of the Offer, any members of the Wider GTS Group;
(vi) require any member of the Wider GTS Group or any member of the
Wider Esprit Telecom Group to acquire or offer to acquire any shares or
other securities in any member of the Wider Esprit Telecom Group owned
by any third party where any such acquisition or offer is material in
the context of the Esprit Telecom Group taken as a whole;
(vii) to an extent which is material in the context of the Esprit
Telecom Group taken as a whole, result in any member of the Wider Esprit
Telecom Group ceasing to be able to carry on business under the name
which it presently does so; or
(viii) to an extent which is material in the context of the Esprit
Telecom Group taken as a whole, result in any member of the Wider GTS
Group having to dispose of any shares or other securities in any member
of the Wider Esprit Telecom Group or the Wider GTS Group;
and all applicable waiting and other time periods during which any Relevant
Authority could decide to take, institute, implement or threaten any such
action, proceeding, suit, investigation, enquiry or reference or otherwise
intervene having expired, lapsed or been terminated;
(F) in each case with such exceptions as would not be material in the
context of the Esprit Telecom Group taken as a whole or the Offer, all
Authorizations reasonably deemed necessary or appropriate for or in respect
of the Offer and the proposed acquisition of any Esprit Telecom Securities
or other securities in, or control of, Esprit Telecom by the Wider GTS
Group, or which are necessary for any member of the Wider Esprit Telecom
Group to carry on its business, having been obtained in terms and in a form
satisfactory to GTS from all appropriate Relevant Authorities or other
bodies whom any member of the Wider GTS Group or the Wider Esprit Telecom
Group has entered into contractual arrangements and all such Authorizations
remaining in full force and effect at the time at which the Offer becomes
otherwise unconditional and all appropriate waiting periods (including
extensions thereof) under any applicable legislation and regulations of any
jurisdiction having expired, lapsed or been terminated and there being no
intimation or notice of an intention to revoke or not to renew any of the
same having been received, in each case as may be necessary in connection
with the Offer under the laws or regulations of any
A-2
<PAGE> 357
jurisdiction and all necessary statutory or regulatory obligations in
connection with the Offer and its implementation in any relevant
jurisdiction having been complied with;
(G) except as disclosed in the annual report and accounts of Esprit
Telecom for the financial year ended September 30, 1997 or in any SEC
registration, submission or filing or in the preliminary results of Esprit
Telecom for the year ended September 30, 1998 announced on November 20,
1998 or announced at or before 8:00 a.m. (London time) on December 8, 1998
through EASDAQ (or at or before 4:00 p.m. (New York time) on December 7,
1998 through Nasdaq) or as disclosed in writing to GTS specifically for the
purposes of these conditions at or before 8:00 a.m. (London time) on
December 8, 1998 (such information being "Disclosed") there being no
provision of any arrangement, agreement, licence, permit, franchise or
other instrument to which any member of the Wider Esprit Telecom Group is a
party or by or to which any such member or any of their assets is or are or
may be bound, entitled or subject or any circumstance which, as a
consequence of the making of the Offer or the acquisition or proposed
acquisition by any member of the Wider GTS Group of some or all of the
share capital or other securities in Esprit Telecom or because of change in
control or management of Esprit Telecom or otherwise, might reasonably
result in, to an extent which is material in the context of the Esprit
Telecom Group, taken as a whole:
(i) any monies borrowed by or other indebtedness (actual or
contingent) of any member of the Wider Esprit Telecom Group which is not
already repayable on demand being or becoming repayable or being capable
of being declared repayable immediately or prior to the stated maturity
date or repayment date or the ability of any such member to borrow
monies or incur any indebtedness being withdrawn or inhibited;
(ii) the creation of any mortgage, charge or other security
interest over the whole or any material part of the business, property
or assets of any member of the Wider Esprit Telecom Group or any such
security (whenever arising or having arisen) becoming enforceable;
(iii) any such arrangement, agreement, licence, permit, franchise
or other instrument, or the rights, liabilities, obligations or
interests or business of any member of the Wider Esprit Telecom Group
under any such arrangement, agreement, licence, permit, franchise or
other instrument, being terminated or adversely modified or adversely
affected or any material action being taken or any onerous obligation
arising thereunder;
(iv) otherwise than in the ordinary course of business, any assets
or interest of any member of the Wider Esprit Telecom Group being or
falling to be disposed of or charged or any right arising under which
any such asset or interest could be required to be disposed of or
charged;
(v) the interest or business of any member of the Wider GTS Group
or the Wider Esprit Telecom Group in or with any person, firm, company
or body (or any arrangement or arrangements relating to such interest or
business) being terminated or adversely modified or affected;
(vi) any member of the Wider Esprit Telecom Group ceasing to be
able to carry on business under any name under which it presently does
so;
(vii) the value of or the financial or trading position or
prospects of any member of the Wider Esprit Telecom Group being
materially prejudiced or adversely affected; or
(viii) any material restriction on any member of the Wider Esprit
Telecom Group or the Wider GTS Group being able to carry on business as
it presently does so or to deal with any person, firm, company, or body;
(H) save as otherwise Disclosed (as defined in condition (G) above) no
member of the Wider Esprit Telecom Group having since March 31, 1998:
(i) issued, agreed or authorized or proposed the issue of
additional shares of any class, or securities convertible into, or
rights, warrants or options to subscribe for or acquire, any such shares
A-3
<PAGE> 358
or convertible securities (save for the exercise of options under the
Esprit Telecom Share Option Schemes);
(ii) recommended, declared, paid or made or proposed to recommend,
declare, pay or make any bonus, dividend or other distribution;
(iii) otherwise than in the ordinary course of business merged with
any body corporate or acquired or disposed of, or transferred, mortgaged
or charged or created any security interest over, any assets or any
right, title or interest in any asset (including shares and trade
investments), or authorized, proposed or announced any intention to
propose any merger, demerger, acquisition, disposal, transfer, mortgage,
charge or security interest but only if, in the case of a member of the
Wider Esprit Telecom Group which is not a member of the Esprit Telecom
Group in each such case to the extent material;
(iv) issued, authorized or proposed the issue of any debentures or
incurred or increased any indebtedness or contingent liability in any
case to an extent which is material in the context of the Esprit Telecom
Group, taken as a whole and not in the ordinary course of business as
presently carried on;
(v) purchased, redeemed or repaid or announced any proposal to
purchase, redeem or repay any of its own shares or other securities or
redeemed or reduced or made any other change to any part of its share
capital in any case to an extent which is material in the context of the
Esprit Telecom Group, taken as a whole;
(vi) entered into, or varied, or authorized, proposed or announced
its intention to enter into or vary any contract, transaction,
arrangement or commitment (whether in respect of capital expenditure or
otherwise) which is of a long-term, onerous or unusual nature or
magnitude and not in the ordinary course of business as presently
carried on, or which involves or could involve an obligation of a nature
or magnitude which, in any case, is material in the context of the
Esprit Telecom Group, taken as a whole;
(vii) implemented, authorized, proposed or announced its intention
to implement or enter into any reconstruction, amalgamation, commitment,
scheme or other transaction or arrangement otherwise than in the
ordinary course of business;
(viii) entered into or made an offer (which remains open for
acceptance) to enter into or vary the terms of any service agreement or
any other agreement or arrangement with any directors or senior
executives or any connected person of any of such person (within the
meaning of section 346 Companies Act 1985);
(ix) waived or compromised any claim which is material in the
context of the Esprit Telecom Group other than in the ordinary course of
business;
(x) proposed any voluntary winding up;
(xi) made or authorized or proposed or announced an intention to
propose any change in its share or loan capital to an extent which is
material in the context of the Esprit Telecom Group, taken as a whole;
(xii) entered into any contract, transaction or arrangement which
is or is likely to be restrictive in a material respect on the business
of any member of the Wider GTS Group or the Wider Esprit Telecom Group;
(xiii) made any material alteration to its Memorandum or Articles
of Association or other incorporation documents; or
(xiv) entered into or made an offer (which remains open for
acceptance) to enter into an agreement or commitment or passed any
resolution or announced or made any proposal with respect to any of the
transactions or events referred to in this condition (H):
A-4
<PAGE> 359
(I) prior to the date when the Offer would otherwise become
unconditional:
(i) there having been no adverse change in the business, assets,
financial or trading position or profits or prospects of any member of
the Wider Esprit Telecom Group to an extent which is material in the
context of the Esprit Telecom Group taken as a whole;
(ii) there not having been instituted or remaining outstanding any
litigation, arbitration proceedings, prosecution or other legal
proceedings to which any member of the Wider Esprit Telecom Group is a
party (whether as plaintiff or defendant or otherwise) and no such
proceedings having been announced or threatened against any such member
and no investigation by any government or governmental,
quasi-governmental, supranational, statutory, regulatory or
investigative body, authority or court (including any anti-trust or
merger control authority) against or in respect of any such member or
the business carried on by any such member having been threatened,
announced, instituted or remaining outstanding by, against or in respect
of any such member and the effect of which is or is likely to be
material in the context of the Esprit Telecom Group, taken as a whole;
(iii) there having been no receiver, administrative receiver or
other similar officer appointed over any of the assets of any member of
the Wider Esprit Telecom Group or any analogous proceedings or steps
having taken place under the laws of any jurisdiction and there having
been no petition presented for the administration of any member of the
Wider Esprit Telecom Group or any analogous proceedings or steps taken
place under the laws of any jurisdiction; and
(iv) no contingent or other liability having arisen or having been
incurred which would or might reasonably be expected adversely to affect
any member of the Wider Esprit Telecom Group to an extent which is
material in the context of the Esprit Telecom Group, taken as a whole;
(J) neither GTS nor its advisers having discovered prior to the date
when the Offer would otherwise become unconditional that:
(i) any financial, business or other information concerning Esprit
Telecom or the Wider Esprit Telecom Group publicly disclosed at any time
is misleading in any material respect, contains a material
misrepresentation of fact or omits to state a fact necessary to make the
information contained therein not materially misleading; or
(ii) any member of the Wider Esprit Telecom Group is subject to any
liability, contingent (for the purposes of UK GAAP) or otherwise which
is not disclosed in the audited accounts of Esprit Telecom for the
financial year ended on that date and is material in the context of the
Esprit Telecom Group taken as a whole and which should have been so
disclosed in accordance with UK GAAP;
(iii) any member of the Wider Esprit Telecom Group has not complied
with all applicable legislation or regulation of any jurisdiction which
has an impact which is material in the context of the Esprit Telecom
Group; and
(K) GTS not having discovered prior to the date when the Offer would
otherwise become unconditional that:
(i) any member of the Wider Esprit Telecom Group has not complied
with all applicable legislation or regulations of any jurisdiction
relating to environmental matters, or that there has been any disposal,
discharge, spillage, leak, or emission from any land or other asset now
or previously owned, occupied or made use of by any past or present
member of the Wider Esprit Telecom Group which would be likely to give
rise to any material liability (whether actual or contingent) on the
part of any member of the Wider Esprit Telecom Group which is material
in the context of the Esprit Telecom Group taken as a whole;
A-5
<PAGE> 360
(ii) there is, or is reasonably expected to be, any material
liability taken in the context of the Esprit Telecom Group taken as a
whole (whether actual or contingent) to make good, repair, reinstate or
clean up any property now or previously owned, occupied or made use of
by any past or present member of the Wider Esprit Telecom Group or in
which any such member may now or previously had an interest.
GTS reserves the right to waive, in whole or in part, all or any of
conditions (E) to (K) inclusive.
GTS also reserves the right, subject to the consent of the Panel, to extend
the time allowed under the City Code for satisfaction of condition (A) until
such time as conditions (E) to (K) inclusive have been satisfied or, to the
extent permitted, waived. GTS shall be under no obligation to waive or treat as
satisfied any of conditions (E) to (K) (inclusive) by a date earlier than the
latest date specified above for the satisfaction thereof notwithstanding that
the other conditions of the Offer may at such earlier date have been waived or
fulfilled or satisfied and that there are at such earlier date no circumstances
indicating that any of such conditions may not be capable of fulfilment or
satisfaction.
If GTS is required by the Panel to make an offer for Esprit Telecom
Securities under the provisions of Rule 9 of the City Code, GTS may make such
alterations to the terms and conditions of the Offer, including condition (A),
as are necessary to comply with the provisions of that Rule.
The Offer will lapse if the proposed acquisition of Esprit Telecom by GTS,
or any matter arising therefrom, is referred to the Monopolies and Mergers
Commission before the Initial Closing Date.
3. CERTAIN FURTHER TERMS OF THE OFFER
A registration statement relating to the New GTS Stock to be offered in the
Offer has been filed with the US Securities and Exchange Commission and such
securities may not be offered or sold nor may the Offer be accepted in the
United States or by US persons prior to the time such registration statement
becomes effective. The Offer will be made only by means of formal offer
documentation, which in the US will include a prospectus.
PART B -- FURTHER TERMS OF THE OFFER
Unless the context otherwise requires, any reference in Parts B or C of
this Annex A and in the Acceptance Form:
(i) to the "Offer" shall include any revision, variation, renewal
or extension thereto;
(ii) to the "Offer becoming unconditional" shall include references
to the Offer becoming or being declared unconditional;
(iii) to "acceptances of the Offer" shall include deemed
acceptances of the Offer; and
(iv) to the "Offer Period" means, in relation to the Offer, the
period commencing on December 8, 1998 until the latest of:
(a) the date when the Offer lapses; and
(b) the date when the Offer becomes or is declared unconditional
in all respects.
1. ACCEPTANCE PERIOD
(a) The Offer will initially be open for acceptance until 3:00 p.m.
(London time), 10:00 a.m. (New York City time) on March 4, 1999. Although
no revision is envisaged, if the Offer is revised it will remain open for
acceptance for a period of at least 14 days (or such other period as the
Panel may permit) from the date on which written notification of the
revision is posted to holders of Esprit Telecom Securities. Except with the
Panel's consent, no revision of the Offer may be made or posted after March
19, 1999.
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<PAGE> 361
(b) The Offer, whether revised or not, shall not (except with the
Panel's consent) be capable of becoming unconditional after midnight on
April 2, 1999 (or any earlier time and/or date beyond which GTS has stated
that the Offer will not be extended unless GTS has, where permitted,
withdrawn that statement or extended the Offer beyond the stated earlier
date), nor of being kept open for acceptance after the time and date unless
it has previously become unconditional, provided that GTS reserves the
right, with the Panel's consent, to extend the Offer to a later time(s)
and/or date(s). Except with the Panel's consent, GTS may not, for the
purpose of determining whether the Acceptance Condition has been satisfied,
take into account acceptances received or purchases of Esprit Telecom
Securities made after 1:00 p.m. (London time), 8:00 a.m. (New York City
time) on April 2, 1999 (or any earlier time and/or date beyond which GTS
has stated that the Offer will not be extended unless, where permitted, it
has withdrawn that statement or extended the Offer beyond the stated
earlier date) or, if the Offer is so extended, any such later time(s)
and/or date(s) as may be agreed with the Panel. If the latest time at which
the Offer may become unconditional is extended beyond midnight on April 2,
1999, acceptances received and purchases of Esprit Telecom Securities made
in respect of which relevant documents are received by the Receiving Agent
or the US Depositary after 1:00 p.m. (London time), 8:00 a.m. (New York
City time) on April 2, 1999 may (except where the City Code otherwise
permits) only be taken into account with the Panel's agreement.
(c) If the Offer becomes unconditional, it will remain open for
acceptance for not less than 14 days from the date on which it would
otherwise have expired. If the Offer has become unconditional and it is
stated by or on behalf of GTS that the Offer will remain open until further
notice, then not less than 14 days' notice in writing will be given, before
closing the Offer, to those holders of Esprit Telecom Securities who have
not accepted the Offer.
(d) If a competitive situation arises after GTS has made a "no
extension" statement and/or a "no increase" statement in relation to the
Offer, GTS may, if it specifically reserved the right to do so at the time
such statement was made, or otherwise with the Panel's consent, withdraw
that statement and extend or revise the Offer (as appropriate) provided
that it complies with the requirements of the City Code and, in particular,
that it announces such withdrawal and that it is free to extend or revise
the Offer (as appropriate) as soon as possible (and in any event within
four Business Days of the firm announcement of the competing offer or other
competitive situation) and holders of Esprit Telecom Securities are
informed in writing at the earliest practicable opportunity or, in the case
of holders of Esprit Telecom Securities with registered addresses outside
the UK or whom GTS and Bear Stearns knows to be a nominee, trustee or
custodian holding Esprit Telecom Securities for such persons, by
announcement in the United Kingdom and the United States.
GTS may, if it has reserved the right to do so, choose not to be bound
by a "no increase" or a "no extension" statement if it would otherwise
prevent the publication of an increased or improved offer (either as to the
value or nature of the consideration offered or otherwise) which is
recommended for acceptance by the Board of Directors of Esprit Telecom or
in other circumstances permitted by the Panel.
(e) For the purpose of determining at any particular time whether the
Acceptance Condition has been satisfied, GTS shall be entitled to take
account only of those Esprit Telecom Securities carrying voting rights
which have been unconditionally allotted or issued before that time and
written notice of allotment or issue of which, containing all the relevant
details, has been received from Esprit Telecom or its agents before that
time by the Receiving Agents or the US Depositary at the respective
addresses specified in paragraph 3(b) of this Part B. Telex, e-mail or
facsimile transmission will not be sufficient.
(f) In accordance with an SEC exemptive order received by GTS, at
least five US Business Days prior to any reduction in that percentage of
Esprit Telecom Securities (including Esprit Telecom Ordinary Shares
represented by Esprit Telecom ADSs) required to satisfy the Acceptance
Condition, GTS will announce that it will reduce the Acceptance Condition.
GTS will not make such an announcement unless GTS believes there is a
significant possibility that sufficient Esprit Telecom Securities
(including Esprit Telecom Ordinary Shares represented by Esprit Telecom
ADSs) will be assented to the Offer to permit the Acceptance Condition to
be satisfied at such reduced level. Holders of
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Esprit Telecom Securities who are not willing to accept the Offer if the
Acceptance Condition is reduced to the minimum permitted level should
either not accept the Offer until the Subsequent Offer Period or be
prepared to withdraw their acceptance promptly following an announcement by
GTS of its reservation of the right to reduce the Acceptance Condition.
2. ANNOUNCEMENTS
(a) Subject to the "Rights of Withdrawal" section below, by 8:30 a.m.
(London time) in the UK and 8:30 a.m. (New York City time) in the US on the
Business Day next following the day on which the Offer is due to expire or
becomes unconditional or is revised or extended (the "relevant day"), as
the case may be (or such later time(s) and/or date(s) as the Panel may
agree), GTS will make an appropriate announcement and inform Nasdaq and
EASDAQ, respectively, of the position. Such announcements will also state
(unless otherwise permitted by the Panel) the total number of Esprit
Telecom Securities and rights over Esprit Telecom Securities (as nearly as
practicable):
(i) for which acceptances of the Offer have been received;
(ii) acquired or agreed to be acquired by or on behalf of GTS or
any person acting in concert with it during the course of the Offer
Period;
(iii) held by or on behalf of GTS or any person acting in concert
with it before the Offer Period;
(iv) for which acceptances of the Offer have been received from any
person acting in concert with GTS, and will specify the percentages of
the Esprit Telecom Securities represented by each of these figures.
(b) Any decision to extend the time and/or date by which the
Acceptance Condition has to be fulfilled may be made at any time up to, and
will be announced not later than, 8:30 a.m. (London time) in the UK and
8:30 a.m. (New York City time) in the US on the relevant day (as defined in
paragraph 2(a) of this Part B) or such later time(s) and/or date(s) as the
Panel may agree. The announcement will state the next expiry date unless
the Offer is then unconditional, in which case a statement may instead be
made that the Offer will remain open until further notice. In computing the
number of Esprit Telecom Securities represented by acceptances and/or
purchases, there may be included or excluded for announcement purposes
acceptances and purchases which are not complete in all respects or which
are subject to verification, save that those which could not be counted
towards fulfilment of the Acceptance Condition under Notes 4 and 5 (and, if
applicable, Note 6) of Rule 10 of the City Code shall not (unless agreed by
the Panel) be included.
(c) In this Annex A, references to the making of an announcement or
the giving of notice by or on behalf of GTS include the release of an
announcement by public relations consultants or by Bear Stearns to the
press and the delivery by hand or telephone or telex or facsimile or other
electronic transmission of an announcement to Nasdaq and EASDAQ, as the
case may be. An announcement made otherwise to Nasdaq and EASDAQ shall be
notified simultaneously to Nasdaq and EASDAQ (unless otherwise agreed by
the Panel).
(d) Without limiting the manner in which GTS may choose to make any
public announcement and subject to GTS's obligations under applicable law
(including Rules 14d-4(c) and 14d-6(d) under the Exchange Act relating to
GTS's obligations to disseminate promptly public announcements concerning
material changes to the Offer), GTS will have no obligation to publish,
advertise or otherwise communicate any such public announcement other than
by making a release to Nasdaq and EASDAQ.
3. RIGHTS OF WITHDRAWAL
(a) Except as otherwise provided in the paragraph, acceptances of the
Offer by holders of Esprit Telecom Securities are irrevocable. Acceptances
of the Offer may, however, be withdrawn pursuant to the procedures set out
below at any time during the Initial Offer Period and in certain other
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circumstances described below. Esprit Telecom Securities assented to the
Offer during the Initial Offer Period and not validly withdrawn prior to
the expiration of the Initial Offer Period, and Esprit Telecom Securities
assented to the Offer during the Subsequent Offer Period, may not be
withdrawn. Holders of Esprit Telecom Securities will not have withdrawal
rights during the Subsequent Offer Period, except in certain limited
circumstances described below.
(b) If GTS, having announced that the Acceptance Condition has been
satisfied, fails by 3:30 p.m. (London time), 10:30 a.m. (New York City
time) on the relevant day (or such later time or date as the Panel may
agree) to comply with any of the relevant requirements relating to the
Offer specified in paragraph 2(a) of this Part B of Annex A, an accepting
holder of Esprit Telecom Securities may immediately after that time
withdraw his acceptance of the Offer by written notice given by post or by
hand to the Receiving Agents or to the US Depositary at one of the
addresses shown on the back cover to this document, in each case receiving
such notice on behalf of GTS. This right of withdrawal may be terminated
not less than eight days after the relevant day by GTS confirming, if that
be the case, that the Offer is still unconditional and complying with the
other relevant requirements relating to the Offer specified in paragraph
2(a) of this Part B of Annex A. If any such confirmation is given, the
first period of 14 days referred to in paragraph 1(c) of this Part B of
Annex A will run from the date of that confirmation and compliance.
(c) If a no extension and/or a no increase statement is withdrawn in
accordance with paragraph 1(d) of this Part B of Annex A above, any
acceptance of the Offer made after the date of that statement may be
withdrawn thereafter in the manner referred to in paragraph 3(b) of this
Part B of Annex A, for a period of eight days following the date on which
the notice of the withdrawal of such statement is posted to holders of
Esprit Telecom Securities.
(d) To be effective, a written notice of withdrawal must be received
in good time by the party (either the Receiving Agents or the US
Depositary) to whom the Acceptance Form was originally sent and must
specify the name of the person who accepted the Offer, the number of Esprit
Telecom Securities to be withdrawn and (if certificates have been
submitted) the name of the registered holder of the relevant Esprit Telecom
Securities, if different from the name of the person who accepted the Offer
in respect of such Esprit Telecom Securities.
(e) In respect of Esprit Telecom ADSs, if Esprit Telecom ADRs have
been delivered or otherwise identified to the US Depositary or the Belgian
Receiving Agent (where applicable), then prior to the physical release of
such Esprit Telecom ADRs, the serial numbers shown on such Esprit Telecom
ADRs must be submitted and, unless the Esprit Telecom ADSs evidenced by
such Esprit Telecom ADRs have been submitted by an Eligible Institution or
by means of a Letter of Transmittal, the signatures on the notice of
withdrawal must be guaranteed by an Eligible Institution. If interests in
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs have been delivered
pursuant to the procedures for book-entry transfer (See "Procedures for
Accepting the Offer -- Holders of Esprit Telecom ADSs -- Book-entry
transfer" (page 75)) of this Offering Circular/Proxy Statement/Prospectus,
any notice of withdrawal must also specify the name and number of the
account at the appropriate Book-Entry Transfer Facility to be credited with
the withdrawn Esprit Telecom ADSs and must otherwise comply with such
Book-Entry Transfer Facility's procedures.
(f) Withdrawals of Esprit Telecom Securities delivered pursuant to the
Offer may not be rescinded (without GTS's consent) and any Esprit Telecom
Securities properly withdrawn and not properly re-submitted will thereafter
be deemed not validly delivered pursuant to the Offer. Withdrawn Esprit
Telecom Securities may be subsequently re-submitted, however, by following
one of the procedures described (See "-- Procedures for Accepting the
Offer -- All Holders of Esprit Telecom Securities" (page 72)) of this
Offering Circular/Proxy Statement/Prospectus at any time while the Offer
remains open.
(g) All questions as to the validity (including time of receipt) or
any notice of withdrawal will be determined by GTS, whose determination
(except as required by the Panel) will be final and binding. None of GTS,
Esprit Telecom, Bear Stearns, the Receiving Agents, the US Depositary or
any other
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person will be under any duty to give notification of any defects or
irregularities in any notice of withdrawal or incur any liability for
failure to give such notification.
4. REVISED OFFER
(a) Currently, there are no plans to revise the Offer. However, if the
Offer (in its original or any previously revised form(s)) is revised
(either in its terms and conditions or in the value or nature of the
consideration offered or otherwise) and such revision represents on the
date on which such revision is announced (on such basis as Bear Stearns may
consider appropriate) an improvement or no diminution in the value of the
Offer as so revised compared with the consideration or terms previously
offered or in the overall value received and/or retained by a holder of
Esprit Telecom Securities (under the Offer or otherwise), the benefit of
the revised Offer will, subject to paragraphs 4(c), 4(d) and 7 of this Part
B, be made available to any holder of Esprit Telecom Securities who has
accepted the Offer in its original or any previously revised form(s)
(hereinafter called a "previous acceptor"). The acceptance of the Offer by
or on behalf of a previous acceptor in its original or any previously
revised form(s) shall, subject as provided in paragraphs 4(c), 4(d) and 7
of this Part B, be treated as an acceptance of the Offer as so revised and
shall also constitute the separate appointment of GTS and each of its
directors and Bear Stearns and each of its directors as his attorney and/or
agent with authority (i) to accept any such revised offer on behalf of such
previous acceptor, (ii) if such revised offer includes alternative forms of
consideration, to make such elections for and/or accept such alternative
forms of consideration in the proportions such attorney and/or agent in his
absolute discretion thinks fit, and (iii) to execute on behalf of an in the
name of such previous acceptor all such further documents (if any) as may
be required to give effect to such acceptances and/or elections.
In making any such election and/or acceptance, such attorney and/or agent
shall take into account the nature of any previous acceptances and/or
elections made by or on behalf of the previous acceptor and such other
facts or matters as he may reasonably consider relevant.
(b) The authorities conferred by this paragraph 4 and any acceptance
of a revised offer and/or any election(s) pursuant thereto shall be
irrevocable unless and until the previous acceptor becomes entitled to
withdraw his acceptance under paragraph 3 of this Part B and duly does so.
(c) The deemed acceptance referred to in paragraph 4(a) of this Part B
shall not apply, and the authorities conferred by that paragraph shall be
ineffective, to the extent that a previous acceptor shall file with the
Receiving Agents or the US Depositary, within 14 days of the publication of
the document containing the revised offer, a form in which he validly
elects to receive the consideration receivable by him in some other manner.
(d) The deemed acceptance referred to in paragraph 4(a) of this Part B
shall not apply, and the authorities conferred by that paragraph shall not
be exercised if as a result thereof the previous acceptor would (on such
basis as Bear Stearns may consider appropriate) thereby receive less in
aggregate in consideration under the revised offer than he would have
received in aggregate as a result of acceptance of the Offer in the form in
which it was previously accepted by him or on his behalf. The authorities
conferred by paragraph 4(a) of this Part B shall not be exercised in
respect of any election available under the revised offer save in
accordance with this paragraph.
(e) GTS and Bear Stearns reserve the right to treat an executed
Acceptance Form (in respect of the Offer in its original or any previously
revised form(s)) which is received (or dated) on or after the announcement
of any revised offer as a valid acceptance of the revised offer and/or,
where applicable, a valid election for or acceptance of any of the
alternative forms of consideration. Such acceptances shall constitute an
authority in the terms of paragraph 4(a) of this Part B, mutatis mutandis,
on behalf of the relevant holder of Esprit Telecom Securities.
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5. ACCEPTANCES AND PURCHASES
Except as otherwise agreed by the Panel:
(a) an acceptance of the Offer shall not be treated as valid for the
purposes of the Acceptance Condition unless the requirements of Note 4 and,
if applicable, Note 6 of Rule 10 of the City Code are satisfied in respect
of it;
(b) an exchange of Esprit Telecom Securities by GTS or its nominees
or, in the case of a Rule 9 offer, any person acting in concert with GTS or
its nominee will only be treated as valid for the purposes of the
Acceptance Condition if the requirements of Note 5 and, if applicable, Note
6 of Rule 10 of the City Code are satisfied in respect of it; and
(c) before the Offer may become unconditional, the UK Receiving Agent
must have issued a certificate to GTS and/or to Bear Stearns which states
the number of Esprit Telecom Securities in respect of which acceptances
have been received and which comply with paragraph 5(a) of this Part B, and
the number of Esprit Telecom Securities otherwise acquired, whether before
or during the Offer Period, which comply with paragraph 5(b) of this Part
B. Copies of such certificate will be sent to the Panel and to Lehman
Brothers as soon as possible after issue.
6. GENERAL
(a) Subject to the Panel's consent, the Offer will lapse unless all of
the Conditions have been satisfied or (if capable of waiver) waived or,
where appropriate, have been determined by GTS in its reasonable opinion to
be or remain satisfied in each case by midnight (London time) on April 2,
1999 or such later date(s) as GTS may, with the Panel's consent, decide.
GTS reserves the right, if appropriate to seek the Panel's approval to
extend such date to April 23, 1999 or such later date as the Panel may
permit. If the Offer lapses for any reason, then it shall cease to be
capable of further acceptance and GTS, Bear Stearns and holders of Esprit
Telecom Ordinary Shares shall cease to be bound by prior acceptances.
If the Offer lapses pursuant to the City Code, neither GTS nor any person
acting in concert with GTS (for purposes of the City Code) may make an
offer for Esprit Telecom for a period of one year following such lapse,
except with the consent of the Panel.
(b) Unless otherwise consented to by the Panel, settlement of the
consideration to which any holder of Esprit Telecom Securities is entitled
under the Offer will be implemented in full in accordance with the terms of
the Offer without regard to any lien, right of set-off, counterclaim or
other analogous right to which GTS or Bear Stearns may otherwise be, or
claim to be, entitled as against such holder of Esprit Telecom Securities
and will be effected in the manner described See "-- Settlement" (page 78)
of this Offering Circular/Proxy Statement/Prospectus.
(c) The Offer is made on February 2, 1999 and is capable of acceptance
thereafter. The Offer is being made by means of this
Offering/Circular/Proxy Statements/Prospectus and is being extended by
means of an advertisement to be placed in the UK Financial Times on
February 3, 1999, the Wall Street Journal on February 2, 1999 and the
Belgian Financieel Eckonomische Tijd on February 3, 1999 to all persons to
whom this document or an Acceptance Form may not be despatched (or by whom
such documents may not be received) who hold or are entitled to have
allotted or issued to them Esprit Telecom Securities. Copies of this
Offering Circular/Proxy Statement/Prospectus, the Acceptance Form and any
related documents are available from the Receiving Agents and the US
Depositary, at the addresses set out on the back cover of this document.
(d) The terms, provisions, instructions and authorities contained in
or deemed to be incorporated in the Acceptance Form constitute part of the
terms of the Offer. Words and expressions defined in this Offering
Circular/Proxy Statement/Prospectus have the same meanings when used in the
Acceptance Form, unless the context otherwise requires.
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(e) (i) The Offer, all acceptances of it and all elections pursuant to
it, the Acceptance Form, all contracts made pursuant to the Offer, all
action taken or made or deemed to be taken or made pursuant to any of
these terms and the relationship between a holder of Esprit Telecom
Securities and GTS, Bear Stearns, the Receiving Agents or the US
Depositary shall be governed by and interpreted in accordance with
English law.
(ii) Execution of an Acceptance Form by or on behalf of a holder of
Esprit Telecom Securities will constitute his agreement that the Courts
of England are (subject to paragraph 6(e)(iii) of this Part B) to have
jurisdiction to settle any dispute which may arise in connection with
the creation, validity, effect, interpretation or performance of, or the
legal relationships established by, the Offer and the Acceptance Form or
otherwise arising in connection with the Offer and the Acceptance Form,
and for such purposes that he irrevocably submits to the jurisdiction of
the English Courts.
(iii) Execution of the Acceptance Form by or on behalf of an
accepting holder of Esprit Telecom Securities will constitute his
agreement that the agreement in paragraph 6(e)(ii) of this Part B is
included for the benefit of GTS, Bear Stearns, the Receiving Agents and
the US Depositary and accordingly, notwithstanding such agreement, set
out in paragraph 6(e)(ii) of this Part B, GTS, Bear Stearns, the
Receiving Agents and the US Depositary shall each retain the right to,
and may in its absolute discretion, bring proceedings in the courts of
any other country which may have jurisdiction and that the accepting
holder of Esprit Telecom Securities irrevocably submits to the
jurisdiction of the courts of any such country.
(f) Any omission to dispatch this document or the Acceptance Form or
any notice required to be dispatched under the terms of the Offer to, or
any failure to receive the same by, any person to whom the Offer is made,
or should be made, shall not invalidate the Offer in any way or create any
implication that the Offer has not been made to any such person. Subject to
paragraph 7 of this Part B, the Offer extends to any such person and to all
holders of Esprit Telecom Securities to whom this document, the Acceptance
Form and any related documents may not be despatched and who may not
receive such documents, and such persons may collect copies of those
documents from the Receiving Agents at the addresses set out on the back
cover of this document.
(g) If the Offer lapses:
(i) the share or ADR certificate(s) and/or other document(s) of
title will be returned by post (or by such other method as the Panel may
approve) within 14 days of the Offer lapsing, at the risk of the holder
of Esprit Telecom Securities concerned, to the person or agent whose
name and address (outside Canada, Australia or Japan) is set out in the
relevant Box of the Acceptance Form or, if none is set out, to the
first-named holder at his registered address; and
(ii) in respect of Esprit Telecom ADRs in book-entry form, the US
Depositary will return such Esprit Telecom ADRs to the tendering holders
unless otherwise instructed by such holder.
(h) All powers of attorney, appointments as agent and authorities on
the terms conferred by or referred to in this Annex A or in the Acceptance
Form are given by way of security for the performance of the obligations of
the holder of Esprit Telecom Securities concerned and are irrevocable (in
respect of powers of attorney in accordance with Section 4 of the Powers of
Attorney Act 1971) except in the circumstances where the donor of such
power of attorney, appointment or authority is entitled to withdraw his
acceptance in accordance with paragraph 3 of this Part B and duly does so.
(i) Without prejudice to any other provisions of this Part B, GTS and
Bear Stearns reserve the right to treat acceptances of the Offer as valid
if received by or on behalf of either of them at any place or places or in
any manner determined by either of them otherwise than as set out in this
document or in the Acceptance Form.
(j) All communications, notices, certificates, documents of title and
remittances to be delivered by or sent to or from any holders of Esprit
Telecom Securities will be delivered by or sent to or from them (or their
designated agents) at their risk. No acknowledgment of receipt of any
Acceptance Form,
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communication, notice, share certificate(s) and/or other document(s) of
title will be given by or on behalf of GTS.
(k) GTS and Bear Stearns reserve the right to notify any matter
(including the making of the Offer) to allow any holders of Esprit Telecom
Securities with (i) registered addresses outside the UK, Belgium or the US
or (ii) whom GTS or Bear Stearns know to be nominees, trustees or
custodians for such holder of Esprit Telecom Securities with registered
addressed outside the UK, Belgium or the US by announcement or paid
advertisement in any daily newspaper published and circulated in the UK,
Belgium and the US or any part thereof, in which case such notice shall be
deemed to have been sufficiently given notwithstanding any failure by any
such security holders to receive or see such notice. All references in this
document to notice in writing (other than in paragraph 3 of this Part B)
shall be construed accordingly.
(l) If sufficient acceptances are received and/or sufficient Esprit
Telecom Securities are otherwise acquired, GTS intends to apply the
provisions of Sections 428 to 430F of the Companies Act to acquire
compulsorily any outstanding Esprit Telecom Ordinary Shares (including
Esprit Telecom Ordinary Shares represented by Esprit Telecom ADSs) and to
apply for the cancellation of the quotation of the Esprit Telecom ADSs on
Nasdaq and EASDAQ.
(m) Execution of an Acceptance Form will constitute an instruction to
GTS that, on the Offer becoming unconditional in all respects, all mandates
and other instructions or notices recorded in Esprit Telecom's records
immediately prior to the Offer becoming so unconditional in relation to
Esprit Telecom Securities will, unless and until revoked or varied,
continue in full force, mutatis mutandis, in relation to the New GTS Stock
allotted or issued to the relevant holders of Esprit Telecom Securities
pursuant to the Offer.
(n) If the Panel requires GTS to make an offer for Esprit Telecom
Securities under the provisions of Rule 9 of the City Code, GTS may make
such alterations to the Conditions of the Offer as are necessary to comply
with the provisions of that Rule.
(o) All references in this Annex A to any statute or statutory
provision shall include a statute or statutory provision which amends,
consolidates or replaces the same (whether before or after the date
hereof).
(p) Fractions of New GTS Stock will not be allotted or issued to
holders of Esprit Telecom Securities who accept the Offer (including such
holders who are deemed to accept the Offer) but will be aggregated and sold
in the market and the net proceeds of sale will not be paid to the persons
entitled thereto. However, if any person is entitled to cash in an amount
less than $2.00, such amount will not be paid, but will be retained for the
benefit of GTS.
7. OVERSEAS SHAREHOLDERS
(a) The making of the Offer in, or to persons resident in or nationals
of or citizens of, jurisdictions outside the UK and the US or who are
nominees of, custodians or trustees for, citizens or nationals of other
countries ("overseas shareholders") may be affected by the laws of the
relevant jurisdictions. Such overseas shareholders should inform themselves
about and observe any applicable legal requirements. It is the
responsibility of any overseas shareholder wishing to accept the Offer to
satisfy himself as to the full observance of the laws and regulatory
requirements of the relevant jurisdiction in connection with the Offer,
including obtaining any governmental, exchange control or other consents
which may be required, or compliance with other necessary formalities
needing to be observed and payment of any issue, transfer or other taxes or
duties due in such jurisdiction. Any such overseas shareholder will be
responsible for any such issue, transfer or other taxes or other payments
by whomsoever payable and GTS and Bear Stearns (and any person acting on
behalf of either of them) shall be fully indemnified and held harmless by
such shareholder for any such issue, transfer or other taxes or duties as
GTS or Bear Stearns (and any person acting on behalf of either of them) may
be required to pay.
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(b) In particular, the Offer is not being made, directly or
indirectly, in or into Canada, Australia or Japan. GTS will not (unless
otherwise determined by GTS in its sole discretion and save as provided in
paragraph 7(f) of this Part B), mail or deliver or authorize the mailing or
delivery of, this document, the Acceptance Form or any related document in
or into Canada, Australia or Japan including to holders of Esprit Telecom
Securities with registered addresses in Canada, Australia or Japan or to
persons whom GTS knows to be trustees, nominees or custodians holding
Esprit Telecom Securities for such persons ("Restricted Overseas Persons").
(c) Persons receiving such documents (including without limitation,
custodians, trustees and nominees) must not distribute, send or mail them,
directly or indirectly, in, into or from Canada, Australia or Japan or use
such mails or any such means or instrumentality or facility for any
purpose, directly or indirectly, in connection with the Offer. Doing so may
invalidate any purported acceptance of the Offer. Persons wishing to accept
the Offer must not use such mails or any such means of instrumentality or
facility directly or indirectly for any purpose directly or indirectly
related to acceptance of the Offer.
(d) Envelopes containing the Acceptance Form should not be postmarked
in Canada, Australia or Japan or otherwise despatched from Canada,
Australia or Japan and all accepting holders of Esprit Telecom Securities
must provide addresses outside Canada, Australia or Japan for the
remittance of cash and/or receipt of New GTS Stock or for the return of the
Acceptance Form, share or ADR certificates and/or other document(s) of
title.
(e) Unless an exemption under the relevant securities laws is
available, GTS will not issue New GTS Stock or authorize the delivery of
any document(s) of title in respect of New GTS stock to: (i) any person who
is or who GTS has reason to believe is, a Restricted Overseas Person; or
(ii) any person who is unable or fails to give the warranty set out in
paragraph (b) of Part C; or to any person with a registered address in
Canada, Australia or Japan.
(f) The receipt of any Form of Acceptance from a person who puts "Yes"
in Box 4 of the Form of Acceptance and thereby does not give the
representation and warranty set out in paragraph (b) of Part C of this
Annex A below and/or who appears to be a Restricted Overseas Person and/or
who completes Box 3 of the Form of Acceptance with an address in Canada,
Australia or Japan (or who has an address in Canada, Australia or Japan)
but who inserts in Box 5 of the Form of Acceptance an address outside
Canada, Australia or Japan shall, at the discretion of GTS constitute, in
respect of any New GTS Stock to which such acceptor of the Offer may become
entitled, an irrevocable and unconditional request and authority to GTS
and/or its agents:
(i) to sell such New GTS Stock on behalf of such acceptor (and as
its agent) in the market within 14 days of such shares being allotted;
(ii) to receive the share certificates and/or other document(s) of
title in respect of such New GTS Stock and to execute instruments of
transfer in respect of such new securities; and
(iii) to remit the net proceeds of such sale (after deducting
therefrom the expenses of sale) as soon as reasonably practicable to the
person or agent whose name and address (outside Canada, Australia and
Japan) is set out in Box 5 of the Form of Acceptance, or, if none is set
out, to the first-named registered holder in Box 3 of such Form of
Acceptance with a registered address outside Canada, Australia and
Japan. No consideration will be sent to an address in Canada, Australia
or Japan.
Neither GTS nor its advisers nor any person acting on behalf of any of them
shall have any liability to any person for any loss or alleged loss arising
from the price, the timing or the manner of such sale or otherwise in
connection with such sale or any of the provisions of this paragraph 7.
(g) Each holder of Esprit Telecom ADSs executing and delivering a
Letter of Transmittal will represent and warrant that such holder: (i) has
not received or sent copies of the Offering Circular/Proxy
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Statement/Prospectus or any Acceptance Form or any related documents in,
into or from Canada, Australia or Japan and has not otherwise utilized in
connection with the Offer, directly or indirectly, the Canadian, Australian
or Japanese mails or any means or instrumentality (including, without
limitation, facsimile transmission, telex, and telephone) of interstate or
foreign commerce, or any facilities of a national securities exchange, of
Canada, Australia or Japan; (ii) is accepting the Offer from outside
Canada, Australia and Japan; and (iii) is not an agent or fiduciary acting
on a non discretionary basis for a principal, unless such agent or
fiduciary is an authorized employee of such principal or such principal has
given any instructions with respect to the Offer from outside Canada,
Australia and Japan.
(h) These provisions and any other terms of the Offer relating to
overseas shareholders may be waived, varied or modified as regards specific
holders of Esprit Telecom Securities or on a general basis by GTS in its
absolute discretion. Subject thereto, the provisions of this paragraph 7
supersede any terms of the Offer inconsistent with them. References in this
paragraph 7 to a holder of Esprit Telecom Securities include references to
the person or persons executing an Acceptance Form and, if more than one
person executes the Acceptance Form, the provisions of this paragraph 7
shall apply to them jointly and severally.
PART C -- FORM OF ACCEPTANCE
Each holder of Esprit Telecom Ordinary Shares by whom, or on whose behalf,
a Form of Acceptance is executed irrevocably undertakes, represents, warrants
and agrees to and with GTS, Bear Stearns and the Receiving Agent (so as to bind
him, his personal representatives, heirs, successors and assigns) to the
following effect:
(a) that the execution of the Form of Acceptance whether or not any
Boxes are completed shall constitute an acceptance of the Offer in respect
of the number of Esprit Telecom Ordinary Shares inserted or deemed to be
inserted in Box 1 of the Form of Acceptance on and subject to the terms and
Conditions set out or referred to in this Offering Circular/Proxy
Statement/Prospectus and in the Form of Acceptance and that, subject only
to the rights of withdrawal set out or referred to in paragraph 3 of Part B
of this Annex A, each such acceptance and election shall be irrevocable;
(b) unless "YES" is put in Box 4 of the Form of Acceptance, that such
holder of Esprit Telecom Ordinary Shares has not received or sent copies of
this Offering Circular/Proxy Statement/Prospectus, the Form of Acceptance
or any related documents in, into or from Canada, Australia or Japan;
(c) that the execution of the Form of Acceptance constitutes, subject
to the Offer becoming unconditional in all respects in accordance with its
terms and to an accepting holder of Esprit Telecom Ordinary Shares not
having validly withdrawn his acceptance, the irrevocable appointment of GTS
and/or Bear Stearns as such shareholder's attorney and/or agent (the
"attorney") and an irrevocable instruction and authorization to the
attorney:
(i) to complete and execute all or any form(s) of transfer and/or
other document(s) at the discretion of the attorney in relation to the
Esprit Telecom Ordinary Shares referred to in paragraph (a) of this Part
C in favor of GTS or such other person or persons as GTS or its agents
may direct;
(ii) to deliver such form(s) of transfer and/or other document(s)
in the attorney's discretion and/or the certificate(s) and/or other
document(s) of title relating to such Esprit Telecom Ordinary Shares for
registration within 6 months of the Offer becoming or being declared
unconditional in all respects; and
(iii) to do all such other acts and things as may in the attorney's
opinion be necessary or expedient for the purpose of, or in connection
with, the acceptance of the Offer and to vest the Esprit Telecom
Ordinary Shares in GTS or its nominee;
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(d) that the execution of the Form of Acceptance constitutes, subject
to the Offer becoming or being declared unconditional in all respects and
to an accepting holder of Esprit Telecom Ordinary Shares not having validly
withdrawn his acceptance, an irrevocable authority and request:
(i) to Esprit Telecom or its agents to procure the registration of
the transfer of the Esprit Telecom Ordinary Shares pursuant to the Offer
and the delivery of the share certificate(s) and/or other document(s) of
title in respect of the Esprit Telecom Ordinary Shares to GTS or as it
may direct;
(ii) subject to the provisions of paragraph 7 of Part B of this
Annex A, to GTS and Bear Stearns or their respective agents to procure
that the name of such holder of Esprit Telecom Ordinary Shares is
entered in the register of members in respect of the New GTS Stock to
which he becomes entitled pursuant to the Offer and to procure the issue
of a definitive certificate of title for such New GTS Stock; and
(iii) to GTS and Bear Stearns or their respective agents to procure
that despatch by post (or by such other method as the Panel may approve)
of the document(s) of title for any New GTS Stock to which an accepting
holder of Esprit Telecom Ordinary Shares is entitled, at the risk of
such holder of Esprit Telecom Ordinary Shares, to the person or agent
whose name and address outside Canada, Australia and Japan is set out in
Box 3 of the Form of Acceptance (or, if relevant, Box 5, or if no name
and address is set out in Box 3 (or, if relevant, Box 5), to the
first-named registered holder at his registered address outside Canada,
Australia or Japan;
(e) that the execution of the Form of Acceptance and its delivery
constitutes a separate authority to GTS and/or Bear Stearns and/or their
respective directors within the terms of paragraphs 4 and 6 of Part B of
this Annex A;
(f) that, subject to the Offer becoming or being declared
unconditional in all respects (or if the Offer will become unconditional in
all respects or lapse immediately upon the outcome of the resolution in
question) or if the Panel otherwise consents and pending registration:
(i) GTS or its agents shall be entitled to direct the exercise of
any votes and any or all other rights and privileges (including the
right to requisition the convening of a general meeting of Esprit
Telecom or of any class of its shareholders) attaching to any Esprit
Telecom Ordinary Shares in respect of which the Offer has been accepted
or is deemed to have been accepted and not validly withdrawn; and
(ii) the execution of a Form of Acceptance by a holder of Esprit
Telecom Ordinary Shares in respect of the Esprit Telecom Ordinary Shares
comprised in such acceptance and in respect of which such acceptance has
not been validly withdrawn:
(aa) constitutes an authority to Esprit Telecom from such holder
of Esprit Telecom Ordinary Shares to send any notice, circular,
warrant, document or other communication which may be required to be
sent to him/her as a member of Esprit Telecom to GTS at its
registered office;
(bb) constitutes an authority to GTS or any director of GTS to
sign any consent to short notice of a general or separate class
meeting as his attorney and/or agent and on his behalf and/or to
attend and/or execute a form of proxy in respect of such Esprit
Telecom Ordinary Shares appointing any person nominated by GTS to
attend general and separate class meetings of Esprit Telecom (and any
adjournments thereof) and to exercise the votes attaching to such
shares on his behalf, where relevant, such votes to be cast so far as
possible to satisfy any outstanding condition of the Offer; and
(cc) will also constitute the agreement of such holder of Esprit
Telecom Ordinary Shares not to exercise any of such rights without
the consent of GTS and the irrevocable undertaking
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of such Esprit Telecom shareholder not to appoint a proxy to attend
any such general meeting or separate class meeting;
(g) that he will deliver or procure the delivery to the Receiving
Agents at either of the addresses referred to in paragraph 3(b) of Part B
of this Annex A of his share certificate(s) or other document(s) of title
in respect of all Esprit Telecom Ordinary Shares held by him in respect of
which the Offer has been accepted or is deemed to have been accepted and
not validly withdrawn, or an indemnity acceptable to GTS in lieu thereof,
as soon as possible and in any event within six months of the Offer
becoming or being declared unconditional in all respects;
(h) that he is the sole legal and beneficial owner of the Esprit
Telecom Ordinary Shares in respect of which the Offer is accepted or deemed
to be accepted or he is the legal owner of such Esprit Telecom Ordinary
Shares and he has the necessary capacity and authority to execute the Form
of Acceptance;
(i) that the Esprit Telecom Ordinary Shares in respect of which the
Offer is accepted or deemed to be accepted are sold fully paid up and free
from all liens, equities, charges, encumbrances and other third party
rights and/or interests and together with all rights now or hereafter
attaching thereto, including the right to receive and retain all dividends,
interests and other distributions (if any) declared, made or paid after
December 8, 1998;
(j) that the terms and conditions of the Offer contained in this
document shall be deemed to be incorporated in, and form part of, the Form
of Acceptance which shall be read and construed accordingly;
(k) that he will do all such acts and things as shall be necessary or
expedient to vest the Esprit Telecom Ordinary Shares in GTS or its
nominee(s) or such other persons as it may decide and all such acts and
things as may be necessary or expedient to enable the Receiving Agents to
perform their functions for the purposes of the Offer;
(l) that he agrees to ratify each and every act or thing which may be
done or effected by GTS or Bear Stearns or the Receiving Agents or any
director of GTS or any director of Bear Stearns or any director of the
Receiving Agents or their respective agents or Esprit Telecom or its
agents, as the case may be, in the exercise of any of his powers and/or
authorities under this document;
(m) that the execution of the Form of Acceptance constitutes his
agreement to the terms of paragraph 4(e) of Part B of this Annex A;
(n) that on execution the Form of Acceptance shall take effect as a
deed; and
(o) that if any provision of Part B or Part C of this Annex A shall be
unenforceable or invalid or shall not operate so as to afford GTS or Bear
Stearns or the Receiving Agents or any director of any of them the benefit
or authority expressed to be given therein, he shall with all practicable
speed do all such acts and things and execute all such documents as may be
required to enable GTS and/or Bear Stearns and/or the Receiving Agents
and/or any director of any of them to secure the full benefits of Part B
and this Part C of Annex A.
References in this Part C of Annex A to a holder of Esprit Telecom Shares shall
include references to the person or persons executing a Form of Acceptance, and
if more than one person executes a Form of Acceptance, the provisions of this
Part C shall apply to them jointly and severally.
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ANNEX B
OFFER AGREEMENT
BETWEEN
ESPRIT TELECOM GROUP PLC
AND
GLOBAL TELESYSTEMS GROUP INC.
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THIS AGREEMENT is made 8 December 1998
BETWEEN
(1) GLOBAL TELESYSTEMS GROUP INC. ("GTS") of 1751 Pinnacle Drive, North
Tower, 12th Floor, McLean VA 22102, USA; and
(2) ESPRIT TELECOM GROUP PLC ("Esprit") of Minerva House, Valpy Street,
Reading, Berkshire RG1 1AR.
IT IS AGREED AS FOLLOWS:
1. THE OFFER
Reference is made to the press announcement in the form of the draft
attached hereto (the "Press Announcement") setting out the terms and conditions
upon which Bear Stearns will, on behalf of GTS, make an offer (the "Offer") to
acquire the whole of the issued and to be issued share capital of Esprit Telecom
Group plc excluding any such share capital owned by GTS or any subsidiary of GTS
on the date that the Offer is made.
2. DEFINITIONS
In this Agreement, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance, or before such earlier date as GTS may, subject
to the City Code, determine, whether pursuant to the exercise of
conversion or subscription rights or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) save as referred to above words defined in the Press Announcement
have the same meaning herein.
3. RELEASE OF PRESS ANNOUNCEMENT
GTS and Esprit each irrevocably consent to the issue of the Press
Announcement incorporating references to them and to this Agreement subject to
any amendments which may be agreed between them or their financial advisers.
They also each consent to the issue of the Offer Document, incorporating
references to them, and to this Agreement, substantially similar to those
references contained in the Press Announcement. Each understands that this
Agreement will be made available for public inspection.
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<PAGE> 374
4. COVENANTS
4.1 Esprit hereby agrees with GTS that:
(A) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, Esprit shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to the fiduciary duties of the directors of Esprit)
engaging in,
directly or indirectly any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part of
the issued share capital of Esprit or involving the acquisition outside the
ordinary course of business (as carried on to the date hereof) of, or any
business combination involving, Esprit or any of its subsidiaries or any
shares of Esprit or any material part of the shares or assets of Esprit or
any of its subsidiaries or in each case any interest therein (each an
"Esprit Transaction");
(B) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, Esprit shall, so far as is consistent with the
fiduciary duties of its directors, refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to confidentiality
substantially similar to that given by GTS) providing any information in
relation to, or facilitating or cooperating with in any way, any Esprit
Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with Esprit's professional advisers who
appreciate the need for and requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(C) Esprit confirms that it is not in discussions with any third party
in relation to any Esprit Transaction;
(D) subject to the satisfaction of the pre-conditions to the posting
of the Offer Document and subject to the fiduciary duties of the directors
of Esprit, so far as Esprit is reasonably able to do so, it will procure
that such information (other than information of a commercially sensitive
nature the disclosure of which may prejudice Esprit) as GTS or its advisers
reasonably request in relation to Esprit and its subsidiaries and their
respective businesses will be supplied to GTS as soon as practicable
following any such request and Esprit will procure that to the extent it is
able to procure the same, Esprit and its subsidiaries will provide GTS and
its advisers with access to such of the books and financial and other
records of Esprit and its subsidiaries as GTS may reasonably require in
order to satisfy itself as to the business, finances and affairs of Esprit
and its subsidiaries;
(E) from the date hereof and until the date on which the offer lapses
or is withdrawn, Esprit will not take any action which would require
shareholder approval under Rule 21 of the City Code without the prior
consent of GTS such consent not to be unreasonably withheld or delayed. For
the purposes of this paragraph 4.1(E) GTS hereby consents to the issue of
shares by Esprit upon the exercise of options under the Esprit Share Option
Schemes; the grant of options, in the normal course of business, pursuant
to such Esprit Share Option Schemes; the issue of shares by Esprit in
connection with pre-existing contractual obligations and in connection with
any proposed acquisition by Esprit of which GTS is currently aware;
(F) if GTS believes on reasonable grounds that circumstances exist
which would lead to any of the conditions of the Offer not being satisfied,
Esprit shall use all reasonable endeavours to ensure that (at all
reasonable times following the release of the Press Announcement and before
the Offer becomes unconditional in all respects or lapses) GTS and its
advisers are provided with such information regarding
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the Wider Esprit Group as GTS reasonably requires to enable GTS to
establish whether or not the relevant condition is satisfied provided that
any information so provided shall be provided without liability on the part
of any director or officer of Esprit to GTS or Esprit or otherwise;
(G) as soon as practicable after the date hereof, Esprit shall deliver
to GTS a letter identifying all persons it believes are "affiliates" of
Esprit for the purposes of the US Securities Act of 1933, as amended or for
the purposes of qualifying the Offer and the transactions contemplated
thereby for pooling of interests accounting treatment under Opinion 16 of
the Accounting Principles Board and applicable SEC rules and regulations.
Esprit shall use its best efforts to cause each such person, save for those
"affiliates" of Esprit that have entered into certain Registration Rights
Agreements concurrently herewith, to deliver to GTS by the close of the
Offer a written undertaking in customary form.
4.2 GTS agrees with Esprit as follows:
(A) subject to their fiduciary duties under applicable law, the board
of directors of GTS will recommend to the stockholders of GTS that they
vote in favour of the issuance of GTS shares necessary to complete the
Offer and the acquisition by GTS of Esprit at any meeting of stockholders
convened for such purpose, or any adjournment thereof;
(B) the level of directors' and officers' liability cover currently
provided to the directors and officers of Esprit will be maintained,
provided that GTS may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which afford
substantially the same coverage to the insured as the insurance currently
maintained by Esprit for a period of six years after the Offer becomes
wholly unconditional, and such level of cover for the directors and
officers of Esprit shall be maintained (in the form of liability insurance
or otherwise) notwithstanding any of the directors or officers of Esprit
ceasing to be a director or officer;
(C) GTS shall use its best efforts to cause all persons who may be
"affiliates" of GTS for the purposes of qualifying the Offer and the
transactions contemplated thereby for pooling of interests accounting
treatment under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations to comply with applicable holding
periods;
(D) that it will not amend the memorandum or articles of association
of Esprit in a manner that would be adverse to the directors and officers
of Esprit. In the event that the employment of such directors or officers
is transferred by GTS to any member of the Wider GTS Group, or
substantially all of Esprit's assets are transferred, GTS shall ensure that
any director or officer of Esprit (current or former) affected by such
action is afforded no lower level of indemnity by GTS in respect of his or
her office than he or she currently enjoys;
(E) GTS undertakes that it will not, directly or indirectly, commence
or solicit indications of interest or make any proposals with respect to
(in each case, written or otherwise), any exchange or similar offer or,
except as contemplated by (F) below, propose any amendments with respect to
the Esprit Telecom Bonds or the related indentures until pre-condition (A)
to the Offer set out in paragraph 1 to Appendix 1 of the Press Announcement
(the "Consent Pre-Condition") has been waived or satisfied;
(F) GTS undertakes to solicit, on behalf of Esprit and in good faith,
amendments to the indentures governing the Esprit Telecom Bonds necessary
to satisfy the Consent Pre-Condition (and no other amendments) on terms and
conditions and pursuant to documents reasonably satisfactory to Esprit and
its advisers and after consulting with Esprit as to the terms and
conditions of such solicitation (after having provided Esprit and its
advisers with a reasonable opportunity to review and discuss the same);
provided that in no event shall Esprit be obliged to pay any amounts in
respect thereof prior to the time that the Offer is declared wholly
unconditional (and then only if the same would not violate any applicable
law); and
(G) that GTS will use all reasonable efforts to file a registration
statement with the SEC, EASDAQ and any other relevant authority in
connection with the GTS Shares to be issued pursuant to
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<PAGE> 376
the Offer and have such registration statement declared effective or
otherwise approved as promptly as is reasonably practicable and that the
Offer Document will be posted promptly thereafter.
4.3 Esprit and GTS undertake with each other as follows:
(A) each of Esprit and GTS shall use all reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Offer
and the satisfaction of the conditions set out in Appendix 1 to the Press
Announcement, including using its reasonable efforts to obtain all
necessary or advisable waivers, consents or approvals of third parties
required in order to preserve material contractual relationships of GTS,
Esprit and their respective subsidiaries, all necessary or appropriate
waivers, consents and approvals from the SEC and the Panel to effect all
necessary registrations, filings and submissions and to lift any injunction
or other legal bar to the Offer (and, in such case, to proceed with the
Offer as expeditiously as possible);
(B) without limitation to the foregoing, each of GTS and Esprit
undertakes:
(1) to make members of management available to the extent
reasonably necessary to facilitate the successful completion of the
Offer and (to the extent agreed) the refinancing or amendment of the
existing financing facilities of Esprit, including participation in
meetings with investors and shareholders;
(2) to provide all reasonable assistance as may be required to
satisfy the pre-conditions to the posting of the Offer Document and the
conditions of the Offer;
(C) GTS and Esprit will each provide such information and do such acts
as may be reasonably necessary to prepare and expedite the posting of the
Offer Document and, in particular, but without prejudice to the generality
of the foregoing will each provide all necessary information regarding
their respective companies and their subsidiaries and the interests of
their respective directors in the share capital of each company and options
over such share capital which is required to be contained therein in order
to comply with the requirements of the City Code, US Securities Law or any
other applicable law or regulation;
(D) all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party
incurring such expenses, except that those expenses incurred in connection
with printing and filing the Offering Circular/Proxy Statement/Prospectus,
and all expenses incurred in connection with satisfying the Consent
Pre-Condition shall be borne by GTS;
(E) to comply with GTS's obligations to participants in the Esprit
Share Option Schemes under Rule 15 of the City Code, GTS will offer
participants the opportunity to roll over their options to acquire Esprit
Shares into options to acquire GTS shares substantially on (and in
accordance with) the terms of the existing Esprit Share Option Schemes
("the Rollover Offer") and on the same exchange ratio as the Offer. Subject
to the taxation effects of the Rollover Offer for participants in the
Esprit Share Option Schemes being no less favourable than the taxation
effects of exercising options and accepting the Offer, Esprit agrees that
no amendments will be made to the Esprit Share Option Schemes and no
consents given which would have the effect of allowing participants to
exercise options in circumstances where they are currently not entitled to
do so. Where Esprit believes that such taxation effects would be materially
adverse to participants, it will consult with GTS with a view to agreeing
(at GTS's option) either that participants will be able to exercise options
in circumstances where they are currently not able to do so in order that
they can accept the Offer or GTS providing an appropriate indemnity against
such adverse taxation effects;
(F) each of GTS and Esprit agree to use their reasonable best efforts
to avoid taking any action that would prevent the transactions contemplated
by the Offer receiving "pooling of interests" treatment for financial
accounting purposes (including, in the case of GTS, approving any transfer
or disposition of shares by any shareholders of Esprit unless Esprit's
independent auditors have advised Esprit that such transfer or disposition
would not prevent the transactions contemplated by the offer from receiving
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"pooling of interests" treatment for financial accounting purposes). Each
of GTS and Esprit further agrees that in the event they become aware of any
event or circumstance that would reasonably be expected to prevent the
transactions contemplated by the Offer receiving "pooling of interests"
treatment, they shall each use their reasonable best efforts to remedy such
event or circumstance so as to permit such "pooling of interests"
treatment.
5. LAW AND JURISDICTION
5.1 This Agreement is governed by, and construed in accordance with,
English law.
5.2 In relation to any legal action or proceedings to enforce this
Agreement or arising out of or in connection with this Agreement ("Proceedings")
the parties irrevocably submit to the jurisdiction of the English courts and
waive any objection to Proceedings in such courts on the grounds of venue or on
the grounds that the Proceedings have been brought in an inconvenient forum.
6. CONDITIONS
6.1 Notwithstanding any other provision hereof, this Agreement and GTS's
obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9.00 a.m. on 08
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1% of the issued ordinary shares of
Esprit prior to the release of the Press Announcement.
6.2 If these conditions shall not have been satisfied by such time and
date this Agreement shall automatically lapse and be of no further force or
effect and no party hereto shall have any claim against the other save in
respect of any antecedent breach of its terms.
7. MISCELLANEOUS
7.1 No failure or delay by either party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege hereunder. The parties agree that any breach of this
Agreement is likely to cause substantial harm to the other and that money
damages might not be a sufficient remedy for any breach of this Agreement and
that the other will be entitled to specific performance and injunctive relief as
remedies for any such breach. Such remedies shall not be deemed to be the
exclusive remedies for a breach of this Agreement but shall be in addition to
all other remedies available at law or equity.
7.2 The covenants of Esprit set forth herein shall supersede any
obligation that Esprit may have to GTS under the second paragraph on page 4 of
the Confidentiality Agreement dated October 15, 1998 between GTS and Esprit (the
"Confidentiality Agreement") relating to a Takeover Proposal (as such term is
defined in the Confidentiality Agreement).
8. LAPSING
This Agreement shall automatically lapse and be of no further force or
effect and no party hereto shall have any claim against the other save in
respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Telecom Bonds) shall not
have been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
(C) GTS announces that any of the pre-conditions to the Offer set out
in paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
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(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Irrevocable.
9. EXECUTION
This Agreement may be executed in more than one part.
IN WITNESS whereof this Agreement has been signed on behalf of the parties
the day and year first above written.
GERALD THAMES
for
Global TeleSystems Group, Inc.
ROY MERRITT
for
Esprit Telecom Group plc
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ANNEX C
[BEAR STEARNS LOGO]
December 5, 1998
Board of Directors
Global Telesystems Group, Inc.
1751 Pinnacle Drive
North Tower, 12th Floor
McLean, Virginia 22102
Gentlemen:
We understand that Global TeleSystems Group, Inc. ("GTS"), on December 8,
1998, proposes to announce a recommended offer be made (the "Offer") to acquire
all of the issued share capital of Esprit Telecom Group Plc ("Esprit"). Pursuant
to the Offer, we further understand that: (i) each outstanding ordinary share of
Esprit, nominal value one pence per share ("Esprit Ordinary Shares"), will be
exchanged for 0.1271 shares (the "Ordinary Exchange Ratio") of GTS common stock,
par value $0.10 per share ("GTS Common Stock"); and (ii) each outstanding
American Depository Share, each representing the right to receive seven Esprit
Ordinary Shares ("Esprit ADSs"), will be exchanged for 0.89 shares of GTS Common
Stock (the "ADS Exchange Ratio" and, together with the Ordinary Exchange Ratio,
the "Exchange Ratios").
As more specifically set forth in the Press Announcement to be issued on
December 8, 1998 (the "Press Announcement"), the Offer will extend to Esprit
Ordinary Shares which are unconditionally allotted or issued pursuant to the
exercise of options under the Esprit Share Option Schemes (as defined in the
Press Announcement) while the Offer remains open for acceptance (or by such
earlier date as GTS may, subject to the City Code on Takeovers and Mergers (the
"City Code"), decide) or otherwise. The terms and conditions of the Offer are
more fully set forth in the Press Announcement. The Offer will be conditional
upon, inter alia, the consent of the holders of Esprit public debt to waive
certain change of control provisions (the "Esprit Waiver").
The Board of Directors of GTS has requested that Bear, Stearns & Co. Inc.
("Bear Stearns") render an opinion as to whether, as of the date hereof,
collectively, the Exchange Ratios are fair, from a financial point of view, to
the holders of GTS Common Stock.
In arriving at our opinion, we have, among other things:
1. Reviewed the Press Announcement and the draft Irrevocable
Undertakings by the directors and certain shareholders of Esprit (the
"Irrevocable Undertakings"), the Offer Agreement of Esprit and GTS and the
Registration Rights Agreement between GTS and certain shareholders of
Esprit (collectively, the "Transaction Documentation");
2. Reviewed certain publicly available business and historical and
financial information relating to GTS and Esprit;
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3. Reviewed, and discussed with GTS management, certain internal
financial information and other data relating to the business and financial
prospects of GTS, including estimates and financial forecasts prepared by
the management of GTS and which are not publicly available;
4. Reviewed, and discussed with GTS management, certain financial
information and other data relating to the business and financial prospects
of Esprit, including estimates and financial forecasts relating to Esprit
prepared by the management of GTS and which are not publicly available;
5. Reviewed, and discussed with GTS management, certain estimates of
revenue enhancements, cost savings and other combination benefits or
synergies expected to result from the Offer, prepared by the management of
GTS and which are not publicly available;
6. Attended discussions between members of the management of GTS and
Esprit respecting certain financial, business and market information;
7. Reviewed certain historical stock prices, trading activity and
valuation parameters of GTS Common Stock, Esprit Ordinary Shares and Esprit
ADSs;
8. Reviewed the pro forma financial impacts of the Offer on GTS;
9. Reviewed certain publicly available financial data, stock market
data and valuation parameters of companies which in Bear Stearns' judgment
were deemed generally comparable to GTS or Esprit or otherwise generally
relevant;
10. Reviewed the financial terms, to the extent publicly available, of
certain other transactions which in Bear Stearns' judgment were deemed
generally relevant; and
11. Conducted such other studies, analyses and investigations as was
deemed appropriate.
In connection with our review, at your direction, we have not assumed any
responsibility for, and have not undertaken, independent verification of any of
the information reviewed by or provided to us for the purpose of this opinion
and have, at your direction, relied on its being complete and accurate in all
material respects. In addition, at your direction, we have not made or received
any independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of GTS or Esprit, nor have we been furnished with any
such evaluation or appraisal.
With respect to the financial forecasts, estimates, projections, pro forma
effects, contemplated tax and accounting impacts, and calculations of revenue
enhancements, cost savings or synergies, relied upon or provided to us, we have
assumed, at your direction, that they have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of GTS as to the future performance of GTS and Esprit, that they will
be achieved in the amounts and at the times specified therein and, therefore,
have not made any independent assessment of the assumptions contained therein.
We have not been provided, nor have we been asked to obtain, any financial
forecasts, estimates, projections, pro forma effects, contemplated tax and
accounting impacts, and calculations of revenue enhancements, cost savings or
synergies prepared by the management of Esprit. At your direction, in rendering
our opinion we are relying on the base case projections with synergies.
Our opinion is necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available to us as of
December 5, 1998. We have relied upon the representations of GTS that neither it
nor its employees, officers, directors, agents or advisors are aware of any
facts which would make the information relied upon by us incomplete or
misleading. In addition, it should be understood that although subsequent
developments may effect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion.
In addition to the assumptions specified in the preceding paragraph, at
your direction, we have not been asked to, nor do we, offer any opinion as to
the material terms of Transaction Documentation. In rendering this opinion, we
have assumed, with your consent, that Esprit and GTS will comply with all the
material terms and conditions of the Transaction Documentation and all
applicable laws and regulations. We have assumed,
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with your consent, that the Esprit Offer becomes effective in accordance with
the terms of the Press Announcement and that the Offer is accepted in such a
manner that GTS acquires 100 percent of the outstanding Esprit Ordinary Shares
and Esprit ADSs. Finally, we have relied upon the representations of GTS
respecting the tax treatment of the Offer. We have also assumed that the Offer
will be afforded pooling of interest treatment under generally accepted
accounting principles in the United States. To the extent that our opinion
relies upon any analysis or evaluation of legal or accounting, as opposed to
financial, matters, we have relied, with your consent, upon the view of GTS and
Esprit, and each of their respective advisors and counsel, with respect to such
matters.
This letter is not to be used for any purpose other than that set out above
or reproduced, disseminated quoted or referred to at any time, in whole or in
part, without our prior written consent; provided however that it may be
included in its entirety in any prospectus, proxy statement or offering circular
to be distributed to the holders of GTS Common Stock or Esprit Ordinary Shares
or Esprit ADSs in connection with the Offer.
Our opinion (i) does not address GTS's underlying business decision to
effect the Offer; (ii) does not constitute a recommendation to any holder of
common stock as to how such a holder should vote with respect to the Offer; and
(iii) does not constitute a recommendation to the Board of Directors of GTS with
respect to the Offer. Our opinion as expressed herein does not imply any
conclusion as to the likely trading range of GTS Common Shares, Esprit Ordinary
Shares or Esprit ADSs, which may vary depending upon, among other factors,
changes in interest rates, dividend rates, market conditions, general economic
conditions and other factors that generally influence the price of securities.
It is understood that this letter is intended solely for the benefit and use of
the Board of Directors of GTS (solely in that capacity).
Bear Stearns has acted as financial advisor and will act as dealer manager
to GTS in connection with the Offer and will receive a fee for such services. We
have previously rendered certain investment banking and financial advisory
services to affiliates of GTS and received customary compensation. In connection
with the Esprit Waiver, we will act as solicitation agent for and advisor to GTS
and will receive a customary fee for our services. In addition, in the ordinary
course of our business, Bear Stearns or its affiliates, may actively trade the
securities of GTS and Esprit for their own account or for the accounts of their
customers and, accordingly may, subject to applicable rules and regulations,
including the City Code, at anytime hold a long or short position in such
securities.
Subject to and based upon the foregoing, it is our opinion that, as of the
date hereof, collectively, the Exchange Ratios are fair, from a financial point
of view, to the holders of GTS Common Stock.
Bear, Stearns & Co. Inc.
/s/ R. W. STRANG
- ------------------------------------
By: R. W. Strang
Title: Senior Managing Director
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ANNEX D
LEHMAN BROTHERS
28 January, 1999
Board of Directors
Esprit Telecom Group plc
Minerva House
Valpy Street
Reading RG1 1AR
Members of the Board:
Global TeleSystems Group, Inc. ("Global TeleSystems") has made a proposed
recommended offer to the shareholders of Esprit Telecom Group plc (the
"Company") to acquire the entire common stock of the Company (the "Proposed
Transaction"). Global TeleSystems has offered consideration of 0.89 shares of
Global TeleSystems common stock for each outstanding ADR of the Company (the
"Exchange Ratio"). The terms and conditions of the Proposed Transaction are set
forth in more detail in a joint press announcement dated 8 December, 1998.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's shareholders of the Exchange Ratio to be offered to such shareholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analysed: (i) the specific
terms of the Proposed Transaction; (ii) publicly available information
concerning the Company and Global TeleSystems that we believed to be relevant to
our analysis; (iii) financial and operating information with respect to the
business, operations and prospects of the Company and Global TeleSystems
furnished to us by the Company and Global TeleSystems; (iv) a trading history of
the ADRs of the Company from 2 January, 1998 to 6 December, 1998 and a
comparison of that trading history with those of other companies that we deemed
relevant; (v) a trading history of the common stock of Global TeleSystems from 2
January 1998 to 6 December, 1998 and a comparison of that trading history with
those of other companies that we deemed relevant; (vi) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other recent transactions that we deemed relevant; (vii) a comparison of the
financial and operating information of the Company and Global TeleSystems with
those of other companies that we deemed relevant; and (viii) the expected
relative contributions of the Company and Global TeleSystems to the revenues and
cash flows of the combined company following completion of the Proposed
Transaction. In addition, we have had discussions with the managements of the
Company and Global TeleSystems concerning their business, operations, assets,
financial condition and prospects, and have undertaken such other studies,
analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information,
and we have further relied upon the assurances of the managements of the Company
and Global TeleSystems that they are not aware of any facts or circumstances
that would make such information inaccurate or misleading. With respect to the
financial projections of the Company and Global TeleSystems, upon the advice of
the Company and Global TeleSystems, we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgements of the managements of the Company and Global
TeleSystems as to their future financial performance, and that they will perform
substantially in accordance with such projections. In arriving at our opinion,
we have not conducted a physical inspection of the properties and facilities of
the Company or Global TeleSystems and
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have not made or obtained any evaluations or appraisals of the assets or
liabilities of the Company or Global TeleSystems. In addition, you have not
authorised us to solicit, and we have not solicited, any indications of interest
from any third party with respect to the purchase of all or a part of the
business of the Company. Our opinion necessarily is based upon market, economic
and other conditions as they exist on, and can be evaluated as of, the date of
this letter. In rendering this opinion, we are not expressing any opinion as to
the future performance of Global TeleSystems or its share price.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the shareholders of the Company in the Proposed Transaction is fair
to such shareholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past (including acting as lead manager in the
Company's initial public offering and in two high yield debt offerings) and have
received customary fees for such services. In the ordinary course of our
business, we actively trade in the debt and equity securities of the Company and
Global TeleSystems for our own account and for the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any shareholder of the Company as to
whether such shareholder should accept the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS INTERNATIONAL
(EUROPE)
By: /s/ Brian Robertson
Executive Director
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ANNEX E
IRREVOCABLE UNDERTAKING
BY
WALTER ANDERSON
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To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Walter Anderson
8 December 1998
Dear Sirs,
1. THE OFFER
We refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Group plc ("Esprit")
excluding any such share capital owned by GTS or any subsidiary of GTS on the
date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "the Acceptance Date" means 3.00 pm on the 17th US Business Day
following the posting of the Offer Document or, if a MAC Notice has been
served before such day, 1.00 pm on the US Business Day following the
determination in accordance with paragraph 7(B) or 7(C) below that no GTS
MAC has occurred;
(B) "GTS MAC" means a material adverse change in the value of the GTS
Group by virtue of:
(i) a specific event which causes an adverse change in the
business, assets, financial or trading position or profits or prospects
of any member of the Wider GTS Group; or
(ii) there having been a material misrepresentation of fact or
omission to state a fact necessary to make the information contained
therein not materially misleading in any financial, business or other
information publicly disclosed by GTS in relation to the business,
assets, financial or trading position or prospects of any member of the
Wider GTS Group;
which in either case is material in the context of the GTS Group taken as a
whole. For the purposes of this definition:
(1) a GTS MAC shall exclude (without limitation) general factors
affecting the global telecommunications industry or other industries
as a whole;
(2) a decline in the market price of any securities of GTS or
any change in interest rates will not, of themselves, amount to a GTS
MAC; and
(3) GTS shall be considered on a stand alone basis excluding
Esprit;
(C) "Esprit Shares" means the ordinary shares and American Depositary
Shares ("ADSs") in Esprit shown in columns 3 and 4 of Schedule 1 and,
except in sub-paragraph (A) of Paragraph 5 shall include any shares in
Esprit attributable to or deriving from such shares and shall include any
other ordinary shares in Esprit which we acquire and beneficially own after
signing this undertaking but excluding any shares in Esprit transferred
with the prior written consent of GTS;
(D) "the Majority Shareholders" means each of Apax Funds Nominees
Limited, Warburg, Pincus Ventures, L.P. and Gold & Appel Transfer S.A;
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(E) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the
terms of such offer or offers are, in the opinion of Bear Stearns,
with the agreement of Esprit's financial advisers, appointed for the
purposes of Rule 3 of the City Code provided such agreement is not
unreasonably withheld or delayed (but without hereby creating any
duty of care owed by Bear Stearns, except to GTS or by Esprit's
financial advisers, except to Esprit) no less favourable to
shareholders of Esprit than the terms set out in the Press
Announcement or the Offer Document;
(F) references to the share capital of Esprit include that represented
by ADSs; and
(G) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
We irrevocably consent to the issue of the Press Announcement incorporating
references to us and to this undertaking subject to any amendments which may be
agreed with us or Esprit's financial advisers. We also consent to the issue of
the Offer Document, incorporating references to us, and to this undertaking,
substantially similar to those references contained in the Press Announcement.
We understand that this irrevocable undertaking will be made available for
public inspection.
4. UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, we hereby irrevocably undertake to GTS as follows:-
(A) we shall accept or procure acceptance of the Offer in accordance
with its terms in respect of all the Esprit Shares by not later than the
Acceptance Date and shall forward or procure that there is forwarded, with
such acceptance, the share certificates or other documents of title in
respect of the Esprit Shares in accordance with the terms of the Offer;
(B) the Esprit Shares will be acquired by GTS fully paid and free from
all liens, equities, charges, encumbrances and other interests and together
with all rights now or hereafter attaching thereto, including the right to
receive and retain all dividends and other distributions declared, made or
paid hereafter;
(C) notwithstanding that we may be or become entitled to withdraw our
acceptance(s) of the Offer by virtue of any term of the Offer or the rules
of the City Code or any provision of the securities laws or regulations of
the US or otherwise, we shall not withdraw our acceptance(s) and shall
procure that our acceptance(s) is not withdrawn in respect of all or any of
the Esprit Shares;
(D) save as required by paragraph 4(A) or in this paragraph 4(D), we
shall not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of the Esprit
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Telecom Shares or any interest held by us in any of the Esprit Shares save
that we may transfer or otherwise dispose of all or some of our Esprit
Shares provided that:
(1) prior to such transfer or disposition Esprit shall have
received the advice of its independent auditors and GTS shall have
received the advice of its independent auditors that such transfer or
disposition would not prevent the transactions contemplated by the Offer
from receiving "pooling of interests" treatment for financial accounting
purposes;
(2) such transfer or disposition would not delay the Offer becoming
wholly unconditional by more than 10 days or beyond the 60th day after
posting of the Offer Document, or if earlier, the last date by which the
Offer can become wholly unconditional;
(3) before such transfer or disposition the transferee of such
Esprit Shares shall have executed an irrevocable undertaking for no
consideration and under seal in a form substantially similar to this
Irrevocable Undertaking together with a legal opinion in respect thereof
as to due execution and enforceability in a form reasonably satisfactory
to GTS;
(4) such transferee has been advised by Esprit's financial advisers
that the transfer or disposition would not violate the provisions of the
Code;
(5) such transferee is (i) not listed on Schedule 2 hereto; and
(ii) immediately prior to such transfer does not own more than one per
cent of the outstanding GTS Shares; and
(6) we have consulted with GTS (in a way which does not oblige GTS
to make a public announcement) with respect to the timing of such sale
or disposition to mitigate any adverse effect such sale or disposition
would have on the market price of GTS Shares;
(E) we shall not prior to the lapsing or withdrawal of the Offer
without the prior written consent of GTS purchase or otherwise acquire any
shares in Esprit or any interest therein or agree to do so whether
conditionally or unconditionally;
(F) we shall procure that, save pursuant to this undertaking, unless
and until the Offer shall have lapsed or shall have been withdrawn, no
other agreement or arrangement (including any undertaking) shall be entered
into (other than with GTS) which could result in the disposal of, or the
creation or existence of any encumbrance on, all or any of the Esprit
Shares or any interest therein or which might in any way restrict the
disposal of the Esprit Shares or any of them and no other offer shall be
accepted in respect of the Esprit Shares or any of them (whether it is
conditional or unconditional and irrespective of the means by which it is
to be implemented);
(G) we shall not, prior to the issue of the Press Announcement without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, we shall advise
GTS prior to any such disclosure or announcement so that GTS has an
opportunity to seek to control the timing and manner of such disclosure;
(H) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, we shall refrain from knowingly taking any action
or making any statement which is or may be prejudicial to the success of
the Offer, including, without limitation:
(1) soliciting procuring, initiating or engaging in, directly or
indirectly, any discussions or negotiations with any third party,
involving any other offer by any third party for all or any part of the
issued share capital of Esprit or involving the acquisition outside the
ordinary course of business (as carried on to the date hereof) of or any
business combination involving Esprit or any of its subsidiaries or any
material part of the shares or assets of Esprit or any of its
subsidiaries or in each case any interest therein ("each an Esprit
Transaction");
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(2) entering into discussions or negotiations with, or (save as
required by Rule 20.2 of the City Code in which case only that
information strictly required to be provided shall be disclosed and on
the basis of an undertaking as to confidentiality substantially similar
to that given by GTS) providing any information to any person in
relation to, or facilitating or cooperating with in any way, any Esprit
Transaction; or
(3) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior written consent of GTS provided that this shall not apply to
any communications or discussions with our or Esprit professional
advisers who appreciate the need for requirements as to confidentiality
in relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer;
(I) we shall inform GTS immediately:
(1) if we receive an approach from any person in relation to an
Esprit Transaction;
(2) if we are asked to, or do, provide any information to any
person with a view to any person investigating or entering into an
Esprit Transaction; or
(3) if we become aware of any material breach of the provisions of
this undertaking;
and in the case of (1) and (2) above, we shall provide reasonable details
as to the identity of any relevant person and the terms and conditions of
any proposal or details of any information requested or provided, and in
the case of (3) above, shall provide reasonable details of the relevant
breach;
(J) we are not in discussions with any third party in relation to any
Esprit Transaction;
(K) we will procure for GTS all necessary information regarding us and
our interests, in the share capital of Esprit which is required to be
contained in the Offer Document in order to comply with the requirements of
the City Code, US securities law or any other applicable law or regulation;
(L) we shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn, transfer, dispose of, grant rights
over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares.
5. WARRANTIES
5.1 We hereby further undertake warrant and represent to GTS as follows:
(A) we are the registered holder and beneficial owner of the Esprit
Shares (other than those represented by ADSs) and the beneficial owner of
the Esprit Shares represented by ADSs and the Esprit Shares are free from
all liens, equities charges or encumbrances. There are no other ordinary
shares in Esprit registered in our name or beneficially owned, or managed
and controlled by us, or in which we have an interest and we have no
rights, warrants or options to acquire or subscribe for ordinary shares in
Esprit or any interest therein save as specified in columns 3 and 4 of
Schedule 1;
(B) save pursuant to this undertaking we have not agreed,
conditionally or otherwise, to dispose of all or any of the Esprit Shares
or any interest therein and have (and, upon the Offer being made, will
continue to have) all necessary authority to enter into this undertaking
and accept or procure acceptance of the Offer in respect of the Esprit
Shares;
(C) we have the right to transfer the Esprit Shares with all rights
attaching to them as envisaged by the terms of the Offer;
(D) otherwise than in the ordinary course of Esprit telecommunications
business there is not outstanding any indebtedness or other liability
(actual or contingent) owing by any member of the Wider
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Esprit Group to us or any person connected with us, nor is there any
indebtedness owing to any member of the Wider Esprit Group by any such
person;
(E) neither we nor any person connected with us has entered into any
agreement, undertaking, instrument or arrangement with any member of the
Wider Esprit Group.
5.2 We shall procure that (save as may be necessary to give effect to this
undertaking) we shall not allow nor shall we do or procure any act or omission
before the date the Offer becomes wholly unconditional which would constitute a
breach of any of the above warranties if they were given at any and all times
from the date hereof down to the date the Offer becomes wholly unconditional, or
which would make any of the above warranties inaccurate or misleading if they
were so given.
5.3 We further undertake to forthwith disclose in writing to GTS any
matter or thing which may arise or become known to me after the date hereof and
before the date the Offer becomes wholly unconditional which is inconsistent
with any of the above warranties or which might make any of them inaccurate or
misleading if they were given at any and all times from the date hereof down to
the date the Offer becomes wholly unconditional or which is a breach of
sub-paragraph 5.2 above.
6. VOTING RIGHTS
We hereby further irrevocably undertake, represent, warrant and agree to
and with GTS that, until the Offer shall have closed, lapsed or been withdrawn
we shall exercise or procure the exercise of the voting rights attached to the
Esprit Shares as instructed by GTS on any resolution to enable the Offer to
become unconditional if it were passed or rejected at a general or separate
class meeting of GTS.
7. GTS MAC
(A) If at any time before the 17th US Business Day after the posting
of the Offer Document we become aware of an event which could or might
reasonably be expected to give rise to a GTS MAC we shall immediately serve
notice on GTS providing full details of the event alleged to be expected to
give rise to the GTS MAC and of its effect on the value of GTS ("the MAC
Notice"). We shall also serve a copy of the MAC Notice on the other
Majority Shareholders and Esprit. Not more than one MAC Notice may be
served in respect of any individual event, and in the event that more than
one Majority Shareholder serves a MAC Notice in respect of the same event,
only the first to be received by GTS will be valid. In no event shall a
Majority Shareholder have the right to serve a MAC Notice more than 10 US
Business Days after it becomes aware of an event which could or might
reasonably be expected to give rise to the GTS MAC to which such MAC Notice
relates or after the Acceptance Date. For the purposes of this paragraph we
shall be deemed to be aware of the contents of all public filings made by
GTS. GTS shall provide copies to us immediately following filing of any
such filings made by GTS from the date hereof until the Acceptance Date.
(B) As soon as practicable after the service of the MAC Notice, and in
any event within two US Business Days, each of ourselves and GTS will
appoint an investment banking firm of international repute to act as an
appraiser ("the Appraiser"). Each of ourselves and GTS will use their best
endeavours to ensure that the Appraisers shall make an appraisal as to
whether a GTS MAC has occurred and shall notify ourselves and GTS of their
decision within three US Business Days of their appointment. If the
Appraisers agree with each other they shall immediately notify the Majority
Shareholders and GTS.
(C) If the Appraisers are unable to agree between themselves whether a
GTS MAC has occurred, we and GTS will use our best endeavours to procure
that the two Appraisers select a third bank with similar qualifications
("the Referee") which shall make its determination as to whether a GTS MAC
has occurred and shall notify ourselves and GTS of their decision within
three US Business Days after its selection. If our respective Appraisers
fail to agree upon the appointment of the Referee either we or GTS may
refer the matter to the President for the time being of the Law Society of
England and Wales who shall promptly appoint the Referee.
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(D) Each of ourselves and GTS will have all reasonable opportunity of
making oral and written representations to each Appraiser and to the
Referee in enabling them to reach their determinations. The Appraisers and
the Referee shall act as experts and not as arbitrators and, absent fraud
or manifest error, the determination of the Appraisers and the Referee
hereunder will be binding upon ourselves and GTS.
(E) If it is determined under sub-paragraph (B) or (C) that a GTS MAC
has occurred then the provisions of paragraph 12 will apply. The
determination of whether a GTS MAC has or has not occurred can be relied
upon by GTS and all the Shareholders.
(F) Each of ourselves and GTS recognise that the provisions of this
paragraph involve the co-operation of third parties. Each of ourselves and
GTS agree to use our respective best endeavours to ensure that such third
parties co-operate in order to determine, within the time frame described
in this paragraph, whether a GTS MAC has occurred. If it is not practicable
to determine whether a GTS MAC has occurred within that time frame, the
parties shall nevertheless use their best endeavours to ensure that the
question is determined as soon as possible thereafter, and in any event
before the day ("the Last Acceptance Date") which is two US Business Days
and UK Business Days before the last date the Offer is capable of becoming
wholly unconditional.
(G) If it is not determined by the Last Acceptance Date that a GTS MAC
has occurred we and GTS agree that we will jointly request the Panel (and
request the directors of Esprit to assist us in this respect) to extend the
last date that the Offer may become wholly unconditional to a date not
later than 81 days after the posting of the Offer Document. If the
determination that no GTS MAC has occurred does not take place until such
date, then the Acceptance Date shall be extended to 1:00 p.m. on such date.
8. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") we irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
(C) We hereby appoint Herbert Smith (for the attention of Ben Ward) of
Exchange House, Primrose Street, London EC2A 2HS as my process agent to
receive on our behalf service of process in any proceedings in England.
Service upon the process agent shall be good service upon us whether or not
it is forwarded to and received by us. If for any reason the process agent
ceases to be able to act as process agent, or no longer has an address in
England, we irrevocably agree to appoint a substitute process agent with an
address in England acceptable to GTS and to deliver to GTS a copy of the
substitute process agent's acceptance of that appointment within seven
days. In the event that we fail to appoint a substitute process agent, it
shall be effective service for GTS to serve the process upon the last known
address in England of our last known process agent notified to GTS,
notwithstanding that such process agent is no longer found at such address
or has ceased to act.
9. NOMINEES
In the case where the Esprit Shares are registered in the name of a
nominee, we shall direct the nominee to act as if the nominee were bound by the
terms of this irrevocable undertaking and we shall procure that such nominee
does all acts and things necessary to carry the terms hereof into effect as if
we had been the registered holder of the Esprit Shares registered in the name of
such nominee.
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10. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
11. MISCELLANEOUS
(A) We acknowledge that we are not entering into this undertaking in
reliance upon any representation, warranty or undertaking save as expressly
set out herein and, in the absence of fraud, we shall have no claim or
remedy against GTS or Esprit in respect of any misrepresentation, untrue
statement, omission or non-disclosure. In particular, our undertakings
pursuant to paragraph 4 shall be irrevocable and, in the absence of fraud,
shall not be capable of rescission or termination on the basis of any
information subsequently disclosed by GTS or Esprit in any offer document,
listing particulars or registration statement or for any other reason
whatsoever including (without limitation) any failure by all or any of the
directors of Esprit to recommend the Offer or to continue to recommend the
Offer after the date of this undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. We agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
12. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or in the event that a MAC Notice is served before the despatch of the
Offer Document, the date falling 10 US Business Days after determination
that a GTS MAC has not occurred (if later);
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived;
(D) it is determined that a GTS MAC has occurred; or
(E) the Offer is not declared wholly unconditional on or before the
60th day after the Offer document is despatched (or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G)).
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13. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
EXECUTED AS A DEED )
by WALTER ANDERSON ) WALTER ANDERSON
acting through its attorney in fact )
</TABLE>
<TABLE>
<S> <C>
Witness' signature GRIER RACLIN
Witness' name GRIER RACLIN
Witness' address 104 Summerfield Road, Chevy Chase MD 20815
------------------------------------------
Witness' occupation Attorney at law
</TABLE>
We agree and accept the terms of this undertaking.
GRIER RACLIN
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
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SCHEDULE 1
The following represents our shareholding and shares subject to options,
warrants or rights to acquire or subscribe in Esprit:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5
-------- -------- -------- -------- --------
NUMBER OF
ORDINARY SHARES
SUBJECT TO OPTIONS,
NUMBER OF NUMBER OF WARRANTS OR RIGHTS TO
REGISTERED HOLDER BENEFICIAL OWNER ORDINARY SHARES ADSs ACQUIRE OR SUBSCRIBE
----------------- ---------------- --------------- --------- ---------------------
<S> <C> <C> <C> <C>
Walter Anderson Walter Anderson 9 nil nil
BNY (Nominees) Walter Anderson 47,230 nil
Limited as Esprit
register of members
</TABLE>
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SCHEDULE 2
The Shareholder agrees not to transfer or dispose of any of its Shares to
any of the following persons or any of their respective affiliates:
Viatel Inc.
RSL Communications, Ltd.
Colt Telecom Group plc
Rupert Murdoch
PLD Telekom Inc.
Belgacom S.A.
Com Belga
Systema
WorldPort Communications, Inc.
Deutsche Telekom A.G.
France Telecom
British Telecommunications plc
Telecom Italia SpA
Telia AB
Koninklijke KPN NV
Telefonica de Spana, S.A.
ATT Corp.
MCI Worldcom Inc
Sprint Corp.
Global One
Qwest Communications International Inc.
Cable & Wireless Communications plc.
Energis plc
Equant NV
Global Crossing Ltd.
Metromedia Fiber Network Inc.
Teleglobe Inc.
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ANNEX F
IRREVOCABLE UNDERTAKING
BY
APAX FUNDS NOMINEES LIMITED
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To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Apax Funds Nominees Limited
62 Green Street
London W1Y 4BA
8 December 1998
Dear Sirs,
1. THE OFFER
We refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "the Acceptance Date" means 3.00 pm on the 17th US Business Day
following the posting of the Offer Document or, if a MAC Notice has been
served before such day, 1.00 pm on the US Business Day following the
determination in accordance with paragraph 7(B) or 7(C) below that no GTS
MAC has occurred;
(B) "GTS MAC" means a material adverse change in the value of the GTS
Group by virtue of:
(i) a specific event which causes an adverse change in the
business, assets, financial or trading position or profits or prospects
of any member of the Wider GTS Group; or
(ii) there having been anything misleading or a misrepresentation
of fact or omission to state a fact necessary to make the information
contained therein not misleading in any financial, business or other
information publicly disclosed by GTS in relation to the business,
assets, financial or trading position or prospects of any member of the
Wider GTS Group;
which in either case is material in the context of the GTS Group taken as a
whole. For the purposes of this definition:
(1) a GTS MAC shall exclude (without limitation) general factors
affecting the global telecommunications industry or other industries
as a whole;
(2) a decline in the market price of any securities of GTS or
any change in interest rates will not, of themselves, amount to a GTS
MAC; and
(3) GTS shall be considered on a stand alone basis excluding
Esprit;
(C) "Esprit Shares" means the ordinary shares and American Depositary
Shares ("ADSs") in Esprit shown in columns 3 and 4 of Schedule 1 and,
except in sub-paragraph (A) of Paragraph 5 shall include any shares in
Esprit attributable to or deriving from such shares and shall include any
other ordinary shares in Esprit which we acquire and beneficially own after
signing this undertaking but excluding any shares in Esprit transferred in
accordance with paragraph 4(D);
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(D) "the Majority Shareholders" means each of Apax Funds Nominees
Limited, Warburg, Pincus Ventures, L.P., Gold & Appel Transfer S.A and
Walter Anderson;
(E) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
Telecom attributable to or derived from such share capital, but
excluding any such share capital owned on such date by GTS or any
subsidiary of GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the
terms of such offer or offers are, in the opinion of Bear Stearns,
with the agreement of Esprit's financial advisers, appointed for the
purposes of Rule 3 of the City Code provided such agreement is not
unreasonably withheld or delayed (but without hereby creating any
duty of care owed by Bear Stearns, except to GTS or by Esprit's
financial advisers, except to Esprit) no less favourable to
shareholders of Esprit than the terms set out in the Press
Announcement or the Offer Document;
(F) references to the share capital of Esprit include that represented
by ADSs; and
(G) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
We irrevocably consent to the issue of the Press Announcement incorporating
references to us and to this undertaking subject to any amendments which may be
agreed with us or Esprit's financial advisers. We also consent to the issue of
the Offer Document, incorporating references to us, and to this undertaking,
substantially similar to those references contained in the Press Announcement.
We understand that this irrevocable undertaking will be made available for
public inspection.
4. UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, we hereby irrevocably undertake to GTS as follows:-
(A) we shall accept or procure acceptance of the Offer in accordance
with its terms in respect of all the Esprit Shares by not later than the
Acceptance Date and shall forward or procure that there is forwarded, with
such acceptance, the share certificates or other documents of title in
respect of the Esprit Shares in accordance with the terms of the Offer;
(B) the Esprit Shares will be acquired by GTS fully paid and free from
all liens, equities, charges, encumbrances and other interests and together
with all rights now or hereafter attaching thereto, including the right to
receive and retain all dividends and other distributions declared, made or
paid hereafter;
(C) notwithstanding that we may be or become entitled to withdraw our
acceptance(s) of the Offer by virtue of any term of the Offer or the rules
of the City Code or any provision of the securities laws or regulations of
the US or otherwise, we shall not withdraw our acceptance(s) and shall
procure that our acceptance(s) is not withdrawn in respect of all or any of
the Esprit Shares;
(D) save as required by paragraph 4(A) or in this paragraph 4(D), we
shall not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any
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<PAGE> 398
option over or otherwise dispose of or permit the sale or other disposition
of all or any of the Esprit Shares or any interest held by us in any of the
Esprit Shares save that we may transfer or otherwise dispose of all or some
of our Esprit Shares provided that:
(1) prior to such transfer or disposition Esprit shall have
received the advice of its independent auditors and GTS shall have
received the advice of its independent auditors that such transfer or
disposition would not prevent the transactions contemplated by the Offer
from receiving "pooling of interests" treatment for financial accounting
purposes;
(2) such transfer or disposition would not delay the Offer becoming
wholly unconditional by more than 10 days or beyond the 60th day after
posting of the Offer Document, or if earlier, the last date by which the
Offer can become wholly unconditional;
(3) before such transfer or disposition the transferee of such
Esprit Shares shall have executed an irrevocable undertaking for no
consideration and under seal in a form substantially similar to this
Irrevocable Undertaking together with a legal opinion in respect thereof
as to due execution and enforceability in a form reasonably satisfactory
to GTS;
(4) such transferee has been advised by Esprit's financial advisers
that the transfer or disposition would not violate the provisions of the
Code;
(5) such transferee is (i) not listed on Schedule 1 hereto; and
(ii) immediately prior to such transfer does not own more than one per
cent of the outstanding GTS Shares; and
(6) we have consulted with GTS (in a way which does not oblige GTS
to make a public announcement-provided that if GTS is obliged to
disclose as a result of such disclosure this shall not be a breach of
this provision by us) with respect to the timing of such sale or
disposition to mitigate any adverse effect such sale or disposition
would have on the market price of GTS Shares;
(E) we shall not prior to the lapsing or withdrawal of the Offer
without the prior written consent of GTS purchase or otherwise acquire any
shares in Esprit or any interest therein or agree to do so whether
conditionally or unconditionally;
(F) we shall procure that, save pursuant to this undertaking, unless
and until the Offer shall have lapsed or shall have been withdrawn, no
other agreement or arrangement (including any undertaking) shall be entered
into (other than with GTS) which could result in the disposal of, or the
creation or existence of any encumbrance on, all or any of the Esprit
Shares or any interest therein or which might in any way restrict the
disposal of the Esprit Shares or any of them and no other offer shall be
accepted in respect of the Esprit Shares or any of them (whether it is
conditional or unconditional and irrespective of the means by which it is
to be implemented);
(G) we shall not, prior to the issue of the Press Announcement without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, we shall advise
GTS prior to any such disclosure or announcement so that GTS has an
opportunity to seek to control the timing and manner of such disclosure;
(H) subject to paragraph 4(D), at all times after the date hereof and
until the Offer shall have lapsed or been withdrawn, we shall refrain from
knowingly taking any action or making any statement which is or may be
prejudicial to the success of the Offer, including, without limitation:
(1) soliciting procuring, initiating or engaging in, directly or
indirectly, any discussions or negotiations with any third party,
involving any other offer by any third party for all or any part of the
issued share capital of Esprit or involving the acquisition outside the
ordinary course of business (as carried on to the date hereof) of or any
business combination involving Espritor any of its
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<PAGE> 399
subsidiaries or any material part of the shares or assets of Esprit or
any of its subsidiaries or in each case any interest therein ("each an
Esprit Transaction");
(2) entering into discussions or negotiations with, or (save as
required by Rule 20.2 of the City Code in which case only that
information strictly required to be provided shall be disclosed and on
the basis of an undertaking as to confidentiality substantially similar
to that given by GTS) providing any information to any person in
relation to, or facilitating or cooperating with in any way, any Esprit
Transaction; or
(3) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior written consent of GTS provided that this shall not apply to
any communications or discussions with our or Esprit's professional
advisers who appreciate the need for requirements as to confidentiality
in relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer;
(I) we shall inform GTS immediately:
(1) if we receive an approach from any person in relation to an
Esprit Transaction save to the extent bound by any existing duty of
confidentiality;
(2) if we are asked to, or do, provide any information to any
person with a view to any person investigating or entering into an
Esprit Transaction save to the extent bound by any existing duty of
confidentiality; or
(3) if we become aware of any material breach of the provisions of
this undertaking;
and in the case of (1) and (2) above, we shall provide reasonable details
as to the identity of any relevant person and the terms and conditions of
any proposal or details of any information requested or provided, and in
the case of (3) above, shall provide reasonable details of the relevant
breach;
(J) we are not in discussions with any third party in relation to any
Esprit Transaction;
(K) we will procure for GTS all necessary information regarding us and
our interests and those of the funds on whose behalf we hold the Esprit
Shares as nominee, in the share capital of Esprit which is required to be
contained in the Offer Document in order to comply with the requirements of
the City Code, US securities law or any other applicable law or regulation;
(L) we shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn, transfer, dispose of, grant rights
over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares (subject to paragraph
4(D)).
5. WARRANTIES
5.1 We hereby further undertake warrant and represent to GTS as follows:
(A) we are the registered holder of the Esprit Shares (other than
those represented by ADSs) and the owner of the Esprit Shares represented
by ADSs and the Esprit Shares are free from all liens, charges or
encumbrances. There are no other ordinary shares in Esprit registered in
our name or beneficially owned, or managed and controlled by us, or in
which we have an interest and we have no rights, warrants or options to
acquire or subscribe for ordinary shares in Esprit or any interest therein
save as specified in columns 3 and 4 of Schedule 1;
(B) save pursuant to this undertaking we have not agreed,
conditionally or otherwise, to dispose of all or any of the Esprit Shares
or any interest therein and have (and, upon the Offer being made, will
continue to have) all necessary authority to enter into this undertaking
and accept or procure acceptance of the Offer in respect of the Esprit
Shares;
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<PAGE> 400
(C) at the time we are obliged to accept the Offer pursuant to
paragraph 4 (A) we will have the right to transfer the Esprit Shares with
all rights attaching to them as envisaged by the terms of the Offer.
6. VOTING RIGHTS
We hereby further irrevocably undertake, represent, warrant and agree to
and with GTS that, until the Offer shall have closed, lapsed or been withdrawn
we shall exercise or procure the exercise of the voting rights attached to the
Esprit Shares as instructed by GTS on any resolution to enable the Offer to
become unconditional if it were passed or rejected at a general or separate
class meeting of Esprit.
7. GTS MAC
(A) If at any time before the Acceptance Date we become aware of an
event which could or might reasonably be expected to give rise to a GTS MAC
we shall immediately serve notice on GTS providing full details of the
event, misleading statement, misrepresentation or omission alleged to be
expected to give rise to the GTS MAC ("the MAC Notice"). We shall also
serve a copy of the MAC Notice on the other Majority Shareholders and
Esprit. Not more than one MAC Notice may be served in respect of any
individual event, and in the event that more than one Majority Shareholder
serves a MAC Notice in respect of the same event, only the first to be
received by GTS will be valid. In no event shall a Majority Shareholder
have the right to serve a MAC Notice more than 10 US Business Days after it
becomes aware of an event which could or might reasonably be expected to
give rise to the GTS MAC to which such MAC Notice relates or after the
Acceptance Date. For the purposes of this paragraph we shall be deemed to
be aware of the contents of all public filings made by GTS. GTS shall
provide copies to us immediately following filing of any such filings made
by GTS from the date hereof until the Acceptance Date. No MAC Notice may in
any event be served later than 8 US Business Days before the date referred
to in paragraph 12(E).
(B) As soon as practicable after the service of the MAC Notice, and in
any event within two US Business Days, each of ourselves and GTS will
appoint an investment banking firm of international repute to act as an
appraiser ("the Appraiser"). Each of ourselves and GTS will use their best
endeavours to ensure that the Appraisers shall make an appraisal as to
whether a GTS MAC has occurred and shall notify ourselves and GTS of their
decision within three US Business Days of their appointment. If the
Appraisers agree with each other they shall immediately notify the Majority
Shareholders and GTS.
(C) If the Appraisers are unable to agree between themselves whether a
GTS MAC has occurred, we and GTS will use our best endeavours to procure
that the two Appraisers select a third bank with similar qualifications
("the Referee") which shall make its determination as to whether a GTS MAC
has occurred and shall notify ourselves and GTS of their decision within
three US Business Days after its selection. If our respective Appraisers
fail to agree upon the appointment of the Referee either we or GTS may
refer the matter to the President for the time being of the Law Society of
England and Wales who shall promptly appoint the Referee.
(D) Each of ourselves and GTS will have all reasonable opportunity of
making oral and written representations to each Appraiser and to the
Referee in enabling them to reach their determinations. The Appraisers and
the Referee shall act as experts and not as arbitrators and, absent fraud
or manifest error, the determination of the Appraisers and the Referee
hereunder will be binding upon ourselves and GTS.
(E) If it is determined under sub-paragraph (B) or (C) that a GTS MAC
has occurred then the provisions of paragraph 12 will apply. The
determination of whether a GTS MAC has or has not occurred can be relied
upon by GTS and all the Majority Shareholders.
(F) Each of ourselves and GTS recognise that the provisions of this
paragraph involve the co-operation of third parties. Each of ourselves and
GTS agree to use our respective best endeavours to ensure that such third
parties co-operate in order to determine, within the time frame described
in this paragraph, whether a GTS MAC has occurred. If it is not practicable
to determine whether a GTS MAC has occurred within that time frame, the
parties shall nevertheless use their best endeavours to ensure
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that the question is determined as soon as possible thereafter, and in any
event before the day ("the Last Acceptance Date") which is two US Business
Days and UK Business Days before the last date the Offer is capable of
becoming wholly unconditional.
(G) If it is not determined by the Last Acceptance Date that a GTS MAC
has occurred we and GTS agree that we will jointly request the Panel (and
request the directors of Esprit to assist us in this respect) to extend the
last date that the Offer may become wholly unconditional to a date not
later than 81 days after the posting of the Offer Document. If the
determination that no GTS MAC has occurred does not take place until such
date, then the Acceptance Date shall be extended to 1.00 p.m. on such date.
8. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") we irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
9. NOMINEES
In the case where the Esprit Shares are registered in the name of a
nominee, we shall direct the nominee to act as if the nominee were bound by the
terms of this irrevocable undertaking and we shall procure that such nominee
does all acts and things necessary to carry the terms hereof into effect as if
we had been the registered holder of the Esprit Shares registered in the name of
such nominee.
10. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
11. MISCELLANEOUS
(A) We acknowledge that we are not entering into this undertaking in
reliance upon any representation, warranty or undertaking save as expressly
set out herein and, in the absence of fraud, we shall have no claim or
remedy against GTS or Esprit in respect of any misrepresentation, untrue
statement, omission or non-disclosure. In particular, our undertakings
pursuant to paragraph 4 shall be irrevocable and, in the absence of fraud,
shall not be capable of rescission or termination on the basis of any
information subsequently disclosed by GTS or Esprit in any offer document,
listing particulars or registration statement or for any other reason
whatsoever including (without limitation) any failure by all or any of the
directors of Esprit to recommend the Offer or to continue to recommend the
Offer after the date of this undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. We agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for
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any such breach. Such remedies shall not be deemed to be the exclusive
remedies for a breach of this Undertaking but shall be in addition to all
other remedies available at law or equity.
12. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or in the event that a MAC Notice is served before the despatch of the
Offer Document, the date falling 10 US Business Days after determination
that a GTS MAC has not occurred (if later);
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived;
(D) it is determined that a GTS MAC has occurred; or
(E) the Offer is not declared wholly unconditional on or before the
60th day after the Offer document is despatched (or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G)).
13. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
EXECUTED AS A DEED )
by APAX FUNDS NOMINEES LIMITED ) ANDREW BARRETT
by its attorney )
</TABLE>
<TABLE>
<S> <C>
Witness' signature TIMOTHY DRAKE
Witness' name Timothy Drake
Witness' address 222 Grays Inn Road London WC1X 8HB
---------------------------------------------
Witness' occupation Solicitor
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For Global TeleSystems Group, Inc.
F-8
<PAGE> 403
SCHEDULE 1
The following represents our shareholding in Esprit:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5
-------- -------- -------- -------- --------
NUMBER OF
ORDINARY SHARES
SUBJECT TO OPTIONS,
NUMBER OF NUMBER OF WARRANTS OR RIGHTS TO
REGISTERED HOLDER BENEFICIAL OWNER ORDINARY SHARES ADSs ACQUIRE OR SUBSCRIBE
- ----------------- ---------------- --------------- --------- ---------------------
<S> <C> <C> <C> <C>
Apax Funds Investors in 32,294,100 nil nil
Nominees Limited funds IV and V
BNY Nominees Investors in nil 180,500 nil
Limited on Esprit funds IV and V
register
</TABLE>
F-9
<PAGE> 404
SCHEDULE 2
The Shareholder agrees not to transfer or dispose of any of its Shares to
any of the following persons or any of their respective affiliates:
Viatel Inc.
RSL Communications, Ltd.
Colt Telecom Group plc
Rupert Murdoch
PLD Telekom Inc.
Belgacom S.A.
Com Belga
Systema
WorldPort Communications, Inc.
Deutsche Telekom A.G.
France Telecom
British Telecommunications plc
Telecom Italia SpA
Telia AB
Koninklijke KPN NV
Telefonica de Spana, S.A.
ATT Corp.
MCI Worldcom Inc
Sprint Corp.
Global One
Qwest Communications International Inc.
Cable & Wireless Communications plc.
Energis plc
Equant NV
Global Crossing Ltd.
Metromedia Fiber Network Inc.
Teleglobe Inc.
F-10
<PAGE> 405
ANNEX G
IRREVOCABLE UNDERTAKING
BY
GOLD & APPEL TRANSFER S.A.
G-1
<PAGE> 406
To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Gold & Appel Transfer S.A.
Omar Hodge Building
Wickams's Cay
Road Town
Tortola
British Virgin Islands
8 December 1998
Dear Sirs,
1. THE OFFER
We refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "the Acceptance Date" means 3.00 pm on the 17th US Business Day
following the posting of the Offer Document or, if a MAC Notice has been
served before such day, 1.00 pm on the US Business Day following the
determination in accordance with paragraph 7(B) or 7(C) below that no GTS
MAC has occurred;
(B) "GTS MAC" means a material adverse change in the value of the GTS
Group by virtue of:
(i) a specific event which causes an adverse change in the
business, assets, financial or trading position or profits or prospects
of any member of the Wider GTS Group; or
(ii) there having been a material misrepresentation of fact or
omission to state a fact necessary to make the information contained
therein not materially misleading in any financial, business or other
information publicly disclosed by GTS in relation to the business,
assets, financial or trading position or prospects of any member of the
Wider GTS Group;
which in either case is material in the context of the GTS Group taken as a
whole. For the purposes of this definition:
(1) a GTS MAC shall exclude (without limitation) general factors
affecting the global telecommunications industry or other industries
as a whole;
(2) a decline in the market price of any securities of GTS or
any change in interest rates will not, of themselves, amount to a GTS
MAC; and
(3) GTS shall be considered on a stand alone basis excluding
Esprit;
(C) "Esprit Shares" means the ordinary shares and American Depositary
Shares ("ADSs") in Esprit Telecom shown in columns 3 and 4 of Schedule 1
and, except in sub-paragraph (A) of Paragraph 5 shall include any shares in
Esprit attributable to or deriving from such shares and shall
G-2
<PAGE> 407
include any other ordinary shares in Esprit which we acquire and
beneficially own after signing this undertaking but excluding any shares in
Esprit transferred with the prior written consent of GTS;
(D) "the Majority Shareholders" means each of Apax Funds Nominees
Limited, Warburg, Pincus Ventures, L.P. and Gold & Appel Transfer S.A;
(E) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the
terms of such offer or offers are, in the opinion of Bear Stearns,
with the agreement of Esprit's financial advisers, appointed for the
purposes of Rule 3 of the City Code provided such agreement is not
unreasonably withheld or delayed (but without hereby creating any
duty of care owed by Bear Stearns, except to GTS or by Esprit's
financial advisers, except to Esprit) no less favourable to
shareholders of Esprit than the terms set out in the Press
Announcement or the Offer Document;
(F) references to the share capital of Esprit include that represented
by ADSs; and
(G) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
We irrevocably consent to the issue of the Press Announcement incorporating
references to us and to this undertaking subject to any amendments which may be
agreed with us or Esprit's financial advisers. We also consent to the issue of
the Offer Document, incorporating references to us, and to this undertaking,
substantially similar to those references contained in the Press Announcement.
We understand that this irrevocable undertaking will be made available for
public inspection.
4. UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, we hereby irrevocably undertake to GTS as follows:-
(A) we shall accept or procure acceptance of the Offer in accordance
with its terms in respect of all the Esprit Shares by not later than the
Acceptance Date and shall forward or procure that there is forwarded, with
such acceptance, the share certificates or other documents of title in
respect of the Esprit Shares in accordance with the terms of the Offer;
(B) the Esprit Shares will be acquired by GTS fully paid and free from
all liens, equities, charges, encumbrances and other interests and together
with all rights now or hereafter attaching thereto, including the right to
receive and retain all dividends and other distributions declared, made or
paid hereafter;
(C) notwithstanding that we may be or become entitled to withdraw our
acceptance(s) of the Offer by virtue of any term of the Offer or the rules
of the City Code or any provision of the securities laws or regulations of
the US or otherwise, we shall not withdraw our acceptance(s) and shall
procure that our acceptance(s) is not withdrawn in respect of all or any of
the Esprit Shares;
G-3
<PAGE> 408
(D) save as required by paragraph 4(A) or in this paragraph 4(D), we
shall not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of the Esprit Shares or any interest held by us in any of the Esprit Shares
save that we may transfer or otherwise dispose of all or some of our Esprit
Shares provided that:
(1) prior to such transfer or disposition Esprit shall have
received the advice of its independent auditors and GTS shall have
received the advice of its independent auditors that such transfer or
disposition would not prevent the transactions contemplated by the Offer
from receiving "pooling of interests" treatment for financial accounting
purposes;
(2) such transfer or disposition would not delay the Offer becoming
wholly unconditional by more than 10 days or beyond the 60th day after
posting of the Offer Document, or if earlier, the last date by which the
Offer can become wholly unconditional;
(3) before such transfer or disposition the transferee of such
Esprit Shares shall have executed an irrevocable undertaking for no
consideration and under seal in a form substantially similar to this
Irrevocable Undertaking together with a legal opinion in respect thereof
as to due execution and enforceability in a form reasonably satisfactory
to GTS;
(4) such transferee has been advised by Esprit's financial advisers
that the transfer or disposition would not violate the provisions of the
Code;
(5) such transferee is (i) not listed on Schedule 2 hereto; and
(ii) immediately prior to such transfer does not own more than one per
cent of the outstanding GTS Shares; and
(6) we have consulted with GTS (in a way which does not oblige GTS
to make a public announcement) with respect to the timing of such sale
or disposition to mitigate any adverse effect such sale or disposition
would have on the market price of GTS Shares;
(E) we shall not prior to the lapsing or withdrawal of the Offer
without the prior written consent of GTS purchase or otherwise acquire any
shares in Esprit or any interest therein or agree to do so whether
conditionally or unconditionally;
(F) we shall procure that, save pursuant to this undertaking, unless
and until the Offer shall have lapsed or shall have been withdrawn, no
other agreement or arrangement (including any undertaking) shall be entered
into (other than with GTS) which could result in the disposal of, or the
creation or existence of any encumbrance on, all or any of the Esprit
Shares or any interest therein or which might in any way restrict the
disposal of the Esprit Shares or any of them and no other offer shall be
accepted in respect of the Esprit Shares or any of them (whether it is
conditional or unconditional and irrespective of the means by which it is
to be implemented);
(G) we shall not, prior to the issue of the Press Announcement without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, we shall advise
GTS prior to any such disclosure or announcement so that GTS has an
opportunity to seek to control the timing and manner of such disclosure;
(H) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, we shall refrain from knowingly taking any action
or making any statement which is or may be prejudicial to the success of
the Offer, including, without limitation:
(1) soliciting procuring, initiating or engaging in, directly or
indirectly, any discussions or negotiations with any third party,
involving any other offer by any third party for all or any part of the
issued share capital of Esprit or involving the acquisition outside the
ordinary course of business (as carried on to the date hereof) of or any
business combination involving Esprit or any of its
G-4
<PAGE> 409
subsidiaries or any material part of the shares or assets of Esprit or
any of its subsidiaries or in each case any interest therein ("each an
Esprit Transaction");
(2) entering into discussions or negotiations with, or (save as
required by Rule 20.2 of the City Code in which case only that
information strictly required to be provided shall be disclosed and on
the basis of an undertaking as to confidentiality substantially similar
to that given by GTS) providing any information to any person in
relation to, or facilitating or cooperating with in any way, any Esprit
Transaction; or
(3) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior written consent of GTS provided that this shall not apply to
any communications or discussions with our or Esprit's professional
advisers who appreciate the need for requirements as to confidentiality
in relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer;
(I) we shall inform GTS immediately:
(1) if we receive an approach from any person in relation to an
Esprit Transaction;
(2) if we are asked to, or do, provide any information to any
person with a view to any person investigating or entering into an
Esprit Transaction; or
(3) if we become aware of any material breach of the provisions of
this undertaking;
and in the case of (1) and (2) above, we shall provide reasonable details
as to the identity of any relevant person and the terms and conditions of
any proposal or details of any information requested or provided, and in
the case of (3) above, shall provide reasonable details of the relevant
breach;
(J) we are not in discussions with any third party in relation to any
Esprit Transaction;
(K) we will procure for GTS all necessary information regarding us and
our interests, in the share capital of Esprit which is required to be
contained in the Offer Document in order to comply with the requirements of
the City Code, US securities law or any other applicable law or regulation;
(L) we shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn, transfer, dispose of, grant rights
over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares.
5. WARRANTIES
5.1 We hereby further undertake warrant and represent to GTS as follows:
(A) we are the registered holder and beneficial owner of the Esprit
Shares (other than those represented by ADSs) and the beneficial owner of
the Esprit Shares represented by ADSs and the Esprit Shares are free from
all liens, equities charges or encumbrances. There are no other ordinary
shares in Esprit registered in our name or beneficially owned, or managed
and controlled by us, or in which we have an interest and we have no
rights, warrants or options to acquire or subscribe for ordinary shares in
Esprit or any interest therein save as specified in columns 3 and 4 of
Schedule 1;
(B) save pursuant to this undertaking we have not agreed,
conditionally or otherwise, to dispose of all or any of the Esprit Shares
or any interest therein and have (and, upon the Offer being made, will
continue to have) all necessary authority to enter into this undertaking
and accept or procure acceptance of the Offer in respect of the Esprit
Shares;
(C) we have the right to transfer the Esprit Shares with all rights
attaching to them as envisaged by the terms of the Offer;
G-5
<PAGE> 410
(D) otherwise than in the ordinary course of Esprit's
telecommunications business there is not outstanding any indebtedness or
other liability (actual or contingent) owing by any member of the Wider
Esprit Group to us or any person connected with us, nor is there any
indebtedness owing to any member of the Wider Esprit Group by any such
person;
(E) neither we nor any person connected with us has entered into any
agreement, undertaking, instrument or arrangement with any member of the
Wider Esprit Group.
5.2 We shall procure that (save as may be necessary to give effect to this
undertaking) we shall not allow nor shall we do or procure any act or omission
before the date the Offer becomes wholly unconditional which would constitute a
breach of any of the above warranties if they were given at any and all times
from the date hereof down to the date the Offer becomes wholly unconditional, or
which would make any of the above warranties inaccurate or misleading if they
were so given.
5.3 We further undertake to forthwith disclose in writing to GTS any
matter or thing which may arise or become known to me after the date hereof and
before the date the Offer becomes wholly unconditional which is inconsistent
with any of the above warranties or which might make any of them inaccurate or
misleading if they were given at any and all times from the date hereof down to
the date the Offer becomes wholly unconditional or which is a breach of
sub-paragraph 5.2 above.
6. VOTING RIGHTS
We hereby further irrevocably undertake, represent, warrant and agree to
and with GTS that, until the Offer shall have closed, lapsed or been withdrawn
we shall exercise or procure the exercise of the voting rights attached to the
Esprit Shares as instructed by GTS on any resolution to enable the Offer to
become unconditional if it were passed or rejected at a general or separate
class meeting of GTS.
7. GTS MAC
(A) If at any time before the 17th US Business Day after the posting
of the Offer Document we become aware of an event which could or might
reasonably be expected to give rise to a GTS MAC we shall immediately serve
notice on GTS providing full details of the event alleged to be expected to
give rise to the GTS MAC and of its effect on the value of GTS ("the MAC
Notice"). We shall also serve a copy of the MAC Notice on the other
Majority Shareholders and Esprit. Not more than one MAC Notice may be
served in respect of any individual event, and in the event that more than
one Majority Shareholder serves a MAC Notice in respect of the same event,
only the first to be received by GTS will be valid. In no event shall a
Majority Shareholder have the right to serve a MAC Notice more than 10 US
Business Days after it becomes aware of an event which could or might
reasonably be expected to give rise to the GTS MAC to which such MAC Notice
relates or after the Acceptance Date. For the purposes of this paragraph we
shall be deemed to be aware of the contents of all public filings made by
GTS. GTS shall provide copies to us immediately following filing of any
such filings made by GTS from the date hereof until the Acceptance Date.
(B) As soon as practicable after the service of the MAC Notice, and in
any event within two US Business Days, each of ourselves and GTS will
appoint an investment banking firm of international repute to act as an
appraiser ("the Appraiser"). Each of ourselves and GTS will use their best
endeavours to ensure that the Appraisers shall make an appraisal as to
whether a GTS MAC has occurred and shall notify ourselves and GTS of their
decision within three US Business Days of their appointment. If the
Appraisers agree with each other they shall immediately notify the Majority
Shareholders and GTS.
(C) If the Appraisers are unable to agree between themselves whether a
GTS MAC has occurred, we and GTS will use our best endeavours to procure
that the two Appraisers select a third bank with similar qualifications
("the Referee") which shall make its determination as to whether a GTS MAC
has occurred and shall notify ourselves and GTS of their decision within
three US Business Days after its selection. If our respective Appraisers
fail to agree upon the appointment of the Referee either we or GTS
G-6
<PAGE> 411
may refer the matter to the President for the time being of the Law Society
of England and Wales who shall promptly appoint the Referee.
(D) Each of ourselves and GTS will have all reasonable opportunity of
making oral and written representations to each Appraiser and to the
Referee in enabling them to reach their determinations. The Appraisers and
the Referee shall act as experts and not as arbitrators and, absent fraud
or manifest error, the determination of the Appraisers and the Referee
hereunder will be binding upon ourselves and GTS.
(E) If it is determined under sub-paragraph (B) or (C) that a GTS MAC
has occurred then the provisions of paragraph 12 will apply. The
determination of whether a GTS MAC has or has not occurred can be relied
upon by GTS and all the Shareholders.
(F) Each of ourselves and GTS recognise that the provisions of this
paragraph involve the co-operation of third parties. Each of ourselves and
GTS agree to use our respective best endeavours to ensure that such third
parties co-operate in order to determine, within the time frame described
in this paragraph, whether a GTS MAC has occurred. If it is not practicable
to determine whether a GTS MAC has occurred within that time frame, the
parties shall nevertheless use their best endeavours to ensure that the
question is determined as soon as possible thereafter, and in any event
before the day ("the Last Acceptance Date") which is two US Business Days
and UK Business Days before the last date the Offer is capable of becoming
wholly unconditional.
(G) If it is not determined by the Last Acceptance Date that a GTS MAC
has occurred we and GTS agree that we will jointly request the Panel (and
request the directors of Esprit to assist us in this respect) to extend the
last date that the Offer may become wholly unconditional to a date not
later than 81 days after the posting of the Offer Document. If the
determination that no GTS MAC has occurred does not take place until such
date, then the Acceptance Date shall be extended to 1.00 p.m. on such date.
8. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") we irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
(C) We hereby appoint Herbert Smith (for the attention of Ben Ward) of
Exchange House, Primrose Street, London EC2A 2HS as my process agent to
receive on our behalf service of process in any proceedings in England.
Service upon the process agent shall be good service upon us whether or not
it is forwarded to and received by us. If for any reason the process agent
ceases to be able to act as process agent, or no longer has an address in
England, we irrevocably agree to appoint a substitute process agent with an
address in England acceptable to GTS and to deliver to GTS a copy of the
substitute process agent's acceptance of that appointment within seven
days. In the event that we fail to appoint a substitute process agent, it
shall be effective service for GTS to serve the process upon the last known
address in England of our last known process agent notified to GTS,
notwithstanding that such process agent is no longer found at such address
or has ceased to act.
9. NOMINEES
In the case where the Esprit Shares are registered in the name of a
nominee, we shall direct the nominee to act as if the nominee were bound by the
terms of this irrevocable undertaking and we shall procure that such nominee
does all acts and things necessary to carry the terms hereof into effect as if
we had been the registered holder of the Esprit Shares registered in the name of
such nominee.
G-7
<PAGE> 412
10. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
11. MISCELLANEOUS
(A) We acknowledge that we are not entering into this undertaking in
reliance upon any representation, warranty or undertaking save as expressly
set out herein and, in the absence of fraud, we shall have no claim or
remedy against GTS or Esprit in respect of any misrepresentation, untrue
statement, omission or non-disclosure. In particular, our undertakings
pursuant to paragraph 4 shall be irrevocable and, in the absence of fraud,
shall not be capable of rescission or termination on the basis of any
information subsequently disclosed by GTS or Esprit in any offer document,
listing particulars or registration statement or for any other reason
whatsoever including (without limitation) any failure by all or any of the
directors of Esprit to recommend the Offer or to continue to recommend the
Offer after the date of this undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. We agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
12. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or in the event that a MAC Notice is served before the despatch of the
Offer Document, the date falling 10 US Business Days after determination
that a GTS MAC has not occurred (if later);
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived;
(D) it is determined that a GTS MAC has occurred; or
(E) the Offer is not declared wholly unconditional on or before the
60th day after the Offer document is despatched (or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G)).
G-8
<PAGE> 413
13. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
EXECUTED AS A DEED )
by GOLD & APPEL TRANSFER S.A. ) WALTER ANDERSON
acting through its attorney in fact )
</TABLE>
<TABLE>
<S> <C>
Witness' signature GRIER RACLIN
Witness' name GRIER RACLIN
Witness' address 104 Summerfield Road, Chevy Chase MD USA
Witness' occupation Attorney at law
</TABLE>
We agree and accept the terms of this undertaking.
GRIER RACLIN
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
G-9
<PAGE> 414
SCHEDULE 1
The following represents our shareholding and shares subject to options,
warrants or rights to acquire or subscribe in Esprit:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5
-------- -------- -------- -------- --------
NUMBER OF
ORDINARY SHARES
SUBJECT TO OPTIONS,
NUMBER OF NUMBER OF WARRANTS OR RIGHTS TO
REGISTERED HOLDER BENEFICIAL OWNER ORDINARY SHARES ADSs ACQUIRE OR SUBSCRIBE
- ----------------- ---------------- --------------- --------- ---------------------
<S> <C> <C> <C> <C>
Gold & Appel Gold & Appel 16
Transfer S.A. Transfer S.A.
BNY Gold & Appel 4,662,555 nil
(Nominees) Transfer S.A.
Limited as Esprit
register of
members; Bear
Stearns as
registered holder
of ADS
</TABLE>
G-10
<PAGE> 415
SCHEDULE 2
The Shareholder agrees not to transfer or dispose of any of its Shares to
any of the following persons or any of their respective affiliates:
Viatel Inc.
RSL Communications, Ltd.
Colt Telecom Group plc
Rupert Murdoch
PLD Telekom Inc.
Belgacom S.A.
Com Belga
Systema
WorldPort Communications, Inc.
Deutsche Telekom A.G.
France Telecom
British Telecommunications plc
Telecom Italia SpA
Telia AB
Koninklijke KPN NV
Telefonica de Spana, S.A.
ATT Corp.
MCI Worldcom Inc
Sprint Corp.
Global One
Qwest Communications International Inc.
Cable & Wireless Communications plc.
Energis plc
Equant NV
Global Crossing Ltd.
Metromedia Fiber Network Inc.
Teleglobe Inc.
G-11
<PAGE> 416
ANNEX H
IRREVOCABLE UNDERTAKING
BY
WARBURG, PINCUS VENTURES, L.P.
H-1
<PAGE> 417
To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
10017 New York
United States of America
8 December 1998
Dear Sirs,
1. THE OFFER
We refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "the Acceptance Date" means 3.00 pm on the 17th US Business Day
following the posting of the Offer Document or, if a MAC Notice has been
served before such day, 1.00 pm on the US Business Day following the
determination in accordance with paragraph 7(B) or 7(C) below that no GTS
MAC has occurred;
(B) "GTS MAC" means a material adverse change in the value of the GTS
Group by virtue of:
(i) a specific event which causes an adverse change in the
business, assets, financial or trading position or profits or prospects
of any member of the Wider GTS Group; or
(ii) there having been anything misleading or a misrepresentation
of fact or omission to state a fact necessary to make the information
contained therein not misleading in any financial, business or other
information publicly disclosed by GTS in relation to the business,
assets, financial or trading position or prospects of any member of the
Wider GTS Group;
which in either case is material in the context of the GTS Group taken
as a whole. For the purposes of this definition:
(1) a GTS MAC shall exclude (without limitation) general factors
affecting the global telecommunications industry or other industries
as a whole;
(2) a decline in the market price of any securities of GTS or
any change in interest rates will not, of themselves, amount to a GTS
MAC; and
(3) GTS shall be considered on a stand alone basis excluding
Esprit;
(C) "Esprit Shares" means the ordinary shares and American Depositary
Shares ("ADSs") in Esprit shown in columns 3 and 4 of Schedule 1 and,
except in sub-paragraph (A) of Paragraph 5 shall include any shares in
Esprit attributable to or deriving from such shares and shall include any
other ordinary shares in Esprit which we acquire and beneficially own after
signing this undertaking but excluding any shares in Esprit transferred in
accordance with paragraph 4(D);
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(D) "the Majority Shareholders" means each of Apax Funds Nominees
Limited, Warburg, Pincus Ventures, L.P. and Gold & Appel Transfer S.A. and
Walter Anderson;
(E) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers, appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(F) references to the share capital of Esprit include that represented
by ADSs; and
(G) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
We irrevocably consent to the issue of the Press Announcement incorporating
references to us and to this undertaking subject to any amendments which may be
agreed with us or Esprit's financial advisers. We also consent to the issue of
the Offer Document, incorporating references to us, and to this undertaking,
substantially similar to those references contained in the Press Announcement.
We understand that this irrevocable undertaking will be made available for
public inspection.
4. UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, we hereby irrevocably undertake to GTS as follows: --
(A) we shall accept or procure acceptance of the Offer in accordance
with its terms in respect of all the Esprit Shares by not later than the
Acceptance Date and shall forward or procure that there is forwarded, with
such acceptance, the share certificates or other documents of title in
respect of the Esprit Shares in accordance with the terms of the Offer;
(B) the Esprit Shares will be acquired by GTS fully paid and free from
all liens, equities, charges, encumbrances and other interests and together
with all rights now or hereafter attaching thereto, including the right to
receive and retain all dividends and other distributions declared, made or
paid hereafter;
(C) notwithstanding that we may be or become entitled to withdraw our
acceptance(s) of the Offer by virtue of any term of the Offer or the rules
of the City Code or any provision of the securities laws or regulations of
the US or otherwise, we shall not withdraw our acceptance(s) and shall
procure that our acceptance(s) is not withdrawn in respect of all or any of
the Esprit Shares;
(D) save as required by paragraph 4(A) or in this paragraph 4(D), we
shall not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of the Esprit Shares
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or any interest held by us in any of the Esprit Shares save that we may
transfer or otherwise dispose of all or some of our Esprit Shares provided
that:
(1) prior to such transfer or disposition Esprit shall have
received the advice of its independent auditors and GTS shall have
received the advice of its independent auditors that such transfer or
disposition would not prevent the transactions contemplated by the Offer
from receiving "pooling of interests" treatment for financial accounting
purposes;
(2) such transfer or disposition would not delay the Offer becoming
wholly unconditional by more than 10 days or beyond the 60th day after
posting of the Offer Document, or if earlier, the last date by which the
Offer can become wholly unconditional;
(3) before such transfer or disposition the transferee of such
Esprit Shares shall have executed an irrevocable undertaking for no
consideration and under seal in a form substantially similar to this
Irrevocable Undertaking together with a legal opinion in respect thereof
as to due execution and enforceability in a form reasonably satisfactory
to GTS;
(4) such transferee has been advised by Esprit's financial advisers
that the transfer or disposition would not violate the provisions of the
Code;
(5) such transferee is (i) not listed on Schedule 1 hereto; and
(ii) immediately prior to such transfer does not own more than one per
cent of the outstanding GTS Shares; and
(6) we have consulted with GTS (in a way which does not oblige GTS
to make a public announcement -- provided that if GTS is obliged to
disclose as a result of such disclosure this shall not be a breach of
this provision by us) with respect to the timing of such sale or
disposition to mitigate any adverse effect such sale or disposition
would have on the market price of GTS Shares;
(E) we shall not prior to the lapsing or withdrawal of the Offer
without the prior written consent of GTS purchase or otherwise acquire any
shares in Esprit or any interest therein or agree to do so whether
conditionally or unconditionally;
(F) we shall procure that, save pursuant to this undertaking, unless
and until the Offer shall have lapsed or shall have been withdrawn, no
other agreement or arrangement (including any undertaking) shall be entered
into (other than with GTS) which could result in the disposal of, or the
creation or existence of any encumbrance on, all or any of the Esprit
Shares or any interest therein or which might in any way restrict the
disposal of the Esprit Shares or any of them and no other offer shall be
accepted in respect of the Esprit Shares or any of them (whether it is
conditional or unconditional and irrespective of the means by which it is
to be implemented);
(G) we shall not, prior to the issue of the Press Announcement without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, we shall advise
GTS prior to any such disclosure or announcement so that GTS has an
opportunity to seek to control the timing and manner of such disclosure;
(H) subject to paragraph 4(D), at all times after the date hereof and
until the Offer shall have lapsed or been withdrawn, we shall refrain from
knowingly taking any action or making any statement which is or may be
prejudicial to the success of the Offer, including, without limitation:
(1) soliciting procuring, initiating or engaging in, directly or
indirectly, any discussions or negotiations with any third party,
involving any other offer by any third party for all or any part of the
issued share capital of Esprit or involving the acquisition outside the
ordinary course of business (as carried on to the date hereof) of or any
business combination involving Esprit or any of its subsidiaries or any
material part of the shares or assets of Esprit or any of its
subsidiaries or in each case any interest therein (each "an Esprit
Transaction");
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(2) entering into discussions or negotiations with, or (save as
required by Rule 20.2 of the City Code in which case only that
information strictly required to be provided shall be disclosed and on
the basis of an undertaking as to confidentiality substantially similar
to that given by GTS) providing any information to any person in
relation to, or facilitating or cooperating with in any way, any Esprit
Transaction; or
(3) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior written consent of GTS provided that this shall not apply to
any communications or discussions with our or Esprit's professional
advisers who appreciate the need for requirements as to confidentiality
in relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer;
(I) we shall inform GTS immediately:
(1) if we receive an approach from any person in relation to an
Esprit Transaction save to the extent bound by any existing duty of
confidentiality;
(2) if we are asked to, or do, provide any information to any
person with a view to any person investigating or entering into an
Esprit Transaction save to the extent bound by any existing duty of
confidentiality; or
(3) if we become aware of any material breach of the provisions of
this undertaking;
and in the case of (1) and (2) above, we shall provide reasonable
details as to the identity of any relevant person and the terms and
conditions of any proposal or details of any information requested or
provided, and in the case of (3) above, shall provide reasonable details
of the relevant breach;
(J) we are not in discussions with any third party in relation to any
Esprit Transaction;
(K) we will procure for GTS all necessary information regarding us and
our interests and those of the funds on whose behalf we hold the Esprit
Shares as nominee, in the share capital of Esprit which is required to be
contained in the Offer Document in order to comply with the requirements of
the City Code, US securities law or any other applicable law or regulation;
(L) we shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn, transfer, dispose of, grant rights
over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares (subject to paragraph
4(D)).
5. WARRANTIES
5.1 We hereby further undertake warrant and represent to GTS as follows:
(A) we are the registered holder of the Esprit Shares (other than
those represented by ADSs) and the owner of the Esprit Shares represented
by ADSs and the Esprit Shares are free from all liens, charges or
encumbrances. There are no other ordinary shares in Esprit registered in
our name or beneficially owned, or managed and controlled by us, or in
which we have an interest and we have no rights, warrants or options to
acquire or subscribe for ordinary shares in Esprit or any interest therein
save as specified in columns 3 and 4 of Schedule 1;
(B) save pursuant to this undertaking we have not agreed,
conditionally or otherwise, to dispose of all or any of the Esprit Shares
or any interest therein and have (and, upon the Offer being made, will
continue to have) all necessary authority to enter into this undertaking
and accept or procure acceptance of the Offer in respect of the Esprit
Shares;
(C) at the time we are obliged to accept the Offer pursuant to
paragraph 4(A) we will have the right to transfer the Esprit Shares with
all rights attaching to them as envisaged by the terms of the Offer.
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6. VOTING RIGHTS
We hereby further irrevocably undertake, represent, warrant and agree to
and with GTS that, until the Offer shall have closed, lapsed or been withdrawn
we shall exercise or procure the exercise of the voting rights attached to the
Esprit Shares as instructed by GTS on any resolution to enable the Offer to
become unconditional if it were passed or rejected at a general or separate
class meeting of Esprit.
7. GTS MAC
(A) If at any time before the Acceptance Date we become aware of an
event which could or might reasonably be expected to give rise to a GTS MAC
we shall immediately serve notice on GTS providing full details of the
event, misleading statement, misrepresentation or omission alleged to be
expected to give rise to the GTS MAC ("the MAC Notice"). We shall also
serve a copy of the MAC Notice on the other Majority Shareholders and
Esprit. Not more than one MAC Notice may be served in respect of any
individual event, and in the event that more than one Majority Shareholder
serves a MAC Notice in respect of the same event, only the first to be
received by GTS will be valid. In no event shall a Majority Shareholder
have the right to serve a MAC Notice more than 10 US Business Days after it
becomes aware of an event which could or might reasonably be expected to
give rise to the GTS MAC to which such MAC Notice relates or after the
Acceptance Date. For the purposes of this paragraph we shall be deemed to
be aware of the contents of all public filings made by GTS. GTS shall
provide copies to us immediately following filing of any such filings made
by GTS from the date hereof until the Acceptance Date. No MAC Notice may in
any event be served later than 8 US Business Days before the date referred
to in paragraph 12(E).
(B) As soon as practicable after the service of the MAC Notice, and in
any event within two US Business Days, each of ourselves and GTS will
appoint an investment banking firm of international repute to act as an
appraiser ("the Appraiser"). Each of ourselves and GTS will use their best
endeavours to ensure that the Appraisers shall make an appraisal as to
whether a GTS MAC has occurred and shall notify ourselves and GTS of their
decision within three US Business Days of their appointment. If the
Appraisers agree with each other they shall immediately notify the Majority
Shareholders and GTS.
(C) If the Appraisers are unable to agree between themselves whether a
GTS MAC has occurred, we and GTS will use our best endeavours to procure
that the two Appraisers select a third bank with similar qualifications
("the Referee") which shall make its determination as to whether a GTS MAC
has occurred and shall notify ourselves and GTS of their decision within
three US Business Days after its selection. If our respective Appraisers
fail to agree upon the appointment of the Referee either we or GTS may
refer the matter to the President for the time being of the Law Society of
England and Wales who shall promptly appoint the Referee.
(D) Each of ourselves and GTS will have all reasonable opportunity of
making oral and written representations to each Appraiser and to the
Referee in enabling them to reach their determinations. The Appraisers and
the Referee shall act as experts and not as arbitrators and, absent fraud
or manifest error, the determination of the Appraisers and the Referee
hereunder will be binding upon ourselves and GTS.
(E) If it is determined under sub-paragraph (B) or (C) that a GTS MAC
has occurred then the provisions of paragraph 12 will apply. The
determination of whether a GTS MAC has or has not occurred can be relied
upon by GTS and all the Majority Shareholders.
(F) Each of ourselves and GTS recognise that the provisions of this
paragraph involve the co-operation of third parties. Each of ourselves and
GTS agree to use our respective best endeavours to ensure that such third
parties co-operate in order to determine, within the time frame described
in this paragraph, whether a GTS MAC has occurred. If it is not practicable
to determine whether a GTS MAC has occurred within that time frame, the
parties shall nevertheless use their best endeavours to ensure that the
question is determined as soon as possible thereafter, and in any event
before the day ("the Last Acceptance Date") which is two US Business Days
and UK Business Days before the last date the Offer is capable of becoming
wholly unconditional.
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(G) If it is not determined by the Last Acceptance Date that a GTS MAC
has occurred we and GTS agree that we will jointly request the Panel (and
request the directors of Esprit to assist us in this respect) to extend the
last date that the Offer may become wholly unconditional to a date not
later than 81 days after the posting of the Offer Document. If the
determination that no GTS MAC has occurred does not take place until such
date, then the Acceptance Date shall be extended to 1.00 p.m. on such date.
8. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") we irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
(C) We hereby appoint E. M. Warburg, Pincus & Co. International Ltd.
of 28 King Street, St. James, London SW1Y 6QW as my process agent to
receive on our behalf service of process in any proceedings in England.
Service upon the process agent shall be good service upon us whether or not
it is forwarded to and received by us. If for any reason the process agent
ceases to be able to act as process agent, or no longer has an address in
England, we irrevocably agree to appoint a substitute process agent with an
address in England acceptable to GTS and to deliver to GTS a copy of the
substitute process agent's acceptance of that appointment within seven
days. In the event that we fail to appoint a substitute process agent, it
shall be effective service for GTS to serve the process upon the last known
address in England of our last known process agent notified to GTS,
notwithstanding that such process agent is no longer found at such address
or has ceased to act.
9. NOMINEES
In the case where the Esprit Shares are registered in the name of a
nominee, we shall direct the nominee to act as if the nominee were bound by the
terms of this irrevocable undertaking and we shall procure that such nominee
does all acts and things necessary to carry the terms hereof into effect as if
we had been the registered holder of the Esprit Shares registered in the name of
such nominee.
10. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
11. MISCELLANEOUS
(A) We acknowledge that we are not entering into this undertaking in
reliance upon any representation, warranty or undertaking save as expressly
set out herein and, in the absence of fraud, we shall have no claim or
remedy against GTS or Esprit in respect of any misrepresentation, untrue
statement, omission or non-disclosure. In particular, our undertakings
pursuant to paragraph 4 shall be irrevocable and, in the absence of fraud,
shall not be capable of rescission or termination on the basis of any
information subsequently disclosed by GTS or Esprit in any offer document,
listing particulars or registration statement or for any other reason
whatsoever including (without limitation) any failure by all
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or any of the directors of Esprit to recommend the Offer or to continue to
recommend the Offer after the date of this undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. We agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
12. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or in the event that a MAC Notice is served before the despatch of the
Offer Document, the date falling 10 US Business Days after determination
that a GTS MAC has not occurred (if later);
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived;
(D) it is determined that a GTS MAC has occurred; or
(E) the Offer is not declared wholly unconditional on or before the
60th day after the Offer document is despatched (or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G)).
13. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
EXECUTED AS A DEED )
by WARBURG, PINCUS ) ROBERTO ITALIA for and on behalf of
VENTURES, L.P. ) Dominic Shorthouse
by ) Member
)
</TABLE>
<TABLE>
<S> <C>
Witness' signature MATHEW F. HERMAN
Witness' name Mathew F. Herman
Witness' address 64 Holland Park London W11
Witness' occupation Attorney
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For Global TeleSystems Group, Inc.
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SCHEDULE 1
The following represents our shareholding in Esprit:
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5
-------- -------- -------- -------- --------
NUMBER OF
ORDINARY SHARES
SUBJECT TO OPTIONS,
NUMBER OF NUMBER OF WARRANTS OR RIGHTS TO
REGISTERED HOLDER BENEFICIAL OWNER ORDINARY SHARES ADSs ACQUIRE OR SUBSCRIBE
- ----------------- ---------------- --------------- --------- ---------------------
<S> <C> <C> <C> <C>
Warburg, Pincus Investors in the 15,442,150 nil nil
Ventures, L.P. relevant Warburg
Pincus funds
</TABLE>
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SCHEDULE 2
The Shareholder agrees not to transfer or dispose of any of its Shares to
any of the following persons or any of their respective affiliates:
Viatel Inc.
RSL Communications, Ltd.
Colt Telecom Group plc
Rupert Murdoch
PLD Telekom Inc.
Belgacom S.A.
Com Belga
Systema
WorldPort Communications, Inc.
Deutsche Telekom A.G.
France Telecom
British Telecommunications plc
Telecom Italia SpA
Telia AB
Koninklijke KPN NV
Telefonica de Spana, S.A.
ATT Corp.
MCI Worldcom Inc
Sprint Corp.
Global One
Qwest Communications International Inc.
Cable & Wireless Communications plc.
Energis plc
Equant NV
Global Crossing Ltd.
Metromedia Fiber Network Inc.
Teleglobe Inc.
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ANNEX I
IRREVOCABLE UNDERTAKING
BY
SIR ROBIN BIGGAM
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To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Sir Robin Biggam
Streatley House
Streatley
Bedfordshire LU3 3PS
United Kingdom
8 December 1998
Dear Sirs,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial
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advisers. I also consent to the issue of the Offer Document, incorporating
references to me, and to this undertaking, substantially similar to those
references contained in the Press Announcement. I understand that this
irrevocable undertaking will be made available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein (each "an Esprit Transaction");
(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to
I-3
<PAGE> 429
confidentiality substantially similar to that given by GTS) providing
any information to any person in relation to, or facilitating or
cooperating with in any way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
I-4
<PAGE> 430
(N) in so far as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
I-5
<PAGE> 431
8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
I-6
<PAGE> 432
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
SIGNED and DELIVERED
as a Deed by SIR ROBIN BIGGAM DAVID OERTLE
(as attorney for Sir Robin Biggam)
in the presence of:
<TABLE>
<S> <C>
Witness' signature: J CHAMBERS
Witness' name: J. Chambers
Witness' address: 20 Blackfriars Lane, London EC4V 6HB
Witness' occupation: Solicitor
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
I-7
<PAGE> 433
SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
nil
I-8
<PAGE> 434
ANNEX J
IRREVOCABLE UNDERTAKING
BY
JOHN MCMONIGALL
J-1
<PAGE> 435
To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: John McMonigall
"Murrell"
Totters Lane
Murrell Green
Hook
Hampshire RG27 8HX
8 December 1998
Dear Sirs,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
J-2
<PAGE> 436
3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial advisers. I also consent to
the issue of the Offer Document, incorporating references to me, and to this
undertaking, substantially similar to those references contained in the Press
Announcement. I understand that this irrevocable undertaking will be made
available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein save for any transaction specifically permitted by
paragraph 4(D) of the Shareholders Undertaking given by Apax Funds
Nominees Limited (each "an Esprit Transaction");
J-3
<PAGE> 437
(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to confidentiality
substantially similar to that given by GTS) providing any information to
any person in relation to, or facilitating or cooperating with in any
way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
J-4
<PAGE> 438
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
(N) in so far as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
J-5
<PAGE> 439
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not has been
satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
J-6
<PAGE> 440
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
SIGNED and DELIVERED as a Deed by JOHN MCMONIGALL acting through his attorney,
ANDREW BARRETT in the presence of:
Witness' signature: TIMOTHY DRAKE
Witness' name: Timothy Drake
Witness' address: 222 Grays Inn Road, London WC1X 8HJ
Witness' occupation: Solicitor
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
J-7
<PAGE> 441
SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
nil
J-8
<PAGE> 442
ANNEX K
IRREVOCABLE UNDERTAKING
BY
ROY MERRITT
K-1
<PAGE> 443
To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Roy Merritt
8a Moorhouse Road
Notting Hill Gate
London W2 5DJ
United Kingdom
8 December 1998
Dear Sirs,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial
K-2
<PAGE> 444
advisers. I also consent to the issue of the Offer Document, incorporating
references to me, and to this undertaking, substantially similar to those
references contained in the Press Announcement. I understand that this
irrevocable undertaking will be made available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein (each "an Esprit Transaction");
(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to
K-3
<PAGE> 445
confidentiality substantially similar to that given by GTS) providing
any information to any person in relation to, or facilitating or
cooperating with in any way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
K-4
<PAGE> 446
(N) in so far as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
K-5
<PAGE> 447
8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
K-6
<PAGE> 448
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
SIGNED and DELIVERED
as a Deed by ROY MERRITT ROY MERRITT
in the presence of:
</TABLE>
<TABLE>
<S> <C>
Witness' signature: MICHAEL POTTER
Witness' name: Michael Potter
Witness' address: 14 Connaught Square Flat 2 W2
Witness' occupation: Executive
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
K-7
<PAGE> 449
SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
1,459,758 options
K-8
<PAGE> 450
ANNEX L
IRREVOCABLE UNDERTAKING
BY
DAVID OERTLE
L-1
<PAGE> 451
To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: David Oertle
Pavillion Cottage
Eastfield Lane
Whitchurch-on-Thames
Oxon RG8 8EJ
United Kingdom
8 December 1998
Dear Sirs,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
L-2
<PAGE> 452
3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial advisers. I also consent to
the issue of the Offer Document, incorporating references to me, and to this
undertaking, substantially similar to those references contained in the Press
Announcement. I understand that this irrevocable undertaking will be made
available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein (each "an Esprit Transaction");
L-3
<PAGE> 453
(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to confidentiality
substantially similar to that given by GTS) providing any information to
any person in relation to, or facilitating or cooperating with in any
way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
L-4
<PAGE> 454
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
(N) insofar as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
L-5
<PAGE> 455
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
L-6
<PAGE> 456
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
SIGNED and DELIVERED
as a Deed by DAVID OERTLE DAVID OERTLE
in the presence of:
<TABLE>
<S> <C>
Witness' signature: J. CHAMBERS
Witness' name: J. Chambers
Witness' address: 20 Blackfriars Lane, London EC4V 6HD
Witness' occupation: Solicitor
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
L-7
<PAGE> 457
SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
3,172,762 options
L-8
<PAGE> 458
ANNEX M
IRREVOCABLE UNDERTAKING
BY
MICHAEL POTTER
M-1
<PAGE> 459
TO: GLOBAL TELESYSTEMS GROUP, INC.
("GTS")
1751 PINNACLE DRIVE
NORTH TOWER 12TH FLOOR
MCLEAN VA 22102
UNITED STATES OF AMERICA
FROM: MICHAEL POTTER
14 CONNAUGHT SQUARE
LONDON W2
UNITED KINGDOM
8 DECEMBER 1998
DEAR SIRS,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial advisers. I also consent to
the issue of the Offer Document, incorporating references to me, and to this
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undertaking, substantially similar to those references contained in the Press
Announcement. I understand that this irrevocable undertaking will be made
available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein (each "an Esprit Transaction");
(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to
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confidentiality substantially similar to that given by GTS) providing
any information to any person in relation to, or facilitating or
cooperating with in any way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
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<PAGE> 462
(N) insofar as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
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8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
SIGNED and DELIVERED
as a Deed by MICHAEL POTTER MICHAEL POTTER
in the presence of:
<TABLE>
<S> <C>
Witness' signature: ROY MERRITT
Witness' name: Roy Merritt
Witness' address: 8a Moorhouse Road, London W2 SDJ
Witness' occupation: Company Director
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
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SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
653,312 options
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ANNEX N
IRREVOCABLE UNDERTAKING
BY
DOMINIC SHORTHOUSE
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To: Global TeleSystems Group, Inc.
("GTS")
1751 Pinnacle Drive
North Tower 12th Floor
McLean VA 22102
United States of America
From: Dominic Shorthouse
Lake House
Lake Road
Virginia Water
Surrey GU25 4QW
United Kingdom
8 December 1998
Dear Sirs,
1. THE OFFER
I refer to the press announcement in the form of the draft attached hereto
(the "Press Announcement") setting out the terms and conditions upon which Bear
Stearns will, on behalf of GTS, make an offer (the "Offer") to acquire the whole
of the issued and to be issued share capital of Esprit Telecom Group plc
("Esprit") excluding any such share capital owned by GTS or any subsidiary of
GTS on the date that the Offer is made.
2. DEFINITIONS
In this letter, unless the context otherwise requires:
(A) "Offer":
(1) means any offer or offers that may be made by or on behalf of
GTS to acquire:
(a) the whole of the share capital of Esprit in issue at the
date on which the Offer is made (including any securities in Esprit
attributable to or derived from such share capital, but excluding any
such share capital owned on such date by GTS or any subsidiary of
GTS); and
(b) any share capital of Esprit allotted while the Offer remains
open for acceptance or before such earlier date as GTS may determine
whether pursuant to the exercise of conversion or subscription rights
or otherwise; and
(2) extends to any new, increased, extended or revised offer or
offers by or on behalf of GTS, provided that in any such case the terms
of such offer or offers are, in the opinion of Bear Stearns, with the
agreement of Esprit's financial advisers appointed for the purposes of
Rule 3 of the City Code provided such agreement is not unreasonably
withheld or delayed (but without hereby creating any duty of care owed
by Bear Stearns, except to GTS or by Esprit's financial advisers, except
to Esprit) no less favourable to shareholders of Esprit than the terms
set out in the Press Announcement or the Offer Document;
(B) "Options" means the options to subscribe ordinary shares of 1p
each in Esprit held by me shown in Schedule 1; and
(C) save as referred to above words defined in the Press Announcement
have the same meanings herein.
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3. RELEASE OF PRESS ANNOUNCEMENT
I irrevocably consent to the issue of the Press Announcement incorporating
references to me and to this undertaking subject to any amendments which may be
agreed between GTS and Esprit or Esprit's financial advisers. I also consent to
the issue of the Offer Document, incorporating references to me, and to this
undertaking, substantially similar to those references contained in the Press
Announcement. I understand that this irrevocable undertaking will be made
available for public inspection.
4. DIRECTOR'S UNDERTAKINGS
In consideration of GTS agreeing to make the Offer in all material respects
on the terms and subject to the conditions referred to in the Press
Announcement, I hereby irrevocably undertake to GTS as follows:
(A) to the extent that my Options may be exercisable and I exercise my
Options, I shall accept the Offer in accordance with its terms in respect
of all my resulting Esprit Shares and shall forward or procure that there
is forwarded, with such acceptance, the certificates or other documents of
title in respect of my Esprit Shares in accordance with the terms of the
Offer;
(B) save as required by paragraph 4(A), and save with the prior
written consent of GTS (not to be unreasonably withheld or delayed) I shall
not prior to the lapsing or withdrawal of the Offer, conditionally or
unconditionally, sell, transfer, charge, pledge or grant any option over or
otherwise dispose of or permit the sale or other disposition of all or any
of my Options or any interest in any of my Options;
(C) otherwise than pursuant to the exercise of my Options I shall not
prior to the lapsing or withdrawal of the Offer without the prior written
consent of GTS purchase or otherwise acquire any shares in Esprit or any
interest therein or agree to do so whether conditionally or
unconditionally;
(D) I shall procure that, save pursuant to this undertaking, unless
and until the date the Offer shall have lapsed or shall have been
withdrawn, no other agreement or arrangement (including any undertaking)
shall be entered into (other than with GTS) which could result in the
disposal of, or the creation or existence of any encumbrance on, all or any
of my Options or any interest therein or which might in any way restrict
the disposal of my Options or any of them and no other offer shall be
accepted in respect of my Options or any of them (whether it is conditional
or unconditional and irrespective of the means by which it is to be
implemented);
(E) I shall not, prior to the issue of the Press Announcement, without
the prior written consent of GTS, disclose or announce to any person the
fact that discussions or negotiations are taking or have taken place
concerning the Offer save as (and then only to the extent) required by any
law, the rules of NASDAQ or EASDAQ or the City Code or the Panel or
pursuant to any enquiry by a governmental, official or regulatory body
having jurisdiction provided that, in such circumstances, I shall where
practicable advise GTS prior to any such disclosure or announcement so that
GTS has an opportunity to seek to control the timing and manner of such
disclosure;
(F) at all times after the date hereof and until the Offer shall have
lapsed or been withdrawn, I shall refrain from:
(1) soliciting, procuring or initiating; or
(2) (subject to my fiduciary duties as a director of Esprit),
engaging in
directly or indirectly, any discussions or negotiations with any third
party, involving any other offer by any third party for all or any part
of the issued share capital of Esprit or involving the acquisition
outside the ordinary course of business (as carried on to the date
hereof) of, or any business combination involving, Esprit or any of its
subsidiaries or any material part of the shares or business undertaking
or assets of Esprit or any of its subsidiaries or in each case any
interest therein save for any transaction specifically permitted by
paragraph 4(D) of the Shareholders Undertaking given by Warburg, Pincus
Ventures, L.P. (each "an Esprit Transaction");
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(G) at all times from the date hereof until the Offer shall have
lapsed or been withdrawn, I shall, so far as is consistent with my
fiduciary duties as a director of Esprit and my duties under the City Code,
refrain from:
(1) (save as required by Rule 20.2 of the City Code in which case
only that information strictly required to be provided shall be
disclosed and only on the basis of an undertaking as to confidentiality
substantially similar to that given by GTS) providing any information to
any person in relation to, or facilitating or cooperating with in any
way, any Esprit Transaction; or
(2) communicating with any person in relation to or discussing with
any person the terms of the Offer or any matter relating thereto without
the prior consent of GTS provided that this shall not apply to any
communications or discussions with my or Esprit's professional advisers
who appreciate the need for requirements as to confidentiality in
relation to the Offer or to communications or discussions limited to
information set out in the Press Announcement or any other document or
announcement published with the consent of GTS in connection with the
Offer or otherwise in the public domain;
(H) I am not currently in discussion with any person (other than GTS)
in relation to any Esprit Transaction;
(I) I will provide such information and do such acts as may be
reasonably necessary to prepare and expedite the posting of the Offer
Document and, in particular, but without prejudice to the generality of the
foregoing:
(1) will provide all reasonable assistance to GTS as may be
required to satisfy the pre-conditions to the posting of the Offer
Document and the conditions of the Offer;
(2) will cooperate with GTS in seeking any extension of the Initial
Offer Period pursuant to paragraph 7(G) of the Shareholders'
Undertakings and otherwise will agree to any extension of time limits in
the City Code which GTS requests (unless it is acting unreasonably) and
which the Panel approves; and
(3) will use all my reasonable efforts to provide for GTS all
necessary information regarding Esprit and its subsidiaries and my
interests in the share capital of Esprit and options over such share
capital which is required to be contained therein in order to comply
with the requirements of the City Code, US Securities Law or any other
applicable law or regulation;
(4) in so far as I am involved in the management of Esprit, I will
make myself available to the extent reasonably necessary to facilitate
the successful completion of the Offer and (to the extent agreed) the
refinancing or amendment of the existing financing facilities of Esprit
including participation in meetings with investors and shareholders;
(J) I will join with the other directors of Esprit in making in the
Offer Document a statement of responsibility in the terms or to the effect
required by the City Code (subject to any variation agreed by the Panel) or
by any applicable law or regulation;
(K) so far as is consistent with my duties or obligations under the
City Code and with my fiduciary duties as a director of Esprit I will
(together with the other directors of Esprit) recommend to all the
shareholders in Esprit that they should accept the Offer and will agree to
a statement substantially in the terms set out in the paragraph headed
"Recommendation" in the Press Announcement being included in the Offer
Document;
(L) I will, on the Offer becoming unconditional (so far as is
consistent with my fiduciary duties as a director of Esprit) join with the
other members of the board of Esprit in appointing any persons nominated by
GTS to the board of Esprit and its subsidiaries and in approving alternate
directors nominated by such newly appointed directors;
(M) I shall not prior to the date the Offer becomes wholly
unconditional or lapses or is withdrawn or transfer, dispose of grant
rights over or in any way charge, or otherwise deal in or enter into any
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<PAGE> 469
agreement, arrangement or undertaking (conditional or unconditional) to
transfer, dispose of grant rights over or in any way charge, or otherwise
deal in any GTS Shares or any interest therein or any derivative referenced
thereto or any security convertible into GTS Shares; and
(N) insofar as I hold Options, I confirm that it is my current
intention, subject to my receiving satisfactory tax advice (and to the
extent that I have not then exercised my Options), to accept the Rollover
Offer in respect of my remaining Options.
5. DIRECTOR'S FURTHER UNDERTAKINGS
5.1 I hereby further undertake to GTS as follows:
(A) there are no ordinary shares in Esprit registered in my name or
beneficially owned, or managed and controlled by me, or in which I have an
interest and I have no rights, warrants or options to acquire or subscribe
for ordinary shares in Esprit or any interest therein save as specified in
Schedule 1;
(B) save pursuant to this undertaking I have not agreed, conditionally
or otherwise, to dispose of all or any of my Options or any interest
therein and have (and, upon the Rollover Offer being made, will continue to
have) all necessary authority to enter into this undertaking and accept or
procure acceptance of the Rollover Offer in respect of my Options;
(C) save for any regular emoluments and expenses payable pursuant to
my engagement as a director or employee of Esprit there is not outstanding
any indebtedness or other liability (actual or contingent) (other than any
claim for indemnity I may have under the articles of association of Esprit)
owing by any member of the Esprit Group to me, nor is there any
indebtedness owing to any member of the Esprit Group by me; and
(D) save for the terms of my engagement as a director or employee of
Esprit which have been disclosed in writing to GTS I have not entered into
any agreement, undertaking, instrument or arrangement with any member of
the Esprit Group.
5.2 Save, in respect of paragraph 5.1(A), for any exercise of Options
following which the resulting shares are assented to the Offer in accordance
with paragraph 4(A) and further, in respect of paragraph 5.1(B) any regular
emoluments and expenses referred to therein, I shall procure that (save as may
be necessary to give effect to this undertaking) I shall not allow nor shall I
do or procure any act or omission before the date the Offer becomes wholly
unconditional which would constitute a breach of any of the above undertakings
if they were given at any and all times from the date hereof down to the date
the Offer becomes wholly unconditional, or which would make any of the above
undertakings inaccurate or misleading if they were so given.
6. LAW AND JURISDICTION
(A) This undertaking is governed by, and construed in accordance with,
English law.
(B) In relation to any legal action or proceedings to enforce this
undertaking or arising out of or in connection with this undertaking
("Proceedings") I irrevocably submit to the jurisdiction of the English
courts and waive any objection to Proceedings in such courts on the grounds
of venue or on the grounds that the Proceedings have been brought in an
inconvenient forum.
7. CONDITIONS
Notwithstanding any other provision hereof, this irrevocable undertaking
and GTS's obligation to make the Offer, are conditional upon:
(A) the release of the Press Announcement at or before 9 a.m. on 8
December 1998; and
(B) irrevocable undertakings, in a form acceptable to GTS, being
received in respect of not less than 50.1 per cent. of the issued ordinary
shares of Esprit prior to the release of the Press Announcement.
N-5
<PAGE> 470
If these conditions shall not have been satisfied by such time and date
this irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms.
8. MISCELLANEOUS
(A) My undertakings pursuant to paragraph 4 shall be irrevocable and,
in the absence of fraud, shall not be capable of rescission or termination
on the basis of any information subsequently disclosed by GTS or Esprit in
any offer document, listing particulars or registration statement or for
any other reason whatsoever including (without limitation) any failure by
all or any of the directors of Esprit to recommend the Offer or to continue
to recommend the Offer after the date of this Undertaking.
(B) No failure or delay by GTS in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise of any
right, power or privilege hereunder. I agree that any breach of this
Undertaking is likely to cause substantial harm to GTS and that money
damages would not be a sufficient remedy for any breach of this Undertaking
and that GTS will be entitled to specific performance and injunctive relief
as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for a breach of this Undertaking but shall be in
addition to all other remedies available at law or equity.
9. LAPSING
This irrevocable undertaking shall automatically lapse and be of no further
force or effect and no party hereto shall have any claim against the other save
in respect of any antecedent breach of its terms, in the event that:
(A) precondition (A) to the Offer set out in Paragraph 1 of Appendix 1
of the Press Announcement (relating to the Esprit Bonds) shall not have
been satisfied or waived on or before 29 January 1999;
(B) the Offer Document is not despatched on or before 15 April 1999;
or
(C) GTS announces that any of the pre-conditions of the Offer set out
in Paragraph 1 of Appendix 1 to the Press Announcement has not been
satisfied and that it has not been and will not be waived; or
(D) the Offer is not declared wholly unconditional on or before the
60th day after the Offer Document is despatched or, if later, the date to
which the Initial Offer Period is extended pursuant to paragraph 7(G) of
the Shareholders' Undertakings; or
(E) I cease to be a director of Esprit.
N-6
<PAGE> 471
10. EXECUTION
This undertaking may be executed in more than one part.
Yours faithfully,
<TABLE>
<S> <C>
SIGNED and DELIVERED
as a Deed by DOMINIC SHORTHOUSE ROBERTO ITALIA for and on behalf of
in the presence of: DOMINIC SHORTHOUSE
</TABLE>
<TABLE>
<S> <C>
Witness' signature: MATHEW F. HERMAN
Witness' name: Mathew F. Herman
Witness' address: 64 Holland Park London W11
Witness' occupation: Attorney
</TABLE>
We agree and accept the terms of this undertaking.
GERALD THAMES
For and on behalf of
GLOBAL TELESYSTEMS GROUP, INC.
N-7
<PAGE> 472
SCHEDULE 1
The following represents my shares subject to options, warrants or rights
to acquire or subscribe in Esprit:
Number of Ordinary Shares subject to options, warrants or rights to
acquire or subscribe
nil
N-8
<PAGE> 473
ANNEX O
CERTAIN PROVISIONS OF THE COMPANIES ACT 1985
OF GREAT BRITAIN
PART XIIIA
TAKEOVER OFFERS
428. TAKEOVERS OFFERS
(1) In this Part of this Act "takeover offer" means an offer to acquire all
the shares, or all the shares of any class or classes, in a company (other than
shares which at the date of the offer are already held by the offeror), being an
offer on terms which are the same in relation to all the shares to which the
offer relates or, where those shares include shares of different classes, in
relation to all the shares of each class.
(2) In subsection (1) "shares" means shares which have been allotted on the
date of the offer but a takeover offer may include among the shares to which it
relates all or any shares that are subsequently allotted before a date specified
in or determined in accordance with the terms of the offer.
(3) The terms offered in relation to any shares shall for the purposes of
his section be treated as being the same in relation to all the shares or, as
the case may be, all the shares of a class to which the offers relates
notwithstanding any variation permitted by subsection (4).
(4) A variation is permitted by this subsection where --
(a) The law of a country or territory outside the United Kingdom
precludes an offer of consideration in the form of any of the forms
specified in the terms in question or precludes it except after compliance
by the offeror with conditions with which he is unable to comply or which
he regards as unduly onerous; and
(b) the variation is such that the persons to whom an offer of
consideration in that form is precluded are able to receive consideration
otherwise than in that form but of substantially equivalent value.
(5) The reference is subsection (1) to shares already held by the offeror
includes a reference to shares which he has contracted to acquire but that shall
not be construed as including shares which are the subject of a contract binding
the holder to accept the offer when it is made, being a contract entered into by
the holder either for no consideration and under seal or for no consideration
other than a promise by the offeror to make the offer.
(6) In the application of subsection (5) to Scotland the words "and under
seal" shall be omitted.
(7) Where the terms of an offer make provision for their revision and for
acceptances on the previous terms to be treated as acceptances on the revised
terms, the revision shall not be regarded for the purposes of this Part of this
Act as the making of a fresh offer and references in this Part of this Act to
date of the offer shall accordingly be construed as references to the date on
which the original offer was made.
(8) In this Part of this Act "the offeror" means, subject to section 430D,
the person making a takeover offer and "the company" means the company whose
shares are the subject of the offer.
[429. RIGHT OF OFFEROR TO BUY OUT MINORITY SHAREHOLDERS
(1) If, in a case in which a takeover offer does not relate to shares of
different classes, the offeror has by virtue of acceptances of the offer
acquired or contracted to acquire not less than nine-tenths in value of the
shares to which the offer relates he may give notice to the holder of any shares
to which the offer relates which the offeror has not acquired or contracted to
acquire that he desires to acquire those shares.
(2) If, in a case in which a takeover offer relates to shares of different
classes, the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire not less than nine-tenths in value of the shares of any
class to which the offer relates, he may give notice to the holder of any shares
of that class which the offeror has not acquired or contracted to acquire that
he desires to acquire those shares.
(3) No notice shall be given under subsection (1) or (2) unless the offeror
has acquired or contracted to acquire the shares necessary to satisfy the
minimum specified in that subsection before the end of the period of four months
beginning with the date of the offer; and no such notice shall be given after
the end of the period
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of two months beginning with the date on which he has acquired or contracted to
acquire shares which satisfy that minimum.
(4) Any notice under this section shall be given in the prescribed manner;
and when the offeror gives the first notice in relation to an offer he shall
send a copy of it to the company together with a statutory declaration by him in
the prescribed form stating that the conditions for the giving of the notice are
satisfied.
(5) Where the offeror is a company (whether or not a company within the
meaning of this Act) the statutory declaration shall be signed by a director.
(6) Any person who fails to send a copy of a notice or a statutory
declaration as required by subsection (4) or makes such a declaration for the
purposes of that subsection knowing it to be false or without having reasonable
grounds for believing it to be true shall be liable to imprisonment or a fine,
or both, and for continued failure to send the copy or declaration, to a daily
default fine.
(7) If any person is charged with an offence for failing to send a copy of
a notice as required by subsection (4) it is a defence for him to prove that he
took reasonable steps for securing compliance with that subsection.
(8) When during the period within which a takeover offer can be accepted
the offeror acquires or contracts to acquire any of the shares to which the
offer relates but otherwise than by virtue of acceptances of the offer, then,
if --
(a) the value of the consideration for which they are acquired or
contracted to be acquired ("the acquisition consideration") does not at
that time exceed the value of the consideration specified in the terms of
the offer; or
(b) those terms are subsequently revised so that when the revision is
announced the value of the acquisition consideration, at the time mentioned
in paragraph (a) above, no longer exceeds the value of the consideration
specified in those terms, the offeror shall be treated for the purposes of
this section as having acquired or contracted to acquire those shares by
virtue of acceptances of the offer; but in any other case those shares
shall be treated as excluded from those to which the offer relates.
430. EFFECT OF NOTICE UNDER SECTION 429
(1) The following provisions shall, subject to section 430C, have effect
where a notice is given in respect of any shares under section 429.
(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer.
(3) Where the terms of an offer are such as to give the holder of any
shares a choice of consideration the notice shall give particulars of the choice
and state --
(a) that the holder of the shares may within six weeks from the date
of the notice indicate his choice by a written communication sent to the
offeror at an address specified in the notice; and
(b) which consideration specified in the offer is to be taken as
applying in default of his indicating a choice as aforesaid;
and the terms of the offer mentioned in subsection (2) shall be
determined accordingly.
(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can still be
complied with; and if the consideration chosen by the holder of the shares --
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound
or able to provide it,
O-2
<PAGE> 475
the consideration shall be taken to consist of an amount of cash payable
by the offeror which at the date of the notice is equivalent to the
chosen consideration.
(5) At the end of six weeks from the date of the notice the offeror shall
forthwith --
(a) send a copy of the notice to the company; and
(b) pay or transfer to the company the consideration for the shares to
which the notice relates.
(6) If the shares to which the notice relates are registered the copy of
the notice sent to the company under subsection (5)(a) shall be accompanied by
an instrument of transfer executed on behalf of the shareholder by a person
appointed by the offeror; and on receipt of that instrument the company shall
register the offeror as the holder of those shares.
(7) If the shares to which the notice relates are transferable by the
delivery of warrants or other instruments the copy of the notice sent to the
company under subsection (5)(a) shall be accompanied by a statement to that
effect; and the company shall on receipt of the statement issue the offeror with
warrants or other instruments in respect of the shares and those already in
issue in respect of the shares shall become void.
(8) Where the consideration referred to in paragraph (b) of subsection (5)
consists of shares or securities to be allotted by the offeror the reference in
that paragraph to the transfer or the consideration shall be construed as a
reference to the allotment of the shares or securities to the company.
(9) Any sum received by a company under paragraph (b) of subsection (5) and
any other consideration received under that paragraph shall be held by the
company on trust for the person entitled to the shares in respect of which the
sum or other consideration was received.
(10) Any sum received by a company under paragraph (b) of subsection (5),
and any dividend or other sum accruing from any other consideration received by
a company under that paragraph, shall be paid into a separate bank account,
being an account the balance on which bears interest at an appropriate rate and
can be withdrawn by such notice (if any) as is appropriate.
(11) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to any consideration held on trust by virtue of
subsection (9) cannot be found and twelve years have elapsed since the
consideration was received or the company is wound up the consideration
(together with any interest, dividend or other benefit that has accrued from it)
shall be paid into court.
(12) In relation to a company registered in Scotland, subsections (13) and
(14) shall apply in place of subsection (11).
(13) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to and consideration held on trust by virtue of
subsection (9) cannot be found and twelve years have elapsed since the
consideration was received or the company is wound up --
(a) the trust shall terminate;
(b) the company or, as the case may be, the liquidator shall sell any
consideration other than cash and any benefit other than cash that has
accrued from the consideration; and
(c) a sum representing --
(i) the consideration so far as it is cash;
(ii) the proceeds of any sale under paragraph (b) above; and
(iii) any interest, dividend or other benefit that has accrued from
the consideration,
shall be deposited in the name of the Accountant of Court in a bank
account such as is referred to in subsection (10) and the receipt for
the deposit shall be transmitted to the Accountant of Court.
O-3
<PAGE> 476
(14) Section 58 of the Bankruptcy (Scotland) Act 1985 (so far as consistent
with this Act) shall apply with any necessary modifications to sums deposited
under subsection (13) as that section applies to sums deposited under section
57(1)(a) of that Act.
(15) The expenses of any such enquiry as is mentioned in subsection (11) or
(13) may be defrayed out of the money or other property held on trust for the
person or persons to whom the enquiry relates.
430A. RIGHT OF MINORITY SHAREHOLDER TO BE BOUGHT OUT BY OFFEROR
(1) If a takeover offer relates to all the shares in a company and at any
time before the end of the period within which the offer can be accepted --
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares to which the offer
relates; and
(b) those shares, with or without any other shares in the company
which he has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares in the company,
the holder of any shares to which the offer relates who has not accepted
the offer may by a written communication addressed to the offeror
require him to acquire those shares.
(2) If a takeover offer relates to shares of any class or classes and at
any time before the end of the period within which the offer can be accepted --
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares of any class to
which the offer relates; and
(b) those shares, with or without any other shares of that class which
he has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares of that class,
the holder of any shares of that class who has not accepted the offer
may by a written communication addressed to the offeror require him to
acquire those shares.
(3) Within one month of the time specified in subsection (1) or, as the
case may be, subsection (2) the offeror shall give any shareholder who has not
accepted the offer notice in the prescribed manner of the rights that are
exercisable by him under that subsection; and if the notice is given before the
end of the period mentioned in that subsection it shall state that the offer is
still open for acceptance.
(4) A notice under subsection (3) may specify a period for the exercise of
the rights conferred by this section and in that event the rights shall not be
exercisable after the end of that period; but no such period shall end less than
three months after the end of the period within which the offer can be accepted.
(5) Subsection (3) does not apply if the offeror has given the shareholder
a notice in respect of the shares in question under section 429.
(6) If the offeror fails to comply with subsection (3) he and, if the
offeror is a company, every officer of the company who is in default or to whose
neglect the failure is attributable, shall be liable to a fine and for continued
contravention, to a daily default fine.
(7) If an offeror other than a company is charged with an offence for
failing to comply with subsection (3) it is a defence for him to prove that he
took all reasonable steps for securing compliance with that subsection.
430B. EFFECT OF REQUIREMENT UNDER SECTION 430A
(1) The following provisions shall, subject to section 430C, have effect
where a shareholder exercises his rights in respect of any shares under section
430A.
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<PAGE> 477
(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer or on such other terms as may be agreed.
(3) Where the terms of an offer are such as to give the holder of shares a
choice of consideration the holder of the shares may indicate his choice when
requiring the offeror to acquire them and the notice given to the holder under
section 430A(3) --
(a) shall give particulars of the choice and of the rights conferred
by this subsection; and
(b) may state which consideration specified in the offer is to be
taken as applying in default of his indicating a choice;
and the terms of the offer mentioned in subsection (2) shall be
determined accordingly.
(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can still be
complied with; and if the consideration chosen by the holder of the shares --
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound
or able to provide it,
the consideration shall be taken to consist of an amount of cash payable
by the offeror which at the date when the holder of the shares requires
the offeror to acquire them is equivalent to the chosen consideration.
430C. APPLICATIONS TO THE COURT
(1) Where a notice is given under section 429 to the holder of any shares
the court may, on an application made by him within six weeks from the date on
which the notice was given --
(a) order that the offeror shall not be entitled and bound to acquire
the shares; or
(b) specify terms of acquisition different from those of the offer.
(2) If an application to the court under subsection (1) is pending at the
end of the period mentioned in subsection (5) of section 430 that subsection
shall not have effect until the application has been disposed of.
(3) Where the holder of any shares exercises his rights under section 430A
the court may, on an application made by him or the offeror, order that the
terms on which the offeror is entitled and bound to acquire the shares shall be
such as the court thinks fit.
(4) No order for costs or expenses shall be made against a shareholder
making an application under subsection (1) or (3) unless the court considers --
(a) that the application was unnecessary, improper or vexatious; or
(b) that there has been unreasonable delay in making the application
or unreasonable conduct on his part in conducting the proceedings on the
application.
(5) Where a takeover offer has not been accepted to the extent necessary
for entitling the offeror to give notices under subsection (1) or (2) of section
429 the court may, on the application of the offeror, make an order authorising
him to give notices under that subsection if satisfied --
(a) that the offeror has after reasonable enquiry been unable to trace
one or more of the persons holding shares to which the offer relates;
(b) that the shares which the offeror has acquired or contracted to
acquire by virtue of acceptances of the offer, together with the shares
held by the person or persons mentioned in paragraph (a), amount to not
less than the minimum specified in that subsection; and
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<PAGE> 478
(c) that the consideration offered is fair and reasonable; but the
court shall not make an order under this subsection unless it considers
that it is just and equitable to do so having regard, in particular, to the
number of shareholders who have been traced but who have not accepted the
offer.
430D. JOINT OFFERS
(1) A takeover offer may be made by two or more persons jointly and in that
event this Part of this Act has effect with the following modifications.
(2) The conditions for the exercise of the rights conferred by sections 429
and 430A shall be satisfied by the joint offerors acquiring or contracting to
acquire the necessary shares jointly (as respects acquisitions by virtue of
acceptances of the offer) and either jointly or separately (in other cases);
and, subject to the following provisions, the rights and obligations of the
offeror under those sections and sections 430 and 430B shall be respectively
joint rights and joint and several obligations of the joint offerors.
(3) It shall be a sufficient compliance with any provisions of those
sections requiring or authorising a notice or other document to be given or sent
by or to the joint offerors that it is given or sent by or to any of them; but
the statutory declaration required by section 429(4) shall be made by all of
them and, in the case of a joint offeror being a company, signed by a director
of that company.
(4) In sections 428, 430(8) and 430(E) references to the offeror shall be
construed as references to the joint offerors or any of them.
(5) In section 430(6) and (7) references to the offeror shall be construed
as references to the joint offerors or such of them as they may determine.
(6) In sections 430(4)(a) and 430B(4)(a) references to the offeror being no
longer able to provide the relevant consideration shall be construed as
references to none of the joint offerors being able to do so.
(7) In Section 430C references to the offeror shall be construed as
references to the joint offerors except that any application under subsection
(3) or (5) may be made by any of them and the reference in subsection (5)(a) to
the offeror having been unable to trace one or more of the persons holding
shares shall be construed as a reference to none of the offerors having been
able to do so.
430E. ASSOCIATES
(1) The requirement in section 428(1) that a takeover offer must extend to
all the shares, or all the shares of any class or classes, in a company shall be
regarded as satisfied notwithstanding that the offer does not extend to shares
which associates of the offeror hold or have contracted to acquire; but, subject
to subsection (2), shares which any such associate holds or has contracted to
acquire, whether at the time when the offer is made or subsequently, shall be
disregarded for the purposes of any reference in this Part of this Act to the
shares to which takeover offer relates.
(2) Where during the period within which a takeover offer can be accepted
any associate of the offeror acquires or contracts to acquire any of the shares
to which the offer relates, then, if the condition specified in subsection
(8)(a) or (b) of section 429 is satisfies as respects those shares they shall be
treated for the purposes of that section as shares to which the offer relates.
(3) In section 430A(1)(b) and (2)(b) the reference to shares which the
offeror has acquired or contracted to acquire shall include a reference to
shares which any associate of his has acquired or contracted to acquire.
(4) In this section "associate", in relation to an offeror means --
(a) a nominee of the offeror;
(b) a holding company, subsidiary or fellow subsidiary of the offeror
or a nominee of such a holding company, subsidiary or fellow subsidiary;
(c) a body corporate in which the offeror is substantially interested;
or
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(d) any person who is, or is a nominee of, a party to an agreement
with the offeror for the acquisition of, or of an interest in, the shares
which are the subject of the takeover offer, being an agreement which
includes provisions imposing obligations or restrictions such as are
mentioned in section 204(2)(a).
(5) For the purposes of subsection (4)(b) a company is a fellow subsidiary
of another body corporate if both are subsidiaries of the same body corporate
but neither is a subsidiary of the other.
(6) For the purposes of subsection (4)(c) an offeror has a substantial
interest in a body corporate if --
(a) that body or its directors are accustomed to act in accordance
with his directions or instructions; or
(b) he is entitled to exercise or control the exercise of one-third or
more of the voting power at general meetings of that body.
(7) Subsections (5) and (6) of section 204 shall apply to subsection (4)(d)
above as they apply to that section and subsections (3) and (4) of section 203
shall apply for the purposes of subsection (6) above as they apply for the
purposes of subsection (2)(b) of that section.
(8) Where the offeror is an individual his associates shall also include
his spouse and any minor child or step-child of his.
430F. CONVERTIBLE SECURITIES
(1) For the purposes of this Part of this Act securities of a company shall
be treated as shares in the company if they are convertible into or entitle the
holder to subscribe for such shares; and references to the holder of shares or a
shareholder shall be construed accordingly.
(2) Subsection (1) shall not be construed as requiring any securities to be
treated --
(a) as shares of the same class as those into which they are
convertible or for which the holder is entitled to subscribe; or
(b) as shares of the same class as other securities by reason only
that the shares into which they are convertible or for which the holder is
entitled to subscribe are of the same class.
O-7
<PAGE> 480
For holders of Esprit Telecom Ordinary Shares, the duly completed and
signed Form of Acceptance, accompanied by your share certificate(s) and/or other
document(s) of title for Esprit Telecom Ordinary Shares, should be sent by hand
(during normal business hours) or by mail to New Issue Department, IRG plc, P.O.
Box No. 166, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TH, United
Kingdom or by hand only, during normal business hours to IRG plc, 23 Ironmonger
Lane, London EC2, United Kingdom. Belgian holders of Esprit Telecom Ordinary
Shares may transmit the Form of Acceptance to the Belgian Receiving Agent, The
Bank of New York -- Brussels, Client Services Group, Attn: Alain Vanden Eede,
Avenue des Arts 35 Kunstlaan, 1040 Brussels, Belgium.
For holders of Esprit Telecom ADSs, facsimiles of the Letter of
Transmittal, properly completed and duly signed, will be accepted by the US
Depositary. The Letter of Transmittal and certificates evidencing Esprit Telecom
ADSs and any other required documents should be sent or delivered by each holder
or his broker, dealer, commercial bank, trust company or other nominee to the US
Depositary at one of its addresses set forth below or, as to Belgian holders of
Esprit Telecom ADSs only, the Belgian Receiving Agent at its address set forth
above.
The US Depositary for the Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
Tender & Exchange Department (For Eligible Institutions Tender & Exchange Department
P.O. Box 11248 Only) 101 Barclay Street
Church Street Station (212) 815-6213 Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
For Confirmation Telephone:
(800) 507-9357
</TABLE>
------------------------
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Managers at their respective addresses and telephone numbers
listed below. Additional copies of this Offering Circular/Proxy
Statement/Prospectus, the Form of Acceptance, the Letter of Transmittal and the
Notice of Guaranteed Delivery may be obtained from the Information Agent. A
shareholder may also contact brokers, dealers, commercial banks or trust
companies for assistance concerning the Offer.
The Information Agent for the Offer is:
[GEORGESON LOGO]
Wall Street Plaza
New York, New York 10005
Banks and Brokers call: (212) 440-9800 (collect)
All others call: (800) 223-2064 (toll free)
For holders outside the United States call:
(44) 171 335 8600 (collect)
The Dealer Managers for the Offer are:
<TABLE>
<S> <C>
BEAR, STEARNS INTERNATIONAL LIMITED BEAR, STEARNS & CO. INC.
One Canada Square 245 Park Avenue
London E14 5AD England New York, NY 10167
(0171) 516 6935 Call toll free: (888) 823-6441
</TABLE>
<PAGE> 1
EXHIBIT (a)(2)
GLOBAL TELESYSTEMS GROUP, INC.
1751 PINNACLE DRIVE
NORTH TOWER, 12TH FLOOR
MCLEAN, VIRGINIA 22102
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby makes, constitutes and appoints Gerald W. Thames,
William H. Seippel and Grier C. Raclin and each of them, lawful attorney and
proxies of the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned to attend the Special Meeting of
Stockholders of Global TeleSystems Group, Inc. to approve the proposal to issue
new common stock to acquire all the issued and outstanding Esprit Telecom Group
plc ordinary shares and ADSs in accordance with the terms set forth in the
accompanying Offering Circular/Proxy Statement/Prospectus at McLean, Virginia on
Wednesday, March 3, 1999 at 10:00 a.m., local time, and at any adjournment(s)
thereof, with all powers the undersigned would be entitled to vote if personally
present.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR the approval of the proposal to issue new common stock to acquire
all the issued and outstanding Esprit Telecom Group plc ordinary shares and ADSs
in accordance with the terms set forth in the accompanying Offering
Circular/Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS OF THE COMPANY, BY UNANIMOUS VOTE OF ALL DIRECTORS
PRESENT AND VOTING, RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSAL TO ISSUE
NEW COMMON STOCK TO ACQUIRE ALL THE ISSUED AND OUTSTANDING ESPRIT TELECOM GROUP
PLC ORDINARY SHARES AND ADSS IN ACCORDANCE WITH THE TERMS SET FORTH IN THE
ACCOMPANYING OFFERING CIRCULAR/PROXY STATEMENT/PROSPECTUS.
(Continued and to be signed and dated, on reverse side)
<PAGE> 2
1. Approval of the proposal to issue new common stock to acquire all the issued
and outstanding Esprit Telecom Group plc ordinary shares and ADSs in
accordance with the terms set forth in the accompanying Offering
Circular/Proxy Statement/Prospectus.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
I/we will attend meeting [ ] Address change mark here [ ]
Please sign exactly as name appears. When shares are held by joint tenants, both
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
Dated: , 1999
- ---------------------------------------------------------------------------
Signature
- ---------------------------------------------------------------------------
Signature if held jointly
VOTES MUST BE INDICATED [X]
IN BLACK OR BLUE INK.
PLEASE SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT (A)(3)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you
are in any doubt about the Offer or the action you should take, you are
recommended to seek your own personal financial advice immediately from an
appropriately authorized independent financial advisor or, if you are in the
United Kingdom, an independent professional advisor authorized under the
Financial Services Act 1986.
Bear, Stearns International Limited, which is regulated in the United
Kingdom by The Securities and Futures Authority Limited in the conduct of its
investment business and Bear, Stearns & Co. Inc. are acting exclusively for GTS
and no one else in connection with the Offer and will not be responsible under
the regulations of The Securities and Futures Authority Limited to anyone other
than GTS for providing the protections afforded to customers of either Bear
Stearns entity in relation to the Offer nor for giving advice in relation to the
offer. The provisions of this paragraph are not intended to disclaim any
liability of either Bear Stearns entity under U.S. securities laws.
If you have sold or otherwise transferred all your Esprit Telecom Ordinary
Shares, please pass this Form of Acceptance and the accompanying Offering
Circular/Proxy Statement/Prospectus dated February 2, 1999 (the "Offering
Circular/Proxy Statement/ Prospectus"), as soon as possible to the purchaser or
transferee, or to the stockbroker, bank or other agent through whom the sale or
transfer was effected, for delivery to the purchaser or transferee. However, the
Offer is not being made directly or indirectly in Canada, Australia or Japan and
such documents should not be distributed, forwarded or transmitted into or from
Canada, Australia or Japan by any means whatsoever including without limitation
mail, facsimile, transmission, telex or telephone. No Form of Acceptance which
is received in any envelope postmarked, or which appears to GTS or its agents to
have been sent from Canada, Australia or Japan will be treated as valid.
Application will be made for the New GTS Stock to be quoted on Nasdaq and
EASDAQ, under the symbol "GTSG". It is expected that the listings will become
effective and that dealings, for normal settlement, will commence on Nasdaq and
EASDAQ in the New GTS Stock on the first trading day following the day on which
the Offer becomes or is declared unconditional in all respects (except only, for
the quotation of such shares on Nasdaq and EASDAQ becoming effective).
- --------------------------------------------------------------------------------
FORM OF ACCEPTANCE AND AUTHORITY
IN RESPECT OF THE RECOMMENDED OFFER BY
BEAR, STEARNS INTERNATIONAL LIMITED
AND
BEAR, STEARNS & CO. INC.
ON BEHALF OF
GLOBAL TELESYSTEMS GROUP, INC.
FOR
ALL OF THE ISSUED SHARE CAPITAL OF
ESPRIT TELECOM GROUP PLC
ACCEPTANCES OF THE OFFER MUST BE RECEIVED BY 3.00 PM (LONDON TIME), 10.00 AM
(NEW YORK CITY TIME), ON MARCH 4, 1999
- --------------------------------------------------------------------------------
Terms used in the Form of Acceptance shall bear the same meaning as in the
Offering Circular/Proxy Statement/Prospectus. This Form of Acceptance should be
read in conjunction with the Offering Circular/ Proxy Statement/Prospectus. The
provisions of Parts B and C of Annex A to the Offering Circular/Proxy
Statement/Prospectus are deemed to be incorporated in and form part of this Form
of Acceptance and should be read carefully by each holder of Esprit Telecom
Ordinary Shares.
<PAGE> 2
PROCEDURE FOR ACCEPTANCE
- To accept the Offer, you must complete and sign this Form of Acceptance
on page 3 by following the instructions set out on pages 2, 4 and 5.
- All holders of Esprit Telecom Ordinary Shares who are individuals must
sign in the presence of a witness, who must also sign where indicated. If
you hold Esprit Telecom Ordinary Shares jointly with others, you must
arrange for all joint holders to sign this Form of Acceptance.
- The duly completed and signed Form of Acceptance, accompanied by your
share certificate(s) and/or other document(s) of title for Esprit Telecom
Ordinary Shares, should be sent by hand (during normal business hours) or
by post to New Issue Department, IRG plc, P.O. Box No. 166, Bourne House,
34 Beckenham Road, Beckenham, Kent BR3 4TH, United Kingdom or by hand
only, during normal business hours to IRG plc, 23 Ironmonger Lane, London
EC2, United Kingdom, as soon as possible, but in any event so as to be
received not later than 3.00 pm (London time), 10.00 am (New York City
time), on March 4, 1999. Belgian holders of Esprit Telecom Ordinary
Shares may transmit the form of Acceptance to the Belgian Receiving
Agent, The Bank of New York-Brussels, Client Services Group, Attn: Alain
Vanden Eede, Avenue des Arts 35 Kunstlaan, 1040 Brussels, Belgium. No
acknowledgment of receipt of documents will be given.
- If your share certificate(s) and/or other document(s) of title is/are not
readily available (but is/are held by your bank, stockbroker or other
agent) or is/are lost, this form should nevertheless be completed, signed
and returned as stated above so as to be received not later than 3.00 pm
(London time), 10.00 am (New York City time), on March 4, 1999, together
with any share certificate(s) and/or other document(s) of title, that you
may have available, accompanied by a letter stating that the balance will
follow, or that you will obtain a letter of indemnity in respect of lost
share certificates and/or other documents of title; and the share
certificate(s), letter of indemnity and/or other document(s) of title
should be lodged as soon as possible thereafter with the Receiving Agents
at the address, and in the manner, set out above.
- Do not detach any part of this Form of Acceptance.
- If you have any questions as to how to complete this Form of Acceptance,
please contact IRG plc at 44 181-6392188.
2
<PAGE> 3
(This page intentionally left blank)
3
<PAGE> 4
PLEASE COMPLETE THIS FORM
<TABLE>
<C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
1 THE OFFER
To accept the Offer, insert in Box 1 the Ordinary Shares is written in Box 1 and you
total number of Esprit Telecom Ordinary have signed Box 2, you will be deemed to have Complete here
Shares for which you wish to accept the accepted the Offer in respect of your entire
Offer. You must also sign Box 2 in accordance registered holding of Esprit Telecom Ordinary
with the instructions set out below, which Shares. If appropriate, you should also
will constitute your acceptance of the Offer, complete Box 4 and/or Box 5.
and complete Box 3. If no number or a number
greater than your registered holding of
Esprit Telecom
- ---------------------------------------------------------------------------------------------------------------------
2 SIGNATURES
To accept the Offer you must sign Box 2 and, association or other regulations.
in the case of a joint holding, arrange for Alternatively, a company to which s.36A Sign here
ALL joint holders to do likewise. All Companies Act 1985 applies may execute the
registered holders, including joint holders, form by a director and the company secretary Witness here
who are individuals must sign Box 2 in the or by two directors of the company signing
presence of a witness who must also sign Box the Form and inserting the name of the
2 where indicated. If these instructions are company above their signatures. Each such
not followed, the Form will be invalid. The person signing the Form for a company should
witness must be over 18 years of age and state the office which he/she holds. If the
should not be another joint holder signing Form is not signed by the registered
the Form. The same witness may witness the holder(s), insert the name(s) and capacity
signature of each joint holder. The witness (e.g. attorney or executor(s)) of the
should also print his/her name where person(s) signing the Form. You should also
indicated. A corporation must execute this deliver evidence of your authority in
Form under its common seal, the seal being accordance with the notes on pages 6 and 7.
affixed and witnessed in accordance with its
articles of
- ---------------------------------------------------------------------------------------------------------------------
3 NAME(S) AND ADDRESS
Complete Box 3 with the full name and address this is the address to which your
of the sole or first-named registered holder consideration and/or other documents will be Complete here
together with the names of all other joint sent provided the address inserted in Box 3
holders (if any) in BLOCK CAPITALS. Unless is not in Canada, Australia or Japan.
you complete Box 5,
- ---------------------------------------------------------------------------------------------------------------------
4 OVERSEAS PERSONS
If you are unable to give the warranty "Yes" in Box 4. If you do not put "Yes" in
required by paragraph (b) of Part C of Annex Box 4 you will be deemed to have given such Complete here
A to the Offering Circular/Proxy warranty.
Statement/Prospectus, you must put
- ---------------------------------------------------------------------------------------------------------------------
5 ALTERNATIVE ADDRESS
If you wish the documents of title relating address outside Canada, Australia or Japan by
to your New GTS Stock and/or other documents holders with registered addresses in Canada, Complete here
to be sent to someone (who must be outside Australia or Japan who have completed Box 3
Canada, Australia or Japan) other than the with an address in Canada, Australia or
sole or first-named registered holder at the Japan.
address set out in Box 3 (e.g. your bank
manager or stockbroker) you should complete
Box 5. Box 5 must be completed with an
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<C> <S>
- ---------------------------------------------------------------------------------
1 TO ACCEPT THE OFFER
Complete Box 1 and Box 3 (and, if appropriate, Box 4
and/or Box 5) and sign Box 2 in the presence of a witness
- ---------------------------------------------------------------------------------
2 SIGN HERE TO ACCEPT THE OFFER
Execution by individuals
---------------------------------------------------------
Signed and delivered as a deed by:
1.
--------------------------------------------------------
2.--------------------------------------------------------
3.--------------------------------------------------------
4.--------------------------------------------------------
---------------------------------------------------------
NOTE: THE SIGNATURE OF EACH REGISTERED HOLDER WHO IS AN
INDIVIDUAL SHOULD BE WITNESSED. IN THE CASE OF JOINT
HOLDERS, ALL MUST SIGN.
Execution by a company
---------------------------------------------------------
Executed and delivered as a deed under the seal of the
company named below OR Executed and delivered as a deed by
the company named below
-----------------------------------------------------------
Name of Company in the presence of/acting by
-----------------------------------------------------------
Name of Director
-----------------------------------------------------------
Name of Director/Company Secretary
---------------------------------------------------------
- ---------------------------------------------------------------------------------
3 FULL NAME(S) AND ADDRESS(ES)
---------------------------------------------------------
First-named registered holder
1. Forename(s) ------------------------------------------
Surname(Mr/Mrs/Miss/Title)----------------------------
Address------------------------------------- Postcode
Second-named registered holder
2. Forename(s)------------------------------------------
Surname(Mr/Mrs/Miss/Title)----------------------------
---------------------------------------------------------
In case of query, please state your daytime telephone
numbers
----------------------------------------------------------
- ---------------------------------------------------------------------------------
4 Please put "Yes" in Box 4 if you are unable to give the
warranty relating to overseas shareholders in paragraph
(b) of Part C of Annex A to the Offering Circular/Proxy/
Statement/Prospectus
- ---------------------------------------------------------------------------------
5 Address outside Canada, Australia or Japan to which
consideration and/or other document(s) is/are to be sent
if not that set out under "First-named registered holder"
in Box 3 above.
- ---------------------------------------------------------------------------------
<CAPTION>
<C> <C>
1 TO ACCEPT THE OFFER
BOX 1
Complete Box 1 and Box 3 (and, if appropriate, Box 4
and/or Box 5) and sign Box 2 in the presence of a witness
---------------------------------------------------------
No. of Esprit Telecom Ordinary Shares in respect
of which you are accepting the Offer
---------------------------------------------------------
- ---------------------------------------------------------------------------------
2
BOX 2
---------------------------------------------------------
Witnessed by:
1. Name-------------------------------------------------
Signature
-------------------------------------------------
Address
---------------------------------------------------
2. Name-------------------------------------------------
Signature
-------------------------------------------------
Address
---------------------------------------------------
3. Name-------------------------------------------------
Signature
-------------------------------------------------
Address
---------------------------------------------------
4. Name-------------------------------------------------
Signature
-------------------------------------------------
Address
---------------------------------------------------
---------------------------------------------------------
WITNESSED. IN THE CASE OF JOINT HOLDERS, ALL MUST
SIGN.
Execution by a company
---------------------------------------------------------
-----------------------------------------------------------
Signature
-----------------------------------------------------------
Signature
(Affix Company Seal if appropriate)
---------------------------------------------------------
- ---------------------------------------------------------------------------------
3 BOX 3
---------------------------------------------------------
Third-named registered holder
3. Forename(s)------------------------------------------
Surname(Mr/Mrs/Miss/Title)----------------------------
Fourth-named registered holder
4. Forename(s)------------------------------------------
Surname(Mr/Mrs/Miss/Title)----------------------------
---------------------------------------------------------
- ---------------------------------------------------------------------------------
BOX 4
---------------------------------------------------------
---------------------------------------------------------
4 Please put "Yes" in Box 4 if you are unable to give the
warranty relating to overseas shareholders in paragraph
(b) of Part C of Annex A to the Offering Circular/Proxy/
Statement/Prospectus
---------------------------------------------------------
- ---------------------------------------------------------------------------------
BOX 5
---------------------------------------------------------
5 Address outside Canada, Australia or Japan to which
consideration and/or other document(s) is/are to be sent
if not that set out under "First-named registered holder"
in Box 3 above.
Name-------------------------------------------
Address--------------------------------------------------
-----------------------------------------------------------
Postcode
---------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
FURTHER NOTES REGARDING THE COMPLETION AND LODGING OF THIS FORM
In order to be effective, this Form must, except as mentioned below, be
signed personally (or under a power of attorney, the original or certified copy
of which must be lodged with this Form) as a deed by the registered holder or,
in the case of a joint holder, by ALL the joint holders and each individual
signature must be independently witnessed. A corporation must execute this Form
under its common seal, the seal being affixed and witnessed in accordance with
its articles of association or other regulations. Alternatively, a company to
which section 36A of the Companies Act 1985 applies may execute this form by a
director and the company secretary or by two directors signing the form and
inserting the name of the company above their signatures. Each such person
signing this Form for a company should state the office which he/she holds.
In order to avoid inconvenience to yourself and delay in the processing of
your Form, the following points may assist you:
1. If the sole holder has died.
If grant of probate or letters of administration has/have been
registered with Esprit Telecom (or its registrar), this form must be
signed by the personal representative(s) of the deceased and returned
with the share certificate(s) and/or other document(s) of title
either by post or by hand (during normal business hours) to IRG plc,
New Issues Department, P.O. Box No. 166 Bourne House, 34 Beckenham
Road, Beckenham, Kent BR3 4TH, UK or in the case of Belgian holders
of Esprit Telecom Ordinary Shares, they may be returned to the Bank
of New York-Brussels, Client Services Group, Attn: Alain Vanden Eede,
Avenue des Arts 35 Kunstlaan, 1040 Brussels, Belgium. If grant of
probate or letters of administration has not/have not been registered
with Esprit Telecom (or its registrar), the personal representatives
or the prospective personal representatives or executors should sign
this form and forward it with the share certificate(s) and/or other
document(s) of title. However, grant of probate or letters of
administration must be lodged with IRG plc or the Belgian Receiving
Agent (where applicable) at the address set out above before the
consideration due can be forwarded to the personal representatives or
executors. All signatures must be witnessed.
2. If one of the joint-registered holders had died.
This Form must be signed by all surviving holders in the presence of
a witness and lodged with IRG plc or the Belgian Receiving Agent
(where applicable) in the manner set out above with the share
certificate(s) (and/or other document(s) of title) and accompanied by
the death certificate. Grant of probate or letters of administration
in respect of the deceased holder must also be lodged with IRG plc or
the Belgian Receiving Agent (where applicable) in the manner set out
above before the consideration due can be despatched.
3. If your share certificate(s) is/are held by your bank, stockbroker or
some other agent.
If your share certificate(s) and/or other document(s) of title is/are
not readily available (but is/are held by your bank, stockbroker or
other agent), the completed form should be lodged with IRG plc or the
Belgian Receiving Agent (where applicable) in the manner set out
above together with a note saying e.g. "share certificates to follow"
and you should arrange for the share certificate(s) and/or other
document(s) of title to be forwarded to IRG plc or the Belgian
Receiving Agent (where applicable) by your bank, stockbroker or other
agent as soon as possible thereafter.
4. If you have lost any of your share certificate(s).
The completed Form, and any share certificate(s) which you may have
available, should be lodged with IRG plc or the Belgian Receiving
Agent (where applicable) in the manner set out above accompanied by a
letter stating that you have lost one or more of your share
certificates. At the same time, you should write to David Reibel,
General Counsel of Esprit Telecom (telephone (44 118) 951 4000), or
Susan Fadil, Company Secretary of Esprit Telecom (telephone (44 171)
248 4282), requesting that a letter of indemnity for the lost share
certificates be sent to you which, when completed in accordance with
the instructions given, should be returned by post or by hand (during
normal hours) to IRG plc.
6
<PAGE> 7
5. If the form has been signed under power of attorney.
The completed form together with the share certificate(s) and/or
other document(s) of title should be lodged with IRG plc or the
Belgian Receiving Agent (where applicable) in the manner set out
above accompanied by the original power of attorney (or a copy
thereof duly certified in accordance with the Powers of Attorney Act
1971). The power of attorney will be noted by IRG plc and returned as
directed.
6. If your name or other particulars are shown incorrectly on the share
certificate e.g.
<TABLE>
<S> <C>
Name on the share certificate(s)............. Richard Allen
Correct Name................................. Richard Allan
</TABLE>
The Form should be completed in your correct name and lodged with IRG
plc or the Belgian Receiving Agent (where applicable) in the manner
set out above with your share certificate(s) and accompanied by a
letter from your bank, stockbroker or solicitor confirming that the
person in whose name Esprit Telecom Ordinary Shares are registered is
one and the same as the person who has signed the Form. If an
incorrect address is shown, the correct address should be written on
this form. If you have changed your name, lodge your marriage
certificate or deed poll or, in the case of a company, a copy of the
certificate of incorporation or change of name with this Form for
noting.
7. If a holder is away from home (e.g. abroad or on holiday).
Send this Form by the quickest means (e.g. air mail) to the holder
for execution (provided that such documents may not be forwarded or
transmitted, by any means, in or into Canada, Australia or Japan) or,
if he/she has executed a power of attorney, the attorney should sign
the Form and the original power of attorney (or a copy thereof duly
certified in accordance with the Powers of Attorney Act 1971) must be
lodged with this Form for noting (see 5 above). No other signatures
are acceptable.
8. If you have sold all, or wish to sell part of, your holding of Esprit
Telecom Ordinary Shares.
If you have sold or transferred all your Esprit Telecom Ordinary
Shares, you should at once hand this Form together with the
accompanying Offering Circular/Proxy Statement/Prospectus to the
bank, stockbroker or other agent through whom you made the sale for
onward transmission to the purchaser or transferee. However, such
documents may not be forwarded or transmitted, by any means, in or
into Canada, Australia or Japan. If you wish to sell part of your
holding of Esprit Telecom Ordinary Shares and also wish to accept the
Offer in respect of the balance and are unable to obtain the balance
certificate, you should ensure that the stockbroker, bank or other
agent through whom you make the sale obtains the appropriate
endorsement or certification signed on behalf of Esprit Telecom by
David Reibel, General Counsel of Esprit Telecom (telephone (44 118)
951 4000), or Susan Fadil, Company Secretary of Esprit Telecom
(telephone (44 171) 248 4282), in respect of the balance of your
holding of Esprit Telecom Ordinary Shares.
9. Payment of consideration
The documents of title relating to the New GTS Stock due to you under
the Offer cannot be sent to you until all relevant documents have
been properly completed and lodged with IRG plc or the Belgian
Receiving Agent (where applicable) and in the manner set out above.
Notwithstanding that no share certificate(s) and/or other document(s)
of title is/are delivered with this Form, the Form, if otherwise
valid, accompanied by an appropriate endorsement of certification to
the effect that Esprit Telecom Ordinary Shares referred to therein
are available for acceptance and signed on behalf of Esprit Telecom
by David Reibel, General Counsel of Esprit Telecom (telephone (44
118) 951 4000), or Susan Fadil, Company Secretary of Esprit Telecom
(telephone (44 171) 248 4282), will be treated as valid for all
purposes.
7
<PAGE> 1
EXHIBIT (A)(4)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you
are in any doubt about the Offer or about the action you should take, you are
recommended to seek your own personal financial advice immediately from an
appropriately authorized independent professional advisor or, if you are in the
United Kingdom, an independent financial advisor authorized under the Financial
Services Act 1986.
If you have sold or otherwise transferred all your registered holdings of
Esprit Telecom ADSs, please pass this document and the accompanying Offering
Circular/Proxy Statement/Prospectus dated February 2, 1999 (the "Offering
Circular/Proxy Statement/Prospectus"), as soon as possible to the purchaser or
transferee, or to the stockbroker, bank or other agent through whom the sale or
transfer was effected, for delivery to the purchaser or transferee. However, the
Offer is not being made directly or indirectly in Canada, Australia or Japan and
such documents should not be distributed, forwarded or transmitted into or from
Canada, Australia or Japan by any means whatsoever including without limitation
mail, facsimile, transmission, telex or telephone.
Bear, Stearns International Limited, which is regulated in the United
Kingdom by The Securities and Futures Authority Limited in the conduct of its
investment business and Bear, Stearns & Co. Inc. are acting exclusively for GTS
and no one else in connection with the Offer and will not be responsible under
the regulations of The Securities and Futures Authority Limited to anyone other
than GTS for providing the protections afforded to customers of either Bear
Stearns entity in relation to the Offer nor for giving advice in relation to the
Offer. The provisions of this paragraph are not intended to disclaim any
liability of either Bear Stearns entity under U.S. securities laws.
- --------------------------------------------------------------------------------
LETTER OF TRANSMITTAL
TO ACCEPT THE OFFER FOR AMERICAN DEPOSITARY SHARES
EACH REPRESENTING SEVEN ORDINARY SHARES, PAR VALUE L0.01 PER SHARE
OF
ESPRIT TELECOM GROUP PLC
BY
BEAR, STEARNS INTERNATIONAL LIMITED
AND
BEAR, STEARNS & CO. INC.
ON BEHALF OF
GLOBAL TELESYSTEMS GROUP, INC.
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 3:00 P.M. (LONDON
TIME), 10:00 A.M. (NEW YORK CITY TIME), ON THURSDAY, MARCH 4, 1999, UNLESS
EXTENDED. AT THE CONCLUSION OF THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION
THEREOF, IF ALL CONDITIONS HAVE BEEN SATISFIED OR, WHERE PERMITTED, WAIVED, ALL
ESPRIT TELECOM SECURITIES VALIDLY TENDERED AND NOT WITHDRAWN WILL BE PURCHASED
AND THE OFFER WILL BE EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF AT LEAST 14
CALENDAR DAYS. HOLDERS OF ESPRIT TELECOM ORDINARY SHARES AND ESPRIT TELECOM
ADSS, AS THE CASE MAY BE, WILL HAVE WITHDRAWAL RIGHTS DURING THE INITIAL OFFER
PERIOD, BUT NOT DURING THE SUBSEQUENT OFFER PERIOD INCLUDING ANY EXTENSION
THEREOF, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
The US Depositary for the Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
(For Eligible Institutions
Tender & Exchange Department Only) Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station For Confirmation Telephone: Receive and Deliver Window
New York, New York 10286-1248 (800) 507-9357 New York, New York 10286
</TABLE>
Belgian holders of Esprit Telecom ADSs may transmit documents to the
Belgian Receiving Agent at the following address:
THE BANK OF NEW YORK-BRUSSELS
Client Services Group
Attn: Alain Vanden Eede
Avenue des Arts 35 Kunstlaan
1040 Brussels
Belgium
<PAGE> 2
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE TO A NUMBER, OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED WITHIN THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
<TABLE>
<C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
DESCRIPTION OF ESPRIT TELECOM ADSs TENDERED
- --------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER(S) OF ESPRIT TELECOM ADSs (PLEASE
FILL IN, IF BLANK, EXACTLY ESPRIT TELECOM ADS CERTIFICATE(S) AND
AS NAME(S) APPEAR(S) ON ADS ESPRIT TELECOM ADSs TENDERED
CERTIFICATE(S)) (ATTACH ADDITIONAL LIST, IF NECESSARY)
- --------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
ESPRIT TELECOM ESPRIT TELECOM ADSs NUMBER OF ESPRIT
ADS CERTIFICATE EVIDENCED BY SHARE TELECOM ADSs
NUMBER(S)* CERTIFICATE(S)* TENDERED**
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Total Esprit Telecom ADSs....................
- --------------------------------------------------------------------------------------------------------------
* Need not be completed by holders delivering Esprit Telecom ADSs by book-entry transfer.
** Unless otherwise indicated, it will be assumed that all Esprit Telecom ADSs evidenced by each
ADS Certificate delivered to the US Depositary or the Belgian Receiving Agent (where applicable), are
being tendered hereby. See Instruction 4.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX
BELOW
ACCEPTANCE OF THE OFFER IN RESPECT OF ESPRIT TELECOM ORDINARY SHARES (EXCEPT
INSOFAR AS THEY ARE REPRESENTED BY ESPRIT TELECOM ADSs EVIDENCED BY ESPRIT
TELECOM ADRs) CANNOT BE MADE BY MEANS OF THIS LETTER OF TRANSMITTAL. If you hold
Esprit Telecom Ordinary Shares that are not represented by Esprit Telecom ADSs,
you may obtain a Form of Acceptance and Authority (the "Acceptance Form") from
the US Depositary or the Receiving Agents. See Instruction 12 of this Letter of
Transmittal.
Your bank or broker can assist you in completing this form. The
instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the Offering
Circular/Proxy Statement/Prospectus and this Letter of Transmittal may be
directed to the Dealer Managers or Information Agent at their respective
addresses and telephone numbers indicated below.
Delivery of a Letter of Transmittal, Esprit Telecom ADRs evidencing Esprit
Telecom ADSs (or book-entry transfer of such Esprit Telecom ADSs evidenced by
Esprit Telecom ADRs) and any other required documents to the US Depositary or
the Belgian Receiving Agent (where applicable), by Esprit Telecom ADS holders
will be deemed an acceptance of the Offer by such holder with respect to such
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs subject to the terms and
conditions set out in the Offering Circular/Proxy Statement/Prospectus and this
Letter of Transmittal.
If delivery of Esprit Telecom ADSs is to be made by book-entry transfer to
an account maintained by the US Depositary at The Depository Trust Company
pursuant to the procedures for book-entry transfer set forth in "The
Offer -- Procedures for Accepting the Offer -- All Holders of Esprit Telecom
Securities -- Holders of Esprit Telecom ADSs -- Book-entry transfer" in the
Offering Circular/Proxy Statement/Prospectus, then either this Letter of
Transmittal or an Agent's Message (as defined below) should be used.
The term "Agent's Message" means a message, transmitted by The Depository
Trust Company and received by the US Depositary and forming a part of a
Book-Entry Confirmation, which states that The
2
<PAGE> 3
Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the Esprit Telecom ADSs
which are the subject of such Book-Entry Confirmation that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal.
[ ] CHECK HERE IF TENDERED ESPRIT TELECOM ADSs ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE US DEPOSITARY AT
THE DEPOSITORY TRUST COMPANY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS
IN THE DEPOSITORY TRUST COMPANY MAY DELIVER ESPRIT TELECOM ADSs EVIDENCED
BY ESPRIT TELECOM ADRs BY BOOK-ENTRY TRANSFER):
Name of Tendering Institution:
-------------------------------------------------------------------------------
DTC Account Number:
----------------------------------------------------------------------------
Transaction Code Number:
----------------------------------------------------------------------------
Occupation:
----------------------------------------------------------------------------
If a holder of Esprit Telecom ADSs wishes to accept the Offer and Esprit
Telecom ADRs evidencing such Esprit Telecom ADSs are not immediately available
or the procedures for book-entry transfer cannot be completed on a timely basis,
or if time will not permit all required documents to reach the US Depositary or
the Belgian Receiving Agent (where applicable) prior to the expiration of the
Initial Offer Period or the Subsequent Offer Period, as the case may be, such
holder's acceptance of the Offer may nevertheless be effected using the
guaranteed delivery procedure set out under "The Offer -- Procedures for
Accepting the Offer -- All Holders of Esprit Telecom Securities -- Holders of
Esprit Telecom ADSs -- Guaranteed Delivery Procedures" in the Offering
Circular/Proxy Statement/Prospectus. See Instruction 2 of this Letter of
Transmittal. HOWEVER, RECEIPT OF A NOTICE OF GUARANTEED DELIVERY WILL NOT BE
TREATED AS A VALID ACCEPTANCE FOR THE PURPOSE OF SATISFYING THE ACCEPTANCE
CONDITION, UNLESS ESPRIT TELECOM ADRs EVIDENCING ESPRIT TELECOM ADSs REFERRED TO
IN THE NOTICE OF GUARANTEED DELIVERY ARE RECEIVED BY THE US DEPOSITARY OR THE
BELGIAN RECEIVING AGENT (WHERE APPLICABLE) PRIOR TO THE EXPIRATION OF THE
INITIAL OFFER PERIOD.
[ ] CHECK HERE IF THE ADRs REPRESENTING TENDERED ESPRIT TELECOM ADSs ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO
THE US DEPOSITARY AND COMPLETE THE FOLLOWING:
Name(s) of Holder(s):
----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------------------------------------------
Window Ticket No. (if any):
----------------------------------------------------------------------------
Name of Institution that Guaranteed Delivery:
---------------------------------------------------------------
For ADSs delivered by Book-Entry Transfer, complete the following:
DTC Account Number:
----------------------------------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
3
<PAGE> 4
Ladies and Gentlemen:
The undersigned acknowledges that such person has received and reviewed the
Offering Circular/Proxy Statement/Prospectus, dated February 2, 1999 (the
"Offering Circular/Proxy Statement/Prospectus"), of Global TeleSystems Group,
Inc., a Delaware corporation ("GTS"), and this Letter of Transmittal, which
together with any amendments or supplements hereto or thereto constitute the
offer of GTS (collectively, the "Offer") (i) to exchange for new shares of
Common Stock, $0.10 par value per share of GTS (a "GTS Stock"), each outstanding
Ordinary Share, par value, one pence per share (an "Esprit Telecom Ordinary
Share"), of Esprit Telecom Group plc, a limited public company incorporated
under the laws of England and Wales ("Esprit Telecom"), and (ii) to exchange for
new shares of GTS Stock, each outstanding American Depositary Share of Esprit
Telecom, each representing seven Esprit Telecom Ordinary Shares (an "Esprit
Telecom ADS") on the basis of 0.1271 GTS Stock for each Esprit Telecom Ordinary
Share tendered and 0.89 GTS Stock for each Esprit Telecom ADS tendered. Unless
otherwise defined in this Letter of Transmittal, capitalized terms used herein
have the meaning set forth in the Offering Circular/Proxy Statement/ Prospectus.
The undersigned hereby instructs the US Depositary to accept the Offer on
behalf of the undersigned with respect to the Esprit Telecom ADSs evidenced by
Esprit Telecom ADRs (which expression in this Letter of Transmittal shall,
except where the context otherwise requires, be deemed to include, without
limitation, the Esprit Telecom Ordinary Shares represented thereby) specified in
the box entitled "Description of Esprit Telecom ADSs Tendered," subject to the
terms and conditions of the Offer, by informing GTS in writing that the Offer
has been so accepted. The undersigned hereby acknowledges that delivery of this
Letter of Transmittal, the Esprit Telecom ADRs evidencing tendered Esprit
Telecom ADSs (or book-entry transfer of such Esprit Telecom ADSs evidenced by
Esprit Telecom ADRs) and any other required documents to the US Depositary or
the Belgian Receiving Agent (where applicable) by a holder of Esprit Telecom
ADSs will be deemed (without any further action by the US Depositary or the
Belgian Receiving Agent (where applicable)) to constitute acceptance of the
Offer by such holder in respect of such holder's Esprit Telecom ADSs, subject to
the terms and Conditions of the Offer.
The undersigned understands that acceptance of the Offer by the undersigned
pursuant to the procedures described herein and in the instructions hereto,
subject to the withdrawal rights described in the Offering Circular/Proxy
Statement/Prospectus, will constitute a binding agreement between the
undersigned and GTS upon the terms and subject to the Conditions of the Offer.
IF ACCEPTANCE HAS BEEN MADE IN RESPECT OF THE ESPRIT TELECOM ADSs, THEN A
SEPARATE ACCEPTANCE IN RESPECT OF THE ESPRIT TELECOM ORDINARY SHARES REPRESENTED
BY SUCH ESPRIT TELECOM ADSs MAY NOT BE MADE.
The undersigned hereby delivers to the US Depositary or the Belgian
Receiving Agent (where applicable) the above-described Esprit Telecom ADSs
evidenced by Esprit Telecom ADRs for which the Offer is being accepted, in
accordance with the terms and Conditions of the Offer, receipt of which is
hereby acknowledged.
Upon the terms of the Offer (including, if the Offer is revised, varied,
extended or renewed, the terms or conditions of any such revision, variation,
extension, or renewal), and effective at the time that all Conditions to the
Offer have been satisfied, fulfilled or, where permitted, waived (at which time
GTS will give notice thereof to the US Depositary), and if he or she has not
validly withdrawn his or her acceptance, the undersigned hereby sells, assigns
and transfers to, or upon the order of, GTS all right, title and interest in and
to all Esprit Telecom ADSs evidenced by Esprit Telecom ADRs with respect to
which the Offer is being accepted (and any and all Esprit Telecom ADSs or other
securities or rights issuable in respect of such Esprit Telecom ADSs) and
irrevocably constitutes and appoints the US Depositary the true and lawful agent
and attorney-in-fact of the undersigned with respect to such Esprit Telecom ADSs
(and any such other Esprit Telecom ADSs, securities or rights), with full power
of substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to (a) deliver Esprit Telecom ADRs for such Esprit
Telecom ADSs (and any such other Esprit Telecom ADSs, securities or rights), or
accept transfer of ownership of such Esprit Telecom ADSs (and any such other
Esprit Telecom ADSs, securities or rights) on
4
<PAGE> 5
the account books maintained by The Depository Trust Company together, in any
such case, with all accompanying evidences of transfer and authenticity, to, or
upon the order of, GTS, (b) present such Esprit Telecom ADRs for such Esprit
Telecom ADSs (and any other Esprit Telecom ADSs, securities or rights) for
transfer, and (c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Esprit Telecom ADSs (and any such other Esprit
Telecom ADSs, securities or rights), all in accordance with the terms of the
Offer.
The undersigned agrees that its execution hereof (together with any
signature guarantees) and its delivery to the US Depositary shall or the Belgian
Receiving Agent (where applicable) confer to GTS, Bear Stearns and each of their
respective directors the authority described in paragraph 5 of Part B of Annex A
to the Offering Circular/Proxy Statement/Prospectus.
The undersigned agrees that effective from and after the date hereof or, if
later, the dates on which all Conditions to the Offer are satisfied, fulfilled
or, where permitted, waived: (a) GTS or its agents shall be entitled to direct
the exercise of any votes and any or all other rights and privileges (including
the right to requisition the convening of a general meeting of Esprit Telecom or
of any class of holders of its share capital) attaching to the Esprit Telecom
Ordinary Shares represented by any Esprit Telecom ADSs evidenced by Esprit
Telecom ADRs in respect of which the Offer has been accepted or is deemed to
have been accepted and not validly withdrawn (the "Accepted ADSs") and (b) the
execution of this Letter of Transmittal by a holder of Esprit Telecom ADSs
(together with any signature guarantees) and its delivery to the US Depositary
shall constitute in respect of Accepted ADSs (i) an authority to Esprit Telecom
from the undersigned to send any notice, circular, warrant, document or other
communication that may be required to be sent to him or her as a Esprit Telecom
ADS holder to GTS at its registered office, (ii) an authority to GTS or any
director of GTS to sign any consent to short notice of a general or separate
class meeting on behalf of the holder of Accepted ADSs and/or to execute a form
of proxy in respect of the Accepted ADSs appointing any person nominated by GTS
to attend general and separate class meetings of Esprit Telecom (or any
adjournments thereof) and to exercise the votes attaching to the Esprit Telecom
Ordinary Shares represented by such Accepted ADSs on his or her behalf, such
votes to be cast so far as possible to satisfy any outstanding Condition, and
(iii) the agreement of the undersigned not to exercise any such rights without
the consent of GTS and the irrevocable undertaking of the undersigned not to
appoint a proxy for or to attend any such general meeting or separate class
meeting of Esprit Telecom in respect of such Accepted ADSs.
The undersigned hereby represents and warrants that the undersigned has
full power of authority to accept the Offer and to sell, assign and transfer the
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs (and the Esprit Telecom
Ordinary Shares represented by such Esprit Telecom ADSs) in respect of which the
Offer is being accepted or deemed to be accepted (and any and all other Esprit
Telecom ADSs, securities or rights issued or issuable in respect of such Esprit
Telecom ADSs) and, when the same are purchased by GTS, GTS will acquire good
title thereto, free from all liens, equities, charges, encumbrances and other
interests and together with all rights now or hereafter attaching thereto,
including, without limitation, the right to receive and retain all dividends,
interest and other distributions declared, made or paid on or after December 8,
1998 with respect to the Esprit Telecom Ordinary Shares represented by the
Esprit Telecom ADSs. The undersigned will, upon request, execute any additional
documents deemed by the US Depositary or GTS to be necessary or desirable to
complete the sale, assignment and transfer of the Esprit Telecom ADSs evidenced
by Esprit Telecom ADRs in respect of which the Offer is being accepted (and any
and all other Esprit Telecom ADSs, securities or rights).
The undersigned irrevocably undertakes, represents, and warrants to and
agrees with GTS (so as to bind him or her, his or her personal representatives,
heirs, successors and assigns) to the effect that the undersigned: (i) has not
received or sent copies of the Offering Circular/Proxy Statement/Prospectus or
any Acceptance Form or any related documents in, into or from Canada, Australia
or Japan and has not otherwise utilized in connection with the Offer, directly
or indirectly, the Canadian, Australian or Japanese mails or any means or
instrumentality (including, without limitation, facsimile transmission, telex,
and telephone) of interstate or foreign commerce, or any facilities of a
national securities exchange, of Canada, Australia or Japan, (ii) is accepting
the Offer from outside Canada, Australia and Japan and (iii) is not an agent or
fiduciary acting on a nondiscretionary basis for a principal, unless such agent
or fiduciary is an authorized
5
<PAGE> 6
employee of such principal or such principal has given any instructions with
respect to the Offer from outside Canada, Australia and Japan.
All authority herein conferred or agreed to be conferred pursuant to this
Letter of Transmittal shall be binding upon the successors, assigns, heirs,
executors, administrators and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. Except as stated in the Offering Circular/Proxy
Statement/Prospectus, this acceptance is irrevocable.
Unless otherwise instructed under "Special Instructions Regarding New GTS
Stock" below, the undersigned hereby instructs the US Depositary to register the
New GTS Stock to which the undersigned is entitled in the name(s) of the
holder(s) shown above under "Description of Esprit Telecom ADSs Tendered."
Unless otherwise instructed under "Special Delivery Instructions" below, the
undersigned hereby instructs the US Depositary to return, or cause to be
returned, any Esprit Telecom ADRs evidencing Esprit Telecom ADSs in respect of
which the Offer is not being accepted or which are not exchanged (and
accompanying documents, as appropriate) and/or deliver the certificates
representing the New GTS stock to be delivered to the undersigned pursuant to
the Offer to the address(es) of the registered holder(s) appearing above under
"Description of Esprit Telecom ADSs Tendered." In the case of a book-entry
delivery of Esprit Telecom ADSs evidenced by Esprit Telecom ADRs, the
undersigned hereby instructs the US Depositary to credit the account maintained
at The Depository Trust Company with any Esprit Telecom ADSs in respect of which
the Offer is not being accepted or which are not purchased. The undersigned
recognizes that the US Depositary will not transfer any Esprit Telecom ADSs
which are not purchased pursuant to the Offer from the name of the registered
holder thereof to any other person.
SUBJECT TO THE TERMS OF THE OFFERING CIRCULAR/PROXY STATEMENT/ PROSPECTUS,
THIS LETTER OF TRANSMITTAL SHALL NOT BE CONSIDERED COMPLETE AND VALID, AND
PAYMENT OF CONSIDERATION PURSUANT TO THE OFFER SHALL NOT BE MADE, UNTIL THE
ESPRIT TELECOM ADRs EVIDENCING THE ESPRIT TELECOM ADSs IN RESPECT OF WHICH THE
OFFER IS BEING ACCEPTED AND ALL OTHER REQUIRED DOCUMENTATION HAVE BEEN RECEIVED
BY THE US DEPOSITARY OR THE BELGIAN RECEIVING AGENT (WHERE APPLICABLE) AS
PROVIDED IN THE OFFERING CIRCULAR/ PROXY STATEMENT/PROSPECTUS AND THIS LETTER OF
TRANSMITTAL.
6
<PAGE> 7
SPECIAL INSTRUCTIONS
REGARDING NEW GTS STOCK
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if GTS Stock is to be registered in the name of
someone other than the undersigned.
Register GTS Stock in the name of:
Name(s)
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(PLEASE PRINT)
Address
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(INCLUDE ZIP CODE)
Occupation
- ------------------------------------
- ------------------------------------------------
(Employer Identification or Social Security Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the certificates representing the New GTS Stock or
any Esprit Telecom ADSs not tendered or not accepted for exchange are to be sent
to someone other than the undersigned, or to the undersigned at an address other
than that shown in the box entitled "Description of Esprit Telecom ADSs
Tendered."
Mail:
[ ] New GTS Stock Certificate(s) to:
[ ] Esprit Telecom ADS Certificate(s) to:
Name(s)
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(PLEASE PRINT)
Address
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(INCLUDE ZIP CODE)
- ------------------------------------------------
(Employer Identification or Social Security Number)
[ ] CHECK HERE IF ANY OF THE ESPRIT TELECOM ADRs REPRESENTING ESPRIT TELECOM
ADSs THAT YOU OWN HAVE BEEN LOST, STOLEN OR DESTROYED AND SEE INSTRUCTION
11.
Number of Esprit Telecom ADSs represented by the lost, stolen or destroyed
Esprit Telecom
ADSs:
- --------------------------------------------------------------------------------
7
<PAGE> 8
IMPORTANT
ALL TENDERING ESPRIT TELECOM ADS HOLDERS PLEASE SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW OR,
IN THE CASE OF CERTAIN FOREIGN PERSONS, SUBSTITUTE FORM W-8 BELOW)
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
Dated:
- ------------------------------------ , 1999
(Must be signed by registered holder(s) exactly as name(s) appear(s) on Esprit
Telecom ADRs evidencing Esprit Telecom ADSs or on a security position listing or
by person(s) authorized to become registered holder(s) by endorsements, stock
powers and other documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, please set forth
full title and see Instruction 5.)
Name(s):
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone No.:
- -------------------------------------------------------------------------------
Tax Identification or Social Security No.:
- --------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 5)
FOR USE BY ELIGIBLE INSTITUTIONS ONLY,
PLACE MEDALLION GUARANTEE IN SPACE BELOW
Signature(s) Guaranteed by an Eligible Institution:
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Title:
- --------------------------------------------------------------------------------
Name of Firm:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone No.:
- -------------------------------------------------------------------------------
Dated:
- ------------------------------------ , 1999
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. No signature guarantee is required on the
Letter of Transmittal if (a) the Letter of Transmittal is signed by the
registered holder(s) of the Esprit telecom ADSs evidenced by Esprit Telecom ADRs
in respect of which the Offer is being accepted herewith and such holder(s) have
not completed the box entitled " Special Delivery Instructions" or the box
entitled "Special Instructions Regarding New GTS Stock" on this Letter of
Transmittal or (b) the Offer is being accepted in respect of such Esprit Telecom
ADSs for the account of an Eligible Institution. In all other cases, all
signatures on this Letter of Transmittal must be guaranteed by a financial
institution (including most banks, savings and loan associations and brokerage
houses) which is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program, or the Stock Exchange
Medallion Program (an "Eligible Institution"). See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND ADSS. This Letter of Transmittal
is to be completed either if Esprit Telecom ADRs evidencing Esprit Telecom ADSs
are to be forwarded herewith or if delivery is to be made by book-entry transfer
of Esprit Telecom ADSs to an account maintained by the US Depositary at The
Depository Trust Company pursuant to the procedures for book-entry transfer set
out in "The Offer -- Procedures for Accepting the Offer -- All Holders of Esprit
Telecom Securities -- Holders of Esprit Telecom ADSs -- Book-entry transfer" in
the Offering Circular/Proxy Statement/Prospectus. Esprit Telecom ADRs evidencing
Esprit Telecom ADSs or confirmation of a book-entry transfer of such Esprit
Telecom ADSs into the US Depositary's account at The Depository Trust Company,
as well as a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message), and any other documents
required by this Letter of Transmittal, must be delivered to the US Depositary
at one of its addresses set forth herein.
Esprit Telecom ADS holders whose Esprit Telecom ADRs are not immediately
available or who cannot deliver their Esprit Telecom ADRs and all other required
documents to the US Depositary or the Belgian Receiving Agent (where applicable)
or complete the procedures for book-entry transfer prior to the expiration of
the Initial Offer Period of the Subsequent Offer Period, as the case may be, may
accept the Offer with respect to their Esprit Telecom ADSs by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set out in "The Offer -- Procedures for Accepting
the Offer -- all Holders of Esprit Telecom Securities -- Holders of Esprit
Telecom ADSs -- Guaranteed Delivery Procedures" in the Offering Circular/Proxy
Statement/Prospectus, Pursuant to the guaranteed delivery procedures: (a)
acceptance must be made by or through an Eligible Institution; (b) a properly
completed and duly executed Notice of Guaranteed Delivery substantially in the
form provided by GTS must be received by the US Depositary or the Belgian
Receiving Agent (where applicable) prior to the expiration of the Initial Offer
Period or the Subsequent Offer Period, as the case may be; and (c) the Esprit
Telecom ADRs evidencing the Esprit Telecom ADSs in respect of which the Offer is
being accepted (or, in the case of Esprit Telecom ADSs held in book-entry form,
timely confirmation of the book-entry transfer of such Esprit Telecom ADSs into
the US Depositary's account at The Depository Trust Company as described in the
Offering Circular/Proxy Statement/Prospectus), together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) with
any required signature guarantees (or in the case of a book-entry transfer, an
Agent's Message), and any other documents required by this Letter of
Transmittal, are received by the US Depositary within three Nasdaq trading days
after the date of execution of such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF ESPRIT TELECOM ADSs EVIDENCED BY ESPRIT TELECOM
ADRs AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE HOLDERS
OF ESPRIT TELECOM ADSs ACCEPTING THE OFFER. IF DELIVERY IS BY MAIL, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
9
<PAGE> 10
No alternative, conditional or contingent acceptance will be accepted and
no fractional Esprit Telecom ADSs will be purchased. All accepting Esprit
Telecom ADS holders, by execution of this Letter of Transmittal (or facsimile
thereof), waive any right to receive any notice of the acceptance of their
Esprit Telecom ADSs for payment.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the series
numbers of the certificates and/or the number of Esprit Telecom ADSs should be
listed on a separate schedule attached hereto.
4. PARTIAL ACCEPTANCES (NOT APPLICABLE TO BOOK-ENTRY TRANSFERS). If the
Offer is to be accepted in respect of less than all of the Esprit Telecom ADSs
evidenced by any Esprit Telecom ADRs delivered to the US Depositary herewith,
fill in the number of Esprit Telecom ADSs in respect of which the Offer is being
accepted in the box entitled "Number of Esprit Telecom ADSs Tendered." In such
case, a new Esprit Telecom ADR for the remainder of the Esprit Telecom ADSs (in
respect of which the Offer is not being accepted) represented by the old Esprit
Telecom ADR will be sent to the registered holders as promptly as practicable
following the date on which the Esprit Telecom ADSs in respect of which the
Offer has been accepted are purchased.
The Offer will be deemed to have been accepted in respect of all Esprit
Telecom ADSs evidenced by Esprit Telecom ADRs delivered to the US Depositary or
the Belgian Receiving Agent (where applicable) unless otherwise indicated. In
the case of partial acceptances, Esprit Telecom ADSs in respect of which the
Offer was not accepted will not be reissued to a person other than the
registered holder.
5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Esprit
Telecom ADSs in respect of which the Offer is being accepted hereby, the
signature(s) must correspond with the name(s) as written on the face of the
certificates without any change whatsoever.
If any of the Esprit Telecom ADSs evidenced by Esprit Telecom ADRs in
respect of which the Offer is being accepted hereby are owned of record by two
or more owners, all such owners must sign this Letter of Transmittal.
If any of the Esprit Telecom ADSs in respect of which the Offer is being
accepted are registered in different names on different Esprit Telecom ADRs, it
will be necessary to complete, sign and submit as many separate Letters of
Transmittal as there are different registrations of Esprit Telecom ADRs.
If this Letter of Transmittal or any Esprit Telecom ADRs or stock powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and proper evidence
satisfactory to GTS of their authority so to act must be submitted.
When this Letter of Transmittal is signed by the registered holder(s) of
the Esprit Telecom ADSs listed and transmitted hereby, no endorsements of
certificates or separate stock powers are required unless payment of the
purchase price is to be issued to a person other than the registered holder(s).
Signatures on such Esprit Telecom ADRs or stock powers must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Esprit Telecom ADSs listed, the Esprit Telecom ADRs
must be endorsed or accompanied by appropriate stock powers signed exactly as
the name(s) of the registered holder(s) appear(s) on the Esprit Telecom ADRs
evidencing such Esprit Telecom ADSs. Signatures on such Esprit Telecom ADRs or
stock powers must be guaranteed by an Eligible Institution.
6. STOCK TRANSFER TAXES. GTS will pay or cause to be paid any stock
transfer taxes with respect to the transfer and sale to it or its order of
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs pursuant to the Offer. If,
however, delivery of any of the consideration payable pursuant to the Offer is
to be made to any persons other than the registered holder(s), or if Esprit
Telecom ADSs in respect of which the Offer is being accepted are registered in
the name of any person other than the person(s) signing this Letter of
Transmittal, the amount of any stock transfer taxes (whether imposed on the
registered holders(s) or such
10
<PAGE> 11
person(s)) payable on account of the transfer to such person will be deducted
from the purchase price (or new GTS Stock will be withheld) unless satisfactory
evidence of the payment of such taxes or exemption therefrom is submitted.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Esprit Telecom ADRs listed in this
Letter of Transmittal.
7. SPECIAL DELIVERY INSTRUCTIONS. If the certificates representing the new
GTS Stock are to be sent or any Esprit Telecom ADRs evidencing Esprit Telecom
ADSs in respect of which the Offer is not being accepted or which are not
purchased are to be returned to a person other than the signer of this Letter of
Transmittal or to an address other than that shown in the box entitled
"Description of Esprit Telecom ADSs Tendered" on the first page of this Letter
of Transmittal, or the new GTS Stock is to be registered in the name of a person
other than the signer of this Letter of Transmittal, the boxes labeled "Special
Delivery Instructions" and/or "Special Instructions Regarding New GTS Stock" on
this Letter of Transmittal should be completed.
8. WAIVER OF CONDITIONS. GTS reserves the absolute right in its sole
discretion to waive any of the specified Conditions of the Offer, in whole or in
part, to the extent permitted by applicable law and the rules of the City Code.
9. IMPORTANT TAX INFORMATION; SUBSTITUTE FORM W-9 AND SUBSTITUTE FORM
W-8. Under United States federal income tax law, a holder whose tendered Esprit
Telecom ADSs are accepted for exchange must provide the US Depositary (as payor)
with (i) such holder's correct Taxpayer Identification Number ("TIN") on
Substitute Form W-9 below or (ii) in the case of certain exempt foreign persons,
the Substitute Form W-8 below. If such holder is an individual, the TIN is his
or her social security number. If the US Depositary is not provided with the
correct TIN or an adequate basis for exemption, the holder may be subject to a
$50 penalty imposed by the Internal Revenue Service (the "IRS") in addition to
backup withholding in an amount equal to 31% of the gross proceeds resulting
from the Offer.
Certain holders (including, among others, all corporations and certain
foreign individuals) are exempt from these backup withholding requirements.
Certain foreign persons can qualify for this exemption by submitting a Form W-8
or Substitute Form W-8 below, signed under penalties of perjury and attesting to
such person's exempt status.
If backup withholding applies, the US Depositary is required to withhold
31% of the gross proceeds payable to a stockholder or other payee pursuant to
the Offer. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in overpayment of taxes, a refund may be
obtained from the IRS.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Box 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding. Even if the
box in Part 2 is checked and the Certificate of Awaiting Taxpayer Identification
Number is completed, the US Depositary will withhold 31% of all reportable
payments made prior to the time a properly certified TIN is provided to the US
Depositary. Such amounts will be refunded to such holder if a properly certified
TIN is provided to the US Depositary within 60 days.
If the ADR(s) representing Esprit Telecom ADSs are in more than one name or
are not in the name of the actual owner, consult the enclosed guidelines for
information on which TIN to report.
Holders of Esprit Telecom ADSs who acquired shares at different times may
have different tax bases in their Esprit Telecom ADSs and may wish to consult
with their own tax advisors as to the possibility of identifying the specific
Esprit Telecom ADSs surrendered in the Offer in order to establish the basis of
the GTS Common Stock received in exchange therefor.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE
THEREOF) TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY
11
<PAGE> 12
TRANSFER AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE US DEPOSITARY
OR THE BELGIAN RECEIVING AGENT (WHERE APPLICABLE), OR A NOTICE OF GUARANTEED
DELIVERY MUST BE RECEIVED BY THE US DEPOSITARY, PRIOR TO THE OFFER EXPIRATION
DATE. STOCKHOLDERS ARE ENCOURAGED TO RETURN A COMPLETED SUBSTITUTE FORM W-9 OR
SUBSTITUTE FORM W-8 WITH THEIR LETTER OF TRANSMITTAL.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance or additional copies of the Offering Circular/Proxy
Statement/Prospectus, this Letter of Transmittal, the Notice of Guaranteed
Delivery and the Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9 and Substitute Form W-8 may be directed to the
Information Agent at the address and telephone number set forth below.
11. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Esprit Telecom ADR
evidencing Esprit Telecom ADSs has been lost, destroyed or stolen, the holder
thereof should promptly notify the US Depositary by checking the box immediately
following the Special Instructions Regarding GTS Stock -- Special Delivery
Instructions boxes and indicating the number of Esprit Telecom ADSs evidenced by
such lost, destroyed or stolen Esprit Telecom ADRs. The holder thereof will then
be instructed as to the steps that must be taken in order to replace such Esprit
Telecom ADRs. This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen Esprit
Telecom ADRs have been followed.
12. HOLDERS OF ESPRIT TELECOM SHARES NOT REPRESENTED BY ESPRIT TELECOM
ADSS. Holders of Esprit Telecom Ordinary Shares have been sent an Acceptance
Form with the Offering Circular/Proxy Statement/Prospectus and may not accept
the Offer in respect of Esprit Telecom Ordinary Shares pursuant to this Letter
of Transmittal, except insofar as those shares are represented by Esprit Telecom
ADSs. If any holder of Esprit Telecom Shares which are not represented by Esprit
Telecom ADSs needs to obtain a copy of an Acceptance Form, such holder should
contact the Receiving Agents at the appropriate address and telephone number set
forth in the Offering Circular/Proxy Statement/Prospectus or the US Depositary.
13. FRACTIONAL ENTITLEMENTS. Fractional shares of new GTS Stock will not be
issued to holders of Esprit Telecom ADSs, but will be aggregated and sold in the
market and the net proceeds of the sale will be paid to such holders entitled
thereto. However, if any person is entitled to cash in an amount less than $2,
such amount will not be paid but will be retained for the benefit of GTS.
12
<PAGE> 13
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION B)
PAYOR'S NAME THE BANK OF NEW YORK
<TABLE>
<S> <C> <C> <C>
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX NAME:
FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND DATING ADDRESS:
BELOW
TIN:
Social Security Number or
Employer Identification Number
DEPARTMENT OF THE
TREASURY PART 2 -- TIN APPLIED FOR [ ]
INTERNAL REVENUE
SERVICE
CERTIFICATION: UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
PAYOR'S REQUEST FOR (1) the number shown on this form is my correct Taxpayer Identification
TAXPAYER Number (or I am waiting for a number to be issued to me).
IDENTIFICATION (2) I am not subject to backup withholding either because: (a) I am exempt
NUMBER ("TIN") from backup withholding, or (b) I have not been notified by the Internal
AND Revenue Service (the "IRS") that I am subject to backup withholding as a
CERTIFICATION result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE _____________________
You must cross out item (2) of the above certification if you have been notified by the IRS that you
are subject to backup withholding because of underreporting of interest or dividends on your tax
refund and you have not been notified by the IRS that you are no longer subject to backup withholding.
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
--------------------------------------------------------------------
-----------------------------------------
Signature Date
- --------------------------------------------------------------------------------
FOR ASSISTANCE IN COMPLETING THE SUBSTITUTE FORM W-9 PLEASE REVIEW THE ENCLOSED
"GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9."
13
<PAGE> 14
CERTIFICATE OF FOREIGN STATUS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
------------------------------------------------------
SUBSTITUTE NAME OF OWNER
------------------------------------------------------
FORM W-8 U.S. TAXPAYER I.D. NUMBER (if any)
------------------------------------------------------
DEPARTMENT OF THE TREASURY, PERMANENT ADDRESS (See enclosed Guidelines)
INTERNAL REVENUE SERVICE ------------------------------------------------------
CURRENT MAILING ADDRESS (if different from Permanent
CERTIFICATE OF FOREIGN STATUS Address)
------------------------------------------------------------
CERTIFICATION:
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM AN EXEMPT
FOREIGN PERSON BECAUSE:
(1) I am a nonresident alien individual or a foreign
corporation, partnership, estate or trust;
(2) I am an individual who has not been, and plans not to
be, present in the United States for a total of 183 days
or more during the calendar year; and
(3) I am neither engaged, nor plan to be engaged during
the year, in a United States trade or business that has
effectively connected gains from transactions with a
broker or barter exchange.
---------------------------------------------------------
---------------------
Date
Signature
- --------------------------------------------------------------------------------------------------
</TABLE>
FOR ASSISTANCE IN COMPLETING THE SUBSTITUTE FORM W-8 PLEASE REVIEW THE
"GUIDELINES FOR CERTIFICATION OF FOREIGN STATUS ON SUBSTITUTE FORM W-8 BELOW."
GUIDELINES FOR CERTIFICATION OF FOREIGN STATUS
ON SUBSTITUTE FORM W-8
PERMANENT ADDRESS:
<TABLE>
<S> <C>
If you are: Show the address of:
An individual Your permanent residence
A partnership or corporation Principal office
An estate or trust Permanent residence or principal office of
any fiduciary
</TABLE>
NONRESIDENT ALIEN INDIVIDUAL: For United States federal income tax purposes,
"nonresident alien individual" means an individual who is neither a United
States citizen nor resident. Generally, an alien is considered to be a United
States resident if:
The individual was a lawful permanent resident of the United States at
any time during the calendar year, that is the alien held an immigrant visa
(a "green card"), or
The individual was physically present in the United States on:
(1) at least 31 days during the calendar year, and
(2) 183 days or more during the current year and the two preceding
calendar years (counting all the days of physical presence in the current
year, one-third the number of days of presence in the first preceding
year, and one-sixth of the number of days in the second preceding year).
EXEMPT FOREIGN PERSON: If you do not meet the requirements of certification
number two or three above, you may instead certify on Internal Revenue Service
Form 1001, Ownership, Exemption, or Reduced Rate Certificate, that your country
has a tax treaty with the United States that exempts your transactions from
United States tax.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
14
<PAGE> 15
The Information Agent for the Offer is:
GEORGESON LOGO
Wall Street Plaza
New York, New York 10005
Banks and Brokers call: (212) 440-9800 (collect)
All others call: (800) 223-2064 (toll free)
For holders outside the United States call:
(44) 171 335 8600 (collect)
The Dealer Managers for the Offer are:
<TABLE>
<S> <C>
BEAR, STEARNS INTERNATIONAL LIMITED BEAR, STEARNS & CO. INC.
One Canada Square 245 Park Avenue
London E14 5AD New York, NY 10167
(0171) 516 6935 Call toll free: (888) 823-6441
</TABLE>
<PAGE> 1
EXHIBIT (a)(5)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are
in any doubt about the Offer or the action you should take, you are recommended
to seek your own personal financial advice immediately from an appropriately
authorized independent financial advisor or, if you are in the United Kingdom,
an independent professional advisor authorized under the Financial Services Act
1986.
If you have sold or otherwise transferred all your registered holdings of
Esprit Telecom ADSs, please pass this document and the accompanying Offering
Circular/Proxy Statement/Prospectus dated February 2, 1999 (the "Offering
Circular/Proxy Statement/Prospectus"), as soon as possible to the purchaser or
transferee, or to the stockbroker, bank or other agent through whom the sale or
transfer was effected, for delivery to the purchaser or transferee. The Offer is
not being made directly or indirectly in Canada, Australia or Japan and such
documents should not be distributed, forwarded or transmitted into or from
Canada, Australia or Japan by any means whatsoever including without limitation
mail, facsimile, transmission, telex or telephone.
Bear, Stearns International Limited, which is regulated in the United
Kingdom by The Securities and Futures Authority Limited in the conduct of its
investment business and Bear, Stearns & Co. Inc. are acting exclusively for GTS
and no one else in connection with the Offer and will not be responsible under
the regulations of The Securities and Futures Authority Limited to anyone other
than GTS for providing the protections afforded to customers of either Bear
Stearns entity in relation to the Offer nor for giving advice in relation to the
Offer. The provisions of this paragraph are not intended to disclaim any
liability of either Bear Stearns entity under U.S. securities laws.
- --------------------------------------------------------------------------------
NOTICE OF GUARANTEED DELIVERY
TO ACCEPT THE OFFER FOR
AMERICAN DEPOSITARY SHARES
EACH REPRESENTING SEVEN ORDINARY SHARES, PAR VALUE L0.01 PER SHARE
OF
ESPRIT TELECOM GROUP PLC
BY
BEAR, STEARNS INTERNATIONAL LIMITED
AND
BEAR, STEARNS & CO. INC.
ON BEHALF
OF
GLOBAL TELESYSTEMS GROUP, INC.
As set forth under "The Offer -- Procedures for Accepting the Offer -- All
Holders of Esprit Telecom Securities -- Holders of Esprit Telecom
ADSs -- Guaranteed Delivery Procedures" in the Offering Circular/Proxy
Statement/ Prospectus, dated February 2, 1999 (the "Offering Circular/Proxy
Statement/Prospectus"), this form or one substantially equivalent hereto must be
used for acceptance of the Offer (as defined in the Offering Circular/Proxy
Statement/ Prospectus) in respect of American Depositary Shares ("Esprit Telecom
ADSs") of Esprit Telecom Group plc ("Esprit Telecom"), if American Depositary
Receipts evidencing Esprit Telecom ADSs ("Esprit Telecom ADRs") are not
immediately available or the procedures for book-entry transfer cannot be
completed on a timely basis or if time will not permit all required documents to
reach the US Depositary or the Belgian Receiving Agent (where applicable -- see
below) (as such terms are defined in the Offering Circular/Proxy
Statement/Prospectus) prior to the expiration of the Initial Offer Period or the
Subsequent Offer Period (each as defined in the Offering Circular/Proxy
Statement/ Prospectus), as the case may be. Such form may be delivered by hand
or mailed to the US Depositary or may be sent to the Belgian Receiving Agent (in
relation to Belgian holders of Esprit Telecom ADSs only and must include a
guarantee by an Eligible Institution (as defined in the Offering Circular/Proxy
Statement/Prospectus) in the form set out herein. See "The Offer -- Procedures
for Accepting the Offer -- All Holders of Esprit Telecom Securities -- Holders
of Esprit Telecom ADSs -- Guaranteed Delivery Procedures" in the Offering
Circular/Proxy Statement/Prospectus.
The US Depositary for the Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Facsimile Transmission:
(For Eligible Institutions
By Mail: Only) By Hand or Overnight Courier:
Tender & Exchange Department (212) 815-6213 Tender & Exchange Department
P.O. Box 11248 101 Barclay Street
Church Street Station For Confirmation Telephone: Receive and Deliver Window
New York, New York 10286-1248 (800) 507-9357 New York, New York 10286
</TABLE>
The Belgian Receiving Agent for the Offer is:
THE BANK OF NEW YORK -- BRUSSELS
Client Services Group
Attn: Alain Vander Eede
Avenue des Arts 35 Kunstlaan
1040 Brussels
Belgium
<PAGE> 2
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION
OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A
LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN "ELIGIBLE INSTITUTION"
UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE
APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
2
<PAGE> 3
Ladies and Gentlemen:
The undersigned hereby tenders to Global TeleSystems Group, Inc., a
Delaware corporation ("GTS"), upon the terms and subject to the conditions set
forth in the Offering Circular/Proxy Statement/Prospectus, and the related
Letter of Transmittal (which, together with any amendments or supplements
thereto, collectively constitute the "Offer"), receipt of each of which is
hereby acknowledged, the number of Esprit Telecom ADSs specified below pursuant
to the guaranteed delivery procedures described in "The Offer -- Procedures for
Accepting the Offer -- All Holders of Esprit Telecom Securities -- Holders of
Esprit Telecom ADSs -- Guaranteed Delivery Procedures" in the Offering
Circular/Proxy Statement/Prospectus.
THE UNDERSIGNED UNDERSTANDS THAT THE ACCEPTANCE OF THE OFFER IN RESPECT OF
ESPRIT TELECOM ADSs PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL NOT BE
TREATED AS A VALID ACCEPTANCE FOR THE PURPOSE OF SATISFYING THE ACCEPTANCE
CONDITION. SEE "THE OFFER -- PROCEDURES FOR ACCEPTING THE OFFER -- ALL HOLDERS
OF ESPRIT TELECOM SECURITIES -- HOLDERS OF ESPRIT TELECOM ADSs -- GUARANTEED
DELIVERY PROCEDURES" IN THE OFFERING CIRCULAR/PROXY STATEMENT/ PROSPECTUS.
TO BE COUNTED TOWARDS SATISFACTION OF THE ACCEPTANCE CONDITION, THE ESPRIT
TELECOM ADRs EVIDENCING SUCH ESPRIT TELECOM ADSs MUST, PRIOR TO THE FIRST
CLOSING DATE, BE RECEIVED BY THE US DEPOSITARY OR BELGIAN RECEIVING AGENT (WHERE
APPLICABLE) OR, IF APPLICABLE, TIMELY CONFIRMATION OF A BOOK-ENTRY TRANSFER OF
SUCH ESPRIT TELECOM ADSs INTO THE US DEPOSITARY'S ACCOUNT AT THE DEPOSITARY
TRUST COMPANY PURSUANT TO THE PROCEDURES SET OUT IN "THE OFFER -- PROCEDURES FOR
ACCEPTING THE OFFER -- ALL HOLDERS OF ESPRIT TELECOM SECURITIES -- HOLDERS OF
ESPRIT TELECOM ADSs -- GUARANTEED DELIVERY PROCEDURES" IN THE OFFERING
CIRCULAR/PROXY STATEMENT/PROSPECTUS, MUST BE RECEIVED BY THE US DEPOSITARY OR
BELGIAN RECEIVING AGENT (WHERE APPLICABLE), TOGETHER WITH A DULY EXECUTED LETTER
OF TRANSMITTAL OR FACSIMILE THEREOF WITH ANY REQUIRED SIGNATURE GUARANTEES (OR,
IN THE CASE OF A BOOK-ENTRY TRANSFER, AN AGENT'S MESSAGE), AND ANY OTHER
REQUIRED DOCUMENTS.
Number of Esprit Telecom ADSs:
Name(s) of Record Holders of Esprit Telecom ADSs:
- --------------------------------------------------------------------------------
(Please Type or Print)
Address(es):
(Include Zip Code)
Area Code and Telephone Number:
Certificate Number(s) (if available):
- --------------------------------------------------------------------------------
[ ] Check here if Esprit Telecom ADSs will be tendered by book-entry transfer
Account Number:
Name of Depositary Bank:
Account Number:
Signature(s):
- --------------------------------------------------------------------------------
Dated: ________________________, 1999
3
<PAGE> 4
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEES)
The undersigned, a firm that is a member of the Medallion Signature
Guarantee Program or is otherwise an "eligible guarantor institution," as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (each of the foregoing is referred to as an
"Eligible Institution"), hereby (a) represents that the above-named person(s)
"own(s)" the Esprit Telecom ADSs tendered hereby within the meaning of Rule
14e-4 under the Exchange Act ("Rule 14e-4"), (b) represents that the tender of
Esprit Telecom ADSs effected hereby complies with Rule 14e-4, and (c) guarantees
delivery to the US Depositary or the Belgian Receiving Agent (where applicable),
at one of its addresses set forth above, of ADRs evidencing the Esprit Telecom
ADSs tendered hereby in proper form for transfer, or in the case of a tender of
Esprit Telecom ADSs confirmation of book-entry transfer of such Esprit Telecom
ADSs into the Exchange Agent's account at The Depository Trust Company, in each
case with delivery of a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantees in the
case of a tender of Esprit Telecom ADSs (or an Agent's Message (as defined in
the section entitled "The Offer-Procedures for Tendering Esprit Telecom ADSs" in
the Offering Circular/Proxy Statement/Prospectus) in the case of book-entry
transfer), and any other documents required by the Letter of Transmittal, within
three New York Stock Exchange, Inc. trading days after the date of execution of
this Notice of Guaranteed Delivery.
The Eligible Institution that completes this form must communicate the
guarantee to the US Depositary or the Belgian Receiving Agent (where applicable)
and must comply with the delivery obligations described above within the
required time period. Failure to do so could result in financial loss to such
Eligible Institution.
Name of Firm:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
- --------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
(Please Type or Print)
Dated:
- ---------------------, 1999
NOTE: DO NOT SEND ADRS FOR ESPRIT TELECOM ADSS WITH THIS NOTICE, SUCH ADRS
SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
4
<PAGE> 1
EXHIBIT (a)(6)
THIS DOCUMENT SHOULD NOT BE FORWARDED OR TRANSMITTED IN OR INTO CANADA,
AUSTRALIA OR JAPAN.
Bear, Stearns International Limited, which is regulated in the United
Kingdom by The Securities and Futures Authority Limited in the conduct of its
investment business and Bear, Stearns & Co. Inc. are acting exclusively for GTS
and no one else in connection with the offer and will not be responsible under
the regulations of The Securities and Futures Authority Limited to anyone other
than GTS for providing the protections afforded to customers of either Bear
Stearns entity nor for giving advice in relation to the offer. The provisions of
this paragraph are not intended to disclaim any liability of either Bear Stearns
entity under U.S. securities laws.
- --------------------------------------------------------------------------------
OFFER TO PURCHASE
ALL AMERICAN DEPOSITARY SHARES
EACH REPRESENTING SEVEN ORDINARY SHARES, PAR VALUE L0.01 PER SHARE
OF
ESPRIT TELECOM GROUP PLC
BY
BEAR, STEARNS INTERNATIONAL LIMITED
AND
BEAR, STEARNS & CO. INC.
ON BEHALF
OF
GLOBAL TELESYSTEMS GROUP, INC.
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 3:00 P.M. (LONDON
TIME), 10:00 A.M. (NEW YORK CITY TIME), ON THURSDAY, MARCH 4, 1999, UNLESS
EXTENDED ("EXPIRATION DATE"). AT THE CONCLUSION OF THE INITIAL OFFER PERIOD,
INCLUDING ANY EXTENSION THEREOF, IF ALL CONDITIONS HAVE BEEN SATISFIED OR, WHERE
PERMITTED, WAIVED, THE OFFER WILL BE EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF
AT LEAST 14 CALENDAR DAYS. HOLDERS OF ESPRIT TELECOM ORDINARY SHARES AND ESPRIT
TELECOM ADSS, AS THE CASE MAY BE, WILL HAVE WITHDRAWAL RIGHTS DURING THE INITIAL
OFFER PERIOD, BUT NOT DURING THE SUBSEQUENT OFFER PERIOD, EXCEPT IN CERTAIN
LIMITED CIRCUMSTANCES.
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We have been appointed by GLOBAL TELESYSTEMS GROUP, INC., a Delaware
corporation ("GTS"), on behalf of ESPRIT TELECOM GROUP plc, a corporation
organized under the laws of England and Wales ("Esprit Telecom") to act as
Dealer Manager in connection with GTS' offer to acquire all the issued and
outstanding ordinary shares, one pence per share (the "Esprit Telecom Ordinary
Shares") and American Depositary Shares of Esprit Telecom, each representing
seven Esprit Telecom Ordinary Shares ("Esprit Telecom ADSs"), for new shares of
GTS common stock, $0.10 par value per share (a "GTS Stock"), at an exchange
ratio of 0.1271 of a share of GTS' Stock for each Esprit Telecom Ordinary Share
and 0.89 of a share of GTS Stock for each Esprit Telecom ADS (the "Offer"), upon
the terms and subject to the conditions set forth in the Offering Circular/Proxy
Statement/Prospectus, dated February 2, 1999 (the "Offering Circular/Proxy
Statement/Prospectus"), and in the related Form of Acceptance, Letter of
Transmittal and Notice of Guaranteed Delivery enclosed herewith. Terms used in
this document to the extent
<PAGE> 2
not defined herein shall bear the same meaning as in the Offering Circular/Proxy
Statement/Prospectus. Please furnish copies of the enclosed materials to those
of your clients for whose accounts you hold Esprit Telecom Ordinary Shares
registered in your name or in the name of your nominee.
Enclosed for your information and use are copies of the following
documents:
1. Offering Circular/Proxy Statement/Prospectus, dated February 2,
1999;
2. Letter of Transmittal to be used by holders of Esprit Telecom ADSs
in accepting the Offer and tendering ADSs;
3. Notice of Guaranteed Delivery to be used to accept the Offer if the
ADSs and all other required documents are not immediately available or
cannot be delivered to the US Depositary or the Belgian Receiving Agent
(where applicable) by the Expiration Date or if the procedure for
book-entry transfer cannot be completed by the Expiration Date;
4. A letter to security holders of Esprit Telecom from Sir Robin
Biggam, Chairman of the Board of Esprit Telecom, together with a
Solicitation/Recommendation Statement on Schedule 14D-9 filed with the
Securities and Exchange Commission by Esprit Telecom;
5. A letter which may be sent to your clients for whose accounts you
hold Esprit Telecom Ordinary Shares and Esprit Telecom ADSs registered in
your name or in the name of your nominee, with space provided for obtaining
such clients' instructions with regard to the Offer;
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
7. Return envelope addressed to the US Depositary.
THE OFFER MAY NOT BE ACCEPTED IN RESPECT OF ESPRIT TELECOM SHARES BY MEANS
OF A LETTER OF TRANSMITTAL AND NOTICE OF GUARANTEED DELIVERY. A FORM OF
ACCEPTANCE FOR ACCEPTING THE OFFER IN RESPECT OF ESPRIT TELECOM SHARES MAY BE
OBTAINED FROM THE US DEPOSITARY OR THE RECEIVING AGENTS.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE OFFER, PRORATION PERIOD (IF APPLICABLE) AND WITHDRAWAL RIGHTS EXPIRE AT
10:00 A.M., NEW YORK CITY TIME, 3:00 P.M. LONDON TIME ON MARCH 4, 1999, UNLESS
THE OFFER IS EXTENDED.
In all cases, exchange of Esprit Telecom Ordinary Shares tendered and
accepted for pursuant to the Offer will be made only after timely receipt by the
(i) Receiving Agents of completed Forms of Acceptance, together with
certificates evidencing such Esprit Telecom Ordinary Shares, (ii) US Depositary
or the Belgian Receiving Agent (where applicable) of a Letter of Transmittal or
Notice of Guaranteed Delivery (or facsimile thereof) properly completed and duly
executed, with any required signature guarantees (or in the case of a book-entry
transfer, an Agent's Message) together with ADRs evidencing such Esprit Telecom
ADSs and any other required documents.
A securityholder who desires to tender Esprit Telecom ADSs and whose
American Depositary Receipts ("ADRs") evidencing such Esprit Telecom ADSs are
not immediately available, or who cannot comply with the procedure for
book-entry transfer on a timely basis, may tender such Esprit Telecom ADSs by
following the procedure for guaranteed delivery set forth in "The Offering
Circular/Proxy Statement/Prospectus". See "Procedures for Accepting the
Offer-guaranteed delivery procedures".
GTS will not pay any fees or commissions to any broker, dealer or other
person (other than the Dealer Manager, the US Depositary, the Receiving Agent
and the Information Agent as described in the Offering Circular/Proxy
Statement/Prospectus) in connection with the solicitation of tenders of Esprit
Telecom Ordinary Shares and Esprit Telecom ADSs pursuant to the Offer. However,
GTS will reimburse you for customary mailing and handling expenses incurred by
you in forwarding any of the enclosed materials to your clients. GTS will pay or
cause to be paid any stock transfer taxes payable with respect to the transfer
of Esprit
2
<PAGE> 3
Telecom Ordinary Shares and Esprit Telecom ADSs to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to
Bear, Stearns International Limited and Bear, Stearns & Co. Inc., the Dealer
Managers, or Georgeson & Company (the "Information Agent") at their address and
telephone numbers set forth on the back cover page of the Offering
Circular/Proxy Statement/Prospectus.
Additional copies of the enclosed material may be obtained from the
Information Agent, at the address and telephone number set forth on the back
cover page of the Offer to Purchase.
Very truly yours,
Bear, Stearns International Limited
Bear, Stearns & Co. Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE PARENT, GTS, ESPRIT TELECOM, THE DEALER
MANAGERS, THE INFORMATION AGENT, RECEIVING AGENTS OR THE US DEPOSITARY, OR OF
ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY
DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH
THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED
THEREIN.
3
<PAGE> 1
EXHIBIT (a)(7)
THIS DOCUMENT SHOULD NOT BE FORWARDED OR TRANSMITTED IN OR INTO CANADA,
AUSTRALIA OR JAPAN.
Bear, Stearns International Limited, which is regulated in the United
Kingdom by The Securities and Futures Authority Limited in the conduct of its
investment business and Bear, Stearns & Co. Inc. are acting exclusively for GTS
and no one else in connection with the offer and will not be responsible under
the regulations of The Securities and Futures Authority Limited to anyone other
than GTS for providing the protections afforded to customers of either Bear
Stearns entity nor for giving advice in relation to the offer. The provisions of
this paragraph are not intended to disclaim any liability of either Bear Stearns
entity under U.S. securities laws.
- --------------------------------------------------------------------------------
OFFER TO PURCHASE
ALL AMERICAN DEPOSITARY SHARES
EACH REPRESENTING SEVEN ORDINARY SHARES, PAR VALUE (POUND)0.01 PER SHARE
OF
ESPRIT TELECOM GROUP PLC
BY
BEAR, STEARNS INTERNATIONAL LIMITED
AND
BEAR, STEARNS & CO. INC.
ON BEHALF
OF
GLOBAL TELESYSTEMS GROUP, INC.
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 3:00 P.M. (LONDON
TIME), 10:00 A.M. (NEW YORK CITY TIME), ON THURSDAY, MARCH 4, 1999, UNLESS
EXTENDED. AT THE CONCLUSION OF THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION
THEREOF, IF ALL CONDITIONS HAVE BEEN SATISFIED OR, WHERE PERMITTED, WAIVED, THE
OFFER WILL BE EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF AT LEAST 14 CALENDAR
DAYS. HOLDERS OF ESPRIT TELECOM ORDINARY SHARES AND ESPRIT TELECOM ADSS, AS THE
CASE MAY BE, WILL HAVE WITHDRAWAL RIGHTS DURING THE INITIAL OFFER PERIOD, BUT
NOT DURING THE SUBSEQUENT OFFER PERIOD, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
To Our Clients:
Enclosed for your consideration are an Offering Circular/Proxy
Statement/Prospectus, dated February 2, 1999 (the "Offering Circular/Proxy
Statement/Prospectus"), and a related Letter of Transmittal and a Notice of
Guaranteed Delivery in connection with the offer by Global TeleSystems Group,
Inc., a Delaware corporation ("GTS"), to acquire all the issued and outstanding
Ordinary Shares, one pence per share par value (the "Esprit Telecom Ordinary
Shares") and American Depositary Shares of Esprit Telecom, each representing
seven Esprit Telecom Ordinary Shares ("Esprit Telecom ADSs"), of Esprit Telecom
Group plc, a corporation organized under the laws of England and Wales ("Esprit
Telecom") for new shares of GTS
<PAGE> 2
common stock, $0.10 par value per share (a "GTS Stock"), at an exchange ratio of
0.1271 of a share of GTS Stock for each Esprit Telecom Ordinary Share and 0.89
of a share of GTS Stock for each Esprit Telecom ADS, upon the terms and subject
to the conditions set forth in the Offering Circular/Proxy Statement/ Prospectus
(the "Offer"), and in the related Form of Acceptance, Letter of Transmittal and
Notice of Guaranteed Delivery. Terms used in this document to the extent not
defined herein, have the same meaning as in the Offering Circular/Proxy
Statement/Prospectus.
We are the holder of record of Esprit Telecom ADSs evidenced by Esprit
Telecom ADRs held by us for your account. A TENDER OF SUCH ESPRIT TELECOM ADSS
CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR
INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION
ONLY AND CANNOT BE USED BY YOU TO TENDER ESPRIT TELECOM ADSS HELD BY US FOR YOUR
ACCOUNT.
We request instructions as to whether you wish to have us tender on your
behalf any or all of the Ordinary Shares and ADSs held by us for your account,
upon the terms and subject to the conditions set forth in the Offer.
Your attention is invited to the following:
1. The Offer is being made for all Esprit Telecom Ordinary Shares and
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs.
2. The Offer is on the terms and subject to the Conditions set forth
in the Offering Circular/Proxy Statement/Prospectus.
3. The Initial Offer Period of the Offer will expire at 3:00 p.m.
(London time), 10:00 a.m. (New York City time), on March 4, 1999, unless
extended (in accordance with the terms thereof).
4. At the conclusion of the Initial Offer Period, including any
extension thereof, if all Conditions of the Offer have been satisfied,
fulfilled or, where permitted, waived, the Offer will be extended for a
Subsequent Offer Period of at least 14 calendar days.
5. Esprit Telecom ADS holders will not be obligated to pay brokerage
fees or commissions or, except as otherwise provided in Instruction 6 of
the Letter of Transmittal, stock transfer taxes applicable to a sale of
Esprit Telecom ADSs evidenced by Esprit Telecom ADRs to Acquiror.
If you wish to have us tender any or all of your Esprit Telecom Ordinary
Shares or Esprit Telecom ADSs, please so instruct us by completing, executing
and returning to us the instruction form contained in this letter. An envelope
in which to return your instructions to us is enclosed. If you authorize the
tender of your Esprit Telecom Ordinary Shares or Esprit Telecom ADSs, all such
Esprit Telecom Ordinary Shares or Esprit Telecom ADSs will be tendered unless
otherwise specified in your instructions. Your instructions should be forwarded
to us in ample time to permit us to submit a tender on your behalf prior to the
expiration of the Offer.
The Offer is made solely by the Offering Circular/Proxy
Statement/Prospectus and the Acceptance Forms, and is being made to all holders
of Ordinary Shares and ADSs. Acquiror is not aware of any jurisdiction where the
making of the Offer is prohibited by administrative or judicial action pursuant
to any valid state statute. If Acquiror becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of Esprit Telecom Ordinary
Shares and Esprit Telecom ADSs pursuant thereto, Acquiror will make a good faith
effort to comply with such state statute. If, after such good faith effort,
Acquiror cannot comply with such state statute, the Offer will not be made to
(nor will tenders be accepted from or on behalf of) the holders of Esprit
Telecom Ordinary Shares and Esprit Telecom ADSs in such state. In any
jurisdiction where the securities, blue sky or other laws require the Offer to
be made by a licensed broker or dealer, the Offer shall be deemed to be made on
behalf of Acquiror by Bear, Stearns International Limited or Bear, Stearns & Co.
Inc. or one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
2
<PAGE> 3
INSTRUCTIONS WITH RESPECT TO THE OFFER TO EXCHANGE
ALL OUTSTANDING ORDINARY SHARES AND ADSs OF ESPRIT TELECOM GROUP PLC
FOR NEW SHARES OF COMMON STOCK OF GLOBAL TELESYSTEMS GROUP, INC.
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offering Circular/Proxy Statement/Prospectus, dated February 2, 1999 (the
"Offering Circular/Proxy Statement/Prospectus"), and a related Letter of
Transmittal in connection with the offer by Global TeleSystems Group, Inc., a
Delaware corporation (the "Acquiror"), to acquire all the issued and outstanding
Ordinary Shares, one pence (the "Esprit Telecom Ordinary Shares") and American
Depositary Shares ("Esprit Telecom ADSs") of Esprit Telecom Group plc (the
"Offer"), a corporation organized under the laws of England and Wales (the
"Company"), at an exchange ratio of 0.1271 of a share of the Acquiror's Common
Stock for each Ordinary Share and 0.89 of a share of Acquiror's Common Stock for
each ADS.
This will instruct you to tender the number of Esprit Telecom ADSs
indicated below (or, if no number is indicated below, all Esprit Telecom ADSs)
that are held by you for the account of the undersigned, upon the terms and
subject to the conditions set forth in the Offer.
<TABLE>
<S> <C>
- --------------------------------------------------------
NUMBER OF ESPRIT TELECOM ADSs TO BE TENDERED: SIGN HERE
- --------------------------------- ADSs* ---------------------------------------
- -------------------------------------------------------- ---------------------------------------
DATED: , 1999 SIGNATURE(S)
---------------------------------------
---------------------------------------
PLEASE TYPE OR PRINT NAME(S)
---------------------------------------
---------------------------------------
PLEASE TYPE OR PRINT ADDRESS
---------------------------------------
AREA CODE AND TELEPHONE NUMBER
---------------------------------------
TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NUMBER
</TABLE>
- ---------------
* Unless otherwise indicated, it will be assumed that all Esprit Telecom ADSs
held by us for your account are to be tendered.
3
<PAGE> 1
EXHIBIT (a)(8)
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the proper
identification number to provide on the Substitute Form W-9.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT GIVE THE NAME
AND SOCIAL
SECURITY
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
1. Individual account The individual
2. Two or more individuals The actual owner of
(joint account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. The usual revocable The grantor-
savings trust (grantor is trustee(1)
also trustee)
b. The so-called trust The actual owner(1)
account that is not a
legal or valid trust
under state law.
5. Sole proprietorship The owner(3)
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT GIVE THE NAME
AND EMPLOYER
IDENTIFICATION
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
6. A valid trust, estate, or Legal entity (do not
pension trust furnish the
identification number
of the personal
representative or
trustee unless the
legal entity itself is
not designated in the
account title)(4)
7. Corporation The corporation
8. Association, club, The organization
religious, charitable,
educational or other
tax-exempt organization
9. Partnership The partnership
10. A broker or registered The broker or nominee
nominee
11. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a State or local government,
school district, or prison)
that receives agricultural
program payments
- ---------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
employer identification number.
(4) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
- - A corporation
- - An organization exempt from tax under section 501(a) or an individual
retirement plan, or a custodial account under section 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A state, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- - An international organization or any agency or instrumentality thereof.
- - A foreign central bank of issue.
- - A dealer in securities or commodities registered in the United States or a
possession of the United States.
- - A futures commodities merchant registered with the Commodity Futures Trading
Commission.
- - A real estate investment trust.
- - An entity registered at all times under the Investment Company Act of 1940.
- - A common trust fund operated by a bank under section 584(a).
- - A financial institution.
- - A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominees List.
- - A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the United
States and which have at least one nonresident partner.
- - Payments of patronage dividends not paid in money.
- - Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- - Payments described in section 6049(b) to nonresident aliens.
- - Payments on tax-free covenant bonds under section 1451.
- - Payments made by certain foreign organizations.
- - Mortgage interest paid to you.
Exempt payees described above should file Substitute Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR
TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND
DATE THE FORM AND RETURN IT TO THE PAYER.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see the regulations under sections 6041,
6041(a), 6042, 60-44, 6045A and 605N.
PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the number for identification
purposes and help verify the accuracy of your return. Payers must be given the
numbers whether or not recipients are required to file tax returns. Payers must
generally withhold 31% of taxable interest, dividends, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE> 1
EXHIBIT (a)(10)
08 DECEMBER 1998
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN
PART IN OR INTO CANADA, AUSTRALIA OR JAPAN
- --------------------------------------------------------------------------------
GLOBAL TELESYSTEMS GROUP, INC. ("GTS")
PROPOSED RECOMMENDED OFFER FOR ESPRIT TELECOM GROUP PLC
("ESPRIT TELECOM")
o The Boards of GTS and Esprit Telecom announce that agreement has been
reached on the terms of a proposed recommended offer (the "Offer") to be
made by Bear Stearns, on behalf of GTS, to acquire all the issued and to be
issued share capital of Esprit Telecom including those shares represented
by Esprit Telecom ADSs.
o Subject to the satisfaction or, to the extent permitted, waiver of the
pre-conditions referred to below, the Offer will be made on the following
basis:
FOR EVERY ESPRIT TELECOM SHARE, 0.1271 NEW GTS SHARE
FOR EVERY ESPRIT TELECOM ADS, 0.89 NEW GTS SHARE
Based on the NASDAQ closing price of $41.75 per GTS Share on 07
December 1998, the Offer values each Esprit Telecom Share at $5.31
((pound)3.21) and each Esprit Telecom ADS at $37.16 ((pound)22.48)1.
o The Offer represents a premium of approximately 22.8% over the middle
market price of an Esprit Telecom ADS on NASDAQ at the close of business on
07 December 1998, being the last dealing day before the announcement of the
Offer.
o The Offer values the entire issued share capital of Esprit Telecom, fully
diluted for the exercise of all outstanding options, at approximately
$757.3 million ((pound)458.2 million).
o The New GTS Shares to be issued under the Offer will be validly issued and
fully paid and non-assessable and will rank pari passu in all respects with
the existing issued GTS Shares.
- -------------
(1) Exchange rate of (pound)1=$1.6530 based on the 07 December 1998 Noon Buying
Rate.
3
<PAGE> 2
o The Board of Esprit Telecom intends unanimously to recommend the Offer.
o Founded in 1992, Esprit Telecom is a facilities-based provider of
international and national telecommunications services with network and
sales office infrastructure in 30 cities in eight countries in Europe
generating a run rate of over one billion minutes of traffic per annum.
Esprit Telecom Networks Limited, an independent operations subsidiary of
Esprit Telecom, is currently building a 9,000 route kilometre SDH and DWDM
fibre optic network through six European countries. Esprit Telecom also has
links to Washington and New York via a transatlantic circuit owned by other
carriers.
o GTS is a leading independent owner and operator of telecommunications
companies throughout Europe. GTS has five primary lines of business: GTS
Carrier Services, which provides cross-border transport in Europe to other
telecommunications companies; GTS Access Services, which provides
facilities-based access services to businesses throughout Europe; GTS
Business Services - Western Europe, which offers voice, data, Internet and
other telecommunications services to businesses; GTS Business Services -
CIS, where GTS is an alternative provider of high quality
telecommunications services in Moscow, Kiev, St. Petersburg and other
cities in Russia and the CIS; and GTS Mobile Services - CIS, which operates
cellular businesses in Russia and Ukraine. Headquartered in the
metropolitan Washington DC area, GTS's affiliates have offices in London,
Brussels, Moscow, Budapest, Kiev, Prague and Paris.
o The combination of GTS and Esprit Telecom will assist both companies in
their mutual goals of becoming the pre-eminent providers of carriers'
carrier and business communications services throughout Europe. Together,
GTS and Esprit Telecom will have the largest independent cross border
carriers' carrier network in Europe and will have an extensive sales force
in 11 countries in Western Europe.
o The combined group is expected to have:
- A market capitalisation of approximately $4.1 billion2
- Latest quarter annualised consolidated revenues of approximately $482
million
- Approximately 3,000 employees
- Over 35,000 business customers in Western Europe
- A network with 9,200 route kilometres of high capacity, broadband
fibre-transmission facilities in service today
- A broad portfolio of business telecommunications services
- Operations in 11 countries in Western Europe
- -------------
(2) Market capitalisation assumes full conversion of all options, warrants, "in
the money" convertible debt and committed future share issues in respect of
certain acquisitions
4
<PAGE> 3
o The combined group will have (i) presence in 19 countries throughout
Europe; (ii) increased network capacity and resilience; (iii) 500 person
sales force, one of the largest among independent telecommunications
companies in Europe; (iv) ability to provide a wide array of service
offerings; and (v) increased management depth. Furthermore, the combined
group expects to benefit from reduced network operations costs, reduced
administrative costs, and capital expenditure savings.
o Esprit Telecom has operations in seven countries and nine major switch
sites. Together with NetSource Europe ASA, recently acquired by GTS, this
will give the combined group presence in Europe in the UK, Germany, France,
Italy, Spain, the Netherlands, Belgium, Ireland, Denmark, Sweden, Norway,
Austria, Switzerland, the Czech Republic, Hungary, Poland, Slovakia,
Ukraine and Russia. This pan-European presence provides an immediate
critical mass to GTS's existing GTS Business Services - Western Europe
unit, as well as providing an effective platform for entry and a built-in
potential customer base for GTS's CLEC business, GTS Access Services.
o GTS believes this combination should strengthen its position as the most
developed pan-European carriers' carrier, with a presence in 12 countries
and 20 cities throughout Europe and an operational 9,200 route kilometre
network. By the end of 1999, the Hermes Europe Railtel B.V. network is
planned to be deployed in 16 countries and 45 cities, totalling 18,000
route kilometres.
o Certain Esprit Telecom Securityholders have entered into irrevocable
undertakings to accept the Offer in respect of 65% of the issued share
capital of Esprit Telecom. These irrevocable undertakings will continue to
be binding even if a higher competing offer is made. The irrevocable
undertakings will lapse if there are certain material adverse changes in
the value of the GTS Group or in the event that specified deadlines in the
Offer timetable are not met. Further details of the irrevocable
undertakings are set out in Appendix 2.
o The posting of the Offer Document to Esprit Telecom Securityholders is
pre-conditional on:
- GTS obtaining requisite consents from Esprit Telecom Bondholders to the
change in control of Esprit Telecom resulting from the Offer; and
- the necessary registration statement with respect to the Offer becoming
effective under US Securities Law and the relevant approvals being
obtained from EASDAQ and the Commission Banque et Financier in Belgium.
Details regarding the proposals for satisfaction of the first pre-condition
set out above will be contained in documents to be sent to Esprit Telecom
Bondholders in due course.
5
<PAGE> 4
o A further announcement will be made as soon as practicable following the
satisfaction or, to the extent permitted, waiver by GTS of these
pre-conditions, or the determination by GTS that the pre-conditions will
not be satisfied or waived and accordingly that the Offer will not proceed.
o The Offer will be conditional, inter alia, on the approval of GTS's
shareholders and the announcement by NASDAQ and EASDAQ of their decision to
admit the New GTS Shares for quotation.
o The full conditions and certain terms of the Offer are set out in the
attached announcement together with further information on Esprit Telecom
and on GTS. Appendix 4 of the attached announcement contains definitions of
certain expressions used in this announcement.
This summary should be read in conjunction with and is subject to the full text
of the attached announcement.
ENQUIRIES
GTS Telephone: 001 (703) 918 4548
Robert Capozzi
Bear, Stearns International Limited Telephone: +44 (0)171 516 6937
Richard Strang
Esprit Telecom Telephone: +44 (0)118 951 4010
Glenn Manoff
Lehman Brothers International (Europe) Telephone: +44 (0)171 601 0011
Brian Robertson
Simon Costa
There will be an analysts' conference call at 2.30pm (London time) today.
Bear Stearns, which is regulated by The Securities and Futures Authority Limited
in the conduct of its investment business in the United Kingdom, is acting
exclusively for GTS and is acting for no one else in connection with the Offer
and will not be responsible to anyone other than GTS for providing the
protections afforded to customers of Bear Stearns nor for providing advice in
relation to the Offer.
Lehman Brothers, which is regulated by The Securities and Futures Authority
Limited in the conduct of its investment business in the United Kingdom, is
acting exclusively for Esprit Telecom and is acting for no one else in
connection with the Offer and will not be responsible to anyone other than
Esprit Telecom for providing the protections afforded to customers of Lehman
Brothers nor for providing advice in relation to the Offer.
6
<PAGE> 5
Copies of this announcement are not being and must not be, mailed or otherwise
distributed or sent in or into Canada, Australia or Japan and persons receiving
this announcement (including custodians, nominees and trustees) must not
distribute or send it in or into Canada, Australia or Japan.
7
<PAGE> 6
08 DECEMBER 1998
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN
PART IN OR INTO CANADA, AUSTRALIA OR JAPAN
- --------------------------------------------------------------------------------
GLOBAL TELESYSTEMS GROUP, INC. ("GTS")
PROPOSED RECOMMENDED OFFER FOR ESPRIT TELECOM GROUP PLC
("ESPRIT TELECOM")
INTRODUCTION
The Boards of GTS and Esprit Telecom announce that agreement has been reached on
the terms of a proposed recommended offer ( the "Offer") to be made by Bear
Stearns, on behalf of GTS, to acquire all the issued and to be issued share
capital of Esprit Telecom including those shares represented by ADSs.
THE OFFER
Subject to the satisfaction or waiver of the pre-conditions referred to below,
the Offer will be made on the following basis:
FOR EVERY ESPRIT TELECOM SHARE, 0.1271 NEW GTS SHARE
FOR EVERY ESPRIT TELECOM ADS, 0.89 NEW GTS SHARE
Based on the NASDAQ closing price of $41.75 per GTS Share on 07 December 1998,
the Offer values each Esprit Telecom Share at $5.31 ((pound)3.21), each Esprit
Telecom ADS at $37.16 ((pound)22.48) and the entire issued share capital of
Esprit Telecom at approximately $757.3 million ((pound)458.2 million). This
represents a premium of approximately 22.8% over the middle market price of an
Esprit Telecom ADS on NASDAQ at the close of business on 07 December 1998, being
the last dealing day before the announcement of the Offer.2
The New GTS Shares to be issued in respect of the Offer will be validly issued
and fully paid and non-assessable and will rank pari passu in all respects with
the existing issued GTS Shares.
- -------------
(2) Exchange rate of (pound)1=$1.6530 based on the 07 December 1998 Noon Buying
Rate.
8
<PAGE> 7
Application will be made to NASDAQ and EASDAQ for the New GTS Shares issued
pursuant to the Offer to be admitted to NASDAQ and EASDAQ for quotation. Further
details on settlement, listing and dealing will be included in the Offer
Document to be sent to Esprit Telecom Securityholders and GTS Shareholders in
due course, following the satisfaction or, to the extent permitted, waiver of
the pre-conditions.
Full acceptance of the Offer, assuming exercise of options under the Esprit
Telecom Share Option Schemes while the Offer remains open for acceptance (and
upon the exercise of options rolled over into options over GTS Shares and
committed future share issues in respect of certain acquisitions), will result
in the issue of approximately 18.1 million New GTS Shares (which share capital
is taken to include conversions of options, warrants and "in the money"
convertible debt), representing 18.4% of the enlarged GTS share capital.
The Esprit Telecom Securities will be acquired by GTS fully paid and free from
all liens, equities, charges, encumbrances and other interests and together with
all rights now or hereafter attaching thereto, including the right to receive
and retain all dividends and other distributions declared, made or paid
hereafter.
PRE-CONDITIONS
The posting of the Offer Document to Esprit Telecom Securityholders is
pre-conditional on:
- - GTS obtaining requisite appropriate consents from Esprit Telecom
Bondholders to the change in control of Esprit Telecom resulting from the
Offer; and
- - the necessary registration statement with respect to the Offer becoming
effective under US Securities Law and the relevant approvals being obtained
from EASDAQ and the Commission Banque et Financier in Belgium.
Details regarding the proposals for satisfaction of the first pre-condition set
out above will be contained in documents to be sent to Esprit Telecom
Bondholders in due course.
Subject to satisfaction or, to the extent permitted, waiver of the
pre-conditions, the Offer will be made on the terms and subject to the
conditions set out in paragraph 2 of Appendix 1 and the further terms which will
be set out in full in the Offer Document.
IRREVOCABLE UNDERTAKINGS
Certain Esprit Telecom Securityholders have entered into irrevocable
undertakings to accept the Offer in respect of, in aggregate, 81,968,270 Esprit
Telecom Shares (including those represented by Esprit Telecom ADSs) beneficially
owned by them. Together, these represent 65% of the issued share capital of
Esprit Telecom. These irrevocable undertakings will continue to be binding even
if a higher competing offer is made. The irrevocable undertakings will lapse if
there are certain material adverse changes in the value of the GTS Group or in
the event that specified deadlines in the Offer timetable are not met. Further
details of the irrevocable undertakings are set out in Appendix 2.
9
<PAGE> 8
Save for the irrevocable undertakings referred to above, no member of the GTS
Group nor, so far as GTS is aware, any party acting in concert (as defined in
the City Code) with GTS owns or controls any Esprit Telecom Securities or holds
any options to purchase Esprit Telecom Securities or has received any
irrevocable commitments to accept the Offer or has entered into any derivative
contracts referenced to Esprit Telecom Securities which remain outstanding. In
the interest of secrecy, GTS has not made any enquiries in this respect of
certain parties who may be deemed by the Panel to be acting in concert with it
for the purposes of the Offer.
SHARE OPTION SCHEMES
The Offer will extend to any Esprit Telecom Securities unconditionally allotted
or issued whilst the Offer remains open for acceptance (or prior to such earlier
date, not being earlier than the Initial Closing Date, as GTS may, subject to
the City Code, decide) pursuant to the exercise of options under the Esprit
Telecom Share Option Schemes or otherwise.
GTS will give holders of options under the Esprit Telecom Share Option Schemes
the ability to roll over their options into options over GTS Shares. Esprit
Telecom has agreed that (subject to there being no adverse tax consequences for
Esprit Telecom optionholders or GTS giving a satisfactory indemnity) no further
amendments will be made to the Esprit Telecom Share Option Schemes which would
cause options to be exercised at a date earlier than the date they would
otherwise become exercisable.
MANAGEMENT AND EMPLOYEES
Existing employment rights, including pension rights, of the management and
employees of the members of the Esprit Telecom Group will be fully safeguarded.
David Oertle, CEO of Esprit Telecom, will remain with Esprit Telecom through the
transition. He will continue to work with Esprit Telecom towards its successful
integration within the GTS Group. At the same time, Mr Oertle will assume a
senior advisory role working directly with Gerald W. Thames, GTS's President and
CEO, as a key contributor to the development of the corporation's strategic
vision and goals. Roy Merritt, CFO of Esprit Telecom, Hans-Peter Kohlhammer,
Group Managing Director of Sales and Marketing, Jim Reynolds, Chief Operations
Officer, Michael Potter, Chief of Staff and David Reibel, General Counsel and
Director of Corporate Affairs, will continue in their current roles within
Esprit Telecom. Walter Anderson, the former Chairman of Esprit Telecom, has
agreed to serve as a special consultant to the GTS board of directors.
BACKGROUND TO AND REASONS FOR THE OFFER
The boards of GTS and Esprit Telecom believe their businesses are complementary
and that a range of economic, strategic and operational benefits will arise from
combining them. The combination of GTS and Esprit Telecom will assist both
companies in their mutual goals of becoming the pre-eminent providers of
carriers' carrier and business communications services throughout Europe.
Together, GTS and Esprit Telecom will have the largest independent cross border
carriers' carrier network in Europe and will have an extensive sales force in 11
countries in Western Europe.
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The combined group is expected to have:
o A market capitalisation of approximately $4.1 billion1
o Latest quarter annualised consolidated revenues of approximately $482
million
o Approximately 3,000 employees
o Over 35,000 business customers in Western Europe
o A network with 9,200 route kilometres of high capacity, broadband
fibre-transmission facilities in service today
o A broad portfolio of business telecommunications services
o Operations in 11 countries in Western Europe
GTS is dedicated to serving three large telecommunications market segments
within Western Europe: business telecommunications services, carriers' carrier
services, and CLEC services providing voice, data and Internet Protocol (IP)
based services. Esprit Telecom, one of the leading independent providers of
business and carriers' carrier telecommunications services in Europe, will
greatly enhance the combined company's position as a leader in the first two
rapidly growing European markets. GTS has also recently acquired several other
companies including Ebone A/S (an internet transport provider) and NetSource
Europe ASA (a long distance provider) to augment its presence in Europe.
The combined entity will have (i) presence in 19 countries throughout Europe;
(ii) increased network capacity and resilience; (iii) 500 person sales force,
one of the largest among independent telecommunications companies in Europe;
(iv) ability to provide a wide array of service offerings; and (v) increased
management depth. Furthermore, the companies expect to benefit from reduced
network operations costs, reduced administrative costs, and capital expenditure
savings.
Esprit Telecom has operations in seven countries and nine major switch sites.
Together with NetSource Europe ASA, recently acquired by GTS, this will give the
combined group a presence in Europe in the UK, Germany, France, Italy, Spain,
the Netherlands, Belgium, Ireland, Denmark, Sweden, Norway, Austria,
Switzerland, the Czech Republic, Hungary, Poland, Slovakia, Ukraine, and Russia.
This pan-European presence provides an immediate critical mass to GTS's existing
GTS Business Services - Western Europe unit, as well as providing an effective
platform for entry and a built-in potential customer base for GTS's CLEC
business, GTS Access Services. Both GTS Business Services Western Europe and GTS
Access Services intend to lease transport capacity from Hermes Europe Railtel
B.V. under terms no more favourable than those offered to unaffiliated
telecommunications providers.
- -------------
(1) Market capitalisation assumes full conversion of all options, warrants,
"in the money" convertible debt and committed share issues in respect of
certain acquisitions
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GTS believes this combination should strengthen its position as the most
developed pan-European carriers' carrier, with a presence in 12 countries and 20
cities throughout Europe and an operational 9,200 route kilometre network. By
the end of 1999, the Hermes Europe Railtel B.V. network is planned to be
deployed in 16 countries and 45 cities, totalling 18,000 route kilometres.
INFORMATION ON ESPRIT TELECOM
Founded in 1992, Esprit Telecom is a facilities-based provider of international
and national telecommunications services with network and sales office
infrastructure in 30 cities in eight countries in Europe generating a run rate
of over one billion minutes of traffic per annum. Esprit Telecom Networks
Limited, an independent operations subsidiary of Esprit Telecom, is currently
building a 9,000 route kilometre SDH and DWDM fibre optic network through six
European countries. Esprit Telecom also has links to Washington and New York via
a transatlantic circuit owned by other carriers.
Esprit Telecom currently offers telecommunications services and products in four
areas: (i) retail telecommunications services for corporate customers for global
destinations either directly, via dedicated leased lines linked to the Esprit
Telecom network, or indirectly on a switched basis. This includes enhanced
services such as toll free services, calling cards, and switched data services
such as ISDN; (ii) carrier's carrier services based on the Esprit Telecom
Networks business (iii) wholesale services, primarily consisting of long
distance traffic termination services for other telecommunications carriers; and
(iv) network management, access and termination services to service providers,
such as calling card companies, and to resellers.
As of December 1998, Esprit Telecom provided telecommunications services in the
UK, Germany, The Netherlands, France, Spain, Belgium and Italy. The company was
awarded one of the first operating licences in Spain on 03 December 1998
allowing for provision of services in the regions in which it currently
operates. Esprit Telecom now has operator licences in the UK, Belgium, The
Netherlands, France, Spain and Germany. Esprit Telecom acquired the business of
PLUSNET Gesellschaft Fur Netzwerk GmbH, a major switch-based German
telecommunications services provider, in May 1998.
Formed in November 1998, Esprit Telecom Networks is an independent business unit
of Esprit Telecom. Esprit Networks builds, manages and sells carrier services
along Esprit Telecom's pan-European broadband fibre network. The super-high
capacity optical fibre network will run at speeds of 2.5 Gbits/second (STM-16)
to 10 Gbits/second (STM-64) and uses advance SDH transmission and DWDM equipment
supplied by Nortel Networks. The London-Paris network, measuring 1,275 route
kilometres, became operational in April.
The France-Belgium-Netherlands-UK network, measuring 1,230 route kilometres, was
completed in October 1998 and is expected to be operational in January 1999. The
Netherlands-Germany-France network, the French national network, and the Spanish
national network, measuring a combined 7,220 route kilometres, are expected to
be completed by mid-1999.
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On 20 November 1998, Esprit Telecom announced preliminary results for the year
ended 30 September 1998. These results showed that the Esprit Telecom Group
achieved turnover of (pound)82.6 million (1997: (pound)45.5 million) and losses
before tax and exceptional items of (pound)42.1 million (1997: (pound)10.9
million). Reported loss per share was (pound)0.34 in 1998 (1997: (pound)0.10).
Net liabilities as at 30 September 1998 were (pound)7.6 million (1997: net
assets of (pound)31.4 million). Esprit Telecom had 7,657 customers as of 30
September 1998 and recorded 262 million minutes of traffic in the three months
ended 30 September 1998.
INFORMATION ON GTS
Through Hermes Europe Railtel B.V., GTS is developing and operating the initial
segments of a pan-European high-capacity fibre optic network that is designed to
interconnect a majority of the largest Western and Central European cities. As
of April 30, 1998, Hermes Europe Railtel B.V.'s network linked Brussels,
Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich, and
Geneva. The full 18,000 kilometre network is expected to be fully operational
during the year 2000.
GTS is a leading independent owner and operator of telecommunications companies
throughout Europe. GTS has five primary lines of business: GTS Carrier Services,
which provides cross-border transport in Europe to other telecommunications
companies; GTS Access Services, which provides facilities-based access services
to businesses throughout Europe; GTS Business Services - Western Europe, which
offers voice, data, Internet and other telecommunications services to
businesses; GTS Business Services - CIS, where GTS is an alternative provider of
high quality telecommunications services in Moscow, Kiev, St. Petersburg and
other cities in Russia and the CIS; and GTS Mobile Services - CIS, which
operates cellular businesses in Russia and Ukraine. Headquartered in the
metropolitan Washington DC area, GTS's affiliates have offices in London,
Brussels, Moscow, Budapest, Kiev, Prague and Paris.
In the financial year ended 31 December 1997, the GTS Group achieved net
revenues of $47.1 million (1996: $24.1 million), and losses before tax and
exceptional items of $114.5 million (1996: $66.6 million). Reported losses per
share were $3.26 in 1997 (1996: $2.33). Shareholders' equity as at 31 December
1997 was $27.0 million (1996: $113.7 million).
In the nine months ended 30 September 1998, GTS achieved net revenues of $117.3
million and losses before tax and exceptional items of $86.0 million.
SPECIAL MEETING OF GTS SHAREHOLDERS
The acquisition of Esprit Telecom requires, inter alia, the approval of the
holders of a majority of the GTS Shares and a special meeting of GTS will be
held for this purpose. A proxy statement will be sent to GTS Shareholders
convening the special meeting in due course.
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FINANCIAL EFFECTS OF ACCEPTANCE
The financial effects of acceptance of the Offer are set out in Appendix 3.
OFFER DOCUMENT
Subject to the satisfaction or, to the extent permitted, waiver of the
pre-conditions referred to above, Bear Stearns, on behalf of GTS, will despatch
the Offer Document in due course.
RECOMMENDATIONS
The Directors of Esprit Telecom, who have been so advised by Lehman Brothers,
consider that the terms of the Offer are fair and reasonable. In providing
advice to the Directors of Esprit Telecom, Lehman Brothers has taken into
account the Directors' commercial assessment of the Offer. Accordingly, the
Directors of Esprit Telecom intend unanimously to recommend Esprit Telecom
Securityholders to accept the Offer.
In the opinion of the Directors of GTS, the Offer is in the best interests of
GTS Shareholders as a whole. Accordingly, they intend unanimously to recommend
GTS Shareholders to vote in favour of the resolutions to be proposed at the
special meeting of GTS in connection with the Offer which will be convened in
due course.
GENERAL
Fractions of New GTS Shares will not be allotted or issued to persons accepting
the Offer but will be aggregated and sold in the market and the net proceeds of
sale will be paid to the persons entitled thereto except that individual cash
entitlements in amounts of less than $2 will not be paid but will be retained
for the benefit of the combined group.
The Esprit Telecom Securities which are the subject of the Offer will be
acquired fully paid and free from all liens, charges, equitable interests,
encumbrances, rights of pre-emption and other third party rights or interests of
any nature whatsoever created by GTS and together with all rights now or
hereafter attached thereto, including the right to receive and retain all
dividends and other distributions declared, made or paid hereafter.
The New GTS Shares issued pursuant to the Offer will be credited as fully paid
and will rank pari passu in all respects with the existing GTS Shares, including
the right to receive all dividends and other distributions declared, made or
paid after the Offer becomes wholly unconditional.
This announcement does not constitute an offer or invitation to purchase or sell
any securities.
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<PAGE> 13
Bear Stearns, which is regulated by The Securities and Futures Authority Limited
in the conduct of its investment business in the United Kingdom, is acting
exclusively for GTS and is acting for no one else in connection with the Offer
and will not be responsible to anyone other than GTS for providing the
protections afforded to customers of Bear Stearns nor for providing advice in
relation to the Offer.
Lehman Brothers, which is regulated by The Securities and Futures Authority
Limited in the conduct of its investment business in the United Kingdom, is
acting exclusively for Esprit Telecom and is acting for no one else in
connection with the Offer and will not be responsible to anyone other than
Esprit Telecom for providing the protections afforded to customers of Lehman
Brothers nor for providing advice in relation to the Offer.
The availability of the Offer to persons not resident in the UK or US may be
affected by the laws of the relevant jurisdiction. Persons who are not resident
in the UK or US should inform themselves about and observe any applicable
requirements. Further details in relation to overseas shareholders will be
contained in the Offer Document.
The Offer will not be made, directly or indirectly in, nor is the Offer capable
of acceptance from, Canada, Australia or Japan or by use of the mails of, or by
any means or instrumentality of inter-state or foreign commerce of, or any
facilities of a national securities exchange of, Canada, Australia or Japan and
cannot be accepted by any such use, means or instrumentality or otherwise from
within Canada, Japan or Australia. This includes, but is not limited to, the
post, facsimile transmission, telex and telephones. Accordingly, copies of this
announcement are not being, and must not be, mailed or otherwise distributed or
sent in or into, Canada, Japan or Australia. Furthermore, the relevant
clearances have not been obtained and will not be obtained, in relation to the
New GTS Shares from the Securities Commission of any province in Canada; no
prospectus in relation to the New GTS Shares has been, or will be, lodged with
or registered by the Australian Securities Commission; nor have any steps been
taken to enable the New GTS Shares to be offered in Japan in compliance with
applicable securities laws of Japan. Accordingly, the New GTS Shares may not be
offered, sold, resold or delivered, directly or indirectly, into Canada,
Australia or Japan. Persons receiving this announcement, (including custodians,
nominees and trustees) must not distribute or send it in, into, or from Canada,
Japan or Australia. Notwithstanding the restrictions in the previous two
paragraphs, GTS will retain the right to permit the Offer to be accepted and any
sale of securities to be completed if, in its sole discretion, it is satisfied
that the transaction in question is exempt from or not subject to the
legislation or regulation giving rise to the restrictions in question.
Appendix 4 contains definitions of the terms used in this announcement.
This announcement includes forward-looking statements that involve risk and
uncertainty. Although each of GTS and Esprit Telecom believes their respective
expectations reflected in such forward-looking statements are based on
reasonable assumptions, no assurance can be given that such projections will be
fulfilled. Any such forward-looking statement must be considered along with
knowledge that actual events or results may vary materially from such
predictions due to, among other things, political, economic or legal changes in
the
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markets in which GTS or Esprit Telecom, as the case may be, does business,
competitive developments or risks inherent in each company's business plan.
Readers are referred to the documents filed by GTS and Esprit Telecom with the
SEC, specifically the most recent reports filed under the Securities Act of 1933
and the Securities Exchange Act of 1934, which identify important risk factors.
The Panel wishes to draw to the attention of member firms of NASDAQ and EASDAQ
certain UK dealing disclosure requirements following the announcement of GTS's
intention to make an offer for Esprit Telecom. This announcement commenced an
offer period for the purposes of the City Code, which is published and
administered by the Panel. An offer period is deemed to commence at the time
when an announcement is made of a proposed or possible offer, with or without
terms. Esprit Telecom and GTS have equity securities traded on NASDAQ and
EASDAQ.
The above disclosure requirements are set out in Rule 8 of the City Code. In
particular, Rule 8.3 requires public disclosure of dealings during an offer
period by persons who own or control, or who would as a result of any
transaction own or control, 1% or more of any class of relevant securities of
GTS or Esprit Telecom. In the case of the offer for Esprit Telecom, this
requirement will apply until the offer becomes or is declared wholly
unconditional or lapses.
Disclosure should be made on an appropriate form before 12 noon (London time) on
the business day following the date of the dealing transaction. These
disclosures should be sent to the Panel (fax number: +44(0)-171-256 9386).
Copies of appropriate disclosure forms may be obtained on request by faxing Bear
Stearns on +44(0)171-516 6937 (Richard Strang).
The Panel requests that member firms advise those of their clients who wish to
deal in the securities of GTS and/or Esprit Telecom, in the US and Belgium, that
they may be affected by these requirements. If there is any doubt as to their
application, the Panel should be consulted (telephone number: +44(0)-171-382
9026, fax number: +44(0)-171-638 1554).
The attention of the Esprit Telecom Securityholders not resident in the UK or
the US is drawn to the relevant provisions of the formal Offer Document which,
subject to the satisfaction or waiver of the pre-conditions referred to above,
will be despatched on behalf of GTS in due course.
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APPENDIX 1
PRE-CONDITIONS AND CONDITIONS TO THE OFFER
1. PRE-CONDITIONS
The posting of the Offer Document will be conditional upon:
(A) on or prior to 29 January 1998, valid consents to amendments to Section
4.15 of the Indenture dated as of 18 December 1997, between the Company and
The Bank of New York (and the corresponding provisions of the global and
definitive dollar and deutschmark notes related thereto) and Section 4.15
of the Indenture dated as of 24 June 1998 between the Company and The Bank
of New York (and the corresponding provisions of the global and definitive
dollar and deutschmark notes related thereto) shall have been obtained from
holders of the requisite percentage of each series of notes issued
thereunder to provide that the provisions thereof would not apply to any
"Change of Control" (as defined therein) resulting from the transactions
contemplated by the Offer, subject to the terms and conditions specified in
such amendment, such amendment to be effective following the Offer becoming
wholly unconditional; and
(B) on or prior to 15 April 1999, a registration statement with respect to
the New GTS Shares having been declared and remaining effective under the
US Securities Law and no stop order suspending the effectiveness of such
registration statement having been issued and no proceeding for that
purpose having been initiated or threatened by the SEC; and
(C) on or prior to 15 April 1999, the relevant approvals being obtained
from EASDAQ and the Commission Banque et Financier in Belgium.
GTS reserves the right to waive, in whole only, pre-condition (A) above on or
prior to 29 January 1998.
2. CONDITIONS
The Offer will comply with the US federal securities laws (except to the extent
that any exemptive relief has been granted by the SEC) and the applicable rules
and regulations of the NASDAQ and EASDAQ markets and any other relevant
regulatory bodies and the City Code (except to the extent of any dispensation,
waiver or exemption granted by the appropriate body or (as the case may be) the
Panel). The Offer will be governed by English law and will be subject to the
jurisdiction of the courts of England and to the terms and conditions set out
below, in the Offer Document and the related acceptance forms.
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The Offer will be subject to the following conditions:
(A) valid acceptances being received (and not, where permitted, withdrawn) by
not later than the Initial Closing Date in respect of not less than 90% (or
such lesser percentage as GTS may decide) in nominal value of Esprit
Telecom Securities to which the Offer relates, provided that this condition
will not be satisfied unless GTS (and/or any of its wholly-owned
subsidiaries) shall have acquired, or agreed to acquire, whether pursuant
to the Offer or otherwise, Esprit Telecom Securities carrying, in
aggregate, more than 50% of the voting rights then normally exercisable at
general meetings of Esprit Telecom and provided further that this condition
may only be treated as satisfied at a time when all of the conditions (B)
to (K) have either been satisfied or, to the extent permitted, waived.
For the purposes of this condition:
(i) Esprit Telecom Securities which have been unconditionally
allotted shall be deemed to carry the voting rights they will carry
upon being entered in the register of members of Esprit Telecom;
and
(ii) the expression "Esprit Telecom Securities to which the Offer
relates" means (i) Esprit Telecom Securities unconditionally
allotted or issued on or before the date the Offer is made and (ii)
Esprit Telecom Securities unconditionally allotted or issued after
that date but before the time at which the Offer ceases to be open
for acceptance (or such earlier date, not being earlier than the
date on which the Offer becomes unconditional as to acceptances or,
if later, the Initial Closing Date, as GTS may, subject to the City
Code, decide) but excluding any Esprit Telecom Securities which, on
the date the Offer is made, are held or (otherwise than under such
a contract as is described in s.428(5) Companies Act 1985)
contracted to be acquired by GTS and/or its associates (within the
meaning of s.430 E Companies Act 1985);
(B) the approval by holders of a majority of GTS Shares of such resolution(s)
as may be necessary or desirable to approve, effect and implement the issue
of New GTS Shares for the purposes of the Offer and the acquisition by GTS
of Esprit Telecom;
(C) the New GTS Shares to be issued pursuant to the Offer having been approved
for listing on NASDAQ and EASDAQ subject to official notice of issuance of
such New GTS Shares;
(D) no stop order suspending the effectiveness of the registration statement
with respect to the New GTS Shares having been issued and no proceeding for
that purpose having been initiated or threatened by the SEC;
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(E) no Relevant Authority having decided to take, institute, implement or
threaten any action, proceedings, suit, investigation, enquiry or
reference, or made, proposed or enacted any statute, regulation, order or
decision, or taken any other steps which would or could reasonably be
expected to:
(i) make the Offer, or its implementation, or the proposed
acquisition of any Esprit Telecom Securities by any member of the
Wider GTS Group or any matter arising therefrom or relating
thereto, void, illegal or unenforceable under the laws of any
relevant jurisdiction or otherwise materially, directly or
indirectly, restrain, prohibit, restrict or delay the Offer, its
implementation or such proposed acquisition by any member of the
Wider GTS Group or any matter arising therefrom or relating thereto
or impose additional conditions or obligations with respect
thereto, or otherwise challenge or interfere therewith in any such
case to a materially adverse extent;
(ii) result in a material delay in the ability of any member of the
Wider GTS Group, or render any member of the Wider GTS Group
unable, to acquire all or some of the Esprit Telecom Securities or
other securities in Esprit Telecom or require, prevent or
materially delay a divestiture by any member of the Wider GTS Group
of any such shares or securities;
(iii) require the divestiture by GTS or any member of the Wider GTS
Group or any member of the Wider Esprit Telecom Group of all or any
material portion of their respective businesses, assets or
properties or impose any material limitation on the ability of any
of them to conduct all or any material portion of their respective
businesses or own all or any material portion of their respective
assets or properties;
(iv) impose any material limitation on the ability of GTS or any
other member of the Wider GTS Group or of the Wider Esprit Telecom
Group to acquire, or to hold or exercise effectively, directly or
indirectly, any rights of ownership in respect of shares or other
securities in any member of the Wider Esprit Telecom Group or to
exercise management control over Esprit Telecom or any other member
of the Wider Esprit Telecom Group which in any case is material in
the context of the Esprit Telecom Group taken as a whole;
(v) otherwise materially adversely affect the business, profits or
prospects of any member of the Wider Esprit Telecom Group or, as a
consequence of the Offer, any members of the Wider GTS Group;
(vi) require any member of the Wider GTS Group or any member of the
Wider Esprit Telecom Group to acquire or offer to acquire any
shares or other securities in any member of the Wider Esprit
Telecom Group owned by any third party where any such acquisition
or offer is material in the context of the Esprit Telecom Group
taken as a whole;
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(vii) to an extent which is material in the context of the Esprit
Telecom Group taken as a whole result in any member of the Wider
Esprit Telecom Group ceasing to be able to carry on business under
the name which it presently does so; or
(viii) to an extent which is material in the context of the Esprit Telecom
Group taken as a whole, result in any member of the Wider GTS Group
having to dispose of any shares or other securities in any member
of the Wider Esprit Telecom Group or the Wider GTS Group;
and all applicable waiting and other time periods during which any Relevant
Authority could decide to take, institute, implement or threaten any such
action, proceeding, suit, investigation, enquiry or reference or otherwise
intervene having expired, lapsed or been terminated;
(F) in each case with such exceptions as would not be material in the
context of the Esprit Telecom Group taken as a whole or the Offer, all
Authorisations reasonably deemed necessary or appropriate for or in respect
of the Offer and the proposed acquisition of any Esprit Telecom Securities
or other securities in, or control of, Esprit Telecom by the Wider GTS
Group, or which are necessary for any member of the Wider Esprit Telecom
Group to carry on its business, having been obtained in terms and in a form
satisfactory to GTS from all appropriate Relevant Authorities or other
bodies whom any member of the Wider GTS Group or the Wider Esprit Telecom
Group has entered into contractual arrangements and all such Authorisations
remaining in full force and effect at the time at which the Offer becomes
otherwise unconditional and all appropriate waiting periods (including
extensions thereof) under any applicable legislation and regulations of any
jurisdiction having expired, lapsed or been terminated and there being no
intimation or notice of an intention to revoke or not to renew any of the
same having been received, in each case as may be necessary in connection
with the Offer under the laws or regulations of any jurisdiction and all
necessary statutory or regulatory obligations in connection with the Offer
and its implementation in any relevant jurisdiction having been complied
with;
(G) save as disclosed in the annual report and accounts of Esprit Telecom
for the financial year ended 30 September 1997 or in any SEC registration,
submission or filing or in the preliminary results of Esprit Telecom for
the year ended 30 September 1998 announced on 20 November 1998 or announced
at or before 8.00am (London time) on 08 December 1998 through EASDAQ (or at
or before 4.00pm (New York time) on 07 December 1998 through NASDAQ) or as
disclosed in writing to GTS specifically for the purposes of these
conditions at or before 8.00am (London time) on 08 December 1998 (such
information being "Disclosed") there being no provision of any arrangement,
agreement, licence, permit, franchise
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or other instrument to which any member of the Wider Esprit Telecom Group
is a party or by or to which any such member or any of their assets is or
are or may be bound, entitled or subject or any circumstance which, as a
consequence of the making of the Offer or the acquisition or proposed
acquisition by any member of the Wider GTS Group of some or all of the
share capital or other securities in Esprit Telecom or because of change in
control or management of Esprit Telecom or otherwise, might reasonably
result in, to an extent which is material in the context of the Esprit
Telecom Group, taken as a whole:
(i) any monies borrowed by or other indebtedness (actual or contingent)
of any member of the Wider Esprit Telecom Group which is not
already repayable on demand being or becoming repayable or being
capable of being declared repayable immediately or prior to the
stated maturity date or repayment date or the ability of any such
member to borrow monies or incur any indebtedness being withdrawn
or inhibited;
(ii) the creation of any mortgage, charge or other security interest
over the whole or any material part of the business, property or
assets of any member of the Wider Esprit Telecom Group or any such
security (whenever arising or having arisen) becoming enforceable;
(iii) any such arrangement, agreement, licence, permit, franchise or
other instrument, or the rights, liabilities, obligations or
interests or business of any member of the Wider Esprit Telecom
Group under any such arrangement, agreement, licence, permit,
franchise or other instrument, being terminated or adversely
modified or adversely affected or any material action being taken
or any onerous obligation arising thereunder;
(iv) otherwise than in the ordinary course of business, any assets or
interest of any member of the Wider Esprit Telecom Group being or
falling to be disposed of or charged or any right arising under
which any such asset or interest could be required to be disposed
of or charged;
(v) the interest or business of any member of the Wider GTS Group or
the Wider Esprit Telecom Group in or with any person, firm, company
or body (or any arrangement or arrangements relating to such
interest or business) being terminated or adversely modified or
affected;
(vi) any member of the Wider Esprit Telecom Group ceasing to be able to
carry on business under any name under which it presently does so;
(vii) the value of or the financial or trading position or prospects of
any member of the Wider Esprit Telecom Group being materially
prejudiced or adversely affected; or
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(viii) any material restriction on any member of the Wider Esprit
Telecom Group or the Wider GTS Group being able to carry on
business as it presently does so or to deal with any person, firm,
company or body;
(H) save as Disclosed (as defined in condition (G) above) no member of the
Wider Esprit Telecom Group having since 31 March 1998:
(i) issued, agreed or authorised or proposed the issue of
additional shares of any class, or securities convertible into, or
rights, warrants or options to subscribe for or acquire, any such
shares or convertible securities (save for the exercise of options
under the Esprit Telecom Share Option Schemes);
(ii) recommended, declared, paid or made or proposed to
recommend, declare pay or make any bonus, dividend or other
distribution;
(iii) otherwise than in the ordinary course of business merged with
any body corporate or acquired or disposed of, or transferred,
mortgaged or charged or created any security interest over, any
assets or any right, title or interest in any asset (including
shares and trade investments), or authorised, proposed or announced
any intention to propose any merger, demerger, acquisition,
disposal, transfer, mortgage, charge or security interest but only
if, in the case of a member of the Wider Esprit Telecom Group which
is not a member of the Esprit Telecom Group in each such case to
the extent material;
(iv) issued, authorised or proposed the issue of any debentures or
incurred or increased any indebtedness or contingent liability in
any case to an extent which is material in the context of the
Esprit Telecom Group, taken as a whole and not in the ordinary
course of business as presently carried on;
(v) purchased, redeemed or repaid or announced any proposal to
purchase, redeem or repay any of its own shares or other securities
or redeemed or reduced or made any other change to any part of its
share capital in any case to an extent which is material in the
context of the Esprit Telecom Group, taken as a whole;
(vi) entered into, or varied, or authorised, proposed or announced
its intention to enter into or vary any contract, transaction,
arrangement or commitment (whether in respect of capital
expenditure or otherwise) which is of a long-term, onerous or
unusual nature or magnitude and not in the ordinary course of
business as presently carried on, or which involves or could
involve an obligation of a nature or magnitude which, in any case,
is material in the context of the Esprit Telecom Group, taken as a
whole;
22
<PAGE> 21
(vii) implemented, authorised, proposed or announced its intention
to implement or enter into any reconstruction, amalgamation,
commitment, scheme or other transaction or arrangement otherwise
than in the ordinary course of business;
(viii) entered into or made an offer (which remains open for
acceptance) to enter into or vary the terms of any service
agreement or any other agreement or arrangement with any directors
or senior executives or any connected person of any of such person
(within the meaning of s.346 Companies Act 1985);
(ix) waived or compromised any claim which is material in the
context of the Esprit Telecom Group other than in the ordinary
course of business;
(x) proposed any voluntary winding up;
(xi) made or authorised or proposed or announced an intention to
propose any change in its share or loan capital to an extent which
is material in the context of the Esprit Telecom Group, taken as a
whole;
(xii) entered into any contract, transaction or arrangement which
is or is likely to be restrictive in a material respect on the
business of any member of the Wider GTS Group or the Wider Esprit
Telecom Group;
(xiii) made any material alteration to its Memorandum or Articles
of Association or other incorporation documents; or
(xiv) entered into or made an offer (which remains open for
acceptance) to enter into an agreement or commitment or passed any
resolution or announced or made any proposal with respect to any of
the transactions or events referred to in this condition (H);
(I) prior to the date when the Offer would otherwise become unconditional:
(i) there having been no adverse change in the business, assets,
financial or trading position or profits or prospects of any member
of the Wider Esprit Telecom Group to an extent which is material in
the context of the Esprit Telecom Group taken as a whole;
(ii) there not having been instituted or remaining outstanding any
litigation, arbitration proceedings, prosecution or other legal
proceedings to which any member of the Wider Esprit Telecom Group
is a party (whether as plaintiff or defendant or otherwise) and no
such proceedings having been announced or threatened against any
such member and no investigation by any government or governmental,
quasi-governmental, supranational, statutory, regulatory or
investigative body, authority or court (including
23
<PAGE> 22
any anti-trust or merger control authority) against or in respect
of any such member or the business carried on by any such member
having been threatened, announced, instituted or remaining
outstanding by, against or in respect of any such member and the
effect of which is or is likely to be material in the context of
the Esprit Telecom Group, taken as a whole;
(iii) there having been no receiver, administrative receiver or
other similar officer appointed over any of the assets of any
member of the Wider Esprit Telecom Group or any analogous
proceedings or steps having taken place under the laws of any
jurisdiction and there having been no petition presented for the
administration of any member of the Wider Esprit Telecom Group or
any analogous proceedings or steps taken place under the laws of
any jurisdiction; and
(iv) no contingent or other liability having arisen or having been
incurred which would or might reasonably be expected adversely to
affect any member of the Wider Esprit Telecom Group to an extent
which is material in the context of the Esprit Telecom Group, taken
as a whole;
(J) neither GTS nor its advisers having discovered prior to the date when the
Offer would otherwise become unconditional that:
(i) any financial, business or other information concerning Esprit
Telecom or the Wider Esprit Telecom Group publicly disclosed at any
time is misleading in any material respect, contains a material
misrepresentation of fact or omits to state a fact necessary to
make the information contained therein not materially misleading;
or
(ii) any member of the Wider Esprit Telecom Group is subject to any
liability, contingent (for the purposes of UK GAAP) or otherwise
which is not disclosed in the audited accounts of Esprit Telecom
for the financial year ended on that date and is material in the
context of the Esprit Telecom Group taken as a whole and which
should have been so disclosed in accordance with UK GAAP;
(iii) any member of the Wider Esprit Telecom Group has not complied with
all applicable legislation or regulation of any jurisdiction which
has an impact which is material in the context of the Esprit
Telecom Group; and
(K) GTS not having discovered prior to the date when the Offer would otherwise
become unconditional that:
(i) any member of the Wider Esprit Telecom Group has not complied with
all applicable legislation or regulations of any jurisdiction
relating to environmental matters, or that there has been any
disposal, discharge, spillage, leak, or emission from any land or
other asset now or previously
24
<PAGE> 23
owned, occupied or made use of by any past or present member of the
Wider Esprit Telecom Group which would be likely to give rise to
any material liability (whether actual or contingent) on the part
of any member of the Wider Esprit Telecom Group which is material
in the context of the Esprit Telecom Group taken as a whole;
(ii) there is, or is reasonably expected to be, any material liability
taken in the context of the Esprit Telecom Group taken as a whole
(whether actual or contingent) to make good, repair, reinstate or
clean up any property now or previously owned, occupied or made use
of by any past or present member of the Wider Esprit Telecom Group
or in which any such member may now or previously had an interest.
GTS reserves the right to waive, in whole or in part, all or any of conditions
(E) to (K) inclusive.
GTS also reserves the right, subject to the consent of the Panel, to extend the
time allowed under the City Code for satisfaction of condition (A) until such
time as conditions (E) to (K) inclusive have been satisfied or, to the extent
permitted, waived. GTS shall be under no obligation to waive or treat as
satisfied any of conditions (E) to (K) (inclusive) by a date earlier than the
latest date specified above for the satisfaction thereof notwithstanding that
the other conditions of the Offer may at such earlier date have been waived or
fulfilled or satisfied and that there are at such earlier date no circumstances
indicating that any of such conditions may not be capable of fulfilment or
satisfaction.
If GTS is required by the Panel to make an offer for Esprit Telecom Securities
under the provisions of Rule 9 of the City Code, GTS may make such alterations
to the terms and conditions of the Offer, including condition (A), as are
necessary to comply with the provisions of that Rule.
The Offer will lapse if the proposed acquisition of Esprit Telecom by GTS, or
any matter arising therefrom, is referred to the Monopolies and Mergers
Commission before the Initial Closing Date.
3. CERTAIN FURTHER TERMS OF THE OFFER
A registration statement relating to the New GTS Shares to be offered in the
Offer will be filed with the US Securities and Exchange Commission and such
securities may not be offered or sold nor may the Offer be accepted in the
United States or by US persons prior to the time such registration statement
becomes effective. The Offer will be made only by means of formal offer
documentation, which in the US will include a prospectus.
25
<PAGE> 24
APPENDIX 2
IRREVOCABLE UNDERTAKINGS
Irrevocable undertakings have been given by certain Esprit Telecom
Securityholders in respect of 47,736,275 Esprit Telecom Shares and 4,890,285
Esprit Telecom ADSs. Together these represent a total of 81,968,270 Esprit
Telecom Shares (including those represented by Esprit Telecom ADSs),
representing 65% of the issued share capital of Esprit Telecom.
<TABLE>
<CAPTION>
NAME BENEFICIAL HOLDING OF ESPRIT BENEFICIAL
TELECOM ADSS HOLDINGS OF ESPRIT TELECOM
SHARES
<S> <C> <C>
Gold & Appel Transfer S.A. 4,662,555 (i.e. 32,637,885 16
Esprit Telecom Shares)
Walter Anderson 47,230 (i.e. 330,610 9
Esprit Telecom Shares)
Apax Funds Nominees Ltd. 180,500 (i.e. 1,263,500 32,294,100
Esprit Telecom Shares)
Warburg Pincus Ventures L.P. - 15,442,150
</TABLE>
The irrevocable undertakings continue to be binding in the event of a higher
offer. However, they will lapse if : pre-condition (A) to the Offer set out in
Appendix 1 (relating to the Esprit Telecom Bonds) is not satisfied or waived by
29 January 1999; if GTS announces that the pre-conditions will not be met or
waived; if the Offer Document is not despatched by 15 April 1999 (as extended in
certain limited circumstances); if there is a material adverse change in the
value of the GTS Group (as defined in the irrevocable undertakings) before the
17th US Business Day after posting of the Offer Document or if the Offer is not
declared wholly unconditional by the 60th day after posting (as extended in
certain limited circumstances).
26
<PAGE> 25
APPENDIX 3
FINANCIAL EFFECTS OF ACCEPTANCE
The following tables show, for illustrative purposes only and on the bases and
assumptions set out in the notes below, the financial effects of acceptance on
capital value for a Esprit Telecom Shareholder and a Esprit Telecom ADS Holder
accepting the terms of the Offer, if the Offer becomes or is declared
unconditional in all respects:
<TABLE>
<CAPTION>
ESPRIT TELECOM ADSS Notes
<S> <C> <C>
Market Value of 0.89 New GTS Shares (i) $37.1575
Market Value of one Esprit Telecom ADS (ii) $30.2500
--------
Increase $ 6.9075
--------
This represents an increase of 22.8%
--------
ESPRIT TELECOM SHARES
Market Value of 0.1271 New GTS Shares (i) $ 5.3082
Value of one Esprit Telecom Share (iii) $ 4.3214
--------
Increase $ 0.9868
--------
This represents an increase of 22.8%
--------
</TABLE>
Notes
(i) The market value of New GTS Shares is based on the closing price of
$41.75 on NASDAQ for a GTS Share on 07 December 1998, the last dealing
day prior to the announcement of the Offer.
(ii) The market value of Esprit Telecom ADSs is based on the closing price of
$30.25 on NASDAQ for a Esprit Telecom ADS on 07 December 1998, the last
dealing day prior to the announcement of the Offer.
(iii) The value of Esprit Telecom Shares is based upon one seventh of the
market value of a Esprit Telecom ADS.
(iv) No account has been taken of any liability to taxation.
27
<PAGE> 26
APPENDIX 4
DEFINITIONS
The following definitions apply throughout this document, unless the context
requires otherwise:
"Australia" the Commonwealth of Australia, its territories
and its possessions
"Authorisations" all filings, applications, authorisations,
orders, recognitions, grants, consents, licences,
confirmations, clearances, permissions and
approvals under any applicable legislation or
regulations of any jurisdiction
"Bear Stearns" Bear, Stearns International Limited and, to the
extent that the Offer relates to the United
States, Bear, Stearns & Co. Inc.
"CIS" Commonwealth of Independent States
"City Code" the City Code on Takeovers and Mergers
"CLEC" competitive local exchange carrier
"DWDM" Dense Wave Division Multiplexing technology
"EASDAQ" the computerised pan-European quotation system
sponsored by the European Association of
Securities Dealers and Automated Quotations
"Esprit Telecom" Esprit Telecom Group plc
"Esprit Telecom ADSs" American Depository Shares of Esprit Telecom,
each representing seven Esprit Telecom Shares
"Esprit Telecom ADS Holders" holders of Esprit Telecom ADSs
"Esprit Telecom Bond Offer" the proposed offer to be made to holders of
Esprit Telecom Bonds
"Esprit Telecom Bonds" the $230,000,000 11.5% Senior Notes due 2007, the
$150,000,000 10.875% Senior Notes due 2008, the
DEM 125,000,000 11.5% Senior Notes due 2007 and
the DEM 150,000,000 11.0% Senior Notes due 2008
"Esprit Telecom Bondholders" holders of Esprit Telecom Bonds
"Esprit Telecom Group" Esprit Telecom and its subsidiary undertakings
(as such term is defined in the Companies Act
1985)
28
<PAGE> 27
"Esprit Telecom Securities" collectively the Esprit Telecom ADSs and the
Esprit Telecom Shares
"Esprit Telecom
Securityholders" collectively the Esprit Telecom Shareholders and
the Esprit Telecom ADS Holders
"Esprit Telecom Shares" or
"Shares" the existing issued and fully paid ordinary
shares of 1p each in the capital of Esprit
Telecom and any further such shares which are
unconditionally allotted or issued while the
Offer remains open for acceptance (or prior to
such earlier date, not being earlier than the
Initial Closing Date, as GTS may decide
"Esprit Telecom Shareholders" holders of Esprit Telecom Shares
"Esprit Telecom Share
Option Schemes" the Esprit Telecom Employee Share Option
Programme Number 1, the Esprit Telecom Management
Share Option Plan, the Esprit Telecom Company
Share Option Plan, the Esprit Telecom Executive
and Employee Share Option Scheme 1997 and the
Esprit Telecom Savings-Related Share Option
Scheme
"GTS" Global TeleSystems Group, Inc.
"GTS Group" GTS and its subsidiary undertakings (as such term
is defined in the Companies Act 1985)
"GTS Shareholders" holders of GTS Shares
"GTS Shares" shares of common stock, par value $.10 each in
GTS
"Initial Closing Date" 3.00pm (London time), 10.00am (New York time) on
the day following the 20th US Business Day from
the date of the Offer Document, unless GTS, in
its discretion, shall have extended the Offer, in
which case the term "Initial Closing Date" shall
mean the latest time and date at which the Offer,
as so extended by GTS, will expire or, if
earlier, the time at which the conditions of the
Offer set out in paragraph 2 of Appendix 1 are
satisfied or, to the extent permitted, waived
"Initial Offer Period" the period from the date of the Offer Document
to and including the Initial Closing Date
"Lehman Brothers" Lehman Brothers International (Europe)
29
<PAGE> 28
"Majority Shareholders
Undertakings" the irrevocable undertakings to accept the
Offer provided by Gold & Appel Transfer S.A.,
Walter Anderson, Apax Partners Funds Nominees
Ltd, and Warburg, Pincus Ventures L.P.
"NASDAQ" the computerised quotation system sponsored by
the National Association of Securities Dealers
"New GTS Shares" the new GTS Shares proposed to be issued,
credited as fully paid, pursuant to the Offer
"Noon Buying Rate" the noon buying rate for cable transfer in New
York City in pounds sterling as certified by the
New York Federal Reserve Bank for customs
purposes
"Offer" the proposed offer to be made by Bear Stearns, on
behalf of GTS on the terms and subject to the
conditions to be set out in the Offer Document to
acquire the Esprit Telecom Shares and, where the
context admits, any subsequent revision,
variation, extension or renewal thereof
"Offer Document" the formal offer document proposed to be sent to
holders of Esprit Telecom Shares and ADSs
containing, inter alia, the terms and conditions
and further details of the Offer and such other
information as required by the City Code and US
Securities Law
"Overseas Shareholders" holders of Esprit Telecom Shares resident in or
nationals or citizens of, jurisdictions outside
the United Kingdom and the United States or who
are nominees of, or custodians, trustees or
guardians for, citizens or nationals of other
countries
"Panel" The Panel on Takeovers and Mergers
"Relevant Authority" any government or governmental or
quasi-governmental authority (whether,
supra-national, national, regional, local or
otherwise) or statutory or regulatory or
investigative body or other authority (including
any anti-trust or merger control authority),
court, trade agency, association, institution or
professional or environmental body or (without
prejudice to the generality of all the foregoing)
any other person or body in any jurisdiction
30
<PAGE> 29
"Rollover Offer" the proposal for GTS to allow holders of options
under the Esprit Telecom Share Option Schemes to
rollover their options into options over GTS
Shares
"SDH" synchronous digital hierarchy transmission
"SEC" the US Securities and Exchange Commission
"UK GAAP" generally accepted accounting principles as
applied in the UK
"US Business Day" any day other than Saturday, Sunday or a Federal
holiday in the US, and consists of the time
period from 12.01 am to 12.00 midnight, New York
City time
"US Person" a US person as defined in Regulation S of the US
Securities Act 1933, as amended
"US Securities Law" the Securities Act of 1933, the Securities
Exchange Act of 1934 and the rules and
regulations promulgated thereunder
"United States" or "US" the United States of America, its territories and
possessions, any state of the United States of
America and the District of Columbia
"Wider GTS Group" GTS or any of its subsidiaries or subsidiary
undertakings or any joint venture, partnership,
firm or company in which any of them has a
substantial interest
"Wider Esprit Telecom Group" Esprit Telecom or any of its subsidiaries or
subsidiary undertakings or any joint venture,
partnership, firm or company in which any of them
has a substantial interest
$ United States dollars
L. United Kingdom pounds sterling
31
<PAGE> 1
EXHIBIT (a)(11)
Tuesday December 8, 12:52 am Eastern Time
Company Press Release
SOURCE: Global TeleSystems Group, Inc.
GTS and Esprit Telecom Announce Proposed $4.1
Billion Combination
The combined group is expected to have:
- -- A market capitalization of approximately $4.1 billion -- Latest quarter
annualized consolidated revenues of approximately $482 million --
Approximately 3,000 employees -- Over 35,000 business customers in Western
Europe -- A network with 9,200 route kilometers of high capacity, broadband
fiber-transmission facilities in service today -- A broad portfolio of
business telecommunications services -- Operations in 11 countries in
Western Europe
MCLEAN, Va., and LONDON, Dec. 8 /PRNewswire/ -- Global TeleSystems Group,
Inc. (GTS) (Nasdaq and Easdaq: GTSG) and Esprit Telecom Group plc (Esprit
Telecom) (Nasdaq: ESPRY; Easdaq: ESPR) announced today that they have
agreed on the terms of a proposed offer by GTS to purchase all the
outstanding shares of Esprit Telecom and that holders of 65% of the voting
shares of Esprit Telecom have irrevocably agreed to accept the offer. In
addition, the board of directors of GTS and Esprit Telecom intend
unanimously to recommend the proposed offer to shareholders of their
respective companies.
The combination of GTS and Esprit Telecom will assist both companies in
their mutual goals of becoming the pre-eminent providers of carriers'
carrier and business communications services throughout Europe. Together,
GTS and Esprit Telecom will have the largest independent cross border
carriers' carrier network in Europe and will have an extensive sales force
in 11 countries in Western Europe.
The proposed offer is to exchange 0.89 shares of GTS for each Esprit
Telecom American Depositary Share (ADS). Based on GTS's closing common
stock price of $41.75 on December 7, 1998, this proposed offer values each
Esprit Telecom ADS at $37.16 and represents a 22.8% premium to its closing
price on December 7, 1998.
<PAGE> 2
The making of the offer is subject to certain pre-conditions, including the
consent of Esprit Telecom bond holders to waive the change of control
provisions in the Esprit Telecom debt instruments. The proposed offer is
expected to close in the first half of 1999, subject to satisfaction of the
pre-conditions, acceptance of the offer by holders of more than 90% of the
Esprit Telecom shares (or, at GTS's discretion, any percentage greater than
50%) GTS shareholder approval and fulfillment of other customary
conditions.
The boards of GTS and Esprit Telecom believe their businesses are
complementary and that a range of economic, strategic and operational
benefits will arise from combining them.
GTS believes the combination will be cash earnings per share accretive
(where cash earnings is defined as net income excluding non-cash items) in
the medium term. The companies expect that this transaction will be
accounted for as a pooling of interests.
GTS is dedicated to serving three large telecommunications market segments
within Western Europe: business telecommunications services, carriers'
carrier services and competitive local exchange carrier (CLEC) services
providing voice, data and Internet Protocol (IP) based services. Esprit
Telecom, one of the leading independent providers of business and carriers'
carrier telecommunications services in Europe, will greatly enhance the
combined company's position as a leader in the first two of these rapidly
growing European markets. GTS has also acquired several other companies
including Ebone A/S (an internet transport service provider) and NetSource
Europe ASA (a long distance provider), to augment its presence in Europe.
The combined group will have (i) presence in 19 countries throughout
Europe; (ii) increased network capacity and resilience; (iii) 500 person
sales force, one of the largest among independent telecommunications
companies in Europe; (iv) ability to provide a wide array of service
offerings; and (v) increased management depth. Furthermore, the combined
group expects to benefit from reduced network operations costs, reduced
administrative costs, and capital expenditure savings.
Esprit Telecom has operations in seven countries and nine major switch
sites. Together with NetSource Europe ASA, recently acquired by GTS, this
will give the combined group has a presence in Europe in the UK, Germany,
France, Italy, Spain, the Netherlands, Belgium, Ireland, Denmark, Sweden,
Norway, Austria, Switzerland, the Czech Republic, Hungary, Poland,
Slovakia, Ukraine and Russia. This pan-European presence provides an
immediate critical mass to GTS's existing GTS Business Services -- Western
Europe unit, as well as providing an effective platform for entry and a
built-in potential customer base for GTS's CLEC business, GTS Access
Services. Both GTS Business Services -- Western Europe and GTS Access
Services -- intend to lease transport capacity from Hermes Europe Railtel
B.V. under terms no more favorable than those offered to unaffiliated
telecommunications providers.
GTS believes this combination should strengthen its position as the most
developed pan-European carriers' carrier, with a presence in 12 countries
and 20 cities throughout Europe and an operational 9,200 route kilometer
<PAGE> 3
network. By the end of 1999, the Hermes Europe Railtel B.V. network is
planned to be deployed in 16 countries and 45 cities, totaling 18,000 route
kilometers.
David Oertle, CEO of Esprit Telecom, will remain with Esprit Telecom
through the transition. He will continue to work with Esprit Telecom
towards its successful integration within GTS. At the same time, Mr Oertle
will assume a senior advisory role working directly with Gerald W. Thames,
GTS's President and CEO, as a key contributor to the development of the
corporation's strategic vision and goals. Roy Merritt, CFO of Esprit
Telecom, Hans-Peter Kohlhammer, Group Managing Director of Sales and
Marketing, Jim Reynolds, Chief Operations Officer, Michael Potter, Chief of
Staff and David Reibel, General Counsel and Director of Corporate Affairs,
will continue in their current roles within Esprit Telecom. Walter
Anderson, the former Chairman of Esprit Telecom, has agreed to serve as a
special consultant to the GTS board of Directors.
Bear, Stearns International Limited is acting as financial advisor to GTS.
Lehman Brothers International (Europe) is acting as financial advisor to
Esprit Telecom on this acquisition.
About GTS
GTS is a leading independent owner and operator of telecommunications
companies throughout Europe. GTS has five primary lines of business: GTS
Carrier Services, which provides cross-border transport in Europe to other
telecommunications companies; GTS Access Services, which provides
facilities-based access services to businesses throughout Europe; GTS
Business Services -- Western Europe, which offers voice, data, Internet and
other telecommunications services to businesses; GTS Business Services --
Commonwealth of Independent States (CIS), where GTS is an alternative
provider of high quality telecommunications services in Moscow, Kiev, St.
Petersburg and other cities in Russia and the CIS; and GTS Mobile Services
- -- CIS, which operates cellular businesses in Russia and Ukraine.
Headquartered in the metropolitan Washington DC area, GTS's affiliates have
offices in London, Brussels, Moscow, Budapest, Kiev, Prague and Paris.
About Esprit Telecom
Founded in 1992, Esprit Telecom is a facilities-based provider of
international and national telecommunications services with network and
sales office infrastructure in 30 cities in eight countries in Europe
generating a run rate of over one billion minutes of traffic per annum.
Esprit Telecom Networks Limited, an independent operations subsidiary of
Esprit Telecom, is currently building a 9,000 route kilometer SDH and DWDM
fiber optic network through six European countries. Esprit Telecom also has
links to Washington and New York via a transatlantic circuit owned by other
carriers.
This press release includes forward-looking statements that involve risk
and uncertainty. Although each company believes its respective expectations
reflected in such forward-looking statements are based on reasonable
assumptions, no assurance can be given that such projections will be
fulfilled. Any such forward-looking statement must be considered along with
<PAGE> 4
knowledge that actual events or results may vary materially from such
predictions due to, among other things, political, economic or legal changes in
the markets in which GTS or Esprit Telecom, as the case may be, does business,
competitive developments or risks inherent in each company's business plan.
Readers are referred to the documents filed by GTS and Esprit Telecom with the
US Securities Exchange Commission, specifically the most recent reports filed
under the Securities Act of 1933 and the Securities Exchange Act of 1934, which
identify important risk factors.
SOURCE: Global TeleSystems Group, Inc.
<PAGE> 1
EXHIBIT (a)(12)
WEDNESDAY DECEMBER 9, 7:23 PM EASTERN TIME
COMPANY PRESS RELEASE
SOURCE: Global TeleSystems Group, Inc.
GTS ANNOUNCES BROAD DETAILS OF SYNERGIES
FROM COMBINATION WITH ESPRIT TELECOM
MCLEAN, Va., Dec. 9/PRNewswire/ --Following yesterday's announcement that
agreement has been reached on the terms of a proposed recommended offer to be
made by Bear Stearns, on behalf of Global TeleSystems Group, Inc. (GTS) (Nasdaq:
GTSG - news), to acquire Esprit Telecom Group plc (Esprit Telecom) (Nasdaq:
ESPRY - news), GTS announces broad details of certain synergies resulting from
the combination of GTS and Esprit Telecom.
Based upon available information, GTS anticipates that the combination of GTS
and Esprit Telecom will reduce capital outlay and expenses for the two groups
of approximately $30 million for 1999 and that annual savings will have
increased to in excess of $100 million by 2004. These are "high level" estimates
only and are subject to adjustments as discussions between the companies
continue.
Bear, Stearns International Limited is acting as financial advisor to GTS.
Lehman Brothers International (Europe) is acting as financial advisor to Esprit
Telecom on this acquisition.
About GTS
GTS is a leading independent owner and operator of telecommunications companies
throughout Europe. GTS has five primary lines of business: GTS Carrier Services,
which provides cross-border transport in Europe to other telecommunications
companies; GTS Access Services, which provides facilities-based access services
to businesses throughout Europe; GTS Business Services -- Western Europe, which
offers voice, data, Internet and other telecommunications services to
businesses; GTS Business Services -- Commonwealth of Independent States (CIS),
where GTS is an alternative provider of high quality telecommunications services
in Moscow, Kiev, St. Petersburg and other cities in Russia and the CIS; and GTS
Mobile Services -- CIS, which operates cellular businesses in Russia and
Ukraine. Headquartered in the metropolitan Washington DC area, GTS's affiliates
have offices in London, Brussels, Moscow, Budapest, Kiev, Prague and Paris.
About Esprit Telecom
Founded in 1992, Esprit Telecom is a facilities-based provider of international
and national telecommunications services with network and sales office
infrastructure in 30 cities in eight countries in Europe generating a run rate
of over one billion minutes of traffic per annum. Esprit Telecom Networks
Limited, an independent operations subsidiary of Esprit Telecom, is currently
building a 9,000 route kilometer SDH and DWDM fiber optic network through six
European countries. Esprit Telecom also has links to Washington and New York
via a transatlantic circuit owned by other carriers.
1 of 2
<PAGE> 2
For a copy of the UK press announcement and for additional information, contact:
o Global TeleSystems Group
o Robert Capozzi
o 703-918-4548
o [email protected]
o Pager: 1-800-331-4741
o Esprit Telecom
o Glenn Manoff
o +44 (0)118 951 4010
Financial Advisors
For GTS:
Richard Strang
Bear, Stearns International Limited
+44 (0)171 516 6937
For Esprit Telecom:
Brian Robertson,
Simon Costa
Lehman Brothers International (Europe)
+44 (0)171 601 0011
This press release includes forward-looking statements that involve risk and
uncertainty. Although each company believes its respective expectations
reflected in such forward-looking statements are based on reasonable
assumptions, no assurance can be given that such projections will be fulfilled.
Any such forward-looking statement must be considered along with knowledge that
actual events or results may vary materially from such predictions due to, among
other things, political, economic or legal changes in the markets in which GTS
or Esprit Telecom, as the case may be, does business, competitive developments
or risks inherent in each company's business plan. Readers are referred to the
documents filed by GTS and Esprit Telecom with the US Securities Exchange
Commission, specifically the most recent reports filed under the Securities Act
of 1933 and the Securities Exchange Act of 1934, which identify important risk
factors.
SOURCE: Global TeleSystems Group, Inc.
<PAGE> 1
EXHIBIT (a)(13)
This announcement is neither an offer to exchange nor a solicitation of an offer
to exchange any securities. The Offer is made solely in the Offering
Circular/Proxy Statement/Prospectus dated February 2, 1999 and the related Form
of Acceptance, Letter of Transmittal and Notice of Guaranteed Delivery and is
being made to all holders of Esprit Telecom Ordinary Shares and Esprit Telecom
ADSs (as each such term is defined below). The Offer is not being made to (nor
will tenders be accepted from or on behalf of the holders of) Esprit Telecom
Securities (as defined below) in Canada, Japan or Australia or in any
jurisdiction in which the making of the Offer or the acceptance thereof would
not be in compliance with the laws of such jurisdiction. In any jurisdiction
where the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer shall be deemed to be made on behalf of
Global TeleSystems Group, Inc. by Bear, Stearns International Limited and Bear,
Stearns & Co. Inc. (together, "Bear Stearns") or one or more registered brokers
or dealers that are licensed under the laws of such jurisdiction.
Notice of Offer to Exchange for each
Ordinary Share, par value 1 pence per
share, and each American Depositary Share
representing seven Ordinary Shares
of
Esprit Telecom Group plc,
0.1271 of a share and 0.89 of a share, respectively,
of Common Stock, par value $0.10 per share,
of
Global TeleSystems Group, Inc.
Bear Stearns on behalf of Global TeleSystems Group, Inc., a Delaware corporation
(the "Company"), is offering upon the terms and subject to the conditions set
forth in the Offering Circular/Proxy Statement/Prospectus, dated February 2,
1999 (the "Offering Circular/Proxy Statement/Prospectus"), and in the related
Form of Acceptance, Letter of Transmittal and Notice of Guaranteed Delivery to
exchange (i) each outstanding Ordinary Share, par value 1 pence per share (the
"Esprit Telecom Ordinary Shares") of Esprit Telecom Group plc, a public limited
company incorporated under the laws of England and Wales ("Esprit Telecom") and
(ii) each outstanding American Depositary Share of Esprit Telecom representing
seven Esprit Telecom Ordinary Shares (the "Esprit Telecom ADSs" and, together
with the Esprit Telecom Ordinary Shares, the "Esprit Telecom Securities"), for
new shares of Common Stock, par value $0.10 per share, of the Company (the "New
Common Stock") on the basis of 0.1271 of a share of New Common Stock for each
Esprit Telecom Ordinary Share and 0.89 of a share of New Common Stock for each
Esprit Telecom ADS (the "Offer").
Arrangements have been made so that the Offer may also be accepted by Belgian
Persons. The term "Belgian Person" means any individual, corporation,
partnership, trust or other entity resident in Belgium, or any corporation,
partnership, trust or other entity organized under or governed by the laws of
Belgium or any political subdivision thereof.
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 3:00 P.M. (LONDON
TIME), 10:00 A.M. (NEW YORK CITY TIME), ON THURSDAY, MARCH 4, 1999, UNLESS
EXTENDED ("EXPIRATION DATE"). AT THE CONCLUSION OF THE INITIAL OFFER PERIOD,
INCLUDING ANY EXTENSION THEREOF, IF ALL CONDITIONS HAVE BEEN SATISFIED OR, WHERE
PERMITTED, WAIVED, ALL ESPRIT TELECOM SECURITIES VALIDLY TENDERED AND NOT
WITHDRAWN WILL BE PURCHASED AND THE OFFER WILL BE EXTENDED FOR A SUBSEQUENT
OFFER PERIOD OF AT LEAST 14 CALENDAR DAYS. HOLDERS OF ESPRIT TELECOM ORDINARY
SHARES AND ESPRIT TELECOM ADSs, AS THE CASE MAY BE, WILL HAVE WITHDRAWAL
<PAGE> 2
RIGHTS DURING THE INITIAL OFFER PERIOD, BUT NOT DURING THE SUBSEQUENT OFFER
PERIOD INCLUDING ANY EXTENSION THEREOF, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
The Offer is conditioned upon, among other things, (i) there being validly
tendered and not properly withdrawn prior to the Expiration Date a number of
Esprit Telecom Securities representing not less than 90% of the share capital of
Esprit Telecom to which the Offer relates (or such lesser percentage as the
Company may decide, carrying not less than 50% of the voting rights normally
exercisable at a general meeting of Esprit Telecom), (ii) the approval of
resolutions authorizing the issuance of shares of New Common Stock in the Offer
by the requisite affirmative vote of holders of a majority of the Company's
Common Stock in accordance with the General Corporation Law of the State of
Delaware and the Certificate of Incorporation of the Company and (iii) the
satisfaction of the other conditions to the Offer as contained in Annex A to the
Offering Circular/Proxy Statement/Prospectus. If the Company agrees that it will
accept a lesser percentage of Esprit Telecom Securities as a condition to the
Offer, the Company will announce that it will do so at least five U.S. business
days in advance of the Offer being declared unconditional.
For purposes of the Offer, the Company will be deemed to have accepted for
exchange, Esprit Telecom Securities validly tendered to it pursuant to the Offer
and not withdrawn if and when the Offer becomes or is declared unconditional and
in all respects, whereupon the Company will give oral or written notice to the
Receiving Agents and the U.S. Depositary of its acceptance for exchange of such
Esprit Telecom Securities tendered pursuant to the Offer. Upon the terms and
subject to the conditions of the Offer, exchange of Esprit Telecom Securities
accepted for exchange pursuant to the Offer will be made by deposit of the
tendered certificates representing Esprit Telecom Ordinary Shares with the
Receiving Agents, and of the ADSs with the U.S. Depositary or Belgian Receiving
Agent (where applicable), which Receiving Agents and U.S. Depositary will act as
agents for tendering Securityholders for the purpose of receiving New Common
Stock from, and transmitting such New Common Stock to, tendering
Securityholders. In all cases, exchange of Esprit Telecom Securities tendered
and accepted for exchange pursuant to the Offer will be made only after timely
receipt by (i) the Receiving Agents of completed Forms of Acceptance together
with the relevant share certificate(s) representing such Esprit Telecom Ordinary
Shares and/or other document(s), and (ii) the U.S. Depositary or Belgian
Receiving Agent (where applicable) of (a) the Letter of Transmittal and other
required documents and (b) in the case of holders of ADSs tendering their ADSs
pursuant to a book-entry transfer, an Agent's Message (as defined in the
Offering Circular/Proxy Statement/Prospectus) and any other required documents,
together with, in each case, American Depositary Receipts representing such ADSs
(the "ADRs") (or a timely book-entry confirmation with respect to such ADSs).
Any Securityholder who desires to tender ADSs and whose ADRs are not immediately
available or who cannot comply with the procedure for book-entry transfer on a
timely basis, may tender such ADSs by completing a Notice of Guaranteed Delivery
and following the procedure for guaranteed delivery set forth in the Offering
Circular/Proxy Statement/Prospectus under the caption "The Offer--Procedures for
Accepting the Offer--Holders of Esprit Telecom ADS." Any Securityholder whose
Esprit Telecom Securities are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such person if such
Securityholder desires to tender such Esprit Telecom Securities.
The Company expressly reserves the right, in its sole discretion, at any time
and from time to time, to extend for any reason the period of time during which
the Offer is open (subject to the U.K.'s City Code on Takeovers and Mergers),
<PAGE> 3
including the occurrence of any of the events specified in the conditions set
forth in Annex A to the Offering Circular/Proxy Statement/Prospectus, in which
case it will give oral or written notice of such extension to the Receiving
Agents and the U.S. Depositary. During any such extension, all Esprit Telecom
Securities previously tendered and not properly withdrawn will remain subject to
the Offer, subject to the rights of a tendering Securityholder to withdraw such
Securityholder's Esprit Telecom Securities as provided in the Offer.
Under the Offer, holders of Esprit Telecom Securities will be able to withdraw
their acceptances at any time prior to the expiration of the Initial Offer
Period, but not during the Subsequent Offer Period (as each such term is defined
in the Offering Circular/Proxy Statement/Prospectus) except in certain limited
circumstances. The Offer will be deemed not to have been validly accepted in
respect of any Esprit Telecom Securities which have been withdrawn. For the
withdrawal to be effective, a written notice of withdrawal must be received in
good time by the party (either the Receiving Agents or the U.S. Depositary) to
whom the Acceptance Form was originally sent and must specify the name of the
person who accepted the Offer, the number of Esprit Telecom Securities to be
withdrawn and (if certificates have been submitted) the name of the registered
holder of the relevant Esprit Telecom Securities, if different from the name of
the person who accepted the Offer in respect of such Esprit Telecom Securities.
In respect of Esprit Telecom ADSs, if Esprit Telecom ADRs have been delivered or
otherwise identified to the U.S. Depositary or Belgian Receiving Agent (where
applicable), then prior to the physical release of such Esprit Telecom ADRs, the
serial numbers shown on such Esprit Telecom ADRs must be submitted and, unless
the Esprit Telecom ADSs evidenced by such Esprit Telecom ADRs have been
submitted by an Eligible Institution (as defined in the Offering Circular/Proxy
Statement/Prospectus) or by means of a Letter of Transmittal, the signatures on
the notice of withdrawal must be guaranteed by an Eligible Institution. If
interests in Esprit Telecom ADSs evidenced by Esprit Telecom ADRs have been
delivered pursuant to the procedures for book-entry transfer as set forth in the
Offering Circular/Proxy Statement/Prospectus under the caption "The
Offer--Holders of Esprit Telecom ADSs--Book-Entry Transfer", any notice of
withdrawal must also specify the name and number of the account at the
appropriate Book-Entry Transfer Facility to be credited with the withdrawn
Esprit Telecom ADSs and must otherwise comply with such Book-Entry Transfer
Facility's procedures. All questions as to the validity (including time of
receipt) or any notice of withdrawal will be determined by the Company, whose
determination (except as required by the U.K. Panel on Takeovers and Mergers)
will be final and binding. None of the Company, Esprit Telecom, Bear Stearns,
the Receiving Agents, the U.S. Depositary or any other person will be under any
duty to give notification of any defects or irregularities in any notice of
withdrawal or incur any liability for failure to give such notification.
The information required to be disclosed by Rule 14d-6(c)(l)(xvii) of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, is contained in the Offering Circular/Proxy Statement/Prospectus and is
incorporated herein by reference.
The Offering Circular/Proxy Statement/Prospectus and the related Form of
Acceptance, Letter of Transmittal and Notice of Guaranteed Delivery and, if
required, other relevant materials will be mailed to Persons who are record
holders of Esprit Telecom Securities whose names appear on Esprit Telecom's
Securityholder list on January 29,1999 and will be furnished to brokers,
dealers, commercial banks, trust companies and similar persons whose names, or
the names of whose nominees appear on the Securityholder list or, if applicable,
who are listed as participants in a clearing agency's security position listing
for subsequent transmittal to beneficial owners of Esprit Telecom Securities.
<PAGE> 4
The Offering Circular/Proxy Statement/Prospectus, the Form of Acceptance, the
Letter of Transmittal and Notice of Guaranteed Delivery contain important
information which should be read before any decision is made with respect to
accepting the Offer.
Questions and requests for assistance or for additional copies of the Offering
Circular/Proxy Statement/Prospectus and the related Form of Acceptance, Letter
of Transmittal and Notice of Guaranteed Delivery and all other tender offer
materials may be directed to the Information Agent or the Dealer Managers as set
forth below, and copies will be furnished promptly at the Company's expense. The
Company will not pay any fees or commissions to any broker or dealer or any
other person (other than the Information Agent and the Dealer Managers) for
soliciting tenders of Esprit Telecom Securities pursuant to the Offer.
The Information Agent for the Offer is:
GEORGESON LOGO
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect: (212) 440-9800
For holders outside the United States call collect:
(44) 171 335 8600
All others call toll free: (800) 223-2064
The Dealer Managers for the Offer are:
Bear, Stearns International Limited Bear, Stearns & Co. Inc.
One Canada Square 245 Park Avenue
London E14 5AD England New York, New York 10167
(0171) 516 6935
Call toll free: (888) 823-6441
February 2, 1999
<PAGE> 1
EXHIBIT (a)(14)
[ON GLOBAL TELESYSTEMS GROUP, INC. LETTERHEAD]
FOR IMMEDIATE RELEASE
GTS ANNOUNCES SPECIAL MEETING OF SHAREHOLDERS
CONCERNING ACQUISITION OF ESPRIT TELECOM GROUP
MCLEAN, Va., February 2, 1999 - Global TeleSystems Group, Inc. ("GTS") (Nasdaq
and EASDAQ: GTSG) announced today that a Special Meeting of its stockholders
will be held on Wednesday, March 3, 1999, to consider a proposal to approve
resolutions authorizing the issuance of new shares of Common Stock of GTS
pursuant to the offer by GTS to acquire all the issued and outstanding share
capital of Esprit Telecom Group plc ("Esprit Telecom") (Nasdaq: ESPRY; Easdaq:
ESPR) announced on December 8, 1998 (the "Offer"). Stockholders of record of GTS
common stock at the close of business on January 29, 1999, will be entitled to
vote at the Special Meeting Pursuant to the Offer, each Esprit Telecom
securityholder will receive 0.1271 of a share of new common stock of GTS for
each ordinary share of Esprit Telecom held by such holder, and 0.89 of a share
of new common stock of GTS for each American Depositary Share ("ADS") of Esprit
Telecom held by such holder. The Offer is being made in the US by Bear, Stearns
& Co. Inc. and outside the US by Bear, Stearns International Limited on behalf
of GTS.
The Offer will be open for acceptance for an initial offer period which is due
to expire at 10:00 a.m.(New York City time), 3:00 p.m. (London time) on
Thursday, March 4, 1999. Upon expiration of the initial offer period, the Offer
will be extended for a subsequent offer period of at least 14 calendar days, as
required by the rules of the City Code on Takeovers and Mergers of the United
Kingdom ("City Code"), during which time holders of Esprit Telecom ordinary
shares and ADSs who have not tendered such securities may do so. Holders of
Esprit Telecom ordinary shares and ADSs will have withdrawal rights during the
initial offer period but, except in limited circumstances, not during the
subsequent offer period.
Copies of the Offering Circular/Proxy Statement/Prospectus will be mailed and
made available to GTS stockholders as well as to holders of Esprit Telecom
ordinary shares and ADSs upon request. Requests for a copy of the Offering
Circular/Proxy Statement/Prospectus should be directed to Georgeson & Company,
Inc., the Information Agent, at the following address: Georgeson & Company,
Inc., Wall Street Plaza, New York, New York 10005; banks and brokers may call
(212) 929-5500 (collect), holders within the United States may call (800)
223-2064 (toll free) and holders outside the United States may call (44)
171-335-8600 (reverse charges).
Holders of Esprit Telecom ordinary shares and ADSs (other than those located in
Belgium) must return all required documents to IRG plc, the Receiving Agent in
the United Kingdom, when tendering their ordinary shares, or The Bank of New
York, the US Depositary, when tendering their ADSs, prior to the expiration of
the initial and
<PAGE> 2
subsequent offer period. Holders of Esprit Telecom ordinary shares and ADSs
located in Belgium must return, prior to such time, all required documents to
The Bank of New York - Brussels, the Receiving Agent in Belgium for both
Esprit Telecom ordinary shares and ADSs. The Offering Circular/Proxy
Statement/Prospectus and the related acceptance forms contain instructions for
returning such documents by mail, by overnight delivery, by hand and by
facsimile transmission
The UK Panel on Takeovers and Mergers ("The Panel") wishes to draw to the
attention of member firms of Nasdaq and EASDAQ to certain UK dealing disclosure
requirements following the announcement of GTS's intention to make an offer for
Esprit Telecom. The announcement by GTS on December 8, 1998 commenced an offer
period for the purposes of the City Code, which is published and administered by
The Panel. An offer period is deemed to commence at the time when an
announcement is made of a proposed or possible offer, with or without
conditions. Esprit Telecom and GTS have equity securities traded on Nasdaq and
EASDAQ.
The above disclosure requirements are set out in Rule 8 of the City Code. In
particular, Rule 8.3 of the City Code requires public disclosure of dealings
during an offer period by persons who own or control, or who would as a result
of any transaction own or control, 1% or more of any class of relevant
securities of GTS or Esprit Telecom. In the case of the offer for Esprit
Telecom, this requirement will apply until the Offer becomes or is declared
wholly unconditional or lapses.
Disclosure should be made on an appropriate form before 12 noon (London time) on
the business day following the date of the dealing transaction. These
disclosures should be sent to The Panel (fax number: +44-171-256 9386). Copies
of appropriate disclosure forms may be obtained on request by faxing Bear
Stearns on +44-171-516 6937 (Richard Strang).
The Panel requests that member firms advise their clients who wish to deal in
the securities of GTS and/or Esprit Telecom, in the US and Belgium, that they
may be affected by these requirements. If there is any doubt as to their
application, The Panel should be consulted (telephone number: +44-171-382 9026,
fax number: +44-171-638 1554).
The attention of holders of ordinary shares or ADSs in Esprit Telecom not
resident in the UK or the US is drawn to the relevant provisions of the formal
Offer document which will be dispatched today.
For additional information, contact:
Global TeleSystems Group
Robert Capozzi
+1-703-918-4548
[email protected]
<PAGE> 3
Pager: +1-800-331-4741
THIS PRESS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTY. ALTHOUGH THE COMPANY BELIEVES ITS EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, NO ASSURANCE CAN
BE GIVEN THAT SUCH PROJECTIONS WILL BE FULFILLED. ANY SUCH FORWARD-LOOKING
STATEMENT MUST BE CONSIDERED ALONG WITH KNOWLEDGE THAT ACTUAL EVENTS OR RESULTS
MAY VARY MATERIALLY FROM SUCH PREDICTIONS DUE TO, AMONG OTHER THINGS, POLITICAL,
ECONOMIC OR LEGAL CHANGES IN THE MARKETS IN WHICH GTS DOES BUSINESS, COMPETITIVE
DEVELOPMENTS OR RISKS INHERENT IN THE COMPANY'S BUSINESS PLAN. READERS ARE
REFERRED TO THE DOCUMENTS FILED BY GTS WITH THE US SECURITIES AND EXCHANGE
COMMISSION, SPECIFICALLY THE MOST RECENT REPORTS FILED UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND REGISTRATION STATEMENTS FILED PURSUANT TO THE
SECURITIES ACT OF 1933, WHICH IDENTIFY IMPORTANT RISK FACTORS.
