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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23717
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
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4121 WILSON BLVD., 8TH FLOOR
ARLINGTON, VIRGINIA 22203
(Address of principal executive offices)
(703) 236-3100
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.10 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this Form 10-K, and will not be
contained, to the best of the registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of Global TeleSystems Group,
Inc. held by non-affiliates on December 31, 1999 was approximately
$5,613,527,024. On January 31, 2000, there were outstanding approximately
184,892,309 shares of Common Stock of Global TeleSystems Group, Inc.
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ITEM OF FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE
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Part IV, Item 14(c) Exhibits
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GLOBAL TELESYSTEMS GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Business....................................................
ITEM 2. Properties..................................................
ITEM 3. Legal Proceedings...........................................
ITEM 4. Submission of Matters to a Vote of Security Holders.........
PART II
ITEM 5. Market for the Company's Common Equity and Related
Stockholder Matters.......................................
ITEM 6. Selected Financial Data.....................................
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................
ITEM 8. Consolidated Financial Statements and Supplementary
Information for the Company...............................
ITEM 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure..................................
PART III
ITEM 10. Directors and Executive Officers of the Company.............
ITEM 11. Executive Compensation......................................
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................
ITEM 13. Certain Relationships and Related Transactions..............
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................
SIGNATURES............................................................
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PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW AND STRATEGY
Our goal is to become Europe's premier independent e-business services
provider and to maintain and enhance our position as a leading pan-European
provider of broadband, Internet, data and voice services to communications
carriers, Internet service providers and other high-usage customers. In order to
achieve this goal, we will build on the strengths of:
- our pan-European broadband fiber optic network, which is the largest in
Europe;
- our pan-European Tier 1 Internet protocol backbone;
- our position as a leading pan-European supplier of communications
services to approximately 100,000 small-and medium- sized business
customers, with a sales and distribution network spanning 79 European
cities in 18 countries; and
- a large base of carrier and Internet service provider customers, which
comprise a sizable percentage of European's total Internet and broadband
traffic.
The key elements of our strategy for achieving this goal are as follows:
Expand our services portfolio to support the communications and e-business
activities of our customers
We intend to capitalize on the trend of companies seeking to outsource
critical business applications and to integrate Web-based services and products
into their operations by aggressively marketing value-added data, Internet and
e-business enabling services to our existing and future business customers in
addition to the voice services we already offer in our target markets.
We already provide in certain of our target markets a range of data and
Internet services, which we are currently introducing in other countries in
which we operate. Additionally, we are planning to complement our existing
service offerings with new services that will support the e-business initiatives
of our customers, including, for example, enabling our customers to manage
on-line transactions and creating a fulfillment and procurement infrastructure
for supply chain management. These services may be developed internally or, when
speed-to-market is critical, developed and/or marketed in partnerships. We
intend to continue to develop and market advanced networking solutions, such as
outsourced infrastructure and network management to our carrier, Internet
service provider and Web-centric customers.
Leverage our distribution network to further penetrate our existing customer
base and reach new customers
Through our acquisitions of Global TeleSystems (Europe) Limited ("GTS
(Europe) Ltd."), formerly Esprit Telecom Group plc NetSource, Omnicom and
InTouch and the growth of our Central European operations, we have built a
unified pan-European sales and distribution network covering customers in 79
cities in 18 countries. As of December 31, 1999, our sales force consisted of
approximately 660 direct sales personnel. We believe that our highly qualified
sales personnel, who understand our philosophy, services and systems and are
well-trained in local languages and telecommunications business practices,
provide us with a competitive advantage. We will continue to invest in training
programs to equip our sales personnel with the skills necessary to market more
advanced, value-added services to our business customers as their
telecommunications needs evolve from basic Internet connectivity to full
utilization of the Internet, corporate intranets and virtual private networks
for more advanced, mission-critical applications. In this way, we intend to
leverage the strengths of our pan-European sales and distribution network to
capture additional revenues from our existing customer base and reach new
customers.
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Build on our leadership position in the carriers' carrier market to penetrate
a broader bandwidth intensive customer base
Since we began offering service on our fiber optic network in November
1996, we have developed a significant customer base encompassing over 180
telecommunications carriers, Internet service providers and other
bandwidth-intensive customers. As a result of being first in the market, we have
gained significant experience in developing service innovations and tailoring
our service offerings to meet our customers' rapidly evolving needs. We intend
to build on our success in delivering broadband service to carriers by
increasingly focusing on emerging Web- and data-centric companies that require
large amounts of bandwidth to service their end-user customers. These types of
customers include broadband multimedia providers, content providers, such as
motion picture studios and broadcasters, Internet applications service
providers, such as portals and electronic commerce companies, and emerging data
transmission providers, such as wireless operators. By providing
mission-critical, value added solutions to our customers, we seek to establish
ourselves as their strategic partner.
Continue to invest in the reach and capacity of our fiber optic network
We will continue to invest in our network to expand its geographic reach
and capacity in order to ensure that we can accommodate our customers' future
capacity requirements. We are continuing to build our network by extending its
coverage to include approximately 25,000 kilometers across Europe by the end of
2000. We are continuing to deploy dense wavelength division multiplexing
technology that will permit significant future enhancement of our network's
transmission capacity and will allow us to upgrade the capacity, reliability and
efficiency of the network in the future. The capacity of our network is
currently 40 wavelengths per fiber optic pair, each wavelength with a capacity
of 2.5 gigabits per second, or a total capacity of 100 gigabits per second on
the majority of our routes. We intend to install additional upgrades to further
increase our network's capacity in 2000. When introduced, these upgrades are
expected to increase the capacity of a single fiber pair to 96 wavelengths per
fiber optic pair, each wavelength with a capacity of 10 gigabits per second, or
a total capacity of 960 gigabits per second. In addition, we intend to develop
an additional ring on our network connecting the core cities of London, Paris,
Amsterdam, Frankfurt, Dusseldorf, and Brussels. We also plan to install
transmission equipment on a second, currently installed fiber pair on a number
of routes in our network to expand the transmission capacity of those routes.
Build infrastructure and extend our network closer to our customers
- Develop City Enterprise Networks. In order to offer true end-to-end
transmission services to our carrier, business and other
bandwidth-intensive customers, we intend to build intracity fiber
networks, or City Enterprise Networks, in major European cities. We
currently operate five such networks in Paris, Budapest, Prague, Berlin
and Geneva. In addition, we expect to have City Enterprise Networks
deployed in eight additional cities by year end 2000. Each City
Enterprise Network will be designed to connect, within a city, its major
Internet and telecommunications transmission centers, including points of
presence on our network, telehouses, Internet exchange points and, where
economically feasible, our existing customers' points of presence in that
city. This will allow us to reach our customers without relying on
third-party local access providers. We expect to improve service quality
and realize higher margins as we manage more traffic end-to-end over our
network.
- Expand and enhance the transatlantic capacity of our network. We believe
that a large portion of our market growth will come in the form of
Internet protocol-based data and voice services. We currently lease
transatlantic capacity from third parties. Because a majority of Internet
protocol traffic originates in the United States, we have invested in our
own transatlantic capacity infrastructure through the acquisition of a
dedicated fiber pair on the FLAG Atlantic-1 transatlantic fiber optic
link. (FLAG Atlantic is a 50/50 joint venture between GTS and Flag
Telecom.) By owning this fiber pair, we will acquire capacity of 70
gigabits per second upgradeable up to a maximum of 400 gigabits per
second of fully protected capacity from the New York City area directly
to our European network. We believe that owning a large volume of
transatlantic capacity to and from the United States will enhance our
competitive low cost position in Europe while extending our network to
the U.S. at favorable prices. In
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November 1999, we entered into a memorandum of understanding with GlobeNet
Communications Group Limited, which is building a high capacity subsea cable
linking key cities in North and South America. The agreement will enable us to
sell managed bandwidth services from a variety of European cities to Latin
America and GlobeNet to sell similar services between Latin America and
Europe. In addition, in order to maintain and reinforce our strong market
position in the increasingly global carriers' carrier and data- centric
markets, we may enter into arrangements to obtain network capacity
connecting several key U.S. markets by the end of 2000.
- Build or deploy data and Web-hosting centers to support Web-based
services. We intend to develop data- and Web-hosting centers on our
network near key public Internet exchange points to strengthen our
portfolio of Web-based services. This will provide us with the necessary
facilities to undertake secure co-location, data- and Web-hosting
services and facilitate our ability to offer a range of e-commerce and
e-business solutions. By mid-2000, we expect to establish data- and
Web-hosting capability in London, Amsterdam, Frankfurt and Paris. We
intend to deploy up to nine additional data-and Web-hosting centers
during the next two years. These centers are a natural extension of our
strategy to meet the end-to-end needs of the Web- and media-centric
content and application providers who are leading the rapid growth of the
Internet- and multimedia-related segments of our target markets. In
addition to carrying these customers' international traffic on our
network, we will be able to host and distribute their applications,
support their e-business and e-commerce activities and provide peering
arrangements.
Enhance Brand Name Recognition
In the first quarter of 2000, we launched a major marketing program to
develop and enhance the pan-European unified GTS brand name. Our branding
program will include the select use of television commercials, print ads and
direct mailings. Through our branding program we will seek to expand our market
share, increase customer loyalty and develop brand recognition in the European
broadband data, Internet and voice services market.
OUR EUROPEAN OPERATIONS
Overview
We offer a portfolio of bundled voice, data and Internet services to
small-to-medium sized enterprises, pan-European companies and select residential
end-users in 18 European countries. At December 31, 1999, we had approximately
100,000 business customers. We expect that our customer base will increasingly
include large companies with complex communications needs. We are also one of
the leading European providers of managed bandwidth and related communications
services to carriers, Internet service providers and other bandwidth-intensive
customers. We have the largest centrally managed fiber optic network in Europe
and a Tier 1 Internet backbone network. At December 31, 1999, the customers of
these services were contractually obligated to pay us an aggregate of
approximately $635.0 million for future services, provided we perform in
accordance with contractual specifications. This amount increased from $450.3
million at March 31, 1999, $498.7 million at June 30, 1999 and $548.2 million at
September 30, 1999. Such amounts are inclusive of amounts included in deferred
revenue.
We seek to capitalize on the increasing demand in Europe for e-business
services and products, in which businesses use the Internet to perform key
business communications processes. We believe that a wide variety of businesses,
both large and small, will increasingly use the Internet to communicate, improve
operating efficiencies and transact commerce in secure, reliable and
cost-effective ways. We currently provide these customers with a range of voice
and data services, including, in selected European countries, dial-up and
dedicated Internet access and virtual private network services. As we develop
and expand our suite of e-business services to include, among others,
Web-hosting, co-location, messaging and remote access services, we expect to
realize an increasing proportion of our revenue from businesses that rely on
Web-based applications to communicate with customers, suppliers and employees as
well as from new customer segments, such as e-business application service
providers and other Web-centric companies.
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We began providing broadband carrier services in November 1996 and we are
recognized as a pioneer in Europe in fiber optic network deployment and service
development. We have established long-term contracts with these customers. We
provide mission-critical value-added solutions to these customers and
increasingly seek to establish ourselves as their strategic partner. This
integration into our customers' operations often provides us with the
opportunity to introduce and implement additional services with the customer,
which enable us to further penetrate our customer base.
Customers of our broadband services include:
- European incumbent telecommunications operators
- Alternative carriers
- Voice resellers
- International carriers
- Internet service providers
- Value added network service providers
- Web-centric and media-centric companies
We believe that the trend toward substantial increases in the volume of
data traffic is being driven by the rapid growth of the Internet and
data-intensive applications, such as e-business, e-commerce, application
hosting, video-conferencing and multimedia applications, that require
high-quality and cost-effective transmission capacity. In addition, we believe
that our customers will increasingly demand Internet-or Internet Protocol-based
services such as Internet access, Web-hosting and data management services in
order to participate in the expected growth of data communication and the
Internet. In order to reinforce our leadership position, we will continue to add
new services on our network and sell our services in additional markets
throughout Europe.
Voice, Data and Internet-related Services
We currently offer national and international direct and indirect access
services for voice communications as well as enhanced voice, data and e-business
services. We continue to expand our service offerings to provide our customers
with a full range of tailored telecommunications services.
Voice Services. The largest share of the European business and corporate
retail market is currently international voice and fax transmission services. We
believe that customers have selected us as a provider on the basis of
competitive pricing, network quality, responsive account management and
customized services.
We currently distinguish our retail business customers between direct
access retail customers and indirect access retail customers. Our direct access
customers use our owned or dedicated leased lines, while our indirect access
customers access our services indirectly on a switched basis using the public
telecommunications operator network by means of an access code or a carrier
pre-select arrangement. Our direct access retail customers are generally users
of telecommunication services who generate relatively large amounts of long
distance traffic, with such traffic usually being important to the execution of
their core businesses. We offer retail direct access in the majority of our
existing markets.
Our indirect access retail clients access our services by dialing an access
code, generally either using an auto dialer or via a code programmed directly
into their own switches so that it is transparent to the user or their
applicable carrier through a carrier pre-select arrangement. These customers
generally consist of small and medium-size businesses whose telecommunication
requirements do not warrant the costs associated with the dedicated leased lines
of direct access service. Contracts for both direct and indirect access are
typically for a period of one year.
Enhanced Voice Services. We have also focused on developing new voice
services which address the specific needs of our customer base, including
pre-and post-paid calling cards, national and international toll-
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free service, which we target to organizations that require their customers or
employees to be able to simply and cost-effectively call them from other
countries. We have introduced or plan on introducing additional services,
including conferencing services, pre-paid mobile phone services, and virtual
private networks. In several countries, we resell mobile services which we
bundle with our existing voice services and bill on a single integrated bill.
Data, e-Business and Other Services. We currently offer dial-up and
dedicated Internet access and international private leased circuits in selected
target markets. By the end of 2000, we expect to offer these services in all the
countries where we operate. We also plan to complement these services with a
full range of value-added services including co-location, Web-hosting, messaging
and remote access. We will actively market these new services to our existing
customer base and to other European companies that view the Internet as critical
to their expansion plans. Specifically, we plan to extend our data-and
Web-hosting services to enable customers in developing market segments such as
application service providers to distribute applications from our data- and
Web-hosting centers.
We are a leading alternative provider of data, Internet access and voice
services in the Czech Republic, Hungary, Poland, Romania and Slovakia. The
majority of our revenue in the region is derived from Very Small Aperture
Terminals (VSATs), leased lines and Internet access services. We provide these
services on a diverse set of infrastructure assets including City Enterprise
Networks, which we operate in Prague and Budapest, VSATs deployed in the Czech
Republic, Hungary and Romania, a national microwave network in Hungary, and
leased and owned dark fiber, which we expect will connect our City Enterprise
Networks to our pan-European fiber optic network in the second quarter of 2000.
We have acquired several Internet service providers in the region. In the last
24 months, we have acquired two Internet service providers in Poland, two in the
Czech Republic, one in Hungary and one in Slovakia. By year-end 2000, we expect
their networks will be integrated with our network.
Broadband Services
We have developed a broad range of services that vary in technology
(synchronous digital hierarchy, dense wavelength division multiplexing, Internet
protocol), configuration (point-to-point, ring, virtual network services),
quality requirements, and geographical reach (domestic, pan-European,
transatlantic services). Service innovation and the ability to package and price
services flexibly allow us to effectively serve the needs of our customers.
Our broadband services have the following competitive advantages:
- Tailored solutions. We have significant experience in tailoring highly
customized contract terms and volume discounts that allow our customers
to select varying capacity, access, guaranteed availability and contract
terms.
- High capacity cross-border network facilities. Our dense wavelength
division multiplexing network provides high capacity cross-border network
facilities without requiring customers to invest in network
infrastructure or to be constrained by a narrow range of capacity
offerings.
- Diverse routing. Our fiber optic network's diverse, redundant routes are
designed to allow us to provide strong performance commitments. On most
routes, the fiber optic network has performed at over 99.9% availability.
- Cost-reduction through advanced technology. We have substantially reduced
our unit cost by increasing the available capacity on a fiber pair and
deploying advanced dense wavelength division multiplexing technology on
the majority of our routes.
- Uniform network architecture. The uniform technology of our international
managed transmission network allows us to provide a better quality and
reliability of service as well as uniformity of features throughout our
fiber optic network.
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Managed Bandwidth Services. We primarily provide large capacity
cross-border European and transatlantic services over an integrated, managed
network. Our network, based on dense wavelength division multiplexing and
synchronous digital hierarchy technology, provides digital transmission
capability upon which a broad range of advanced applications may be run. Our
network offers availability, flexibility, reliability and bandwidth speeds not
widely available for transport of telecommunications traffic across national
borders in Western Europe. Our network is designed to provide customers with a
wide variety of bandwidth speeds, ranging from a data transmission rate of 2
megabits per second to a data transmission rate of 2.5 gigabits per second.
Access to our network allows our customers to rapidly enter the markets they are
targeting while benefiting from its low unit cost.
We tailor our services to meet the diverse requirements of various customer
segments which require two classes of outsourcing levels:
- Our unprotected ring service provides diversely routed paths on which
customers deploy their own termination equipment and perform their own
protection schemes. These customers tend to be medium to large carriers
and operators that prefer to have control over the physical configuration
of their networks. Through its own termination equipment, and using our
network capacity, the customer has full control of its different traffic
flows. This gives the customer the opportunity to optimize its usage of
the available ring bandwidth based on the volume requirements of its
individual applications.
- Our protected services provide domestic and international self-healing
point-to-point links managed end-to-end by us. As a result, the customer
avoids having to provide for the redundancy of its traffic. We offer
customers service level agreements with service guarantees appropriate
for mission-critical applications. These guarantees cover on-time service
delivery and service availability.
Depending on the customer's bandwidth and application requirements, these
two classes of bandwidth services run on two underlying technologies: either
synchronous digital hierarchy technology over dense wavelength division
multiplexing (for speeds ranging from 2 megabits per second to 155 megabits per
second) or directly on dense wavelength division multiplexing (for speeds
ranging from 155 megabits per second to 2.5 gigabits per second, which is
expected to be upgraded to 10 gigabits per second in 2000).
Internet Protocol Transit Services. The current and future growth of the
Internet has a significant impact on the carrier business. In addition to
increasing the amount of data that is being transported across borders, the
Internet influences the transport technologies, the traffic patterns and the
segments that require carrier-like services.
Through our GTS Ebone brand name, we offer to Internet service providers,
value added network service providers, multimedia application providers and
Web-hosting companies a carrier-grade Internet access service. Ebone Global
Carrier Services provides general purpose, congestion free access to the
worldwide Internet and Ebone Europe Carrier Services provides low delay, high
performance access to the European domain of the worldwide Internet.
In addition, we are using optical Internet protocol technology to offer in
Europe real-time Internet protocol performance that is needed by Internet
protocol operators and by voice, fax and video over Internet protocol providers.
GTS Ebone Europe Services is the first of a series of future services to fully
benefit from the performance offered by optical Internet technology.
Wholesale Services. We offer competitively priced international switching
and transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, such as public
telecommunications companies, new operators, global alliances and regional
telephone companies, global alliances; regional telephone companies, mobile
carriers, Internet service providers and second carriers or resellers. Resales
of wholesale traffic will enable us to benefit from greater purchasing power
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and higher network utilization. Our wholesale services include the provision of
international call termination in three main areas:
- Off-net (third party carriers' carrier traffic)
- On-net (third party carriers' carrier traffic terminating on our network)
- Mobile (termination of fixed-to-mobile and mobile-to-fixed traffic)
Although we have contracts with our wholesale customers, these contracts
generally do not include minimum usage levels and our wholesale customers
generally maintain relationships with a number of telecommunications providers.
In several cases, we will also purchase minutes from our wholesale customers as
suppliers for termination of our off-network calls. We believe that success in
the wholesale business is predicated on high network quality at a low cost base.
As we continue to increase the capacity of our fiber optic network, we
anticipate that the decrease in our cost base will enable us to price these
services more competitively and therefore increase the volume of these services.
Sales and Marketing
Voice, Data and Internet Services
Managing directors in each country are responsible for sales and marketing
activities in that country, local business origination, local regulatory
compliance and licensing requirements, and the relationship with the local
telecommunications companies. The marketing organization in each country is
responsible for executing market initiatives, driving product development,
market research and analysis, and promotion and advertising.
Direct sales constitute our principal sales method in the majority of our
countries of operation. We support our direct sales effort by telemarketing and
telesales, and complement it to a lesser extent by independent sales
intermediaries and resellers. In certain markets we market some of our services
principally through sales agents. In addition, because we are increasingly
focusing on specific industry groups, such as financial institutions, hotels,
travel service organizations and transport companies, we have assigned
specialists to particular industries. We also have been providing intensive
training to enable our sales force to aggressively market e-business services.
The sales operation in each European country for our voice, data and
e-business services is responsible for originating and managing business in its
respective local market, and is staffed with employees who understand our
philosophy, services and systems and local languages and telecommunications
business practices. As of December 31, 1999, we had approximately 435 direct
sales people and 73 full-time equivalent telemarketing employees in Western
Europe for these services. We have 69 sales offices in 67 cities in the
following countries: The United Kingdom, Germany, The Netherlands, Sweden,
Norway, Denmark, Spain, France, Belgium, Italy, Ireland, Luxembourg and
Switzerland. As of December 31, 1999, we had approximately 125 direct sales
personnel in our Central European operations. We have 12 sales offices in 12
cities in the Czech Republic, Hungary, Poland, Romania and Slovakia.
Broadband Services
The term of a typical customer agreement for our broadband services
currently ranges from one to ten years. Throughout 1999, a number of existing
customers have converted from short- to long-term contracts, including 10-year
contracts in which revenues are recognized ratably over the life of the
contract. We expect that this trend will continue in 2000. In addition, we offer
ten year leases which require an up-front payment and produce recurring
operation and maintenance charges. Our customer agrees to purchase, and we agree
to provide, transmission services. In general our customer agrees to pay certain
nonrecurring charges up-front and recurring charges on an annual basis, payable
in twelve monthly installments. If a customer terminates a service order prior
to the end of the contract term, the customer is generally required to pay us a
cancellation charge equal to three months of service for each of the twelve
months remaining in the contract term. We typically guarantee transmission
services to a specified service level. If such levels are not met or we fail to
deliver service by the committed delivery date, the customer is eligible for a
credit against charges otherwise
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payable in respect of the relevant link. Our low cost basis is due to, among
other things, our network's use of advanced fiber optic cable and electronic
equipment permitting high capacity transmission over longer distances between
regeneration/amplifier facilities than legacy networks.
PRODUCT DEVELOPMENT
We seek to develop a wide range of premium quality and innovative
value-added services that both meet our customers' current demands and
anticipate their future requirements. Our strategy is to develop services that
will allow us to further penetrate our existing customer base and to attract new
customers with sophisticated international communications and e-business
requirements and to capitalize on the combined strength of our pan-European
broadband fiber optic network and sales and distribution channels.
We analyze the market by industry and customer size to address individual
customer needs both now and in the future. We develop our services to provide a
balanced portfolio that can address the needs of all of our target customers,
and, accordingly, our services range from standard telephony services to very
high bandwidth solutions for medium, large and multi-national corporations.
Additionally, our country managers tailor products to meet the needs of the
local customer base.
We focus on developing services in the fastest-growing segments of the
business telecommunications market, such as enhanced voice and data services,
corporate network services, Web- and application-hosting and e-business
services. Our development efforts will rely on both internal initiatives as well
as partnerships with third parties. The partnerships may take the form of joint
development, joint marketing and/or reselling agreements. We have already
entered into such agreements with leading providers of business-to-business
Internet messaging solutions for businesses, Internet service providers and
hosting companies. As a way to speed our entry into Web-based services, we are
currently exploring several partnerships of the same type with international
leaders in their respective fields.
OUR NETWORK INFRASTRUCTURE
Overview
Our network infrastructure consists of our pan-European network, our City
Enterprise Networks, our interest in the FLAG Atlantic-1 transatlantic fiber
optic cable project, our data-and Web-hosting centers and our operations system
and support functions. In Europe, our network has 58 carrier points of presence
in 30 cities, 18 Internet protocol nodes in 17 cities and 46 switches in 38
cities. The fiber optic network spans approximately 17,000 kilometers and 12
countries. In addition, five intra-city fiber networks are currently
operational.
Network Design
The design of our pan-European network is based on a layered architecture
which separates the physical layer, the optical layer, the transmission layer,
the switched layer and the data (Internet protocol) layer of our network with
standard interfaces and protocols in order to optimize design and operation and
provide flexibility for introducing new technologies, new applications and new
services.
Physical Layer. The physical layer of our pan-European fiber optic network
is based on a mesh of dark fiber routes interconnecting cities on our network
via at least two or three physically diverse paths for maximum resilience
against fiber or facilities failures.
Optical Layer. The optical layer of our pan-European fiber optic network
represents the core of our network and is based on dense wavelength division
multiplexing. This layer supports the provision of optical services directly to
customers at 2.5 gigabits per second and provides for the operation of multiple
synchronous digital hierarchy and/or Internet protocol systems to run
concurrently on a single fiber pair in a highly cost efficient manner. The
optical layer of our network is based on Ciena 40 wavelength systems with a
capacity of 100 gigabits per second on a fiber pair using dense wavelength
division multiplexing technology. Dense wavelength division multiplexing, or
DWDM, is a technology that allows transmission of multiple waves of light over a
single fiber optic strand, thereby increasing network capacity. By using current
dense wavelength
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division multiplexing technology, we are able to derive up to 40 wavelengths per
fiber optic pair, each wavelength with a capacity of 2.5 gigabits per second,
for a total capacity of 100 gigabits per second over a single fiber optic pair.
We will start to deploy on our core network routes, by the second quarter of
2000 and dependant upon traffic demand, a new generation of wavelength division
multiplexing systems scalable up to a minimum of 960 gigabits per second.
Transmission Layer. We are using synchronous digital hierarchy (SDH) time
division multiplexing equipment to consolidate, groom and add or drop low and
high order traffic coming from our various network components and to support the
provision of synchronous digital hierarchy leased line services to customers at
data transmission rates ranging from 2 megabits per second to 155 megabits per
second. The synchronous digital hierarchy layer of our pan-European fiber optic
network runs via dense wavelength division multiplexing channels in our network
with a multilayered architecture consisting of multiple synchronous digital
hierarchy rings optimized for different traffic characteristics.
Services using synchronous digital hierarchy technology may include local
access capacity between our network point of presence and the customer's point
of presence, depending on customer requirements. Services using dense wavelength
division multiplexing technology are delivered on a standard basis at our point
of presence. On a special project basis and shortly through our City Enterprise
Network, dense wavelength division multiplexing services may be expanded to the
customer's point of presence.
Internet Protocol Layer. Backbone links interconnect core pan-European
fiber optic network nodes at data transmission rates of 2.5 gigabits per second,
providing high quality, seamless Internet protocol connections throughout
Europe. Core network routers are deployed in a redundant configuration to ensure
maximum reliability. Since we design and operate directly both the optical
network layer and the Internet protocol layer, a further optimization of the
resulting network architecture is achieved. The Internet application implemented
on top of the gigabit Internet protocol platform places us among the prominent
Tier 1 Internet service providers in Europe, with direct connections to the
other major European Internet backbone providers. For a direct interconnection
with major U.S. Internet backbones, two network nodes are deployed in the United
States, with high speed connections to the European gigabit backbone. The high
performance core Internet protocol network is designed to support a flexible
introduction of Internet protocol based value added services at the edge of our
network.
Network Management. We control our pan-European fiber optic network through
our main network operations center, located in Brussels. The network operations
center can pinpoint potential service problems and can deal with service
rerouting, if required, much more effectively than in networks controlled by
multiple operators in different countries. Our advanced operational support
systems also allow us to manage 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. Our backup paths and management components enable us to recover from
individual failures at the optical, synchronous digital hierarchy and Internet
protocol layers. Our resilient approach provides for a high level of network
performance and reliability. As a result, we are able to enter into strong
performance commitments with our customers, and services on most routes of our
network have performed at or above 99.9% availability.
We own substantially all of our 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 us because they
reduce the burden of building large quantities of capacity before they can be
used. When we lease dark fiber, the infrastructure provider will generally be
responsible for maintaining the fiber optic cable. We have entered into
agreements with equipment vendors, infrastructure providers and other third
parties to supply and/or maintain the equipment for the network.
Switched Layer. The switched layer of the network consists of 46 voice
switches in 38 different cities. We currently have interconnect agreements in
eleven countries in Western Europe. We continually evaluate developments in
switching technology and products offered by other companies, and will add
different platforms which are complementary and beneficial to our service
network. We maintain our switches with up-to-date software and ensure their
compatibility with the large number of signaling systems in use in the European
and United States markets. Using least-cost routing technologies, each switch is
programmed to
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select the most cost-efficient route or carrier for the required destination. We
also employ dynamic compression equipment to improve utilization of our most
costly transmission lines.
Network Capacity
Our pan-European fiber optic network includes Ciena 40 dense wavelength
division multiplexing systems on a substantial majority of our routes. By
mid-2000, we expect that all our routes will be dense wavelength division
multiplexing based with a data transmission rate of at least 100 gigabits per
second per fiber pair. This 100 gigabits per second allows for synchronous
digital hierarchy and Internet protocol systems of 2.5 gigabits per second to be
installed only when required, thus providing for efficient management of capital
investment.
We will deploy on our core pan-European fiber optic network routes, during
2000 and dependent upon traffic demand, per core route a new generation of
wavelength division multiplexing systems scalable up to a minimum of 960
gigabits per second. These systems will be able to handle wavelengths at 2.5 and
10 gigabits per second allowing us to increase the amount of bandwidth carried
per fiber pair as well as to reduce interface prices in both wavelength division
multiplexing and client layer equipment. We plan to extend capacity in the core
portion of our network by developing an additional ring connecting London,
Paris, Amsterdam, Frankfurt, Dusseldorf and Brussels with cable duct
accommodating up to 144 fibers. We also plan to install transmission equipment
on a second, currently installed fiber pair on a number of routes in our network
to expand the transmission capacity of those routes.
Network Agreements
We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our pan-European fiber optic network. Our agreements for leases of
portions of our pan-European fiber optic 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 dates we provide.
The term of a lease agreement generally ranges from 10 to 18 years. An agreement
typically contains optical specification standards for the fiber and methods of
testing. We are allowed to use the cable for the transmission of messages and
other purposes, including increasing capacity. The infrastructure provider is
responsible for maintenance of the cable facilities. The infrastructure provider
may also provide space for the location of our equipment and related
maintenance. The agreements typically provide for termination by the parties
only for material breach, but allow the breaching party 90 days to cure the
breach. The agreements typically contain a transition period after termination
of the agreement to allow us to continue to serve our customers until we can
reach agreement with an alternative infrastructure provider. In certain areas of
our network where it is not possible to lease dark fiber (which we do not expect
to exceed more than 10 percent of our network), we have signed agreements or
letters of intent for the right to use managed bandwidth. The terms of these
agreements typically range from 10 to 25 years.
We are also deploying our pan-European fiber optic network along the
rights-of-way of a variety of alternative sources, including railways,
motorways, waterways, pipelines and utilities. We constantly evaluate multiple
alternative infrastructure suppliers in order to maximize our flexibility. Many
portions of our pan-European fiber optic network utilize long term rights-of-way
agreements with landowners.
City Enterprise Networks
We currently operate five City Enterprise Networks in Paris, Budapest,
Prague, Berlin and Geneva. We expect to have intracity fiber networks deployed
in the following eight additional cities by year end 2000: Frankfurt, London,
Madrid, Amsterdam, Stockholm, Milan, Zurich and Vienna. We are also evaluating
construction of City Enterprise Networks in the following additional cities:
Brussels, Munich, Barcelona, Stuttgart and Dusseldorf.
Each City Enterprise Network will be designed to connect, within a city,
its major telecommunications transmission centers, including points of presence
on our pan-European fiber optic network, our other points of presence in such
city, telehouses, Internet exchange points and, where economically feasible, our
existing customers' points of presence in that city.
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Relying on our own local infrastructure in key cities through our City
Enterprise Networks will allow us to reduce operating expenses (by avoiding or
reducing our payments to local access providers) and to enhance the robustness
of our network (through end-to-end network management and compatibility of the
City Enterprise Networks with our existing network). Such fully integrated
networks of intracity and intercity connectivity will, we believe, appeal to our
customers in need of managed bandwidth services. We also plan to introduce
wavelength services, also known as optical subnetworks, during the buildout of
our City Enterprise Networks. In addition, we plan to add fiber "subrings" to
the core of our City Enterprise Networks to extend our geographic reach. We will
also connect our data and Web-hosting centers to the initial core rings. By
offering co-location and data and Web-hosting capabilities as a bundled service
with our broadband network capabilities, we intend to attract Web-centric and
media-centric companies to our network without procuring expensive services from
local access providers.
Each City Enterprise Network will, subject to regulatory constraints and
market conditions, consist of up to 144 fiber pairs in underground ducts that we
will buy, lease or lay. We believe this high number of fiber pairs is justified
by the economies of the short distance environment of city centers and the
higher numbers of connection points to link customers to the network. We also
expect to install dense wavelength division multiplexing equipment to enhance
the efficiency of the City Enterprise Networks. Our intracity network rings in
Western Europe will eventually connect customers at data transmission rates of
up to 2.5 gigabits per second.
The Transatlantic Expansion of our Fiber Optic Network
We currently provide connectivity from Europe to the United States through
capacity leased from third parties. In January 1999, through a subsidiary, we
entered into an agreement with FLAG Telecom to establish a 50/50 joint venture
to build and operate the world's first transatlantic dual cable system designed
to carry voice, high speed data and video traffic at data transmission rates of
up to 2.4 terabits per second. The joint venture has announced that this high
capacity fiber optic link between Europe and the United States, which is called
FLAG Atlantic-1, is expected to begin offering unprotected services in the first
quarter of 2001 and fully protected services in the second quarter of 2001. The
joint venture plans to offer a direct link between the New York City area,
London and Paris.
On October 13, 1999, we announced that we had committed to purchase one
dedicated fiber pair on FLAG Atlantic-1. By owning this fiber pair, we will
acquire capacity of 70 gigabits per second upgradeable to a maximum capacity of
400 gigabits per second of fully protected capacity (or 800 gigabits per second
of unprotected capacity) from the New York City area directly to our network in
Europe. This supply of capacity will allow us to accommodate the growing volume
of transatlantic traffic at a competitive low cost base. We expect to commence
service on our fiber pair at the same time that FLAG Atlantic-1 begins offering
services. Finally, we have identified the need to be able to offer services
beyond the New York City area, our current point of presence in the United
States. We therefore expect to lease substantial network capacity connecting
several key U.S. markets by the end of 2000.
Data- and Web-Hosting Centers
Our strategy is to expand our Internet services portfolio by deploying data
and Web-hosting centers on our network near key public Internet exchange points.
This will establish the necessary facilities to undertake data and Web-hosting
services and facilitate the provision of e-business solutions. These centers
will allow us to meet the end-to-end needs of the providers of Web and
media-centric content and applications who are leading the rapid growth of the
Internet and multimedia related segments of our target markets in Europe. Thus,
in addition to carrying these customers' international traffic on our network,
we will be able to host and distribute their applications, support their
e-business activities and provide peering arrangements.
By mid-2000, we expect to establish data and Web-hosting capability in
London, Frankfurt, Paris and Amsterdam. We intend to construct, or arrange for
capacity at, up to nine additional data and Web-hosting centers during the next
two years. These facilities will be specifically designed to offer high speed
access to our network and provide co-location, dedicated and shared data- and
Web-hosting services.
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We will offer high performance distribution of bandwidth-intensive
multimedia applications and regional content through our extensive peering
arrangements. Our networked data- and Web-hosting centers are a key component of
the infrastructure required to serve the future needs of our customer segments.
Additional benefits of the data and Web-hosting centers include:
- Providing Internet service providers with telehousing and managed
services for their Internet protocol routers and servers;
- Providing a NT or UNIX based server, allowing Internet service providers
and Web-centric companies to take full advantage of our expertise in
traffic and server management; and
- Providing shared server management, offering an entry solution to
emerging Internet service providers and Web-centric companies at a
reasonable cost.
Increasing Internet demand is driving Internet service providers to
co-locate their servers and Internet protocol routers closer to their customers,
thereby improving their network reach and performance. Data-and Web-hosting
centers directly connecting Web servers to an Internet protocol backbone remove
the bottlenecks associated with traditional hosting facilities. In addition,
increasing demand for Web content is driving Web-centric companies to locate
servers at those facilities to ensure superior Internet connectivity. Our data-
and Web-hosting centers will offer seamless and scalable Internet connectivity
for emerging Internet service providers and Web-centric companies, offering a
direct connection to our pan-European seamless network at bandwidths of
initially 2.5 gigabits per second, with upgrades up to 10 gigabits per second.
We believe that offering data- and Web-hosting services will provide
opportunities to cross-sell services on our fiber optic network, thereby
improving customer retention and enabling us to address new target segments.
Operations, Systems and Support
Our operations, systems and support functions consist of two main areas:
customer care and billing and network operating services and systems. In
performing our operations functions, we work with particular companies and
sub-contractors that we believe are committed to maintaining our
industry-leading service offerings.
We seek to provide premium customer care throughout our business. Our
customer care and billing system provides us with extensive customer information
which is critical to customer retention and account growth.
We have, or are in the process of, integrating the various legacy operating
and support systems which we have inherited through our recent acquisitions in
order to form a single, uniform, centralized billing platform that will enable
us to execute our business plan. This platform is being installed in two phases.
The first phase was completed in December 1999 and completion of the second
phase is expected in June 2000.
OUR OPERATIONS IN RUSSIA AND OTHER COUNTRIES OF THE CIS -- GOLDEN TELECOM
Through our majority owned subsidiary, Golden Telecom, Inc., we provide
telecommunications services to business customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the CIS. The services that Golden
Telecom provides include international long distance services, domestic long
distance services, cellular services, high speed data transmission, Internet
access and local access services. Dedicated and leased capacity supplements our
own infrastructure, allowing us to bypass the severely congested and poorly
maintained local, domestic and long distance circuits of the Russian and
Ukrainian carriers.
Golden Telecom seeks to integrate and co-market the service offerings of
its subsidiaries, utilizing TeleRoss as the long distance and local access
provider as well as the data communications and Internet access network for
business applications and on-line services, Sovintel as the international
gateway, and Golden Telecom's Mobile Services for additional local access. This
integrated marketing approach enables Golden Telecom to provide comprehensive
telecommunications solutions to multinational corporations operating throughout
Russia and other independent countries of the CIS. In addition, in February
2000,
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Golden Telecom entered into a fifteen-year lease with Sonera Corporation for
broadband fiber optic capacity from Moscow to Stockholm. Golden expects this
link will be operational during the first quarter of 2000. This link will
provide Golden Telecom and its customers with access to complementary broadband
and data networks in Europe and beyond, including our network.
COMPETITION
The ongoing liberalization of the European telecommunications market has
coincided with technological innovation to create an increasingly competitive
market, characterized by still dominant incumbent telecommunications operators
which own and operate fully built networks and infrastructure, as well as an
increasing number of new market entrants.
The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. We anticipate that competition will continue to intensify
as the use of the Internet grows. The tremendous growth and potential market
size of these markets, particularly the e-business services market, has
attracted many new start-ups as well as established businesses from different
industries. We compete primarily on the basis of the pan-European coverage of
our network, the range and quality of services offered, customer service and
price. Competitors may force us to lower our prices or modify our service
offerings to remain competitive.
In each of our current markets where we provide voice, data and Internet
services, we compete primarily with the national public telecommunications
providers. Other competitors of Business Services include private multinational
consortia as well as microwave and satellite carriers, mobile wireless
telecommunications providers, cable television companies, utilities and
competing local telecommunications providers and other medium-sized carriers and
resellers in Europe. Some of our competitors have established their own switch
sites and operate their own networks. Competitors in this segment include MCI
WorldCom, COLT, Viatel and RSL, which compete in multiple countries, and
country-specific competitors such as Energis (UK), Arcor (Germany), Telfort (The
Netherlands), Retevision (Spain), Infostrada (Italy) and Cegetel (France). These
providers are generally more entrepreneurial than the public telecommunications
operators and other dominant providers and sometimes bring experience from more
mature markets. Like us, these providers often target small, medium and
large-sized business customers or other market niches. As we roll-out our suite
of services supporting e-business activities of potential customers, we also
expect to enlarge the number of competitors we will be facing. These will
include a number of international companies as well as country-specific
competitors.
For our broadband customers, we compete with various telecommunications
companies, including MCI WorldCom, Inc., Viatel, Inc., KPN Qwest B.V., COLT
Telecom Group plc, Level 3 Communications, Inc., Carrier1 International S.A.,
Deutsche Telekom AG, France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc. Some of these entities have announced plans to
construct, have begun to construct or are operating high bandwidth fiber optic
networks across various European countries and in several European metropolitan
markets and in some cases, provide transatlantic connectivity, in competition
with our network and our planned City Enterprise Networks.
HISTORICAL OVERVIEW
We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated in Delaware in 1993 and changed our name to Global
TeleSystems Group, Inc. in February 1995. Our principal business office is
located at 4121 Wilson Boulevard, 8th floor, Arlington, Virginia 22203, United
States, and our telephone number is (703) 236-3100.
From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and
Central Europe and (2) establishing and developing Global TeleSystems Europe
B.V. ("GTS Europe B.V"), formerly known as Hermes Europe Railtel B.V., our
subsidiary which deployed the first high speed fiber optic network across
Western Europe and provides a range of bandwidth and internet protocol services
to traditional and emerging communications companies.
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After our initial public offering in February 1998, we adapted our strategy
to address the effects of the economic crisis in emerging markets, particularly
Russia, the emergence of the Internet Protocol as a widely accepted transport
protocol and the deregulation of the provision of telecommunications services to
end-users in Western Europe. We sought to build on the success of our
pan-European fiber optic network by developing a plan to provide
telecommunications services directly to businesses and other end-users.
Accordingly, in late 1998 and in 1999, we acquired four companies that provided
such services to businesses and other high usage customers in Western Europe:
GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), NetSource, Omnicom and
InTouch. In addition, in order to position ourselves as a Tier-1 Internet
service provider in Europe and target the higher growth European Internet
market, we acquired Ebone.
The former Ebone, GTS (Europe) Ltd., NetSource, Omnicom and InTouch
businesses are included within our operations. These acquisitions have provided
us with a significant business customer base and sales and distribution network
across Western Europe, as well as switches, routers and other infrastructure,
and, combined with our Central European operations, position us to offer an
expanded service portfolio of data, Internet and other business applications to
our business customers.
On September 30, 1999, we contributed all of our Russian and CIS operations
to a newly formed subsidiary, Golden Telecom, Inc., which effected an initial
public offering of its common stock on October 5, 1999. We currently own
approximately 62.6% of the common stock of Golden Telecom.
NETCOM ACQUISITION
On February 18, 2000, GTS completed its acquisition of Netcom Internet
Limited ("Netcom") for purchase consideration of approximately $91.5 million in
the form of the issuance of our common stock. Netcom is an Internet service
provider in the United Kingdom, which provides dedicated and dial-up Internet
access, Web-hosting, server co-location, Internet protocol virtual private
networks and other services. Netcom currently serves over 3,600 Web-hosting
customers, approximately 600 dedicated and high-speed Internet access customers
and 14,000 subscription-based Internet dial-up Internet access customers. Netcom
had approximately $12 million in revenues in calendar year 1999.
LICENSES AND REGULATORY ISSUES
OVERVIEW OF EU TELECOMMUNICATIONS LAW AND POLICY
The EU has progressively liberalized its telecommunications markets over
the past decade. In 1990, the EU adopted two measures: the Open Network
Provision Framework Directive and the Services Directive. These two directives
set forth basic rules for access to public telephone networks and required the
liberalization of the provision of all telecommunications services within the EU
except for certain "reserved services", including voice telephony.
In 1992, the EU adopted the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and
end-users at cost-oriented prices, and to establish cost accounting systems for
these products by the end of 1993. Even though most EU member states have
established regulatory frameworks requiring incumbent telecommunications
operators to lease lines to competitors and end-users, we believe that, in some
EU member states, such lines are not yet being offered at cost-orientated
prices.
In 1996, the EU adopted the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the
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date by which all EU member states must remove all remaining restrictions on the
provision of telecommunications services, including voice telephony. A number of
EU member states were granted a delay in implementing the Full Competition
Directive. The only EU member state that is still subject to the derogation is
Greece, whose derogation expires December 31, 2000.
Subject to the foregoing, each EU member state is obliged, under EU law, to
enforce the terms of the Full Competition Directive in such a manner so as to
ensure that its aim and purpose is carried out. Enforceability of the Full
Competition Directive may be challenged at the EU level or at the EU member
state level. In practice, implementation and enforcement of the directive has
been and may also continue to be delayed on a country by country basis.
In June 1997, the EU adopted a directive that governs the manner in which
public network operators and service providers interconnect with the incumbent
telecommunications operators' public networks. Among other things, this
directive requires EU member states to ensure that incumbent telecommunications
operators with significant market power should provide interconnection on the
basis of cost-oriented charges.
In April 1997, the EU 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 are be required
to be dealt with in a timely fashion. The number of licenses may be restricted
only to the extent required to ensure the efficient use of scarce resources,
such as radio frequencies or numbers.
In February 1998, the EU adopted a directive on the application of the Open
Network Provision to voice telephony and on universal service.
In September 1998, the EU adopted amendments to its June 1997 directive on
interconnection mandating the introduction of number portability and carrier
preselection (or equal access) by incumbent telecommunications operators with
significant market power by January 1, 2000. In December 1999, the EU Commission
granted the UK a deferment of its obligation to introduce carrier preselection
until April 1, 2000.
In October 1999, the EU Commission opened an investigation into the
condition of the provisioning and pricing of leased lines. The aim of the
investigation is to establish whether current telephone company practices
infringe EU competition rules.
We believe that the adoption of the Full Competition Directive and the
various related directives adopted by the EU have resulted in the removal of
most regulatory barriers to the establishment and operation of
telecommunications infrastructure in the countries of the EU where we currently
operate.
However, some EU member states are still in the initial stages of
liberalizing their telecommunications markets and establishing competitive
regulatory structures suitable for a competitive environment. For example, some
EU member states have only recently established a national regulatory authority.
In addition, the implementation, interpretation and enforcement of EU directives
differs significantly among the EU member states. While some EU member states
have embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintained
various restrictions on full competition.
Member states of the EU are bound as a matter of international law to
comply with certain multilateral trade rules and regulations. On February 15,
1997, over 60 members of the World Trade Organization committed to open their
telecommunications markets for basic telecommunications services to foreign
competition and ownership and to adopt regulatory measures designed to protect
foreign telecommunications providers against anticompetitive behavior by
domestic incumbent telecommunications operators. For most parties, these
commitments took effect on February 5, 1998 (including the EU member states). We
believe that this Agreement will contribute to the creation of a more
competitive environment internationally. Specifically, it will result in
downward pressure on call termination charges outside the EU. For a discussion
of the regulatory risks involved, see "-- Certain Considerations Generally
Applicable to Our Company -- Delays in regulatory liberalization in EU member
states could adversely affect our service offerings in those countries."
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As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services and deploy our network. Local laws and regulations and the
interpretation of such laws and regulations differ significantly among the
jurisdictions in which we operate. For a discussion of the regulatory risks we
face, see "-- Certain Considerations Generally Applicable to Our
Company -- Delays in liberalization of the EU telecommunications market may
adversely affect execution of our business strategy."
NETWORK AND SERVICE LICENSES
We require licenses, authorizations or registrations in almost all
countries to operate our network and provide our service. Licenses,
authorizations or registrations have been obtained in Austria, Belgium, Czech
Republic, Finland, France, Germany, Italy, Luxembourg, The Netherlands, Spain,
Sweden, Switzerland, the United Kingdom and the United States. No license or
authorization is required to operate our network in Denmark. We intend to file
applications in other countries in anticipation of service launch in accordance
with our network roll-out plan.
A summary discussion of the regulatory framework in certain countries where
we have developed and are developing our 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.
As a result of our acquisition of a number of existing telecommunications
operators, we hold licenses through several of our subsidiary companies. We are
in the process of reviewing our current licenses with a view to achieving the
maximum benefit from these licenses, and reorganization of some of our
operations may result. The following description presents a consolidated view of
our licensing position and does not reflect the position of any single company
within our group.
Austria. The Austrian telecommunications market was fully liberalized in
January 1998. We have been granted concessions to build and operate our network,
including City Enterprise Networks, and provide our services throughout Austria.
Belgium. We have been granted licenses to build and operate our network and
provide managed bandwidth and related services in a zone which includes
approximately 92 population centers in Belgium. Extension of our network,
including deploying City Enterprise Networks, requires previous notification to
the Belgian regulatory authority in order to amend the geographical scope of our
licenses. We have also been granted licenses to provide telephony services
throughout Belgium. The licenses are valid for 15 years from the date of issue.
Czech Republic. We were granted a license for the provision of our
international services on October 6, 1999. The license is valid for 10 years.
Denmark. The Danish telecommunications market was fully liberalized in July
1997. Under Danish law, we do not require a telecommunications license to build
and operate our network in Denmark. In addition, we are registered as a provider
of public telecommunications services.
Finland. The Finnish telecommunications market was fully liberalized in
June 1997. We are registered to build and operate our international network and
provide international services.
France. The French telecommunications market was fully liberalized in
January 1998. We have licenses to build and operate our network, including City
Enterprises Networks, and provide managed bandwidth and related services in
France. We also have licenses that permit us to provide public telephony
services in France. In addition, we have been granted one of seven available one
digit carrier selection code by the French regulatory authority. In exchange for
the grant of the one digit code, certain network deployment obligations have
been imposed on us. We are now in the process of building out a national network
in France. The licenses are valid for a 15 year period from the date of issue.
Our joint venture Flag Atlantic-1 has applied for a separate license that will
allow it to build and operate its network in France. See "Legal Proceedings."
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Germany. The German telecommunications market was fully liberalized in
August 1996. We have licenses to build and operate our network, including City
Enterprise Networks, and provide managed bandwidth and related services in
Germany. We also hold licenses to provide public telephony services in Germany.
Ireland. The Irish telecommunications market was fully liberalized in
December 1998. We have been granted a license to build and operate our network
and provide our services in Ireland. The license is valid for 15 years from the
date of issue.
Italy. Although in the past Italy has been dilatory in implementing EC
liberalization measures, full liberalization occurred in January 1998. We have
been granted licenses to build and operate our network, including City
Enterprise Networks, and provide our services throughout Italy. The licenses are
valid for 15 years from the date of issue.
Luxembourg. The telecommunications market of Luxembourg was fully
liberalized in July 1998. We have licenses to build and operate our network and
provide managed bandwidth and public telephony services in Luxembourg. The
licenses are valid for 30 years from the date of issue.
The Netherlands. The Dutch telecommunications market was fully liberalized
in July 1997. A new Telecommunications Act came into force in December 1998. The
new act confirmed the full liberalization of the Dutch telecommunications
market. We have registered to build and operate our network, including City
Enterprise Networks, and provide our services throughout the Netherlands.
Norway. Although Norway is not a member state of the EU, the Norwegian
telecommunications market is considered to be open to competition. We have
registered to build and operate our network and provide our services in Norway.
Spain. The Spanish telecommunications market was fully liberalized in
December 1998. We have licenses to build and operate our network, including City
Enterprise Networks, and provide managed bandwidth and related services in
Spain. We also hold licenses that allow us to provide public telephony services
in Madrid, Barcelona, Bilbao, Gerona and Valencia. The licenses are valid for 20
years from the date of issue and can be renewed for a maximum of 50 years.
Sweden. The Swedish telecommunications market was full liberalized in 1993.
A new Telecommunications Act was adopted in 1997 to reinforce the powers of the
national regulatory authority, to ensure conformity with EU Directives and to
supplement the pre-existing licensing regime with a general authorization regime
for certain services. Our registrations with the Swedish national regulatory
authorities allow us to build and operate our network, including City Enterprise
Networks, and provide our services throughout Sweden.
Switzerland. A new Swiss Telecommunications Law entered into force in
January 1998. Although Switzerland is not a member state of the EU, the law
largely mirrors the EU telecommunications liberalization directives. From that
date, the existing voice telephony monopoly was abolished and the provision of
competing services fully liberalized. We have a concession to build and operate
our network, including City Enterprise Networks, and provide managed bandwidth
and related services in Switzerland. We also have a license that permits us to
provide public telephony services in Switzerland. The licenses are valid for 10
years from the date of issue.
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 regulatory authority, to create a competitive
marketplace from which detailed regulation could eventually be withdrawn. The
United Kingdom telecommunications market is liberalized beyond the requirements
of the Full Competition Directive, and most restrictions on competition have
been removed in practice as well as in law. As noted above, the UK has been
granted a deferment of its obligation to introduce carrier preselection until
April 1, 2000. OFTEL is currently in consultation with British
Telecommunications and other interested parties on plans for the sharing of
costs of a temporary carrier preselection solution pending development of a
permanent solution to be phased in by 2001.
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We have been granted licenses to build and operate our network, including
City Enterprise Networks, and provide our services throughout the United
Kingdom. Our joint venture FLAG Atlantic Limited has received a license that
will allow it to build and operate its network in the United Kingdom. The
license is valid for 25 years from the date of issue.
United States. The Federal Communications Commission ("FCC") granted us a
license, as amended, pursuant to Section 214 of the Communications Act of 1934
authorizing us to provide limited global facilities-based and global resale
services, (subject to the terms and conditions imposed by the law and
authorization). The Section 214 authorization does not allow us to offer U.S.
services between the United States and Hungary, Poland, the Czech Republic,
Romania, Monaco, Russia, Ukraine, Kazakhstan, Uzbekistan, Azerbaijan, China and
India. We subsequently filed an application with the FCC for a Section 214
authorization to provide international facilities-based and resale service
between the United States and the latter countries. The FCC issued a public
notice stating that the portion of the application relating to service between
the United States and Russia was removed from stream line processing, and that
the remainder of the application was granted.
We also hold a license issued by the FCC Section 214 of the Communications
Act of 1934. Subject to certain restrictions, the Section 214 authorization
permits us to originate and terminate facilities-based and resold private line
and switched telecommunications services in the United States, including among
other things, reselling international private lines interconnected at both ends
to the public switched telephone network on the United States-United Kingdom
route for the provision of switched services. Under the FCC's rules, such
interconnected private lines may at present be used only for switched traffic
that either:
(1) originates in the United Kingdom and terminates in the United
States or vice versa;
(2) originates in the United States, the United Kingdom, Canada, New
Zealand, Australia, Sweden, The Netherlands, France, Germany, Belgium,
Denmark, Norway, Luxembourg, Austria, Switzerland, Japan, Italy, Ireland
and Hong Kong and terminates in another of those countries, having been
routed through the third country via private lines; or
(3) uses the interconnected international private lines to reach a
switching hub.
This third routing arrangement, termed "switched hubbing," may involve
several configurations:
(1) traffic originates in the United States, is carried via private
lines to the United Kingdom and is routed through a switch to points beyond
the United Kingdom;
(2) traffic originates in the United Kingdom, is carried over private
lines to the United States, and is routed through a switch to points beyond
the United States; or
(3) traffic originates in points beyond the United States or the
United Kingdom and is routed via a United States or United Kingdom switch
to terminate in another country (provided that no traffic originates or
terminates in a country that we are not authorized to serve). With respect
to switched hubbing traffic originated or terminated on the GTS (Europe)
Ltd. Network at switches in EU member states other than the United Kingdom,
domestic laws of such EU member states require that the leased lines be
interconnected with the public switched telephone network at one end only.
In addition, the FCC has not made any pronouncement about the legality of
switched hubbing arrangements where the carrier in the destination country
does not consent to receiving traffic indirectly from the originating
country and does not realize the traffic it receives from the "hub" country
is actually originating from a different country.
Under the Act Relating to the Landing and Operation of Submarine Cables in
the United States of May 27, 1921, all submarine cable systems that connect to
the United States must obtain a landing license granted by the President of the
United States. Presidential authority for such licenses has been delegated to
the FCC. Our joint venture FLAG Atlantic-1 has obtained its license to land and
operate a private fiber optic submarine cable extending between the United
States and the United Kingdom and France.
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We do not require any authorization to provide state-to-state services
within the United States. We expect to be able to obtain any license that may be
required to be issued by a state regulatory commission to provide services
between points within a single state.
We intend to file additional applications or license extensions authorizing
us to provide our services and deploy and operate our network in anticipation of
service launch in accordance with our network roll-out plan. With the exception
of countries that are members of the EU and whose laws must comply with EU
Directives, many countries have not liberalized their telecommunications sector.
We cannot assure you that they will do so in a timely manner or at all. In
addition, the terms and conditions of our licenses, authorizations or
registrations may limit or otherwise affect our scope of operations. We cannot
assure you that (1) we will be able to obtain, maintain or renew licenses,
authorizations or registrations to provide the services we currently provide and
plan to provide, (2) such licenses, authorizations or registrations will be
issued or renewed on terms or with fees that are commercially viable, or (3) the
licenses, authorizations or registrations required in the future can be obtained
by us. 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 us.
Internet Protocol Transport
At present there is no general consensus on the regulatory position of
Internet protocol transport services in Europe and the United States. Currently,
Internet protocol transport services are generally treated as unregulated or, in
some European countries, as a telecommunications service subject to minimal
regulatory requirements. We cannot assure you that Internet protocol transport
services will not be regulated in the future in Europe or the United States. We
will continue to monitor regulatory developments that may affect Internet
protocol transport operations.
Data- and Web-Hosting
The laws relating to the regulation and liability of companies providing
data- and Web-hosting services in relation to the information carried or
disseminated through their services are in the process of development in Europe.
In England, for example, a recent court decision held an Internet service
provider liable for certain allegedly defamatory content carried through its
network under factual circumstance in which the Internet service provider had
been notified by the complainant about the message which the Internet service
provider had failed to delete when asked to do so by the complainant. Decisions,
laws regulation and content liability may significantly affect the services we
intend to offer. We will continue to monitor the developments that may affect
these services.
GOLDEN TELECOM
Telecommunications operators in Russia are regulated by the Russian
Ministry of Communications, and its subordinated bodies, Gossvyaznadzor and the
State Radio Frequency Commission. As a practical matter, these
telecommunications authorities generally regulate telecommunications operators
within the scope of their authority to issue licenses and permits and conduct
periodical compliance inspections.
The Communications Law sets out a 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 and administrative regulations implement this institutional
framework.
The Communications Ministry issues licenses to provide telecommunications
services on the basis of a decision by its subordinated body, the Licensing
Commission. The Communications Ministry has generally issued no new licensing
regulations since the enactment of the Communications Law, and in practice the
Communications Ministry continues to issue licenses based on general regulations
applicable to any licensing activity in Russia, except to the extent such
regulations have been modified by licensing regulations with
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respect to cellular services. According to the general licensing regulations,
licenses for rendering telecommunications services may be issued and renewed for
periods which range from 3 to 10 years and several different licenses may be
issued to one person. Under the subsequently adopted cellular licensing
regulations, licenses for rendering cellular services may be issued only on the
basis of a competitive tender for longer periods ranging from five to 15 years.
Once the licenses are received, the licensee is required to register its right
to hold and operate under the license with Gossvyaznadzor, the national
authority responsible for monitoring compliance with regulatory and technical
norms. Renewals may be obtained upon application to the Communications Ministry
and verification by appropriate government authorities that the licensee has
conducted its activities in accordance with the licenses. Officials of the
Communications Ministry have broad discretion with respect to both the issuance
and renewal procedures. The Communications Law and general licensing regulations
provide that a license may not be transferred or assigned to another holder.
Cellular service licenses obtained through competitive tender are freely
assignable.
Regional authorities also exercise influence in the issuance of AMPS
licenses, partly 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 in Moscow and St. Petersburg and other
administrative regions within Russia, exercise significant control over their
respective local telephone networks and may therefore affect the licensing
process.
Telecommunications laws and regulations in Ukraine, while relatively less
developed and less comprehensive, are similar in many respects to those of
Russia, but are subject to greater risks and uncertainties. Regulations
currently prohibit foreign entities from directly owning more than 49% of any
telecommunications operating company. Our Ukrainian joint venture agreements
provide Golden Telecom 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 (Ukraine) has paid a one-time $2.9
million frequency license fee on Golden Telecom (Ukraine)'s license. We cannot
assure you that additional fees will not be imposed in the future upon the
reissuance and/or renewal of such license or for the continued use of assigned
frequencies, nor that the increase in fees will not be implemented again.
Ukrainian international operators are also required to make yearly investments
into PTSN as a condition of their international licenses. For a comprehensive
discussion of these regulatory risks, see also "Certain Considerations Generally
Applicable to Our Company -- Considerations Related to Golden Telecom -- Turmoil
in Russia and the CIS creates significant uncertainty for Golden Telecom's
operations."
EMPLOYEES
On December 31, 1999, we had approximately 2,900 employees, excluding
approximately 1,800 persons employed by Golden Telecom. We believe our relations
with our employees are good.
CERTAIN CONSIDERATIONS GENERALLY APPLICABLE TO OUR COMPANY
Competitors with greater resources may adversely affect our revenues
The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. The ongoing liberalization of the European
telecommunications market has coincided with technological innovation to create
an increasingly competitive market, characterized by still-dominant incumbent
telecommunications operators as well as an increasing number of new market
entrants. We anticipate that competition will continue to intensify as the use
of the Internet grows. The tremendous growth and potential market size of these
markets, particularly the IP services market, has attracted many new start-ups
as well as established businesses from different industries. We compete
primarily on the basis of the pan-European coverage of our network, the range
and quality of services offered, customer service and price. Competitors have
forced us, and may continue to force us, to lower our prices or modify our
service offerings to remain competitive. We cannot assure you that we will be
able to effectively market our expanded service offerings, keep prices at a
profitable level or attract and
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retain customers. Specifically, prices for domestic and international long
distance calls have decreased substantially over the last few years in most of
our current and potential markets. We anticipate continued pricing reductions by
our competitors, and, accordingly, expect the prices for our bandwidth services
and voice services to continue to decrease for the foreseeable future. Many
competitors have established customer bases and extensive brand name recognition
and have greater financial, management and other resources.
Competition for customers of our voice, data and Internet services
Competitors for these customers include large established national
carriers, alliances among telecommunications companies, competitors that own
equipment and networks, companies that purchase and resell the services of other
carriers, Internet service providers and other providers of bundled services. We
may also face competition from cable television companies, wireless telephone
companies, microwave carriers and satellite companies. Many of these competitors
have established customer bases and extensive brand name recognition and have
greater financial, management and other resources. Our medium-to-large-sized
business and governmental agency customers may also be reluctant to entrust
their telecommunications needs to what they perceive to be a relatively new and
unproven operator.
In the area of e-business services, our current and prospective competitors
include the public telephone operators, other national, regional and local
Internet service providers, long distance and local exchange telecommunications
companies, cable television, direct broadcast satellite, wireless communications
providers and on-line service providers. In addition, several major European
cable companies have announced that they are exploring the possibility of
offering Internet connectivity, relying on innovative technologies to upgrade
their networks. Several announcements have also recently been made by other
alternative service companies approaching the Internet connectivity market with
various wireless terrestrial and satellite-based service technologies.
Recently, there have also been several announcements regarding the planned
deployment of broadband services for high speed Internet access by
telecommunications companies, including KPN Qwest B.V. and others. These
services would include new technologies such as digital subscriber lines. These
providers have initially targeted the residential consumer. However, it is
likely that their target markets will expand to encompass business customers,
which is our target market. This expansion could adversely affect the pricing of
our service offerings. Moreover, a number of free ISP services have recently
been introduced and some Internet service providers are offering free personal
computers to their subscribers. These trends could have a material adverse
effect on our business, financial condition and results of operations.
Competition for customers of our broadband services
With respect to our broadband services, we compete with various
telecommunications companies, including MCI WorldCom, Inc., Viatel, Inc., KPN
Qwest B.V., COLT Telecom Group plc, Level 3 Communications, Inc., Carrier1
International S.A., Deutsche Telekom AG, France Telecom S.A., Global Crossing
Ltd. and British Telecommunications plc. Some of these entities have announced
plans to construct, have begun to construct or are already operating high
bandwidth fiber optic networks across various European countries and in several
European metropolitan markets and in some cases, provide transatlantic
connectivity. These existing and future networks do or will compete with our
network and our planned intracity fiber networks.
OUR COMPETITIVE POSITION AND ABILITY TO PROVIDE SERVICES MAY BE COMPROMISED BY
OUR DEPENDENCE ON OTHER TELECOMMUNICATIONS SERVICE PROVIDERS
We need to enter into interconnection agreements with large established
national carriers operating in our target markets. We also rely on local service
providers to provide local access services to enable our customers to link to
our fiber optic network. We may also need to enter into agreements which permit
us to place our equipment at the facilities of such third parties and/or lease
telecommunications transport capacity from such third parties. Failure to enter
into interconnection and other agreements which provide satisfactory pricing and
other terms could affect our ability to compete in a targeted market. In
addition, we have experienced delays
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in provisioning of local access services to enable our customers to connect to
our network. We continue to experience provisioning delays that will delay our
ability to provide services contracted for by the customer and therefore defer
our recognition of revenue to later periods.
WE MAY EXPERIENCE A POTENTIAL LACK OF CUSTOMER DEMAND
Although we have been delivering services to a number of customers and have
experienced demand for services in the past, we cannot assure you that customer
demand for services over our network will continue to grow. Further, we cannot
assure you that there will be enough customer demand to realize the anticipated
cash flow, operating efficiencies and cost benefits of our network.
EUROPEAN USE OF THE INTERNET, ELECTRONIC COMMERCE, DATA TRANSMISSION SERVICES,
MULTIMEDIA AND OTHER BANDWIDTH INTENSIVE APPLICATIONS MAY NOT INCREASE AS WE
EXPECT
Our business plan assumes that European use of the Internet, electronic
commerce, data transmission services, multimedia and other bandwidth-intensive
applications will increase substantially in the next few years, in a manner
similar to the increased use in the United States market in the past few years.
If the use of data transmission services, multimedia and bandwidth-intensive
applications in Europe does not increase as we anticipate, demand for many of
our value added services, including managed bandwidth services, Internet
protocol transit services and data- and Web-hosting services, will be lower than
we currently anticipate. Reduced demand for our services would have a negative
effect on our pricing power and our financial condition.
SUBSTANTIAL ADDITIONAL CAPITAL IS REQUIRED TO EXPAND OUR NETWORK
We will require significant amounts of capital to develop and expand our
network. We expect to incur between $900 million and $950 million through 2000
in additional capital expenditures, including capital lease obligations, to
expand the reach and capacity of our network, construct intracity fiber
networks, deploy data-and Web-hosting centers in our target metropolitan
markets, expand our e-business services offering, and purchase equipment to
upgrade the capacity of the dedicated fiber pair we have purchased on the FLAG
Atlantic-1 transatlantic fiber link. However, the actual amount and timing of
our future capital requirements may differ from our estimates. Thus, additional
financing may be needed to expand the reach and capacity of our network, to
construct our intracity fiber networks, deploy data- and Web-hosting centers,
fund initiatives related to our e-business services offering, to purchase
equipment to upgrade the capacity of the dedicated fiber pair we have purchased
on the FLAG Atlantic-1 transatlantic fiber link and for general working capital
purposes. We cannot assure you that such additional financing will be available
on terms acceptable to us or at all. If we fail to obtain this financing, we
might have to delay or abandon our plans for expanding the reach and capacity of
our network, constructing our intracity fiber networks, deploying data- and
Web-hosting centers, expanding our e-business services offering, and purchasing
equipment to upgrade the capacity of the dedicated fiber pair that we have
purchased on the FLAG Atlantic-1 transatlantic fiber link. Delaying or
abandoning these plans could have a material adverse effect on our financial
condition.
OUR ACTUAL COSTS AND REVENUES MAY VARY FROM WHAT WE EXPECT THEM TO BE
Our revenues and the costs of expanding the reach and capacity of our
network, constructing our intracity fiber networks, deploying data- and
Web-hosting centers, expanding our e-business services offering, purchasing
equipment to upgrade the transmission capacity of the dedicated fiber pair we
have purchased on the FLAG Atlantic-1 transatlantic fiber link and operating our
business depend upon a variety of factors, including our ability to:
- Efficiently manage the enhancement of our network and operations;
- Access markets and attract a sufficient number of customers;
- Negotiate favorable contracts with suppliers;
- Obtain additional licenses, regulatory approvals, rights-of-way and
infrastructure contracts;
- Provide and develop services to which our customers will subscribe; and
- Effectively manage our billing and information systems.
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Our revenues and costs are also dependent upon factors that are not within our
control, including:
- Regulatory changes;
- Changes in technology;
- Increased competition;
- Strikes;
- Weather; and
- Performance by third-parties, including our vendors, infrastructure
providers and customers, in connection with the enhancement of our
network.
Due to the uncertainty of these factors, our actual costs and revenues may vary
from what we expect them to be and our future capital requirements might
increase. Accordingly, we cannot assure you that the amount of funds required to
enhance our network and construct our City Enterprise Networks and deploying
data- and Web-hosting centers will not be greater than anticipated.
WE MAY FACE DIFFICULTIES IN INTEGRATING, MANAGING AND OPERATING NEW TECHNOLOGIES
Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for dense wavelength division multiplexing, which allows multiple
signals to be carried simultaneously. Integrating these new technologies could
increase the risk of system failure and result in further strains on our
resources. Additionally, any damage to our network management center or our
major switching centers could harm our ability to monitor and manage the network
operations and generate accurate call detail reports from which billing
information is derived.
THE TECHNOLOGY OF OUR NETWORK COULD BECOME OBSOLETE AND HARM OUR COMPETITIVENESS
If our network is not able to meet its design specifications or if it is
unable to keep pace with technological changes in the telecommunications
industry, our network could become obsolete. Our network utilizes dense
wavelength division multiplexing and synchronous digital hierarchy technology,
another digital transmission standard that facilitates the compatibility of
dissimilar equipment from different vendors. While the currently operational
portion of our network has performed at or above design specifications since
November 1996, our network may not achieve the technical specifications for
which we designed it. Additionally, we may be unable to allocate the funds
necessary to upgrade our network as technological improvements in
telecommunications equipment are introduced. This could harm our competitive
position relative to other more technologically advanced networks.
INTEGRATION OF ACQUISITIONS
Although we have integrated the management of companies that we acquired
during 1999, GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), NetSource,
Omnicom, and InTouch, we are still in the process of realizing the synergies
that we expected from these acquisitions. There can be no assurance that we will
realize such synergies.
WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY
Our ability to achieve our strategic objectives will depend in large part
on the successful, timely and cost-effective realization of numerous elements of
our business plan, including:
- Our plan to develop and offer seamless connectivity between Europe and
the United States;
- Our plan to construct intracity fiber networks in up to sixteen major
European cities by year-end 2001;
- Our plan to establish data- and Web-hosting centers in up to thirteen
major European cities by year-end 2001;
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- Our plan to construct an additional ring connecting London, Paris,
Amsterdam, Frankfurt, Dusseldorf and Brussels;
- Our plan to expand our offering of e-business services;
- The execution of agreements with various parties regarding, among other
things, rights-of-way, lease of dark fiber and development and
maintenance of infrastructure and equipment;
- The timely performance by third parties of their contractual obligations
to engineer, design and construct the infrastructure underlying our
intracity fiber networks, the extension of our network and the planned
transatlantic cable operated by the FLAG Atlantic-1 joint venture; and
- Activation of full capacity on the FLAG Atlantic-1 transatlantic cable
which could be delayed or prevented if the FLAG Atlantic-1 joint venture
fails to comply with interest coverage and other financial ratios in the
credit facility it has entered into to finance construction of the cable.
We cannot assure you that we will successfully execute these elements of our
business plan. In addition, any delays in realizing these elements of our
strategy would materially and adversely affect the timely or successful
realization of our business plan.
We believe that our cost estimates and the build-out schedules for our
intracity fiber networks and data and Web-hosting centers are reasonable with
respect to these projects. However, the actual costs or time required to
complete the plans could substantially exceed current estimates. Any significant
delay or increase in the costs to develop such plans could have a material
adverse effect on our operations.
OUR INABILITY TO IDENTIFY FUTURE ACQUISITION OPPORTUNITIES OR ACQUIRE THE
FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE SUCH OPPORTUNITIES MAY HINDER OUR
ABILITY TO EXECUTE OUR BUSINESS PLAN
Our inability to successfully implement our acquisition strategy may hinder
the expansion of our business and make our services less attractive to customers
seeking a geographically broader network. We believe that additional attractive
acquisition opportunities currently exist in Western and Central Europe and the
United States. We continuously evaluate attractive acquisition opportunities
and, at any given time, may be engaged in discussions with respect to possible
material acquisitions or other business combinations. Although we have
discussions with other companies to assess opportunities on an ongoing basis, we
do not currently have a definitive agreement with respect to any material
acquisition or joint venture. We may be unable to identify, finance and
complete, on acceptable terms, suitable acquisitions, transactions or business
combinations. Furthermore, we may not be able to raise the additional capital
necessary to fund such acquisitions and may have to divert management's
attention and our financial and other resources from other areas.
WE MAY CONTINUE TO HAVE SUBSTANTIAL NET LOSSES INDEFINITELY WHICH MAY MAKE IT
DIFFICULT TO FUND OUR OPERATIONS
We have historically sustained substantial operating and net losses. If we
do not become profitable in the future, the value of our common stock may fall
and we could have difficulty obtaining funds to continue our operations. We
expect to continue incurring significant operating losses during the next
several years while we expand our operations, infrastructure, service offerings
and customer base in our target markets. In particular, we expect to have
negative cash flow for the 2000 fiscal year.
WE MAY NOT IMPLEMENT BILLING AND MANAGEMENT INFORMATION SYSTEMS EFFECTIVELY AND
ON SCHEDULE
We are converting the existing billing systems in the various businesses we
have acquired to a new billing system that we believe will provide the
capability and flexibility to support our anticipated growth. If our new billing
and management information systems are not effectively implemented, our call
details may not be accurately recorded and customer bills may not be generated
promptly and accurately. This would adversely impact on our business since we
would not be able to promptly invoice and collect on customer balances due to
us. See "-- Our Network Infrastructure -- Operations, Systems and Support."
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SYSTEM FAILURES OR INTERRUPTIONS IN OUR NETWORK MAY CAUSE LOSS OF CUSTOMERS
Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Our network is vulnerable to damage or cessation of operations from:
- Fire;
- Earthquakes;
- Severe storms;
- Power loss;
- Natural disasters;
- Damage from human error and tampering;
- Software defects;
- Capacity limitations;
- Breaches of security;
- Physical break-ins;
- Intentional acts of vandalism;
- Telecommunications failures; and
- Other factors that can cause interruptions in service or reduced capacity
for our customers.
We have designed our network to minimize the risk of such system failure
but we cannot assure that we will not experience failures or shutdowns relating
to individual points of presence or even catastrophic failure of the entire
network. Such significant or prolonged system failures or shutdowns could damage
our reputation and result in the loss of customers.
ALTHOUGH WE HAVE IMPLEMENTED NETWORK SECURITY MEASURES, OUR NETWORK MAY BE
SUSCEPTIBLE TO VIRUSES, BREAK-INS OR DISRUPTIONS
We have implemented many network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. Furthermore,
inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect our existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported in the press. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins or
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or could have a material adverse effect on our business or
reputation or on our ability to attract and retain customers for our services.
Moreover, until more consumer reliance is placed on security technologies
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available, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet service industry and our customer base
and revenues.
OUR BUSINESS WILL SUFFER IF WE LOSE KEY PERSONNEL OR FAIL TO ATTRACT AND RETAIN
OTHER QUALIFIED PERSONNEL
Our operations are managed by a small number of key executive officers. The
loss of any of these officers could have a negative effect on our business. The
loss of senior management or the failure to recruit additional qualified
personnel in the future could significantly impede our financial plans, network
development, marketing and other objectives. Although we have designed incentive
and compensation programs to retain key employees and have entered into
employment agreements with certain executive officers, we cannot assure you as
to the continued availability of qualified key executive officers.
We believe that our growth and future success will depend in large part on
our continued ability to attract and retain highly skilled and qualified
management, marketing, technical and sales executives and other personnel who
are in high demand and often have multiple employment options. The competition
for qualified management, marketing, technical and sales executives and other
personnel in the telecommunications industry is intense. We will also need to
train our sales personnel to ensure that we successfully market our expanded
offering of e-business services to our business customers. We may lose key
employees or be forced to increase their compensation. We cannot assure you that
we will be able to hire, retain or successfully train necessary personnel.
WE MAY ENCOUNTER DELAYS, OPERATIONAL PROBLEMS AND INCREASED COSTS IF WE ARE
UNABLE TO ACQUIRE KEY EQUIPMENT FROM OUR MAJOR SUPPLIERS
We are significantly dependent on the technology and equipment which we
acquire from telecommunications equipment manufacturers that may provide vendor
financing for, and maintenance of, this equipment. Without this equipment, we
would face delays, operational disruption and higher expenses. Our main
suppliers are Ciena, Alcatel, Nortel, Ericsson, Siemens and Cisco Systems. While
we could obtain equipment of comparable quality from several alternative
suppliers, we may be unable to acquire compatible equipment from such
alternative sources on a timely and cost-efficient basis.
WE WILL LOSE TAX BENEFITS IF WE ARE UNABLE TO USE OUR NET OPERATING LOSS
CARRYFORWARDS
As of December 31, 1999, we had net operating loss carry forwards for U.S.
federal tax purposes of approximately $183.8 million expiring in 2004 through
2019. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
Because of the change in ownership provisions of the Tax Reform Act of 1986, our
ability to use the tax benefits from our net operating loss carryforwards may be
subject to an annual limit.
OUR INFRASTRUCTURE MAY NOT KEEP PACE WITH OUR RAPID GROWTH
Our operating and financial control systems and infrastructure may not be
adequate to maintain and effectively manage future growth. If we fail to
continually upgrade our administrative, operating and financial control systems,
or if unexpected expansion difficulties arise as a result of our rapid growth,
our business, results of operations and financial condition could suffer a
material adverse effect. We must also purchase additional telecommunications
facilities and expand, train and manage our employee base. Inaccuracies in our
forecasts of market demand could result in insufficient or excessive
telecommunications facilities and fixed expenses that are not in line with our
operations. As we proceed with our development and expansion, there will be
additional demands on our customer support, sales and marketing and
administrative resources and network infrastructure.
FAILURE TO CARRY SUFFICIENT TRAFFIC ON OUR LEASED LINES COULD CAUSE US TO INCUR
LOSSES ON THE LEASED PORTION OF OUR NETWORK
The revenues generated by transporting traffic in our leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are unable to charge
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an appropriate price for such traffic, we could fail to generate revenue
sufficient to cover our lease costs, and would therefore incur operating losses
on the particular route or routes. For a more comprehensive discussion of our
network agreements, see "-- Our Network Infrastructure -- Network Agreements."
RISKS ASSOCIATED WITH REGULATORY MATTERS
Delays in liberalization of the EU telecommunications market may adversely
affect execution of our business strategy
A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. We may
implement our business plan and make capital expenditures in a given country in
anticipation of regulatory liberalization which may not occur. This
liberalization is occurring in accordance with existing European Commission
directives. Even if an EU member state promptly adopts liberalization measures
in a timely fashion, established national or regional telecommunications
operators, regulators, trade unions and other sources may resist implementing
such measures. Further, our provision of services in Europe and the
implementation of our business plan may be materially adversely affected if any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries.
Delays in obtaining regulatory licenses and approvals could adversely affect
our plans to offer services in our targeted markets
Because we plan to provide an expanded array of telecommunications services
in Europe, we will become subject to significant additional regulation at the
EU, national and local levels. In particular, we must obtain and renew
agreements for the long-term lease of dark fiber, rights-of-way and other
permits to install fiber optic cable from railroads, utilities and governmental
authorities to expand the geographic reach of the network. We must also apply
for permits and other regulatory approvals from government and local authorities
to construct our intracity fiber networks. In addition, we are dependent on FLAG
Atlantic Limited applying for and obtaining the permits and other regulatory
approvals required to build and operate the FLAG Atlantic-1 transatlantic cable
link. We cannot assure you that we or (as to FLAG Atlantic-1) FLAG Atlantic
Limited will be able to obtain or maintain the necessary lease agreements,
regulatory approvals, rights and permits on a timely basis or that we will not
be adversely affected by regulatory developments, which could have a material
adverse effect on these planned businesses. Delays in receiving regulatory
approvals, or the enactment of adverse regulations or regulatory requirements,
may delay or prevent us from expanding the geographic reach of our network and
our service offering.
We may be liable for information disseminated through our network in EU member
states
The law relating to the regulation and liability of Internet service
providers in relation to information carried or disseminated is developing.
The EU Commission has prepared a proposal for a directive on certain legal
aspects of electronic commerce, which, if adopted by the European Parliament and
Council, would require member states to make certain changes to national laws.
The proposed directive would apply to us and other service providers established
in the EU and aims to establish a consistent legal framework for electronic
commerce within the EU.
The proposed directive includes provisions which would limit the liability
(other than for prohibitory injunctions) of "intermediaries" (such as Internet
service providers and carriers that transmit or host information provided by
third party users of the service) in respect of certain access, caching and
hosting services provided by them, subject to compliance with certain
conditions. The limitations potentially limit civil and criminal liability for
all types of illegal activities initiated by third parties on-line (for example,
copyright piracy, unfair competition practices, misleading advertising,
copyright infringements, defamation, trademark infringements). If an
intermediary fails to qualify for such limitations, the nature and scope of its
liability will be established on the basis of member states' existing
legislation which may not provide us with the same protections from liability.
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The proposed directive is still under review with member states and it is
impossible to predict whether it will eventually be adopted and, if so, in what
form. Decisions, laws, regulations and other activities regarding regulation and
content liability may adversely affect the development and profitability of
companies offering Internet access services, including us.
The imposition upon Internet and Web-hosting service providers of potential
liability for material carried on or disseminated through their systems could
require us to implement measures to reduce our exposure to liability. Such
measures may require that we spend substantial resources or discontinue some of
our service offerings. Any of these actions could have a material adverse effect
on our business, operating results and financial condition.
There may be restrictions on our ability to carry certain traffic through our
network in EU member states
In October 1999, the EU adopted a directive on data protection which
establishes minimum levels of protection for personal information and imposes
limits on the collection, processing, storage and dissemination of such data
without the subject's consent. The directive is being implemented in EU member
states in various stages. Certain functions that we and our carrier customers
perform (such as storage of routing and billing information) are subject to the
directive. The directive forbids the transfer of personal information collected
in the EU to countries that lack "adequate" privacy protection. At the moment,
the United States is not judged to have "adequate" privacy protection. The EU
and U.S. authorities are currently holding discussions aimed at resolving this
issue and enabling the free circulation of personal information between the EU
and the United States. However, if these discussions are not successful, there
is a possibility that the movement of certain types of telecommunications
traffic from the EU to the United States could be disrupted, with consequent
impact on our revenues.
FLUCTUATIONS IN FOREIGN CURRENCIES MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL
RESULTS AND MAY MAKE IT MORE COSTLY FOR US TO PAY OUR U.S. DOLLAR-DENOMINATED
DEBT
Although we report our results in U.S. dollars, a substantial portion of
our sales and some of our costs, assets and liabilities are denominated in
Euros, pounds sterling and other currencies. Changes in foreign currency
exchange rates can reduce the value of our assets and revenues and increase our
liabilities and costs. The weakening of the Euro against the U.S. dollar during
1999 has had the effect of decreasing reported revenues denominated in such
currency when translated into U.S. dollars.
We have substantial debt denominated in U.S. dollars. However, most of our
revenues are denominated in the Euro and other European currencies. Therefore,
our ability to pay interest and principal on such debt is dependent on the then
current exchange rates between U.S. dollars and the currencies in which our
revenues are denominated. We historically have not used hedging transactions to
limit our exposure to risks from doing business in foreign currencies. In April
1998, our subsidiary GTS Europe B.V. entered into a currency swap contract to
limit its exposure to some if its currency risks. We cannot assure you that
changes in currency exchange rates will not have a material adverse effect on
our business, financial condition and results of operations.
SUBSTANTIAL RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our common stock in the public
market pursuant to effective registration statements under the Securities Act,
or the perception that sales could occur, may have an adverse effect on the
market price for our common stock. We filed, and the SEC has declared effective,
five registration statements covering the resale of our common stock. One
registration statement covers the resale of our convertible bonds due 2000 and
the shares of common stock into which they are convertible. We expect that a
substantial portion of these bonds will be converted to an aggregate of
approximately 10.6 million shares of our common stock as a result of our call on
December 20, 1999 to redeem these bonds on March 20, 2000. An additional
approximately 57.5 million shares are subject to resale under the remaining four
registration statements. Additionally, three registration
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statements on Form S-8 cover the resale of shares of common stock issued to
employees, officers and directors under our employee benefit plans. We are also
required under the Netcom acquisition agreement to file with the SEC and
maintain effective for a period of two years from the closing date of the Netcom
acquisition a registration statement covering approximately 4 million shares of
our common stock that will enable the sellers of Netcom to resell the GTS common
stock issued to them as consideration.
OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE
The market price for our common stock could fluctuate due to various
factors. These factors include:
- Failure to realize projected benefits from our recent acquisitions or
deliver on announced service innovations;
- Acquisition-related announcements;
- Announcements by us or our competitors of new contracts, technological
innovations or new products;
- Changes in government regulations;
- Fluctuations in our quarterly and annual operating results;
- Political and economic development in emerging markets (including Russia
and the other independent countries of the CIS); and
- General market conditions.
WE MAY BE UNABLE TO MEET OUR SUBSTANTIAL DEBT OBLIGATIONS
We have incurred substantial debt and may incur substantial additional debt
to implement our business plans. Our ability to make principal and interest
payments on our debt, will depend upon, among other things, our future operating
performance. Our future operating performance depends on a variety of factors,
many of which are beyond our control. Because of this uncertainty, we cannot
assure you that we will generate sufficient cash flow to make payments on our
debt. Insufficient future cash flow could impair our ability to raise additional
equity or debt financing to expand the reach and capacity of our network. Our
cash flow could also be insufficient to make principal and interest payments on
our debt. If this happens, we may be required to renegotiate the terms of, or to
refinance, our long-term debt. We cannot assure you that we would be able to
refinance or renegotiate the terms of our debt when required.
As a result of our current high level of debt, we:
- Will need significant cash to service our debt, which will reduce funds
available for operations, future business opportunities and investments
in new or developing technologies and make us more vulnerable to adverse
economic conditions;
- May be more vulnerable to general adverse economic and industry
conditions;
- May find it more difficult to make interest and principal payments on
certain of our debt, which could be a default under the indentures
relating to our and our subsidiaries' other outstanding debt securities;
- May not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;
- May be less flexible in planning for, or reacting to, changes in our
business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and
- Will have more debt than some of our competitors, which may place us at a
competitive disadvantage with respect to such competitors.
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If we fail to make the required payments or to comply with our debt
covenants, we will default on our debt. A default would permit our debtholders
to accelerate the maturity of the debt, which in turn could cause defaults under
our other debt.
COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR OPERATIONS
The covenants in our currently outstanding debt and the currently
outstanding debt of our subsidiaries may materially and adversely affect our
ability to finance our future operations or capital needs or to engage in other
business activities. Among other things, these covenants place limitations as
to:
- Incurrence of additional debt;
- Payment of dividends or make certain other restricted payments;
- Our ability to use our assets as collateral for loans;
- Disposition of our assets;
- Entrance into transactions with affiliates; or
- The consolidating, merging or selling all or substantially all of our
assets and the assets of our subsidiaries.
OUR MANAGEMENT, LEGAL AND FINANCIAL CONTROLS MAY HAVE BEEN INADEQUATE TO ENSURE
THAT WE COMPLIED WITH APPLICABLE LAWS
Our reporting and control standards may have been insufficient in emerging
markets to ensure that certain practices complied with all applicable laws. If
we or any of our ventures were found to have been involved in unlawful
practices, we or our ventures could be exposed, among other things, to
significant fines, the risk of prosecution and the loss of its licenses. Russia
and the other independent countries of the CIS in which we operate lack
corporate management and financial reporting legal requirements, and have
underdeveloped banking, computer and other internal control systems.
Additionally, we have had difficulty hiring and retaining qualified employees in
these markets. As a result, we have had difficulty in emerging markets:
- Establishing internal 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.
In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. In early 1997, we retained special outside counsel to conduct a
thorough review of our business practices in the emerging markets in which we
operate. In addition, in June 1999, our special counsel completed an update of
the 1997 review in Russia and Ukraine. Neither the review nor the update
identified any violations of law that we believe would have a material adverse
effect on our or Golden Telecom's financial condition. However, we cannot ensure
that all potential deficiencies have been properly identified or that
governmental authorities will not disagree with our assessment. If our or Golden
Telecom's control procedures and compliance programs are not effective or if
governmental authorities determine that we or Golden Telecom have violated any
law, depending on the penalties assessed and the timing of any unfavorable
resolution, our or Golden Telecom's future results of operations and cash flows
could be materially adversely affected.
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CERTAIN CONSIDERATIONS RELATED TO GOLDEN TELECOM
Turmoil in Russia and the CIS creates significant uncertainty for Golden
Telecom's operations
To date, we have earned a significant portion of our revenue from
operations in Russia and the other countries of the CIS. All foreign companies
operating in the former Soviet Union, including our subsidiary Golden Telecom,
face significant political, economic, regulatory, legal and tax risks, as
described below.
Continuing political instability in the countries where Golden Telecom
operates could depress foreign and local investment and spending, which could
adversely affect its results of operations
Since the dissolution of the Soviet Union in December 1991, Russia and
Ukraine have been undergoing significant political and economic transformation,
the result of which is a generally unstable political climate characterized by
frequent changes in governments, political gridlock in the legislative process,
widespread corruption among government officials and a significant rise in
organized crime and other criminal activity.
This political and economic instability in Russia, Ukraine and the other
countries where Golden Telecom operates could disrupt the direction and the pace
of political and economic reforms. Such a disruption could discourage foreign
and local investment and spending, in which case demand for Golden Telecom's
services could decrease and Golden Telecom's results of operations could
deteriorate. If this were to occur, then the value of our investment in Golden
Telecom could deteriorate and the market price of our stock could decrease.
In addition, a dramatic change in government policies permitting foreign
investment or the privatization of the telecommunications industry could also
have a material adverse effect on Golden Telecom's operations.
Economic instability in Russia and Ukraine could adversely affect the demand
for Golden Telecom's services and its ability to collect on invoices
Since August 1998, the Russian and Ukrainian economies have remained in a
depression that has been exacerbated by political instability. If the political
situations in these countries do not stabilize and their economies do not
strengthen, we expect that demand for Golden Telecom's services will remain
depressed. The failure of the Russian and Ukrainian economies has also weakened
the financial condition and the results of operations of many of Golden
Telecom's customers. As a result, some of these customers have been unable to
pay Golden Telecom's invoices, and Golden Telecom's revenues have suffered
accordingly.
The Russian banking crisis could adversely affect Golden Telecom's ability to
convert rubles to hard currency and manage cash flows
The instability of the ruble and the institution of further restrictions on
certain foreign exchange payments could negatively affect our ability to convert
rubles into foreign currency and transfer foreign exchange payments out of
Russia. Through Golden Telecom, we have earned and continue to earn significant
revenue in Russia. The value of the ruble against the U.S. Dollar, however, has
steadily declined. As a result of the August 17, 1998 decision by the Russian
Government and the Central Bank of Russia to devalue the ruble and its
aftermath, the value of the ruble against the U.S. Dollar has fallen even more
significantly, negatively affecting Golden Telecom's financial performance.
During the quarter ended September 30, 1998, Golden Telecom recorded a $13.1
million pre-tax charge, the largest portion of which consisted of foreign
currency exchange losses on Golden Telecom's net monetary assets that are
denominated in rubles. Since the August 17th decision, the Russian authorities
have been unable to maintain a stable exchange rate. Thus, an additional
significant and sudden decline in the value of the ruble might occur which could
negatively affect Golden Telecom's financial performance and require Golden
Telecom and us to record another significant pre-tax charge.
Golden Telecom's ability to hedge against further declines in the values of
the ruble by converting to other currencies is significantly limited. The ruble
is generally non-convertible outside Russia. Within Russia, the market for
converting rubles into other currencies is limited and is subject to rules that
restrict the purposes for which conversion and payment are allowed. This market
may become even more restricted or may cease to exist as a result of policies
the Russian government may implement.
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The 90-day moratorium that the August 17th decision imposed on certain
foreign exchange payments delayed transfers of funds. Although the 90-day
moratorium has expired, it could be renewed or established in another form if
the Russian government and Central Bank anticipate further liquidity crises. Any
delay in converting rubles into foreign currency to make a payment or delay in
the transfer of such foreign currency could have a material adverse effect on
operations.
Golden Telecom manages intercompany liquidity through a cash collateralized
debt facility offered through a Western bank operating under a Russian banking
licence. If Golden Telecom loses access to this or a similar hard currency
facility, its ability to manage its liquidity position and foreign exchange risk
may suffer.
The reorganization of the Russian and Ukrainian telecommunications industries
may create stronger competition for Golden Telecom
Russia
The Russian government has reorganized the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, Golden Telecom's partner in
Sovintel, and most of Golden Telecom's other principal joint venture partners.
According to recent reports in the Russian business press, Rostelecom is
proposed to be merged with Svyazinvest. This reorganization could make it more
difficult for Golden Telecom to attract and retain customers because:
- Rostelecom may exercise its influence in Svyazinvest to cause regional
telephone companies to route domestic and international traffic
originating in the regions through Rostelecom rather than through Golden
Telecom;
- Golden Telecom's business relationships with its joint venture partners,
which make up a major component of our business strategy in Russia, may
suffer; and
- The effective consolidation of Rostelecom with Golden Telecom's joint
venture partners would create greater competition for Sovintel and Golden
Telecom's regional TeleRoss ventures.
Ukraine
In preparation for a large-scale privatization, the Ukrainian government
has reorganized the state telecommunications sector so that Ukrtelekom, the
state telecommunications operator, holds all the government's interests in the
telecommunications industry. Furthermore, the Ukrainian government has been
negotiating with the foreign partners of Utel, its joint venture which provides
international and domestic long distance services, to buy out their interests in
the company. It is anticipated that after the foreign partners are bought out,
Utel would then merge with Ukrtelekom.
The emergence of a single powerful Ukrainian telecommunications provider
could make it more difficult for Golden Telecom to attract and retain customers
because:
- A single Ukrainian operator with political connections would be more
likely to be able to influence the Ukrainian government to create
favorable market conditions for itself and cause unfavorable conditions
for Golden Telecom;
- The new company is likely to become a stronger competitor;
- Golden Telecom's ability to negotiate reasonable interconnection rates
may suffer; and
- Any subsequent privatization of Ukrtelekom may bring in strong management
and resources from a major Western telecommunications operator,
increasing its competitive strengths.
More restrictive Russian and Ukrainian telecommunications policies could
constrain Golden Telecom's operations
Russian and Ukrainian telecommunications regulations govern the issuance
and continuing validity of Golden Telecom's licenses and the terms and
conditions under which it provides services. Changes to these
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regulations may make it prohibitively expensive for Golden Telecom to provide
services and could have a material adverse effect on Golden Telecom's results of
operations.
Russia's parliament recently adopted legislation which, if implemented,
could restrict foreign ownership of telecommunications operators if necessary to
protect the social order and national security. Any change to current government
regulations or policies that negatively affects Golden Telecom's licenses or its
ability to obtain licenses in the future would restrict our operations in
Russia.
Ukrainian regulatory authorities have established mandatory tariff
guidelines for wireline services. Golden Telecom's pricing structure in its
wireline business in Ukraine is in excess of the limits established in the
mandatory guidelines. Any enforcement action undertaken in regard to the pricing
guidelines by Ukrainian authority could result in fines or in the suspension or
revocation of its Ukrainian licenses.
Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures that are more than 49%-owned by foreign investors.
Golden Telecom does not believe that this prohibition extends to indirect
investment by a foreign entity through a wholly owned Ukrainian subsidiary.
Golden Telecom's investments in Golden Telecom (Ukraine) are made both directly
through a foreign company and indirectly through a wholly owned Ukrainian
subsidiary. In connection with the initial public offering of common stock of
Golden Telecom, its partner in Golden Telecom (Ukraine), an affiliate of ING
Barings, contributed to Golden Telecom its interest in Golden Telecom (Ukraine)
in exchange for approximately 420,000 newly issued shares of Golden Telecom. As
a result, Golden Telecom's direct and indirect investment in Golden Telecom
(Ukraine) has increased to 69%. If Ukrainian authorities determine that the
prohibition against foreign participation extends to indirect holdings, then
Golden Telecom would be in violation of this legislation. The consequences of
this violation are unpredictable and may include license suspension or
revocation, or an order to divest a portion of Golden Telecom's holdings. For a
more comprehensive discussion of regulatory issues in Russia and other
independent countries of the CIS, see "-- Licenses and Regulatory
Issues -- Golden Telecom."
Golden Telecom may be unable to enforce its rights due to confusion in
Russia's laws and legal structures
The current confusion with the Russian and CIS legal structure makes it
difficult to know if Golden Telecom would be able to enforce its rights in
disputes with its joint venture partners or other parties, or if Golden Telecom
is in compliance with all applicable laws, rules and regulations. Furthermore,
the dispersion of regulatory power among a number of government agencies in
Russia and the other independent countries of the CIS has resulted in
inconsistent or contradictory regulations and unpredictable enforcement. The
Russian and other CIS governments have rapidly introduced laws and regulations
and have changed their legal structures in an effort to make their economies
more market-oriented, resulting in considerable legal confusion, especially in
areas of the law that directly affect Golden Telecom's operations. We cannot
assure you that local laws and regulations will become stable in the future.
Golden Telecom's ability to provide services in Russia and the other independent
countries of the CIS could be adversely affected by difficulties in protecting
and enforcing its rights and by future changes to local laws and regulations.
Corruption and organized crime in Russia and Ukraine may adversely affect
Golden Telecom's operations
Russia and Ukraine are both plagued with widespread corruption and criminal
activity. High levels of corruption exist among government officials and among
commercial enterprises in which the state has an ownership interest. So long as
organized crime in Russia and Ukraine remains pervasive, we believe Golden
Telecom's employees may be subjected to threats of violence, or property may be
damaged, or both.
Golden Telecom's Russian and Ukrainian tax burdens may be significantly
greater than currently anticipated
Russia
It is possible that Golden Telecom's Russian taxes may be greater than the
estimated amount that Golden Telecom and we have expensed to date and accrued on
our balance sheets. The Russian tax system
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has many uncertainties and Russian tax authorities have become increasingly
aggressive in their interpretation of the tax law, and in their enforcement and
collection activities. Any additional tax liability, as well as any unforeseen
changes in the tax law, could have a material adverse effect on the future
results of operations or cash flows of Golden Telecom's Russian operations in a
particular period. Russian tax authorities are conducting an examination of
Golden Telecom's potential tax liability in connection with some of its cellular
operations. We cannot assure you that this examination will not result in a fire
or a revocation, suspension or cancellation of Golden Telecom's licenses.
Ukraine
Ukrainian tax law is similarly unpredictable. Sudden shifts in tax law and
policy and retroactive legislation are common. Recent decisions by the tax
authorities may subject Golden Telecom to significantly higher tax liability
from Ukranian currency exchange gains.
Russian and Ukrainian legislation may not adequately protect against
expropriation and nationalization
The governments of Russia and Ukraine have enacted legislation to protect
foreign investment and other property against expropriation and nationalization.
In the event that such property is expropriated or nationalized, legislation
provides for fair compensation. However, we cannot assure you that such
protections would be enforced. This uncertainty is due to several factors,
including:
- - the lack of state budgetary resources;
- - the apparent lack of political will to enforce legislation to protect property
against expropriation and nationalization;
- - the lack of an independent judiciary and sufficient mechanisms to enforce
judgments; and
- - widespread corruption among government officials.
Expropriation or nationalization of Golden Telecom's business would be
detrimental to our and Golden Telecom's operations.
Broad discretion of Russian and Ukrainian regulators results in inconsistent
legislation and unpredictable enforcement
The dispersion of regulatory powers among a number of government agencies
in Russia and Ukraine has resulted in inconsistent or contradictory regulations
and unpredictable enforcement. This situation has made it difficult for Golden
Telecom to comply with all laws and regulations that appear to apply to Golden
Telecom and has resulted in unpredictable regulatory enforcement. For example,
pursuant to the Russian Communications Law, Goskomsvyaz, the State Committee for
Telecommunications, has authority to regulate and control the development of the
communications industry in Russia. However, there is additional legislation that
recognizes and defines the roles of other regulatory organs.
The Russian Communications Law requires any entity that offers any
communications service to obtain the appropriate license in accordance with the
Communications Law and other applicable licensing regulations. A similar
licensing regime exists in Ukraine. However, neither the Communications Law nor
applicable regulations in Russia or Ukraine provide clear guidelines for the
issuance or extension of a license, and state agencies exercise broad discretion
when determining whether to approve a license application, as well as the terms
and conditions of any license. Such broad discretion in the issuance of licenses
may result in arbitrary decision making and may also give rise to opportunities
for corruption.
The Ukrainian regulatory agency requires that the terms of international
licenses include provisions requiring licensees to pay unspecified annual
amounts into local network development. The required amount of investment may be
substantial, and we cannot predict whether failure to comply will lead to the
revocation of Golden Telecom's license.
Golden Telecom's relationships with its joint venture partners limit its
independence and flexibility
Golden Telecom depends to a significant degree on local partners in its
joint ventures to provide it with interconnection with local networks,
regulatory and marketing expertise, and familiarity with the local
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business environment. They also help to facilitate the acquisition of necessary
licenses and permits. As a result, any significant disruption in Golden
Telecom's relationship with these parties could make it more difficult for it to
expand its operations and to maintain its existing services.
Under the terms of some of Golden Telecom's joint venture agreements, it
has the right to nominate key employees, direct operations and determine
strategies for these joint ventures. However, its partners in some ventures,
particularly in its wireless operations, have the ability to frustrate its
exercise of these rights. Significant corporate decisions by most ventures, such
as approving budgets and business plans, declaring and paying dividends, and
entering into substantial transactions, effectively require the consent of
Golden Telecom's local partners. Moreover, Golden Telecom would prefer not to
take significant actions without the consent and support of its partners.
Accordingly, Golden Telecom does not have unilateral control over the operations
of its joint ventures.
In addition, Ukrainian legislation restricts the level of foreign ownership
in the telecommunications industry. These regulations may restrict Golden
Telecom's ability to increase its holdings in ventures and increase its reliance
on local partners who may lack significant financial resources and may be unable
to meet capital calls at the level of their ownership interests. For a
discussion of these joint ventures, see "-- Our Operations in Russia and Other
Countries of the CIS-Golden Telecom."
Government interaction with our or Golden Telecom's current or former partners
could have adverse spillover effects on Golden Telecom
The interactions between government authorities and our or Golden Telecom's
past or current partners may create problems for us and for Golden Telecom. For
example, we are aware that U.S. and Russian authorities may be reviewing the
activities of our former partners in GTS-Vox, the holding company which formerly
owned Golden Telecom's interest in TCM. We and certain of our and Golden
Telecom's employees have been requested by such governmental authorities to
provide information as part of those inquiries, including in connection with a
U.S. grand jury investigation. The authorities' inquiries have raised issues
about the formation of TCM and the sale of the interest in GTS-Vox to us,
including issues concerning Russian anti-monopoly and securities filings and the
commercial relationship between TCM and the local telephone network in Moscow.
Golden Telecom's involvement in the authorities' review of its former partners'
activities could result in a diversion of Golden Telecom's management's time and
resources or a deterioration in its relationship with our partners. In addition,
the review could lead to the imposition of administrative fines or other
penalties and forfeitures of assets or our ownership interest in TCM.
Golden Telecom's partners are often also its competitors
Notwithstanding Golden Telecom's agreements with its joint venture
partners, they sometimes compete directly with its joint ventures. Competition
with its joint venture partners in the same markets may create conflicts of
interest and may result in a loss of customers. For example, Golden Telecom's
partner in Sovintel, Rostelecom, is the dominant international and domestic long
distance carrier in Russia. Similarly, most of Golden Telecom's regional
partners across Russia offer local and long distance services in competition
with our local joint ventures and TeleRoss, and some of these partners also
offer mobile services in direct competition with some of Golden Telecom's mobile
operations. Golden Telecom's partners in its mobile ventures also sometimes
offer independent mobile services in direct competition with its joint ventures.
Golden Telecom may consider acquiring some of its partners' interests in
certain joint ventures if it is able to do so within regulatory guidelines and
on commercially attractive terms. If Golden Telecom was to make such
acquisitions, we expect that Golden Telecom would continue to employ local
personnel in order to retain the benefit of their local expertise. After an
acquisition, however, Golden Telecom would be directly competing with a
powerful, formerly state-owned enterprise that had been its partner before
Golden Telecom acquired its interest. Golden Telecom would have to rely on this
partner-turned-competitor to gain access from its networks to customer sites
along the so-called "last mile". It is possible that this competitor would
attempt to create adverse operating conditions for Golden Telecom's business.
36
<PAGE> 38
Golden Telecom's targeted customers may not trust a privately owned, foreign
controlled entity for their communications needs
Prior to 1991, the telecommunications industry in the countries where
Golden Telecom operates was wholly owned and controlled by the state. After
1991, private companies, including foreign controlled companies, entered these
markets as telecommunications service providers. Many potential customers may be
unwilling to entrust their communications system to non-state controlled
companies, and, in particular, to private companies controlled by foreign
investors. Furthermore, state entities that require the types of services that
Golden Telecom offers, such as the Central Bank, may refuse to select a service
provider that is controlled by foreign investors. Because Golden Telecom is
controlled by foreign investors, Golden Telecom may in some instances be unable
to reach its targeted customers.
ITEM 2. PROPERTIES
We lease office space to serve as sales office and/or administrative
facilities, including our approximately 35,000 square-foot corporate
headquarters in Arlington, Virginia with a ten-year lease expiring October 2009.
We maintain our operational headquarters in London in an approximately 52,000
square-foot facility under a twenty-one year lease expiring December 2020. We
have also entered into a fifteen-year lease for up to 26,000 square feet of
space in New York City to house a switch for our wholesale operations and a
technical operations center. We are initially occupying 15,000 square feet of
this facility, but have committed to lease an additional 11,000 square feet in
fall of 2000.
We own substantially all of the telecommunications equipment required for
our business; however, we lease a substantial part of our fibers on a long-term
basis. The installed fiber optic cable is laid under the various rights-of-way
held by us. Other fixed assets are located at various leased locations in
geographic areas that we serve.
Global TeleSystems (Europe) Ltd. (formerly Esprit Telecom Group plc) leases
its principal executive offices, located in Reading, United Kingdom, under
long-term leases, which expire 2008. The leases contain a tenant only option to
cancel in March 2003. In addition, it leases property at each of the locations
where it maintains sales offices.
GTS Europe B.V. has its principal administrative offices and its Network
Operations Center in two adjacent buildings in Hoeilaart, Belgium, just outside
Brussels. The leases on both the buildings expire on June 30, 2005. One of the
buildings has an option to cancel on January 1, 2002 with a penalty of six
months rent. In addition, GTS Europe B.V. has short-term leases expiring on
February 28, 2000 in Rixensart, Belgium and on September 1, 2000 in Kraainem,
Belgium. GTS Europe B.V. has also entered into leases for two additional
buildings in the same complex as its principal offices. GTS Europe B.V.
commenced its occupancy of these buildings in January 2000. These leases run
through January 2009 but may be terminated after six years with six months
notice plus six months rental penalty.
In addition to the offices in Belgium, GTS Europe B.V. has a leased office
space in Dublin, Ireland, which expires on October 2, 2022, in London, United
Kingdom, which expires in August 2002, in Frankfurt, Germany, which expires in
March 2004 and Madrid, Spain, which expires in January 2004. GTS Europe B.V. and
our various subsidiaries related to our Business Services operations lease
various offices on a short-term basis for regional sales and service personnel.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and proceedings in the ordinary course of
our business. In addition, we are involved in the following claims, proceedings
and inquiries:
In October 1999, Interactive Communications Services (ICS) brought a claim
against our wholly owned subsidiary GTS Carrier Services (Ireland) Limited for
damages alleged to exceed E2.9 million. Although a detailed claim has not yet
been served, ICS has obtained an initial injunction preventing GTS Carrier
Services (Ireland) Limited from suspending or terminating certain
telecommunications services provided to ICS. However, the injunction was
discharged on October 26, 1999 because ICS failed to pay L267,000 to
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<PAGE> 39
GTS Carrier Services (Ireland) Limited, which was a condition for the injunction
to remain in place. From evidence before the court in connection with that
injunction, it appears that ICS's damages claim relates to an alleged breach of
contract in GTS Carrier Services (Ireland) Limited not commissioning or
connecting telecommunications circuits as quickly as ICS claims GTS contracted
to do. We believe that ICS's claim is without merit.
On March 26, 1999, we opposed the license fee imposed by the French
regulator as, among other things, contrary to Article 11 of EC Directive 97/13
which requires license fees to cover only the administrative cost of managing
the license. On September 23, 1999, the French regulator informed us that they
rejected our position. On November 24, 1999, we filed a complaint before the
French administrative tribunal opposing the license fee. Under French law, we
would not be required to pay the license fee and the French regulator does not
have the right to terminate our license until such time as a ruling by the
French administrative tribunal is issued. If our claim is rejected in a final
non-appealable judgment, we will be required to pay our license fee in France.
We do not believe that the outcome of this litigation will have a material
adverse effect upon our financial condition.
In addition, we and our subsidiaries, 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 tortious interference with a business
relationship. Trial is scheduled for May 2000. 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, we do
not believe that the outcome of this litigation will have a material adverse
effect upon our financial condition.
We and certain of our and Golden Telecom's employees have been requested by
Russian and U.S. governmental authorities to provide information apparently in
connection with inquiries into the activities of the former owners of GTS Vox,
which formerly owned Golden Telecom's interests in TCM, including in connection
with a U.S. grand jury investigation. Their inquiries have raised issues about
the formation of TCM and the sale of the interest in GTS-Vox to us. We have
cooperated and intend to continue to cooperate with any legitimate governmental
inquiries.
Based on information currently available, we believe that none of such
current claims, proceedings or inquiries, individually or in the aggregate, will
have a material adverse effect on our financial condition or results of
operations, although there can be no assurance that this will remain the case.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded on the Nasdaq National Market from February 5,
1998, the date our initial public offering, to October 25, 1999 under the symbol
"GTSG." Effective and since October 26, 1999, our common stock ceased trading on
the Nasdaq National Market and began trading on the New York Stock Exchange
under the symbol "GTS." The following table sets forth, for the periods
indicated, the high and low closing prices (on the New York Stock Exchange) and
high and low closing prices (on the Nasdaq National Market) of our common stock
as reported on the Nasdaq National Market and the New York Stock Exchange. The
trading prices in the table have been adjusted to reflect our July 1999 two for
one stock split.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1999:
Quarter ending March 31, 1999............................. $33.31 $24.43
Quarter ending June 30, 1999.............................. 45.75 27.17
Quarter ending September 30, 1999......................... 38.93 19.38
Quarter ending December 31, 1999.......................... 36.13 19.81
1998:
Quarter ending March 31, 1998............................. $24.50 $12.97
Quarter ending June 30, 1998.............................. 25.63 17.69
Quarter ending September 30, 1998......................... 32.13 12.25
Quarter ending December 31, 1998.......................... 29.75 10.57
</TABLE>
As of December 31, 1999, there were approximately 421 holders of record of our
common stock.
We have not paid any cash dividends on our common stock and do not intend
to pay cash dividends in the foreseeable future. In addition, the indenture
governing our 9 7/8% Senior Notes due 2005 currently prohibits the payment of
cash dividends. This indenture contains restrictions against making restricted
payments (in the form of the declaration or payment of certain dividends or
distributions, the purchase, redemption or other acquisition of any of our
capital 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 exists, the Company's leverage ratio does not
exceed 6.0 to 1.0 and such restricted payments do not exceed certain amounts.
On June 16, 1999 the Company's stockholders approved an increase in the
Company's authorized common stock from 135 million to 270 million shares. On
July 21, 1999, the Company effected a two-for-one split of its common stock
through the distribution of a stock dividend. All shares and per share amounts
have been restated to reflect the stock split.
During the year ended December 31, 1999 we issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:
On October 15, 1999, the Company entered into an exchange agreement
with all of the minority interest holders of Global TeleSystems Europe
B.V.'s ("GTS Europe B.V.") common shares and grantees of GTS Europe B.V.
stock options that provides for the acquisition by the Company of their
equity interest in GTS Europe B.V. The exchange will take place in up to
three separate exchanges commencing on October 18, 1999. Pursuant to the
agreement, the Company will acquire the respective minority interest
holders' common shares in GTS Europe B.V. that have been held by them for a
period greater than six months. Pursuant to this agreement, in October
1999, the Company exchanged 5,985,930 of its common shares for 6,565 of GTS
Europe B.V.'s common shares. The 5,985,930 shares of common stock were
issued pursuant to the Regulation D and Regulation S exemptions from
registration under the Securities Act. Further, minority interest holders
of GTS Europe B.V. have additional beneficial ownership rights in GTS
Europe B.V.'s common shares, and common share options, totaling 3,601
common shares. As stated above, the Company will acquire these GTS Europe
B.V. common
39
<PAGE> 41
shares in the future; however, future acquisitions will be based on fair
values of GTS Europe B.V. and the Company.
In August 1999, the Company acquired substantially all of the
outstanding shares of common stock of InTouch Telecom B.V., a company
organized under the laws of The Netherlands. The Company's purchase
consideration was comprised of cash and the issuance of 313,868 common
shares of the Company. The Company's common stock was issued in this
transaction pursuant to the exemption under Regulation S from registration
under the Securities Act.
In June 1999, GTS increased its ownership of GTS Europe B.V. to 95.4%
by acquiring the remaining shares held by NMBS/SNCB (the "Belgian
Railway"). The Company issued 2,150,380 shares of its common stock in
exchange for the Belgian Railway's interest in GTS Europe B.V. The
Company's common stock was issued in this transaction pursuant to the
Regulation S exemption from registration under the Securities Act.
On April 26, 1999, GTS acquired a majority stake in Omnicom, a French
company, and assumed operational control. On April 27, 1999, GTS initiated
an offer for the remaining shares of Omnicom. The Company's purchase
consideration was comprised of cash and the issuance of 3,706,572 common
shares of the Company. The Company's common stock was issued in this
transaction pursuant to the exemption under Regulation S from registration
under the Securities Act.
On April 19, 1999, we issued, pursuant to the exemptions under Rule
144A and Regulation S from registration under the Securities Act, $500.0
million of depositary shares (the "Shares"), each representing 1/100 of a
share of 7.25% cumulative convertible preferred stock (the "Preferred
Stock"). Each Share has a liquidation preference of $50 per share. Holders
of the Shares are entitled to quarterly cash payments of $.90625 per Share
commencing on June 15, 1999. We realized net proceeds, after underwriting
discounts and commissions, of $485.0 million.
During the year ended December 31, 1998 we issued securities which were not
registered under the Securities Act, as follows:
In connection with the acquisition of NetSource Europe ASA, during the
fourth quarter of 1998 and first quarter of 1999, we issued 7,868,166
shares of our common stock to holders of NetSource stock who accepted our
offer to purchase the NetSource stock owned by such holders. We received
the NetSource shares tendered as consideration for our common shares. We
issued the 7,868,166 shares of common stock pursuant to the exemption under
Regulation S from registration under the Securities Act. Up to 206,834
additional shares of our common stock may be issued pursuant to this
transaction.
During the second quarter of 1998, we issued 673,260 shares of our
common stock to one of our partners in a business venture ("Seller"), in
connection with fulfilling our obligations under a 1995 purchase agreement,
as amended, with the Seller. During the third quarter of 1998, we issued an
additional 253,718 shares of our common stock and paid $40 million to the
Seller to purchase their remaining interest in the business venture. We
issued these shares pursuant to the exemption under Regulation S from
registration under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected historical financial data of the
Company as of and for the five years ended December 31, 1999. The historical
financial data as of December 31, 1999 and 1998 and for the years ended December
31, 1999, 1998, and 1997 have been derived from the historical financial
statements of the Company, which financial statements have been audited by Ernst
& Young LLP, independent auditors, as indicated in their report included
elsewhere herein. The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto appearing elsewhere in this Report.
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<PAGE> 42
The selected financial data presents the restatement of our historical
financial statements for 1998 and prior periods to reflect the business
combination with GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), which
was accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 852.2 $ 372.4 $ 121.4 $ 62.5 $ 30.5
Operating loss............................. (433.7) (143.7) (91.4) (55.4) (44.4)
Loss before extraordinary loss............. (616.7) (243.1) (134.8) (76.2) (44.2)
Extraordinary loss......................... -- (12.7) -- -- --
Net loss................................... (616.7) (255.8) (134.8) (76.2) (44.2)
Preferred Dividends........................ 25.7 -- -- -- --
Net loss applicable to common
shareholders............................ (642.4) (255.8) (134.8) (76.2) (44.2)
Loss per common share:
Loss per common share before extraordinary
loss.................................... (3.76) (1.70) (1.37) (1.01) (0.74)
Extraordinary loss per share............... -- (0.09) -- -- --
Net loss per common share.................. (3.76) (1.79) (1.37) (1.01) (0.74)
Deficiencies of earnings available to cover
fixed charges(1)........................ (598.8) (235.3) (132.3) (74.8) (44.2)
OTHER DATA:
EBITDA(2).................................. $ (78.4) $ (64.9) $ (72.9) $ (45.7) $(38.6)
Net cash used in operating activities...... (330.8) (120.9) (52.3) (42.8) (5.6)
Net cash used in investing activities...... (917.0) (455.9) (117.6) (86.4) (81.0)
Net cash provided by financing
activities.............................. 1,352.3 1,032.4 468.4 179.0 74.9
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $1,082.9 $ 998.5 $ 358.4 $ 67.9 $ 17.8
Property and equipment, net................ 1,004.5 643.0 260.0 47.0 35.0
Total assets............................... 4,001.8 2,614.6 876.6 275.1 136.1
Total debt................................. 2,552.2 1,792.3 645.7 89.3 39.4
Redeemable preferred stock................. 502.3 -- -- -- --
Shareholders' equity....................... 128.3 349.9 77.6 128.3 63.9
</TABLE>
- ---------------
(1) Because of our historic losses, we have experienced a deficiency of earnings
available to cover fixed charges throughout our existence. The deficiency of
earnings available to cover fixed charges has been computed by adding loss
from continuing operations before income taxes and preferred stock dividends
minus fixed charges. Fixed charges consist of interest on all indebtedness
and amortization of discount on all indebtedness.
(2) EBITDA is earnings (loss) from operations before interest, taxes,
depreciation and amortization, foreign currency gains (losses), other income
(expense) and non-recurring expenses. EBITDA is a measure of a company's
performance commonly used in the telecommunications industry, but should not
be construed as an alternative to net income (loss) determined in accordance
with generally accepted accounting principles ("GAAP") as an indicator of
operating performance or as an alternative to cash from operating activities
determined in accordance with GAAP as a measure of liquidity.
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<PAGE> 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to our financial condition
and results of operations for the three years ended December 31, 1999. This
information should be read in conjunction with the "Selected Financial Data" and
our Consolidated Financial Statements and the notes related thereto appearing
elsewhere in the document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report
including, without limitation, those concerning (i) projected traffic volume,
(ii) future revenues and costs, (iii) heightened competition, (iv) rapid
technological and market change and (v) implementation of our business strategy,
contain forward-looking statements concerning our operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on our results of operations are the
potential risk of delay in implementing our business plan; the political,
economic and legal aspects of the markets in which we operate; competition; and
our need for additional substantial financing. These and other factors are
discussed herein under "Business -- Certain Considerations Applicable to Our
Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Report.
The factors described in this Report could cause actual results or outcomes
to differ materially from those expressed in any of our forward-looking
statements made by or on our behalf, and investors, therefore, should not place
undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors may emerge from time to time, and it is not possible for management to
predict all of such factors. Further, management cannot assess the impact of
each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
OVERVIEW
From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and
Central Europe and (2) establishing and developing Global TeleSystems Europe
B.V. ("GTS Europe B.V."), formerly known as Hermes Europe Railtel B.V., our
subsidiary which deployed the first high speed fiber optic network across
Western Europe and provides a range of bandwidth and Internet Protocol services
to traditional and emerging communications companies.
After our initial public offering in February 1998, we adapted our strategy
to address the effects of the economic crisis in emerging markets, particularly
Russia, the emergence of the Internet Protocol as a widely accepted transport
protocol and the deregulation of the provision of telecommunications services to
end-users in Western Europe. We sought to build on the success of our
pan-European fiber optic network by developing a plan to provide
telecommunications services directly to businesses and other end-users.
Accordingly, in late 1998 and in 1999, we acquired four companies that provided
such services to businesses and other high usage customers in Western Europe:
Global TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly
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<PAGE> 44
Esprit Telecom Group plc, NetSource, Omnicom and InTouch. In addition, in order
to position ourselves as a Tier-1 Internet service provider in Europe and target
the higher growth European Internet market, we acquired Ebone.
The former Ebone, GTS (Europe) Ltd., NetSource, Omnicom and InTouch
businesses are now included in our operations. These acquisitions have provided
us with a significant business customer base and sales and distribution network
across Western Europe, as well as switches, routers and other infrastructure,
and, combined with our Central European operations, position us to offer an
expanded service portfolio of data, Internet and other business applications to
our business customers.
On September 30, 1999, we contributed all of our Russian and CIS operations
to a newly formed subsidiary, Golden Telecom, Inc., which effected an initial
public offering of its common stock on October 5, 1999. We currently own
approximately 62.6% of the common stock of Golden Telecom.
BUSINESS STRATEGY
Our goal is to become Europe's premier independent e-business services
provider and to maintain and enhance our position as a leading pan-European
provider of broadband, Internet, data and voice services to communications
carriers, Internet service providers and other high-usage customers. In order to
achieve this goal, we will build on the strengths of our pan-European broadband
fiber optic network, our pan-European IP backbone and our position as a leading
supplier of communications services to businesses, with a sales and distribution
network spanning 79 cities in 18 European countries. The key elements of our
strategy for achieving these goals are as follows:
- Expand our services portfolio to support the communications and
e-business activities of our customers;
- Leverage our Business Services distribution network to further penetrate
our existing customer base and reach new customers;
- Build on our leadership position in the carriers' carrier market to
penetrate a broader bandwidth intensive customer base;
- Continue to invest in the reach and capacity of our fiber optic network;
- Build infrastructure and extend our network closer to our customers by;
- Expanding and enhancing the transatlantic capacity of our network and
- Build or deploy data and web-hosting centers to support Web-based
services.
- Enhance brand name recognition
GTS (EUROPE) LTD. -- BUSINESS COMBINATION
The following discussion of our results of operations and liquidity and
capital resource requirements reflect the restatement of our financial results
for 1998 and prior periods as a result of the business combination with Global
TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly Esprit Telecom
Group plc, which we accounted for as a pooling of interests.
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RESULTS OF OPERATIONS
The following table sets forth our statement of operations as a percentage
of revenues:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0%
Access and network services.............................. 61.5 63.9 80.0
Selling, general and administrative...................... 47.7 53.5 80.0
Depreciation and amortization............................ 25.0 21.1 15.2
Merger and restructuring costs........................... 16.7 -- --
----- ----- ------
Loss from operations..................................... (50.9) (38.5) (75.2)
Other income (expense):
Interest, net............................................ (15.8) (19.1) (21.9)
Other income (expense)................................... (3.6) (5.5) (11.8)
----- ----- ------
Net loss before income taxes and extraordinary loss...... (70.3) (63.1) (108.9)
Income taxes............................................. 2.1 2.1 2.1
----- ----- ------
Net loss before extraordinary loss....................... (72.4) (65.2) (111.0)
Extraordinary loss -- debt refinancing................... -- (3.4) --
----- ----- ------
Net loss................................................. (72.4)% (68.6)% (111.0)%
===== ===== ======
Preferred dividend....................................... 3.0 -- --
----- ----- ------
Net loss applicable to common shareholders............... (75.4)% (68.6)% (111.0)%
===== ===== ======
</TABLE>
Year Ended December 31, 1999 Compared To The Year Ended December 31, 1998
The Company reported a net loss of $616.7 million for the year ended
December 31, 1999, compared to a net loss of $255.8 million in the same period
of the prior year.
Revenue. Our consolidated revenue increased to $852.2 million for the year
ended December 31, 1999 as compared to $372.4 million for the year ended
December 31, 1998. Significant components of revenue for the year ended December
31, 1999 were Europe ($746.8 million) and Golden Telecom ($97.9 million).
Revenue for the year ended December 31, 1998 was primarily comprised of Europe
($286.6 million) and Golden Telecom ($86.1 million). The growth in revenue in
Europe was primarily attributable to the increase in our customer base, the
expansion of our network and the resulting increased traffic in all of our
operations and acquisitions completed during the year. Additional contributors
to the revenue growth in 1999 are as follows: within Golden Telecom, we followed
the consolidation method of accounting for certain business ventures, whereas in
the first half of 1998, these business ventures were accounted for following the
equity method of accounting.
Access and Network Services. Our access and network costs consist of costs
associated with providing telecommunications services through our network and
the costs of leased capacity. During 1999 these costs increased to $523.7
million or 61.5% of revenues as compared to $238.1 million or 63.9% of revenues
for 1998. The slight decrease in these costs as a percentage of revenues in 1999
is attributable to the growth in our customer revenue which was partially offset
by increased settlement and interconnect costs paid to third parties and direct
network operating and maintenance costs. We are continuing to incur substantial
capital and operating costs related to the implementation of our business
strategy, including the expansion our network with which we expect to better
serve our customer needs. We expect that these investments will increase our
operating efficiency thereby lowering our unit costs going forward.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 increased to $406.9 million or 47.7% of revenues as compared
to $199.2 million or 53.5% of revenues for 1998. The decrease in selling,
general and administrative expenses as a percentage of revenue is attributable
to the growth in our revenue base and our efforts to integrate our business
operations and eliminate redundant costs.
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<PAGE> 46
The increase in selling, general and administrative expenses in 1999 is
attributable to the following: additional expenses related to acquired entities;
increases in payroll, related costs from the recruitment and hiring of
additional staff associated with business growth; an increase in our sales and
marketing efforts; additional building rent expense related to the increased
office space due to growth in the Company's infrastructure; increased
administrative costs required for our increased customer base and the
development of the Company's new brand identity. We expect to establish sales
offices in additional European cities, which involves incurring substantial
start-up costs. However, we expect to improve our effectiveness and leverage
these expenses as a percentage of revenue.
Depreciation and Amortization. Depreciation and amortization increased to
$212.8 million or 25.0% of revenues for the year ended December 31, 1999 as
compared to $78.8 million or 21.1% of revenues for the year ended December 31,
1998. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we have experienced an increase in amortization expense associated
with goodwill that has resulted from our acquisition activities. The Company
expects that depreciation expense will continue to increase in subsequent
periods as the Company's network expansion efforts continue.
Merger and Restructuring Costs. During 1999, we recorded a $142.5 million
charge to earnings attributable to merger and restructuring costs. Of the $142.5
million, $63.7 million, $19.8 million and $59.0 million was recorded in the
first quarter, third quarter and fourth quarter of 1999, respectively.
The $63.7 million first quarter charge was attributable to the
transactional costs associated with the acquisition and integration of GTS
(Europe) Ltd. (formerly Esprit Telecom plc). Of the $63.7 million, $1.4 million
remains as an accrual at December 31, 1999.
The $19.8 million third quarter charge was a result of our decision that
the allocation of sufficient resources to support certain of our cellular
ventures in Russia was not consistent with our current strategic plans.
Accordingly, we decided to abandon certain cellular ventures and decided to
cease to provide any further financial assistance to these ventures other than
the assumption of certain debt obligations. We are seeking to sell our ownership
interests in these assets in furtherance of our plan of abandonment. Of the
$19.8 million, $3.3 million remains as an accrual, at December 31, 1999, for
cash payments that we expect to incur as part of our plan of abandonment.
The $59.0 million fourth quarter charge reflects a charge of $40.1 million
for the integration and rationalization of our switched-voice assets as well as
$18.9 million for certain employee reorganization and severance costs. These
charges were principally a result of the acquisitions and organizational
consolidations that we effected in 1999. Of the $59.0 million, $25.8 million
remains as an accrual, at December 31, 1999, for additional cash payments that
we expect to incur as part of our plan of restructuring.
In 1998 we recorded a $12.7 million extraordinary charge to earnings
resulting from the early extinguishment of 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 obligations.
Interest Expense. Interest expense increased to approximately $208.9
million in 1999 from $131.0 million in 1998. This significant increase in
interest expense is attributable to the substantial increase in our outstanding
debt obligations during 1999, (see "Liquidity and Capital Resources" below),
partially offset by an increase in capitalized interest resulting from the
construction of the Company's network. We had outstanding debt obligations of
$2.6 billion and $1.8 billion at December 31, 1999 and 1998, respectively.
Interest Income. Interest income for 1999 increased to $74.3 million from
$60.0 million in 1998. This increase was due to the interest earned through our
short-term investment of the proceeds received from our financing activities.
Foreign Currency Loss. We recognized foreign currency losses of $8.9
million in 1999 as compared to $23.2 million in 1998. The losses in 1999 are
primarily attributable to the impact of foreign currency fluctuations on our
unhedged debt obligations. The losses in 1998 were attributable to the
devaluation of the
45
<PAGE> 47
Russian ruble and losses on several forward exchange contracts and the weakening
of the U.S. dollar versus European currencies in the third and fourth quarters
of 1998.
Year Ended December 31, 1998 Compared To The Year Ended December 31, 1997
Revenue. Our consolidated revenue increased to $372.4 million for the year
ended December 31, 1998 as compared to $121.4 million for the year ended
December 31, 1997. Significant components of revenue for the year ended December
31, 1998 were Europe ($286.6 million) and Golden Telecom ($86.1 million).
Revenue for the year ended December 31, 1997 was primarily comprised of Europe
($93.3 million) and Golden Telecom ($27.2 million). The growth in revenue was
primarily attributable to the increase in our customer base and resulting
traffic in all of our operations. An additional contributor to the revenue
growth in 1998 was that we followed the consolidation method of accounting for
certain business ventures during the second half of 1998, whereas in 1997, these
business ventures were accounted for following the equity method of accounting.
Access and Network Services. Our access and network costs consist of costs
associated with providing telecommunications services through our network and
the costs of leased capacity. In 1998 these costs increased to $238.1 million or
63.9% of revenues as compared to $97.1 million or 80.0% of revenues for 1997.
The decrease in telecommunication services as a percentage of revenues in 1998
is attributable to the growth in our customer revenue offset by increased
settlement and interconnect costs paid to third parties and direct network
operating and maintenance costs.
Selling, General and Administrative. Selling, general and administrative
expenses for 1998 increased to $199.2 million or 53.5% of revenues as compared
to $97.2 million or 80.0% of revenues for 1997. The decrease in selling, general
and administrative expenses as a percentage of revenues in 1998 is attributable
to growth in our customer revenue offset by increases in the number of staff
associated with business growth, as well as administrative and marketing costs
required for our increased customer base.
Depreciation and Amortization. Depreciation and amortization increased to
$78.8 million or 21.1% of revenues for the year ended December 31, 1998 as
compared to $18.5 million or 15.2% of revenues for the year ended December 31,
1997. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we experienced an increase in amortization expense associated with
goodwill that has arisen from our acquisition activities.
Interest Expense. Interest expense increased to approximately $131.0
million in 1998 from $39.8 million in 1997. This significant increase in
interest expense is attributable to the substantial increase in our outstanding
debt obligations during 1998.
Interest Income. Interest income for 1998 increased to $60.0 million from
$13.2 million in 1997. This increase was due to the interest we earned through
our short-term investments that has grown, due to the proceeds of our financing
activities.
Foreign Currency Loss. We recognized foreign currency losses of $23.2
million in 1998 as compared to $3.4 million in 1997. The losses in 1998 were
attributable to the devaluation of the Russian ruble and losses on several
forward exchange contracts and the weakening of the U.S. dollar versus European
currencies in the third and fourth quarters of 1998.
46
<PAGE> 48
LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The telecommunications industry is capital intensive. In order for us to
successfully compete, we will require substantial capital to continue to develop
our telecommunications networks, implement our e*Business strategy and meet the
funding requirements of our operations, including losses from operations, as
well as to provide capital for our acquisition and business development
initiatives. We currently expect that during the year 2000, we will incur
between $900 million and $950 million in capital expenditures, including capital
lease obligations, to implement our current strategic capital expenditure plan,
including the transatlantic capacity participation discussed below.
We are participating in the construction and operation of the FLAG
Atlantic-1 transoceanic cable through our 50% interest in the FLAG Atlantic
Limited joint venture. We have agreed pursuant to the terms of the joint venture
to (1) invest $100 million for our interest in the venture, which is to be paid
in October 2000 and (2) purchase capacity on the fiber cable for $200 million.
As of December 31, 1999 we had paid $60 million for this capacity and will pay
the remaining $140 million at a rate of $20 million per quarter from January
2000 to June 2001.
In January 1999, GTS Europe B.V. issued $200 million aggregate principal
amount of 10.375% senior notes due 2009 and E85 million (approximately $100
million) aggregate principal amount of 10.375% senior notes due 2006. In
November 1999, GTS Europe B.V. issued E225 million aggregate principal amount of
10.50% senior notes due 2006 and E275 million 11.0% senior notes due 2009. These
new senior notes have substantially the same terms as the senior notes GTS
Europe B.V. issued in January 1999 and August 1997. A subsidiary of our
98.4%-held GTS Europe B.V. subsidiary, is currently engaged in negotiations for
a new credit facility (the "New Credit Facility") with one or more institutional
lenders in an aggregate amount of E500 million which we expect to close by the
end of the second quarter of 2000. Borrowings under the New Credit Facility
would be structurally senior to the senior notes sold in August 1997, January
1999 and November 1999 by GTS Europe B.V.
We believe that the net proceeds from the issuance of the senior notes
mentioned above, and borrowings under the New Credit Facility, combined with our
existing cash balances and projected internally generated funds, should be
sufficient to fund our currently identified capital expenditures, at least
through December 31, 2000, including capital expenditures and payments on the
long-term fiber lease arrangements on our GTS Europe B.V. network. However, it
is possible that we will seek additional financing in the future. Additionally,
as our business strategy evolves, we continuously evaluate the optimal capital
structure to ensure that it meets our overall corporate strategy.
The actual amount and timing of our future capital requirements may differ
materially from our estimates. In particular, the accuracy of our estimates is
subject to changes and fluctuations in our revenues, operating costs and
development expenses, which can be affected by our ability to (1) effectively
and efficiently manage the expansion of the GTS Europe B.V. network and
operations and the build-out of our City Enterprise Network infrastructure in
our targeted metropolitan markets, (2) implement our strategy to become a
leading provider of e-business services in Europe, (3) effectively and
efficiently manage the build-out of the FLAG Atlantic-1 transatlantic cable
through our participation in the FLAG Atlantic joint venture, (4) obtain
infrastructure contracts, rights-of-way, licenses, interconnection agreements
and other regulatory approvals necessary to complete and operate the GTS Europe
B.V. network, construct our City Enterprise Network infrastructure and implement
data and Web-hosting capability in London, Amsterdam, Frankfurt, Paris and other
European cities, (5) negotiate favorable contracts with suppliers, including
large volume discounts on purchases of capital equipment and (6) access markets,
attract sufficient numbers of customers and provide and develop services for
which customers will subscribe. Our revenues and costs are also dependent upon
factors that are not within our control such as political, economic and
regulatory changes, changes in technology, increased competition and various
factors such as strikes, weather, and performance by
47
<PAGE> 49
third parties in connection with our operations. Due to the uncertainty of these
factors, actual revenues and costs may vary from expected amounts, possibly to a
material degree, and such variations are likely to affect our future capital
requirements. In addition, if we expand our operations at an accelerated rate or
consummate acquisitions, our funding needs will increase, possibly to a
significant degree, and we will expend our capital resources sooner than
currently expected. As a result of the foregoing, or if our capital resources
otherwise prove to be insufficient, we will need to raise additional capital to
execute our current business plan and to fund expected operating losses, as well
as to consummate future acquisitions and exploit opportunities to expand and
develop our businesses.
LIQUIDITY ANALYSIS
We had cash and cash equivalents of $1.1 billion and $998.5 million as of
December 31, 1999 and 1998, respectively. We had restricted cash of $312.1
million and $143.4 million as of December 31, 1999 and 1998, respectively, that
represents amounts held in escrow for debt interest payments and amounts to be
paid in connection with the Flag Atlantic Limited joint venture.
In 1999, 1998 and 1997, we used cash of $330.8 million, $120.9 million and
$52.3 million, respectively, for our operating activities. The significant
increase in cash spending for our operations in 1999 and 1998 is attributable to
the growth of our business operations which has resulted in higher operating
cash costs and accounts receivable carrying balances. We also used cash of
$917.0 million, $455.9 million and $117.6 million for our investing activities
in 1999, 1998 and 1997, respectively. Of the $917.0 million of 1999 investing
activities, $339.4 million of cash was spent on business acquisitions and $386.0
million of cash was spent primarily on building our telecommunications networks.
In 1998 investing activities included $257.4 million spent on business
acquisitions and $231.0 million spent on building our telecommunications network
as compared to $2.4 million and $58.2 million in 1997, respectively. We cannot
assure you that our operations will achieve or sustain profitability or positive
cash flow in the future. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our debt service obligations or working capital requirements.
Substantially all of our operations are in Western Europe and therefore our
consolidated financial results are subject to fluctuations in currency exchange
rates. Our operations transact their business in the following significant
currencies: British Pound Sterling, the Russian Ruble and the Euro. For those
operating companies that transact their business in currencies that are not
readily convertible, we attempt to minimize our exposure by indexing our
invoices and collections to the applicable dollar/foreign currency exchange rate
to the extent our costs (including interest expense, capital expenditures and
equity) are incurred in U.S. Dollars. Although we are attempting to match
revenues, costs, borrowing and repayments in terms of their respective
currencies, we have experienced, and may continue to experience, losses and a
resulting negative impact on earnings with respect to holdings solely as a
result of foreign currency exchange rate fluctuations, which include foreign
currency devaluations against the U.S. Dollar. Furthermore, certain of our
operations have notes payable and notes receivable which are denominated in a
currency other than their own functional currency or loans linked to the U.S.
Dollar. We may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.
We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We are currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. Our ability to hedge our exposure is
limited since certain of our operations are located in countries whose
currencies are not easily convertible. Financial hedge instruments for these
countries are nonexistent or limited and also pricing of these instruments is
often volatile and not always efficient. We designed and implemented reporting
processes to monitor the potential exposure on an ongoing basis in 1998. We will
use the output of this process to execute financial hedges to cover foreign
exchange exposure when practical and economically justified.
In April 1998, we consummated a foreign exchange swap transaction to
mitigate the foreign exchange exposure resulting from the issuance of $265
million senior notes issued by GTS Europe B.V.
48
<PAGE> 50
YEAR 2000 COMPLIANCE
We initiated a Year 2000 compliance program during 1998 to address the
risks associated with the Year 2000 issue and to avoid material loss or impact
to us or our customers due to these risks. We experienced no substantial
problems relating to the Year 2000 issues. We incurred approximately $4.0
million in costs, $2.8 million of which we incurred during 1999, to ensure that
business would continue without incident after December 31, 1999. We continue to
monitor all of our systems and have accrued a minimal amount to cover costs that
we expect during the first quarter of 2000. We believe that any and all
additional Year 2000 issues or concerns that may arise will be addressed and
corrected by March 31, 2000.
IMPACT OF THE EURO
In accordance with the Treaty on EU, signed at Maastricht on February 7,
1992, Stage III of the Economic and Monetary Union (EMU) commenced on January 1,
1999, and a single currency, the "Euro" (E), has been introduced. In addition on
January 1, 1999, eleven of the fifteen member countries of the European Union,
including Belgium, The Netherlands, Ireland, France, Germany, Italy and Spain
established an irrevocable fixed conversion rate between their existing
sovereign currencies and the Euro. The Euro trades on currency exchanges and is
available for non-cash transactions. The Euro exists in parallel with national
currencies, and transactions may be denominated in either currency until
December 31, 2001 (though only notes and coins of the national currencies will
be available for physical exchange). From January 1, 2002, Euro notes and coins
will be introduced and national currencies will be withdrawn by June 30, 2002.
Those participating member states have also transferred authority for conducting
monetary policy to the European Central Bank.
Through certain of our subsidiaries we have significant operations within
the EU, including many of the countries that adopted the Euro. We are currently
evaluating the system issues raised by the adoption of the Euro, including:
preparing business systems for trading in Euros and converting the accounting
systems of companies in the common currency area from their national currency to
Euros; the benefit of the elimination of exchange rate risk in cross border
transactions within the common currency area; the potential impact of increases
in pricing transparency on price differentials between member states; and
training and human resources issues. We are also currently evaluating the impact
the Euro will have on our continuing business operations and no assurances can
be given that the Euro will not have material adverse affect on our business,
financial condition and results of operations. However, we do not expect the
Euro to have a material effect on our competitive position as a result of price
transparency within the European Union as we have always operated as a
pan-European business with transparent pricing in ECU for the majority of our
customers. Moreover, we are evaluating our ability to update our information
systems to accommodate the adoption of the Euro but we do not expect to incur
material costs in either the evaluating or the updating of such systems. In
addition, we cannot accurately predict the impact the Euro will have on currency
exchange rates or on our currency exchange risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our treasury function manages our funding, liquidity, and exposure to
interest rate and foreign exchange rate risks. Our treasury operations are
conducted within a framework of policies and guidelines authorized by our Board
of Directors. In accordance with our policy, we do not enter into any
transactions of a speculative nature.
We are exposed to market risk from changes in interest rates on long-term
obligations and as a global company, we also face exposure to adverse movements
in foreign currency exchange rates. A portion of our debt obligations are
denominated in currencies which expose us to risks associated with changes in
foreign exchange rates. We have developed risk management policies that
establish guidelines for managing foreign exchange risk and periodically
evaluate the materiality of foreign exchange exposures and the financial
instruments available to mitigate this exposure.
Our subsidiary, GTS Europe B.V., has entered into a foreign currency swap
agreement in order to mitigate our exposure on US dollar denominated debt. We
also attempt to mitigate this and other exposures
49
<PAGE> 51
from debt obligations denominated in exposed currencies by maintaining assets in
the exposed currency wherever possible. We find it impractical to hedge all
foreign currency exposure and as a result will continue to experience foreign
currency gains and losses. The introduction of the Euro as a common currency for
members of the European Union occurred on January 1, 1999.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
----- ---- ---- ---- ----- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT, INCLUDING
CURRENT PORTION:
Fixed rate................ 93.7 $4.9 $3.7 $3.4 $ 3.0 $2,158.5 $2,267.2 $2,387.7
Avg. interest rate........ 8.1% 8.8% 8.8% 9.7% 11.2% 9.8% -- --
Variable rate............. -- $0.5 $0.5 $0.5 $ 0.3 -- $ 1.8 $ 1.8
Avg. interest rate........ -- 7.1% 8.4% 8.3% 8.3% -- -- --
</TABLE>
The following tables provide information about our derivative financial
instruments and other financial instruments by functional currency and where
applicable, presents such information in US dollar equivalents. The tables
summarize information on instruments that are sensitive to foreign currency
exchange rates, including a foreign currency swap agreement and foreign currency
denominated debt obligations.
OPERATIONS WITH EURO FUNCTIONAL CURRENCY
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
----- ----- ------ ---- ---- ---------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT, INCLUDING
CURRENT PORTION:
US Dollars
Fixed rate........... -- -- -- -- -- $465.0 $465.0 $470.0
Avg. interest rate... -- -- -- -- -- 11.0% -- --
CURRENCY SWAP AGREEMENTS
RELATED TO LONG-TERM DEBT:
Receipt of USD
Notional amount...... $30.5 $30.5 $295.5 -- -- -- $356.5 $286.6
Avg. contract rate... 1.82 1.82 1.82 -- -- -- -- --
</TABLE>
OPERATIONS WITH BRITISH POUND FUNCTIONAL CURRENCY
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
---- ---- ---- ---- ---- ---------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT, INCLUDING
CURRENT PORTION:
US Dollars
Fixed rate................. -- -- -- -- -- $380.0 $380.0 $377.6
Avg. interest rate......... -- -- -- -- -- 11.3% -- --
Euro
Fixed rate................. -- -- -- -- -- $142.4 $142.4 $142.3
Avg. interest rate......... -- -- -- -- -- 11.2% -- --
</TABLE>
50
<PAGE> 52
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE
COMPANY
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,082.9 $ 998.5
Accounts receivable, net of allowance for doubtful
accounts of $44.1 million and $9.5 million,
respectively........................................... 286.4 174.4
Restricted cash........................................... 258.5 82.0
Prepaid expenses and other current assets................. 59.1 38.5
--------- --------
TOTAL CURRENT ASSETS.............................. 1,686.9 1,293.4
Property and equipment:
Communications equipment............................... 1,025.7 632.2
Construction in process................................ 196.9 104.6
--------- --------
1,222.6 736.8
Accumulated depreciation.................................. (218.1) (93.8)
--------- --------
Net property and equipment............................. 1,004.5 643.0
Goodwill and intangible assets, net of accumulated
amortization of $141.9 million and $52.5 million,
respectively........................................... 1,172.9 543.5
Other assets.............................................. 137.5 134.7
--------- --------
TOTAL ASSETS...................................... $ 4,001.8 $2,614.6
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 198.6 $ 172.9
Debt and capital lease obligations maturing within one
year................................................... 122.2 67.0
Accrued telecommunications expense........................ 116.0 25.1
Other current liabilities................................. 265.9 146.1
--------- --------
TOTAL CURRENT LIABILITIES......................... 702.7 411.1
Long-term debt and capital leases, less current portion... 2,430.0 1,725.3
Deferred revenue and other liabilities.................... 123.9 74.9
--------- --------
TOTAL LIABILITIES................................. 3,256.6 2,211.3
COMMITMENTS AND CONTINGENCIES
Minority interest......................................... 114.6 53.4
Redeemable preferred stock, $0.0001 par value (10,000,000
shares authorized; 100,000 shares issued and
outstanding)........................................... 502.3 --
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value (270,000,000, shares
authorized; 184,472,884 and 161,466,744 shares issued
and outstanding, respectively)......................... 18.4 16.1
Additional paid-in capital................................ 1,280.8 877.6
Notes receivable due from shareholder..................... (10.4) --
Accumulated deficit....................................... (1,160.5) (543.8)
--------- --------
TOTAL SHAREHOLDER'S EQUITY........................ 128.3 349.9
--------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........ $ 4,001.8 $2,614.6
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE> 53
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $ 852.2 $ 372.4 $ 121.4
Operating Expenses:
Access and network services............................... 523.7 238.1 97.1
Selling, general and administrative....................... 406.9 199.2 97.2
Depreciation and amortization............................. 212.8 78.8 18.5
Merger and restructuring costs............................ 142.5 -- --
-------- ------- -------
Total operating expenses.......................... 1,285.9 516.1 212.8
-------- ------- -------
Loss from operations........................................ (433.7) (143.7) (91.4)
Other Income/(Expense):
Interest, net............................................. (134.6) (71.0) (26.6)
Foreign currency losses................................... (8.9) (23.2) (3.4)
Other (expenses)/income................................... (21.6) 2.6 (10.9)
-------- ------- -------
(165.1) (91.6) (40.9)
-------- ------- -------
Net loss before income taxes and extraordinary loss......... (598.8) (235.3) (132.3)
Income taxes................................................ 17.9 7.8 2.5
-------- ------- -------
Net loss before extraordinary loss.......................... (616.7) (243.1) (134.8)
Extraordinary loss -- debt refinancing...................... -- (12.7) --
-------- ------- -------
Net loss.................................................... (616.7) (255.8) (134.8)
-------- ------- -------
Preferred dividends......................................... 25.7 -- --
-------- ------- -------
Net loss applicable to common shareholders.................. $ (642.4) $(255.8) $(134.8)
======== ======= =======
Loss per common share:
Net loss per share before extraordinary loss.............. $ (3.76) $ (1.70) $ (1.37)
Net loss per share -- extraordinary loss.................. -- (0.09) --
-------- ------- -------
Net loss per share........................................ $ (3.76) $ (1.79) $ (1.37)
======== ======= =======
Weighted average common shares outstanding.................. 170.8 142.6 98.3
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 54
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Operating Activities
Net loss.................................................. $ (616.7) $(255.8) $(134.8)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and amortization............................. 210.8 79.4 24.5
Equity in losses of ventures, net of dividends received... 16.7 1.3 17.5
Change in fair value of foreign exchange instruments...... (38.7) 28.7 --
Merger and restructuring costs............................ 83.6 -- --
Other adjustments......................................... (6.9) 2.1 20.3
Changes in assets and liabilities:
Accounts receivable.................................... (138.5) (128.3) (23.1)
Accounts payable and accrued expenses.................. 101.6 115.6 54.1
Unearned revenue....................................... 112.7 68.7 1.4
Other changes in assets and liabilities................ (55.4) (32.6) (12.2)
-------- ------- -------
Net Cash Used in Operating Activities................ (330.8) (120.9) (52.3)
Investing Activities:
Acquisitions, net of cash acquired........................ (339.4) (257.4) (2.4)
Purchases of property and equipment....................... (386.0) (231.0) (58.2)
Restricted cash........................................... (173.2) 32.0 (62.9)
Other investing activities................................ (18.4) .5 5.9
-------- ------- -------
Net Cash Used in Investing Activities................ (917.0) (455.9) (117.6)
Financing Activities:
Proceeds from debt, net of debt issuance costs............ 818.3 787.9 384.9
Net proceeds from issuance of stock and minority shares... 631.0 370.0 86.4
Repayments of debt........................................ (97.0) (116.1) (.1)
Other financing activities................................ -- (9.4) (2.8)
-------- ------- -------
Net Cash Provided by Financing Activities............ 1,352.3 1,032.4 468.4
Effect of exchange rate changes on cash and cash
equivalents............................................... (20.1) 2.7 (8.0)
-------- ------- -------
Net increase in cash and cash equivalents................... 84.4 458.3 290.5
Cash and cash equivalents at beginning of year.............. 998.5 540.2 67.9
-------- ------- -------
Cash and cash equivalents at end of year.................... $1,082.9 $ 998.5 $ 358.4
======== ======= =======
Supplemental Disclosure of Cash Flow Information:
Issuance of common shares or notes for interest in
business ventures...................................... $ 336.6 $ 19.5 $ 4.1
======== ======= =======
Capitalization of leases.................................. $ 126.4 $ 149.4 $ 142.4
======== ======= =======
Conversion of bonds and notes into common shares.......... $ 38.5 $ 40.6 $ 4.3
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 55
GLOBAL TELESYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES TOTAL
---------------- PAID-IN RECEIVABLE, ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT EQUITY
------ ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ 89.9 9.0 264.9 -- (145.6) 128.3
Proceeds from the sale of common
stock, net of expenses of $9,850.... 15.3 1.5 87.7 -- -- 89.2
Comprehensive Income.................. -- -- (5.7) -- -- (5.7)
Net loss.............................. -- -- -- -- (134.8) (134.8)
-------
Total comprehensive income...... (140.5)
Other................................. 1.0 .1 .5 -- -- .6
------ ------- -------- ------- --------- -------
Balance at December 31, 1997............ 106.2 10.6 347.4 -- (280.4) 77.6
Changes in shareholders' equity for
GTS (Europe) Ltd. for the three
months ended December 31, 1997, not
presented elsewhere................. .4 -- 1.6 -- (7.6) (6.0)
------ ------- -------- ------- --------- -------
Adjusted Balance at December 31, 1997... 106.6 10.6 349.0 -- (288.0) 71.6
Proceeds from the sale of common
stock, net of expenses of $22,805... 31.1 3.1 350.8 -- -- 353.9
Exercise of stock options and other
transactions........................ 5.8 .6 15.6 -- -- 16.2
Conversion of notes payable........... 4.1 .4 40.4 -- -- 40.8
Exercise of common stock warrants..... 5.1 .5 (.5) -- -- --
Issuance of common stock in connection
with business combinations.......... 8.7 .9 115.2 -- -- 116.1
Comprehensive Income.................. -- -- 7.1 -- -- 7.1
Net loss.............................. -- -- -- -- (255.8) (255.8)
-------
Total comprehensive income...... (248.7)
------ ------- -------- ------- --------- -------
Balance at December 31, 1998............ 161.4 16.1 877.6 (543.8) 349.9
Exercise of stock options and other
transactions........................ 5.0 .5 38.8 -- -- 39.3
Conversion of notes payable........... 3.8 .4 38.1 -- -- 38.5
Issuance of common stock in connection
with business combinations and
employment arrangements............. 13.6 1.3 344.9 (10.4) -- 335.8
Issuance of common stock in connection
with preferred dividends............ .7 .1 23.3 -- -- 23.4
Comprehensive Income.................. -- -- (41.9) -- -- (41.9)
Net loss.............................. -- -- -- -- (616.7) (616.7)
-------
Total comprehensive income...... (658.6)
------ ------- -------- ------- --------- -------
Balance at December 31, 1999............ 184.5 $ 18.4 $1,280.8 $ (10.4) $(1,160.5) $ 128.3
====== ======= ======== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE> 56
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
e*Business and borderless broadband services across Europe, serving businesses
and carriers in European countries with a range of broadband, Internet/IP and
voice services. As an industry leader in Europe, the Company operates cross-
border fiber-optic network and a Tier-1 IP backbone. Also, GTS is the majority
owner of Golden Telecom, which offers a variety of fixed-line and mobile
telecommunications services in Russia, Ukraine and other former Soviet nations.
Effective March 4, 1999, the Company completed its business combination
with Global TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly Esprit
Telecom Group plc, which was accounted for as a pooling of interests.
Accordingly, these financial statements have been restated and are presented as
if the companies have been combined since inception (see Note 3, "Business
Combinations and Venture Transactions").
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of minority shareholder rights, super majority
voting conditions or other governmentally imposed uncertainties so severe that
they prevent the Company from obtaining unilateral control of the venture. If
the Company has little ability to exercise significant influence over a venture,
the venture is accounted for by the cost method. All significant inter-company
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 recognized have been recovered.
Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements in order to conform to the 1999 presentation.
CASH AND CASH EQUIVALENTS
The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $312.1 million and $143.4
million of restricted cash at December 31, 1999 and 1998, respectively. The
restricted cash is primarily related to cash held in escrow for contractual
obligations and interest payments associated with the Company's debt
obligations.
55
<PAGE> 57
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 three
to ten years for telecommunications equipment 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 capitalizes material
interest costs associated with the construction of capital assets for business
operations and amortizes the costs over the assets' useful lives. The Company
has capitalized interest costs of $13.0 million and $4.9 million during the
years ended December 31, 1999 and 1998, respectively. Prior to 1998, the Company
had no capitalized interest.
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 five to
twenty 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 an
event or change in circumstances indicates 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 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
discounted cash flow analysis or other valuation techniques. During 1997, the
Company recorded a write-down of certain long-lived assets. No impairment
expense was recognized in 1999 or 1998.
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
reinvested in those operations permanently.
56
<PAGE> 58
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK SPLITS
Effective July 21, 1999, outstanding shares of common stock split
two-for-one. All shares and per share amounts have been restated to reflect the
stock split.
FOREIGN CURRENCY TRANSLATION
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). 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 other comprehensive income, 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 contracts is accounted for when the services are provided.
Billings received in advance of service being performed are deferred and
recognized as revenue as the service is performed.
NET LOSS PER SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method and
outstanding options using the "treasury stock" method. All of the items that
would normally effect diluted earnings would not be considered for dilution
purposes, when the company recognizes a loss for the period, as they are
anti-dilutive.
57
<PAGE> 59
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market prices. At December 31, 1999
and 1998, the fair value of the Company's fixed rate debt is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
CARRYING CARRYING
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Senior subordinated convertible debentures at
interest rates ranging from 5.75% to
8.75%...................................... $ 864.4 $ 546.0 $851.0 $584.5
Senior nonconvertible debentures at interest
rates ranging from 9.875% to 11.5%......... 1,683.2 1,685.2 938.1 915.1
</TABLE>
The recorded amounts for all other long-term debt of the Company
approximates 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, most of which are
maintained in high-quality financial institutions. 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.
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The Company has taken and intends to
continue to take actions that may minimize the unfavorable effect of a continued
ruble devaluation.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk and periodically evaluates the
materiality of foreign exchange exposures in different countries and the
financial instruments available to mitigate this exposure. The Company finds it
impractical to hedge all foreign currency exposure and as a result, will
continue to experience foreign currency gains and losses.
The Company currently accounts for its existing derivatives under SFAS No.
52, "Foreign Currency Translation." In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes a reporting standard for derivative instruments which will require
the Company to record all derivatives as either assets or liabilities and
requires that those instruments are recorded at their fair value. During June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of SFAS No. 133." This
statement defers the effective date of SFAS 133 to 2001. The Company plans to
adopt SFAS No. 133 for fiscal year beginning January 1, 2001. The Company has
not yet determined the impact of the adoption of this statement.
The Company enters into foreign currency forward contracts to minimize
foreign exchange risk. The Company utilizes foreign currency agreements that are
short term in duration (generally one week or less). As of December 31, 1999,
the Company had no outstanding forward contracts. Additionally, GTS Europe B.V.
maintains one foreign currency swap transaction agreement (see Note 6, "Foreign
Currency Transactions").
58
<PAGE> 60
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 generally 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 generally 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.
NOTE 3: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS
During 1999 and 1998 the Company has acquired several businesses and has
also increased its ownership interest in several of its previously existing
ventures by either buying out or acquiring part of the minority shareholders'
interest in these ventures.
The more significant business combinations and venture transactions are
identified below.
1999 Business Combinations and Venture Transactions
GTS Europe B.V.
The Company increased its ownership in GTS Europe B.V. from 89.9% at
December 31, 1998 to 98.4% at December 31, 1999 by the following transactions:
On October 15, 1999, the Company entered into an exchange agreement with
all of the minority interest holders of GTS Europe B.V.'s common shares and
grantees of GTS Europe B.V. stock options that provides for the acquisition by
the Company of their equity interest in GTS Europe B.V. The exchange will take
place in up to three separate exchanges commencing on October 18, 1999. Pursuant
to the agreement the Company will acquire the respective minority interest
holders' common shares in GTS Europe B.V. that have been held by them for a
period greater than six months. Pursuant to this agreement and effective October
15, 1999, the Company exchanged 5,985,930 of its common shares for 6,565 of GTS
Europe B.V.'s common shares. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $133.0 million and
has been reflected as goodwill, which is being amortized over 20 years. Further,
minority interest holders of GTS Europe B.V. have additional beneficial
ownership rights in GTS Europe B.V.'s common shares, and common share options,
totaling 3,600 common shares. As stated above, the Company will acquire these
GTS Europe B.V. common shares in the future; however, future acquisitions will
be based on future market values of GTS Europe B.V. and the Company.
In June 1999, GTS increased its ownership of GTS Europe B.V. by acquiring
the remaining shares held by NMBS/SNCB (the Belgian Railway). The Company issued
2,150,380 shares of its common stock in exchange for the Belgian Railway's
interest in GTS Europe B.V. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $75.4 million and
has been reflected as goodwill, which is being amortized over 20 years.
59
<PAGE> 61
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Omnicom
In April 1999, GTS acquired Omnicom, a French company, for approximately
$320 million in cash and 3,706,572 shares of the Company's common stock. The
excess of the purchase price paid over the fair value of assets acquired has
been preliminarily calculated at approximately $453.4 and has been reflected as
goodwill, which is being amortized over 20 years.
GTS (Europe) Ltd.
On March 4, 1999, GTS acquired substantially all of the outstanding
ordinary shares and American Depositary Shares of GTS (Europe) Ltd. Upon
completion of the transaction, the number of shares issued for the outstanding
ordinary shares and American Depositary Shares of GTS (Europe) Ltd. was
32,055,024. The Company accounted for this combination as a pooling of
interests. Accordingly, the Company restated the accompanying financial
statements and financial data to represent the combined financial results of the
previously separate entities for all periods presented.
GTS (Europe) Ltd. had a fiscal year-end of September 30. The GTS (Europe)
Ltd. statements of operations for the years ended September 30, 1997 and 1996
were combined with GTS's statements of operations for the calendar year ended
December 31, 1997. The three months of operations of GTS (Europe) Ltd. from
October 1, 1997 to December 31, 1997 are not included in any of the statements
of operations presented. Accordingly, an adjustment was made in the consolidated
statements of shareholders' equity for 1997 to include the net income and other
transactions of GTS (Europe) Ltd. for the three months ended December 31, 1997.
On September 24, 1999, GTS (Europe) Ltd. filed an 8-K declaring a fiscal year-
end change from September 30 to December 31.
Golden Telecom
On October 5, 1999 Golden Telecom, Inc. ("Golden Telecom"), a then wholly
owned subsidiary of GTS, completed an initial public offering of its common
stock. Golden Telecom was formed to hold GTS's interest in the businesses it
owns and operates in Russia and the CIS. Golden Telecom, through subsidiaries,
is a facilities-based provider of integrated telecommunications services in
Moscow, Kiev, St. Petersburg and other major population centers throughout
Russia, Ukraine and other countries of the CIS. Through the initial and a
secondary public offering, Golden Telecom raised over $50 million from public
investors and approximately $45 million from strategic investors, which was
recorded as minority interest. In addition, GTS contributed $50 million to
Golden Telecom. At December 31, 1999, GTS had a 62.6% ownership interest in
Golden Telecom.
1998 Business Combinations
During 1998, GTS acquired substantially all of the outstanding common stock
of Netsource Europe ASA, ("Netsource") and Thyssen Festnetz GmbH's Co. KG
(collectively "Plusnet"). The Company recorded combined goodwill of $318.0
million for these acquisitions.
Further, in 1999 and 1998, the Company has acquired other less significant
telecommunications businesses offering similar or complementary services to
those offered by the Company. Such business combinations have been accomplished
through the purchase of the outstanding stock or assets of the acquired entity
for cash and shares of GTS stock. The cash portion of these transactions and
acquisitions has generally been financed through the Company's equity and debt
proceeds. The Company has accounted for these transactions and business
combinations following the purchase method of accounting, and as such, any
purchase price paid over net tangible assets acquired has been reflected as
goodwill.
60
<PAGE> 62
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma results of operations for the acquisitions would not
have had a material impact on the Company's operating results for the years
ended December 31, 1999 and 1998, and therefore no pro forma information has
been disclosed herein.
In conjunction with the 1999 and 1998 business combinations, assets
acquired, liabilities assumed and common stock issued were as follows (in
millions):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Fair value of assets acquired............................ $ 50.6 $ 94.2
Goodwill................................................. 717.2 308.4
Fair value of liabilities assumed........................ (91.8) (86.0)
Common stock issued...................................... (336.6) (93.0)
------- ------
Net cash paid............................................ $ 339.4 $223.6
======= ======
</TABLE>
NOTE 4: COMPREHENSIVE INCOME
The following table reflects the calculation of comprehensive income (loss)
for GTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Net loss.............................................. $(616.7) $(255.8)
Other comprehensive income (loss):
Preferred Dividends................................. (25.7) --
Foreign currency translation adjustments............ (16.2) 7.1
------- -------
(41.9) 7.1
------- -------
Comprehensive loss.................................... $(658.6) $(248.7)
======= =======
</TABLE>
NOTE 5: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Senior nonconvertible debentures....................... $1,685.2 $ 915.1
Senior subordinated convertible debentures............. 546.0 584.5
Capital lease obligation............................... 283.2 261.2
Other financing agreements............................. 37.8 31.5
-------- --------
2,552.2 1,792.3
Less: debt and capital lease obligations maturing
within one year...................................... 122.2 67.0
-------- --------
Total long-term debt and capital lease
obligations................................ $2,430.0 $1,725.3
======== ========
</TABLE>
Debt Obligations of GTS (Parent Company)
In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Convertible
Debentures due 2010") that mature July 1, 2010. The Convertible Debentures due
2010 are redeemable on or after July 1, 2001 at our option, at redemption prices
ranging from 104.025% to 100.0% of the principal amount, plus accrued and unpaid
interest. The Convertible
61
<PAGE> 63
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debentures due 2010 are convertible into approximately 17.0 million common
shares at any time prior to maturity or redemption at a conversion price of
$27.525 per common share. Interest is payable semiannually in January and July.
The Convertible Debentures due 2010 are subordinated to all existing and future
senior indebtedness of the Company, except for the Convertible Bonds due 2000,
as defined below, with which they rank pari passu in right of payment.
In February 1998, the Company issued $105.0 million aggregate principal
amount of 9.875% senior notes due February 15, 2005 (the "9.875% Senior Notes
due 2005"). Approximately $19.6 million of the net proceeds from the sale of
such notes were initially placed in escrow for the first four semiannual
interest payments, commencing August 15, 1998. Interest is payable semiannually
in February and August. The 9.875% Senior Notes due 2005 are senior in rank to
both the Convertible Debentures due 2010 and the Convertible Bonds due 2000.
In July 1997, the Company issued $144.8 million aggregate principal amount
of convertible senior subordinated bonds ("the Convertible Bonds due 2000") that
mature on June 30, 2000. As a result of the completion of GTS's initial public
offering in February 1998 (the "Stock Offering"), see Note 7, "Shareholders'
Equity," the interest rate on the Convertible Bonds due 2000 will remain at
8.75% until maturity. The Convertible Bonds due 2000 are convertible into 14.5
million common shares at a conversion price of $10.00 per share. During the
twelve months ended December 31, 1999 and 1998, a total of $38.5 million and
$27.2 million, respectively, of the Convertible Bonds due 2000 were converted
into approximately 3.8 million and 2.7 million common shares, respectively of
the Company's common stock. The Bonds are subordinated to all existing and
future indebtedness of the Company, except for the Convertible Debentures due
2010, with which they rank pari passu in right of payment.
On December 20, 1999, GTS called for redemption on March 20, 2000, all of
the outstanding Convertible Bonds due June 2000. The redemption price of such
bonds is $1,016 per $1,000 principal amount of such bonds, including accrued
interest to the redemption date. There were $79.1 million in aggregate principal
amount of such bonds outstanding at December 31, 1999.
Debt Obligations of GTS Europe B.V. (formerly Hermes Europe Railtel B.V.)
In November 1999, our 98.4%-held subsidiary Global TeleSystems Europe B.V.,
formerly Hermes Europe Railtel B.V. ("GTS Europe B.V.") issued E225.0 million
aggregate principal amount of 10.50% Senior Notes due January 15, 2006 (the
"10.5% Senior Notes due 2006") and E275.0 million aggregate principal amount of
11% Senior Notes due January 15, 2009 (the "11% Senior Notes due 2009").
Interest is payable semiannually in December and June. The 10.5% Senior Notes
due 2006 and 11% Senior Notes due 2009 notes were issued pursuant to two
indentures with terms that are substantially similar to the indentures governing
the 11.5% Senior Notes due 2007, which were issued by GTS Europe B.V. in August
1997, and the 10.375% Senior Notes due 2006 and the 10.375% Senior Notes due
2009, which were issued by GTS Europe B.V. in January 1999.
The 11% Senior Notes due 2009 are redeemable in whole or in part, at our
option at any time on or after December 1, 2004 at a price ranging from 105.50%
to 100.0% of the principal amount, plus accrued and unpaid interest. GTS may
also redeem up to 35% of the principal amount of the 11% Senior Notes due 2009
at any time prior to prior to December 1, 2002 at a redemption price equal to
111% of the principal amount of the notes redeemed, plus accrued and unpaid
interest, with the net cash proceeds of public equity offerings of GTS Europe
B.V. or strategic equity investments of at least $75.0 million, provided that
following such redemption at least 65% of the original principal amount of the
11% Senior Notes due 2009 remains outstanding. The 10.5% Senior Notes due 2006
notes are not so redeemable.
In January 1999, GTS Europe B.V. issued $200 million aggregate principal
amount of 10.375% Senior Notes due January 15, 2009 (the "10.375% Senior Notes
due 2009") and E85 million (approximately
62
<PAGE> 64
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$100 million) aggregate principal amount of Senior Notes due January 15, 2006
(the "10.375% Senior Notes due 2006" and together with the 10.375% Senior Notes
due 2009, the "10.375% Senior Notes due 2006 and 2009"). Interest is payable
semiannually in January and July, commencing July 15, 1999. The 10.375% Senior
Notes due 2009 are redeemable in whole or in part, at our option at any time on
or after January 15, 2004 at a price ranging from 105.188% to 100.0% of the
principal amount, plus accrued and unpaid interest. The 10.375% Senior Notes due
2006 are redeemable in whole or in part, at our option at any time on or after
January 15, 2003 at a price ranging from 105.188% to 100.0% of the principal
amount, plus accrued unpaid interest. GTS may also redeem up to one-third of the
principal amount of the 10.375% Senior Notes due 2006 and 2009 prior to January
15, 2002 at a redemption price equal to 110.375% of the principal amount of the
notes so redeemed, plus accrued and unpaid interest thereon, with the net cash
proceeds of one or more public equity offerings of GTS Europe B.V. or strategic
equity investments of at least $75.0 million, provided, however, that following
such redemption, at least two-thirds of the original principal amount of such
notes remains outstanding.
In August 1997, GTS Europe B.V. issued $265.0 million aggregate principal
amount of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes pay interest semiannually in February and August at a rate of 11.5%.
Approximately $56.6 million of the net proceeds of the offering of the Senior
Notes was initially placed in escrow for the first four semiannual interest
payments commencing February 15, 1998. GTS may redeem the Senior Notes, in whole
or in part, any time on or after August 15, 2002 at a price ranging from 105.75%
to 100.0% of the principal amount, plus accrued and unpaid interest. GTS may
also redeem up to one-third of the principal amount 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 GTS Europe B.V. or strategic equity
investments with gross proceeds of at least $75.0 million, provided, however,
that at least two-thirds of the principal amount of the Senior Notes originally
issued remain outstanding after each such redemption.
The debt obligations of GTS Europe B.V. described above represent senior
obligations of GTS Europe B.V. and are structurally senior to the debt
obligations of GTS described above.
Debt Obligations of GTS (Europe) Ltd. (formerly Esprit Telecom Group plc)
In June 1998, our wholly owned subsidiary Global TeleSystems (Europe)
Limited, formerly Esprit Telecom Group plc, ("GTS (Europe) Ltd.") issued $150.0
million and DM 150.0 million aggregate principal amount of Senior Notes due June
15, 2008 (the "Senior Notes due 2008"). The Senior Notes due 2008 pay interest
semi-annually in June and December at a rate of 10.875% and 11.00% respectively.
GTS may redeem the Senior Notes due 2008, in whole or in part, any time on or
after June 15, 2003, at a price ranging from 105.438% to 100.0% of the principal
amount, plus accrued and unpaid interest. GTS may redeem, at our option, up to
35% of the principal amount of each series of the 11.5% Senior Notes due 2007,
defined below, and Senior Notes due 2008 prior to December 15, 2000 and June 15,
2001, respectively, at prices equal to 111.50% of the principal amount of the
11.5% Senior Notes due 2007, and 110.875% of the principal amount of the Senior
Notes due 2008, plus other amounts, with the net cash proceeds of public equity
offerings of GTS (Europe) Ltd. or strategic equity investments of at least $50
million, provided that following such redemption at least 65% of the principal
amount of the notes remain outstanding.
In December 1997, GTS (Europe) Ltd. issued $230.0 million and DM 125.0
million aggregate principal amount of senior notes due December 15, 2007 (the
"11.5% Senior Notes due 2007"). The 11.5% Senior Notes due 2007 rank pari-passu
with ordinary creditors with interest payable semi-annually in June and December
at a rate of 11.5%. Approximately $72.0 million and DM 36.0 million of the net
proceeds of the offering of the 11.5% Senior Notes due 2007 was initially placed
in escrow for the first six semi-annual payments commencing June 15, 1998. GTS
may redeem the 11.5% Senior Notes due 2007, in whole or in part, any time on or
after December 15, 2002 at redemption prices ranging from 105.75% to 100.0% of
the principal amount, plus accrued and unpaid interest.
63
<PAGE> 65
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The debt obligations of GTS (Europe) Ltd. described above represent senior
obligations of GTS (Europe) Ltd. and are structurally senior to the debt
obligations of GTS described above.
Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at the prevailing negotiated market rates. GTS (Europe) Ltd. has two
revolving credit lines with available funds of approximately $2.2 million that
were unused at December 31, 1999.
Aggregate maturities of long-term debt, as of December 31, 1999, are as
follows: 2000 -- $93.7 million, 2001 -- $5.4 million, 2002 -- $4.2 million,
2003 -- $3.9 million, 2004 -- $3.3 million and $2,158.5 million thereafter.
The Company paid interest of $186.9 million, $124.2 million and $2.2
million in 1999, 1998, and 1997, respectively.
NOTE 6: FOREIGN CURRENCY TRANSACTIONS
On April 19, 1998, GTS Europe B.V. 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 $265.0 million aggregate principal amount 11.5% Senior Notes due 2007
(the "Senior Notes"). GTS Europe B.V. remeasured the value of the swap as of
December 31, 1999 and 1998 and the resulting change in value of $39.5 million
and $27.8 million, respectively, has been recorded as a non-current liability on
the balance sheet and recognized as a foreign currency item in the statement of
operations. The foreign currency effect recognized on marking the Swap to its
remeasured value for the years ended December 31, 1999 and 1998 was offset in
the statement of operations by the revaluation of the Senior Notes.
NOTE 7: SHAREHOLDERS' EQUITY
COMMON STOCK
On June 16, 1999 the GTS's stockholders approved an increase in the
Company's authorized common stock from 135 million to 270 million shares. In
June 1999, the Company's Board of Directors approved a two-for-one split of its
common stock. The stock split was effected by the distribution of a stock
dividend on July 21, 1999 to holders of the Company's common stock at the close
of business on July 1, 1999. All share and per share amounts have been restated.
In July 1998, the Company completed a secondary public offering of 5.6
million shares of common stock at $22.75 per common share. Net proceeds from the
offering were $118.7 million. In addition, in conjunction with such offering,
shareholders of the Company sold 23.4 million shares of the Company's common
stock. The Company did not realize any of the proceeds of such sale.
In February 1998, the Company completed an initial public offering of 25.6
million shares of common stock at $10.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed in the United States on the Nasdaq National Market. Net proceeds from the
Stock Offering were $235.2 million. In October 1999, GTS began trading on the
New York Stock Exchange.
In February 1999 and June 1998, pursuant to previously issued and redeemed
debt obligations, warrants to purchase 116,260 and 6,666,666 common shares,
respectively, were exercised using a cash-less exercise. In addition, warrants
to purchase 8,772,626 shares of the Company's common stock expire in 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.
64
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has reserved 72,577,381 shares of common stock for issuance
upon conversion of the exercise of outstanding stock options, warrants,
convertible bonds and similar dilutive rights.
PREFERRED STOCK
In April 1999, the Company issued, for gross proceeds of $500 million in a
private placement, ten million Depositary Shares, each representing 1/100th of a
share of a new series of 7.25% cumulative convertible preferred stock. Net
proceeds of this offering were $485 million, excluding certain transaction
costs. Holders of the Depositary Shares are entitled to a quarterly cash payment
of $0.90625 per Depositary Share (or 7.25% per year per depositary share)
payable on March 15, June 15, September 15 and December 15 of each year
commencing on June 15, 1999. Each Depositary Share will have a liquidation
preference of $50 per share and will be convertible into GTS common stock at
$34.50 per GTS common share. The preferred stock is convertible at any time into
1.45 shares of common stock. GTS may redeem the shares of the convertible
preferred stock, in whole or in part, at its option on or after March 15, 2002.
As of December 31, 1999 and 1998, 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.
NOTE 8: 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, 1999, 1998 and 1997 would have been
approximately $689.0 million, $269.8 million and $142.0 million, respectively.
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, 1999, the maximum number of shares of common stock
available for grant under the Option Plans was 43.1 million. Except for the
Company's performance based options granted under the 1992 stock option plan,
options granted under the Option Plans issued prior to June of 1999, generally
vest over a three to four-year period from the date of grant and expire ten
years from the date of grant. In 1996 and 1998, the Company had granted options
with vesting terms that provide for vesting within five and six years after the
date of grant, respectively, unless certain performance goals are met, in which
case vesting could occur over a shorter period of time. Effective June 1999,
options granted under the Option Plan generally vest over a three year term with
one-third vesting after one year and one thirty-sixth vesting each month
thereafter. Upon a change of control, as defined in the Option Plans, all
options would immediately vest.
The fair value of options granted under the GTS plans during 1999, 1998 and
1997 is estimated to be between $1.20 and $38.05, $8.26 and $16.86 and $1.47 and
$3.68 per common share, respectively, on the date of grant using the Black
Scholes option pricing model with the following assumptions: dividend yield of
0% and expected life of three to five years for all periods presented, risk free
interest rates between 4.57% and 6.32% for 1999, between 4.19% and 5.64% for
1998 and 5.74% for 1997, volatility of .75 for 1999 and 1998 grants and .50 for
1997 grants. We determined our volatility factor in 1999 and 1998 based on the
Company's historic stock performance and in 1997 with the assistance of an
investment banker based on peer public companies.
65
<PAGE> 67
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 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...................... 18,520,280 $ 8.93 15,449,514 $ 4.10 11,350,512 $3.07
Options granted............. 12,820,630 28.32 9,235,842 13.44 5,561,556 6.03
Options exercised........... 4,594,246 5.21 5,223,982 3.01 359,234 1.60
Options canceled or
expired................... 2,676,249 15.29 941,094 8.14 893,584 3.58
---------- ---------- ----------
Outstanding at end of
year...................... 24,070,415 19.55 18,520,280 8.94 15,659,250 4.05
========== ========== ==========
Options exercisable at year
end....................... 4,461,025 $ 7.26 5,433,264 $14.35 6,628,991 $2.71
</TABLE>
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PRICE NUMBER LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 1999: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.10 to $5.13................ 2,903,486 5.1 $ 3.39 2,262,414 $ 3.47
6.45 to 10.00................ 3,505,462 6.6 7.84 1,599,064 7.72
12.42 to 19.00................ 4,589,409 8.6 13.55 313,199 17.76
19.38 to 24.92................ 1,579,980 8.9 22.20 272,200 22.29
26.06 to 32.00................ 10,269,430 9.5 28.25 -- --
32.11 to 38.62................ 1,222,648 9.5 37.43 14,148 38.13
</TABLE>
In addition, prior to the establishment of the Option Plans, options were
granted to certain key employees to purchase 2,344,500 shares of the Company's
common stock at an exercise price of $0.265 per share. There are 388,256 of
these options outstanding and fully exercisable at December 31, 1999.
In the fourth quarter of 1997, GTS Europe B.V. implemented a stock option
plan for its key officers and employees (the "GTS Europe B.V. Plan"). As a
result of issuing options under the GTS Europe B.V. Plan, GTS Europe B.V.
incurred a non-cash charge of approximately $3.7 million, of which $2.6 million
was recorded during 1997 and the remaining $1.1 million was recorded in 1998.
NOTE 9: 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 after three years of
service. The Company's expense under the Savings Plan was approximately $0.2
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
Company made no discretionary (non-matching) contributions for the years ended
December 31, 1999, 1998 or 1997.
66
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
With respect to certain GTS (Europe) Ltd. employees, the Company is
required to contribute a fixed percentage, based upon the salary earned, to the
employees' nominated pension insurance policy or other pension arrangements.
During the years ended December 31, 1999, 1998 and 1997, the Company incurred
expense of $0.4 million, $1.9 million and $0.3 million, respectively related to
these pension arrangements.
GTS Europe B.V. established a pension plan in 1995 that covers all GTS
Europe B.V. employees upon twenty-five years of age and at least one year of
service. GTS Europe B.V. has entered into an insurance arrangement (an
investment contract) whereby an insurance provider has undertaken a legal
obligation to provide specific benefits to participants in return for a fixed
premium. As such, GTS Europe B.V. does not bear significant financial risk for
its pension plan. GTS Europe B.V.'s expense under the pension plan was $1.8
million, $1.0 million and $0.7 million for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 10: INCOME TAXES
The components of loss before extraordinary loss and income taxes were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Pretax loss:
Domestic...................................... $(177.2) $ (63.9) $ (64.9)
Foreign....................................... (421.6) (171.4) (67.4)
------- ------- -------
$(598.8) $(235.3) $(132.3)
======= ======= =======
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the Company recorded
$17.9 million, $7.8 million and $2.5 million, respectively, in income tax
expense that related exclusively to its current provision for foreign taxes.
The reconciliation of the U.S. statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Taxes at U.S. statutory rates......................... 35.0% 35.0% 35.0%
Foreign income taxes.................................. 3.0 3.3 1.8
Foreign operating losses generating no tax benefit.... (24.6) (25.5) (18.3)
Domestic operating losses generating no tax benefit... (10.4) (9.5) (16.7)
----- ----- -----
3.0% 3.3% 1.8%
===== ===== =====
</TABLE>
67
<PAGE> 69
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carry-forwards......................... $64.3 $64.9
Other deferred tax assets................................. 11.0 4.0
----- -----
Net deferred tax asset...................................... 75.3 68.9
Less: valuation allowance................................. (75.3) (68.9)
----- -----
Total............................................. $ -- $ --
===== =====
</TABLE>
As of December 31, 1999, the Company had net operating loss carry-forwards
("NOL's") for U.S. federal income tax purposes of approximately $183.8 million
expiring in fiscal years 2004 through 2019. 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 may be subject to an annual limitation.
As of October 1, 1999, the U.S. companies of Golden Telecom, Inc. ("GTI")
are no longer included in the consolidated U.S. tax return of the Company as the
Company owns less than 80% of Golden Telecom companies. Upon the initial public
offering of Golden Telecom shares, GTI was allocated $23.6 million previous
NOL's.
NOTE 11: COMMITMENTS AND CONTINGENCIES
LEASES
The Company has various lease agreements for fiber and equipment. 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,
---------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Telecommunications equipment................................ $395.8 $313.0
Less: accumulated amortization.............................. 47.1 16.5
------ ------
$348.7 $296.5
====== ======
</TABLE>
Rental expense for operating leases aggregated $23.4 million, $9.9 million
and $4.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
68
<PAGE> 70
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments, by year and in the aggregate, under the capital
leases and non-cancelable operating leases with initial or remaining terms in
excess of one year as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
December 31, 2000......................................... $ 53.9 $ 59.4
2001.................................................... 47.9 20.3
2002.................................................... 46.2 17.2
2003.................................................... 44.6 15.9
2004.................................................... 43.1 14.7
Thereafter................................................ 267.4 100.2
------ ------
Total minimum lease payments.................... 503.1 $227.7
======
Less amount representing interest......................... 219.9
------
Present value of net minimum lease payments............... 283.2
Less current portion of capital lease obligations......... 28.5
------
Long-term portion of capital lease obligations............ $254.7
======
</TABLE>
OTHER COMMITMENTS AND CONTINGENCIES
The Company's has future purchase commitments amounting to $189.3 million
as of December 31, 1999.
As discussed in Note 14, "Investments in and Advances to Ventures", the
Company has committed to purchase capacity from its FLAG joint ventures in
addition to an equity investment. This commitment is included in the future
purchase commitments noted above.
In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its consolidated
ventures. The total amount guaranteed at December 31, 1999 was approximately
$19.8 million.
TAX MATTERS
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
The Company has entered into a subscription agreement (the "Subscription
Agreement") dated as of April 6, 1999 with H. Brian Thompson, its Chairman and
Chief Executive Officer, in connection with
69
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Thompson's employment agreement with the Company. The Subscription Agreement
provides that Mr. Thompson purchase $20 million of the Company's common stock
valued at $27.17 per share, or a total of 736,056 shares. The Subscription
Agreement provides further that Mr. Thompson pay for 368,028 of these shares for
$10 million in cash and for 368,028 of these shares using the proceeds of a loan
in the principal amount of $10 million from the Company. These arrangements were
consummated in June 1999. In connection with the loan, Mr. Thompson has
delivered a secured promissory note to the Company which bears interest at the
Federal Mid-Term Rate and has a maturity of six years.
During the fourth quarter of 1998 and the second quarter of 1999, the
Company acquired AB Swed Carrier's and NMBS/SNCB's ownership interest in GTS
Europe B.V. (formerly Hermes Europe Railtel, B.V.). In connection with this
purchase, a wholly-owned subsidiary of the Company paid approximately $10.1
million to a company, which was affiliated with a then board member of GTS
Europe B.V., for negotiating the purchase transaction on behalf of the Company.
NOTE 13: 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 75%. The Company has no investments in ventures
that are accounted for by the cost method.
The components of the Company's investments in and advances to ventures,
which are included in other assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Equity in net assets acquired............................... $14.7 $14.8
Excess of investment cost over equity in net assets acquired
net of amortization of $3,476 and $3,836, respectively.... 3.5 4.1
Accumulated earnings recognized............................. 8.8 12.8
Dividends................................................... (1.5) (.7)
Cash advances and other..................................... 35.1 19.7
----- -----
Total investments in and advances to ventures..... $60.6 $50.7
===== =====
</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.
70
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. During 1997, the Company recorded a
write-off of certain investments in excess of their net realizable value. The
total charge was classified in the statement of operations as other income
(loss). The Company recorded no such write-offs during the years ended December
31, 1999 and 1998.
Investments in FLAG Atlantic Limited
GTS indirectly owns 50% of FLAG Atlantic Limited, a Bermuda corporation
("FLAG Atlantic"), which was formed to develop, construct, operate and arrange
the financing for a 15,000 kilometer, 12 fiber, submarine fiber optic cable
system which will connect the United States and Europe, and the landed portions
of the system, which will connect London, Paris and New York. FLAG Telecom is
the indirect owner of the other 50% of FLAG Atlantic. Total project costs are
estimated at $1.1 billion.
GTS has made an equity investment commitment of $100 million and a dark
fiber capacity purchase commitment of $200 million, which are fully supported by
a bank letter of credit. As of December 31, 1999, GTS paid $60 million in cash
toward our commitment. In addition, FLAG Atlantic has entered into a $600
million credit facility with a group of banks. The bank facility is non-recourse
to GTS and FLAG; however, in addition to other collateral and assignment of
certain contracts, GTS and FLAG Telecom have pledged the stock they own in FLAG
Atlantic to the lenders in the bank credit facility.
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, 1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
EQUITY METHOD ENTITIES 1999 1998 1997
- ---------------------- ------ ------ ------
<S> <C> <C> <C>
Revenue.................................................... $115.4 $201.1 $226.2
Gross margin............................................... 55.1 82.0 110.2
Net income (loss).......................................... (6.6) (.7) 4.3
Current assets............................................. 184.5 58.0 80.8
Total assets............................................... 357.2 178.4 211.2
Current liabilities........................................ 43.8 78.0 87.2
Total liabilities.......................................... 294.0 114.2 130.4
</TABLE>
NOTE 14: MERGER AND RESTRUCTURING CHARGES
During 1999 the Company recorded a $142.5 million charge to earnings
attributable to merger and restructuring costs. Of the $142.5 million, $63.7
million, $19.8 million and $59.0 million was recorded in the first quarter,
third quarter and fourth quarter of 1999, respectively.
The $63.7 million first quarter charge was attributable to the
transactional and other costs associated with the acquisition and integration of
GTS (Europe) Ltd. (formerly Esprit Telecom plc). Of the $63.7 million, $1.4
million remains as an accrual, at December 31, 1999, for additional
transactional costs to be paid.
The $19.8 million third quarter charge was a result of the Company's
decision that the allocation of sufficient resources to support certain cellular
ventures in Russia was not consistent with the Company's current strategic
plans. Accordingly, the Company decided to abandon certain cellular ventures in
and decided to cease to provide any further financial assistance to these
ventures other than the assumption of certain debt
71
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations. The Company is seeking to sell its ownership interests in these
assets in furtherance of the plan of abandonment. Of the $19.8 million, $3.3
million remains as an accrual, at December 31, 1999, for cash payments that the
Company expects to incur as part of the plan of abandonment.
The $59.0 million fourth quarter charge reflects a charge of $40.1 million
for the integration and rationalization of our switched-voice assets as well as
$18.9 million for certain employee-related reorganization costs. These charges
were principally a result of the acquisitions and organizational consolidations
that the Company affected in 1999. Of the $59.0 million, $25.8 million remains
as an accrual, at December 31, 1999, for additional cash payments that the
Company expects to incur as part of our plan of restructuring.
In 1998, the Company recorded a $12.7 million extraordinary charge to
earnings resulting from the early extinguishment of 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 obligations.
NOTE 15: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA
The Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information," as of December 31, 1998. SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segment and related disclosures about its products, services, geographic areas
and major customers.
Based on our organizational structure, the Company operates in two
reportable segments: Europe and Golden Telecom. The Company's reportable
segments represent business units that primarily offer similar products and
services to communications carriers, internet service providers and other
high-usage customers; however, the business units are managed separately due to
the geographic dispersion of their operations.
Our product and service offering includes the provision of broadband,
internet, data and voice services to our customers.
72
<PAGE> 74
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about the Company's segments is as follows:
LINE OF BUSINESS DATA:
CONSOLIDATED:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Europe............................................... $ 746.8 $ 286.6 $ 93.3
Golden Telecom....................................... 97.9 86.1 27.2
Corporate............................................ 7.5 (0.3) 0.9
-------- -------- -------
Total Revenue.......................................... 852.2 372.4 121.4
Loss from operations:
Europe............................................... (306.1) (90.5) (42.8)
Golden Telecom....................................... (31.6) (19.5) (18.8)
Corporate............................................ (96.0) (33.7) (29.8)
-------- -------- -------
Total loss from operations............................. (433.7) (143.7) (91.4)
Unallocated other (income) expense:
Interest expense, net................................ (134.6) (71.0) (26.6)
Other (income) expense, net.......................... (30.5) (20.6) (14.3)
-------- -------- -------
Loss before income taxes.......................... (598.8) (235.3) (132.3)
Assets:
Europe............................................... 3,120.1 1,497.6 625.6
Golden Telecom....................................... 366.6 235.8 129.6
Corporate............................................ 515.1 881.2 121.4
-------- -------- -------
Total assets........................................... 4,001.8 2,614.6 876.6
Capital expenditures:
Europe............................................... 347.8 208.9 55.2
Golden Telecom....................................... 22.1 20.7 1.8
Corporate............................................ 16.1 1.4 1.2
-------- -------- -------
Total capital expenditures............................. 386.0 231.0 58.2
</TABLE>
73
<PAGE> 75
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
The selected financial data presents the restatement of the Company's
historical financial statements for 1998 to reflect the business combination
with GTS (Europe) Ltd., which was accounted for as a pooling of interests.
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1999
Revenues................................... $ 170.9 $ 200.3 $ 227.9 $ 253.1 $ 852.2
Gross profit............................... 68.3 87.0 87.7 85.5 328.5
Net loss................................... (162.2) (102.3) (112.8) (239.4) (616.7)
======= ======= ======= ======= =======
Preferred dividend........................... -- (7.6) (9.1) (9.0) (25.7)
-------
Net loss applicable to common
shareholders............................ (162.2) (109.9) (121.9) (248.4) (642.4)
======= ======= ======= ======= =======
Loss per common share:
Net loss per share......................... (1.00) (0.66) (0.70) (1.38) (3.76)(a)
======= ======= ======= ======= =======
1998
Revenues................................... $ 46.2 $ 66.0 $ 118.3 $ 141.9 $ 372.4
Gross profit............................... 13.1 20.9 45.4 54.9 134.3
Net loss before extraordinary item(1)...... (37.1) (48.0) (63.7) (94.3) (243.1)
Extraordinary item........................... (12.7) -- -- -- (12.7)
------- ------- ------- ------- -------
Net loss................................... (49.8) (48.0) (63.7) (94.3) (255.8)
======= ======= ======= ======= =======
Net loss per share before extraordinary
item.................................... (0.30) (0.34) (0.42) (0.61) (1.70)
Extraordinary loss per share................. (0.11) -- -- -- (0.09)
------- ------- ------- ------- -------
Net loss per share......................... (0.41) (0.34) (0.42) (0.61) (1.79)(a)
======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) The sum of earnings per share for the four quarters will not equal earnings
per share for the total year due to changes in the average number of common
shares outstanding.
(1) On July 22, 1999, the Company effected a two for one stock split through a
distribution of a stock dividend. The historical per share information
contained herein has been restated to reflect this split.
NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)
On February 18, 2000, GTS completed its acquisition of Netcom Internet
Limited ("Netcom") for purchase consideration of approximately $91.5 million in
the form of the issuance of our common stock. Netcom is an Internet service
provider in the United Kingdom, which provides dedicated and dial-up Internet
access, Web-hosting, server co-location, Internet protocol virtual private
networks and other services. Netcom currently serves over 3,600 Web-hosting
customers, approximately 600 dedicated and high-speed Internet access customers
and 14,000 subscription-based Internet dial-up Internet access customers. Netcom
had approximately $12 million in revenues in calendar year 1999.
74
<PAGE> 76
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, 1999 and 1998, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements or financial statement schedule of Global TeleSystems (Europe) Ltd.,
a subsidiary, which statements reflect total assets of $632,951,000 as of
December 31, 1998 and total revenues of $176,826,000 and $74,473,000 for the
years ended December 31, 1998 and September 30, 1997, respectively. Those
financial statements and schedule were audited by other auditors whose report
has been furnished to us, and our opinion insofar as it relates to data included
for Global TeleSystems (Europe) Ltd., is based solely on the report of the other
auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Global TeleSystems Group, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, based on our audits and the report of other
auditors, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
McLean, Virginia
February 4, 2000
75
<PAGE> 77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
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 the Company.
Unless otherwise indicated, the current business address of each person is 4121
Wilson Boulevard, 8th Floor, Arlington, Virginia, 22203. There are no family
relationships among any of the directors and officers. Unless otherwise
indicated, each such person is a citizen of the United States.
MEMBERS OF THE BOARD OF DIRECTORS
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ---- --- --------------------------------------------------
<S> <C> <C>
Robert J. Amman........................ 61 Mr. Amman was elected to GTS's Board of Directors in
May 1998 and was appointed President of GTS in March
1999. His term as a director expires at the 2000
annual stockholders meetings. 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 Committee of the Board of
Directors.
David Dey.............................. 62 Mr. Dey was elected to GTS's Board of Directors in
May 1998. His term expires at the 2001 annual
stockholders meeting. 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 Nominations and Governance
Committees of the Board of Directors. Mr. Dey is a
citizen of the United Kingdom.
</TABLE>
76
<PAGE> 78
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ---- --- --------------------------------------------------
<S> <C> <C>
Roger W. Hale.......................... 56 Mr. Hale was elected to GTS's Board of Directors in
May 1998. His term expires at the 2001 annual
stockholders meeting. 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 Chairman of the
Nominations and Governance Committee and is a member
of the Executive Committee of the Board of Directors.
Bernard McFadden....................... 66 Mr. McFadden has served as a director of GTS since
February 1994. His term expires at the 2000 annual
stockholders meeting. During 1999, Mr. McFadden
served as an independent consultant for GTS. 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 chairman of the Compensation
Committee of the Board of Directors.
Stewart J. Paperin..................... 52 Mr. Paperin has served as a director of GTS since
March 1997. His term expires at the 2000 annual
stockholders meeting. 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 Penn Octane Corporation,
NewsReal, Inc., SynXis Corporation and Svyazinvest.
Mr. Paperin is Chairman of the Audit and Budget
Committee and is a member of the Compensation, and
Nominations and Governance Committees of the Board of
Directors.
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ---- --- --------------------------------------------------
<S> <C> <C>
W. James Peet.......................... 45 Mr. Peet has served as a director of GTS since
January 1996. His term expires at the 2002 annual
stockholders meeting. Since July, 1999, Mr. Peet has
been Managing Director of Lehman Brothers
Communications Fund. Mr. Peet was affiliated with The
Chatterjee Group, an investment firm, from 1991 until
February 1999. Prior to that, Mr. Peet spent 6 years
with McKinsey & Company. Mr. Peet was a director of
Hainan Airlines and of Phoenix Information Systems
Corporation. In addition, Mr. Peet served as director
of Viatel, Inc. from November 1995 until June 1998.
Mr. Peet is a member of the Compensation Committee of
the Board of Directors.
Jean Salmona........................... 64 Mr. Salmona has served as a director of GTS since
March 1996. His term expires at the 2001 annual
stockholders meeting. Between December 1989 and
November 1998, Mr. Salmona was Chairman and C.E.O. of
CESIA Consulting Group, of which he is now Honorary
Chairman. 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,
and is a member of the investment committee of AXA
FCPI, an affiliate of AXA Investment Managers. 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 citizen of
France.
Frank V. Sica.......................... 48 Mr. Sica was elected as a director of GTS in March
1999. His term expires at the 2002 annual
stockholders meeting. Mr. Sica is a Managing Director
of Soros Fund Management LLC and head of Soros Fund
Management's private equity operations. Prior to
joining Soros Fund Management, Mr. Sica was a
Managing Director at Morgan Stanley Dean Witter &
Co., the investment banking and brokerage firm. He is
also a director of CSG Systems International, Inc.,
Kohl's Corporation, Emmis Broadcasting, Outboard
Marine Corp., Banco Hipotecario, and JetBlue. Mr.
Sica is a member of the Audit and Budget and
Compensation Committees of the Board of Directors.
</TABLE>
78
<PAGE> 80
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ---- --- --------------------------------------------------
<S> <C> <C>
Alan B. Slifka......................... 70 Mr. Slifka has served as a director of GTS since
1990, and was Chairman until March 1999 when he was
elected Vice Chairman. His term expires at the 2000
annual stockholders meeting. 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 Nominations
and Governance Committees of the Board of Directors.
Adam Solomon........................... 47 Mr. Solomon has served as a director of GTS since
June 1995. His term expires at the 2001 annual
stockholders meeting. 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....................... 53 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 and Executive Vice
Chairman in March 1999. His term expires at the 2002
annual stockholders meeting. 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. He is a director of
Data for Development International Association. Mr.
Thames is a member of the Executive Committee of the
Board of Directors.
</TABLE>
79
<PAGE> 81
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ---- --- --------------------------------------------------
<S> <C> <C>
H. Brian Thompson...................... 60 Mr. Thompson was elected Chairman of the Board and
Chief Executive Officer of GTS in March 1999. His
term as a director expires at the 2002 annual
stockholders meeting. From 1991 until June 1998, Mr.
Thompson was Chairman and Chief Executive Officer of
LCI International, Inc., a provider of
telecommunications services in the United States and
to more than 230 international locations. In June
1998, LCI was acquired by Qwest Communications
International, Inc. and Mr. Thompson became Vice
Chairman of Qwest. He resigned from the Board of
Directors of Qwest in December 1998. He serves as a
member of the board of directors of Bell Canada
International, Inc., Williams Communications Group,
Inc., DynCorp, and as a member of the management
committee of Paging Brazil Holding Co., LLC. He also
serves as Co-Chairman of the Global Information
Infrastructure Commission and as a member of the
Irish Prime Minister's Ireland-America Economic
Advisory Board, and was Chairman of the Advisory
Committee for Telecommunications for Ireland
Department of Public Enterprise. Mr. Thompson is
chairman of the Executive Committee of the Board of
Directors.
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE
- ---- ---
<S> <C> <C>
Robert J. Amman........................ 61 See biographical information under "Directors" above.
Gerard J. Caccappolo................... 58 Mr. Caccappolo joined GTS Europe in January 1995 as
Director of Marketing and Sales, responsible for
market and customer segmentation, services
development, and pricing and sales strategies. Mr.
Caccappolo also serves as President of GTS's Carrier
Services division. Prior to joining GTS Europe, from
September 1988 to December 1994, he was Vice
President of Marketing and Sales -- International
Carriers at Ascom Timeplex Equipment
(Telecommunications) Manufacturer. From 1983 to 1988,
Mr. Caccappolo was Vice President -- Planning and
Corporate Development at Bell Atlantic Corporation.
He began his career at AT&T-Bell Laboratories and
held a number of executive positions at AT&T
Hans Peter Kohlhammer.................. 53 Mr. Kohlhammer joined GTS as President of GTS
Business Services -- Western Europe on March 5, 1999.
From October 1998 to March 1999, Mr. Kohlhammer was
Managing Director of Sales and Marketing GTS (Europe)
Ltd., which then was acquired by GTS. Prior to that,
Mr. Kohlhammer was Chairman of the Board at Thyssen
Telecom AG and held a Board position with Loewe Opta.
Dr. Kohlhammer holds a degree in mathematics and
physics and a doctorate in mathematics from the
University of Bonn.
</TABLE>
80
<PAGE> 82
<TABLE>
<CAPTION>
NAME AGE
- ---- ---
<S> <C> <C>
Jan Loeber............................. 56 Mr. Loeber is Executive Vice President -- Strategic
Planning of GTS. Mr. Loeber joined GTS in January
1995 and served as President, GTS Carrier Services,
and Managing Director of GTS Europe until June 1999.
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 NorthAmerica 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 25 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.
Grier C. Raclin........................ 47 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. In March 1999, Mr. Raclin was elected
Senior Vice President -- External Affairs, General
Counsel and Corporate Secretary. 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.
Robert A. Schriesheim.................. 39 Mr. Schriesheim joined GTS as Executive Vice
President and Chief Corporate Development Officer in
February 1999. In September 1999, Mr. Schriesheim was
appointed Executive Vice President, Corporate
Development and Chief Financial Officer. Prior to
GTS, from 1997, he was President, Chief Executive
Officer and Director of SBC Equity Partners, Inc., a
private equity firm affiliated with Sanwa Business
Credit Corporation that invested in technology-based
service and manufacturing companies. From 1996-1997,
Mr. Schriesheim was Vice President -- Corporate
Business Development for Ameritech Corp., the
regional Bell operating company, and Managing
Director -- Ameritech Development Corporation. From
1993-1996, he was Vice President -- Acquisitions and
New Business Development (1993-1994) and Vice
President -- Global Corporate Development (1995-1996)
of A.C. Nielsen Company, a consumer marketing
research, information and decision-support services
company.
</TABLE>
81
<PAGE> 83
<TABLE>
<CAPTION>
NAME AGE
- ---- ---
<S> <C> <C>
Eileen K. Sweeney...................... 48 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.
H. Brian Thompson...................... 60 See biographical information under "Directors" above.
Jeffrey H. Von Deylen.................. 36 Mr. Von Deylen joined GTS as Senior Vice President,
Finance in October 1999. Prior to his appointment,
Mr. Von Deylen was Vice President, Corporate
Controller at Qwest Communications International,
Inc. He was with Qwest and LCI International, which
Qwest acquired in 1998, for six years. Before his
tenure at Qwest and LCI, Mr. Von Deylen was with
Arthur Andersen, the auditing firm.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons or entities who own more than 10% of the
Company's Common Shares, to file with the SEC and the Nasdaq Stock Market or the
New York Stock Exchange, as the case may be, initial reports of beneficial
ownership and changes in beneficial ownership of the company's equity
securities. Such persons are also required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company as to transactions for which reports are required, all Section 16(a)
filing requirements applicable to such individuals or entities were complied
with during 1999, except with respect to Messrs. James Newman, James Reynolds,
Gerard Caccappolo, Hans-Peter Kohlhammer and Gerald Thames. The Company
determined on February 1, 1999, June 18, 1999, June 18, 1999 and June 18, 1999
that Messrs Newman, Reynolds, Caccappolo and Kohlhammer, respectively, were
executive officers of the Company. Messrs. Newman, Reynolds, Caccappolo and
Kohlhammer filed their "Initial Statements of Beneficial Ownership of
Securities" on Form 3 on April 9, 1999, August 4, 1999, July 29, 1999 and August
3, 1999, respectively. Mr. Newman left the employ of the Company during 1999.
Mr. Thames sold 150,000 shares of the Company's common stock on November 17,
1999, and transferred 19,000 shares of the Company's common stock to a family
foundation on November 22, 1999. Mr. Thames disclosed these dispositions in his
"Annual Statement of Changes in Beneficial Ownership" on Form 5, which was filed
with the SEC on February 14, 2000, instead of in a "Statement of Changes in
Beneficial Ownership" on Form 4.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
During 1999, each Director of GTS, except Messrs. Thompson, Amman, and
Thames, received an annual directors' cash fee of $15,000 applicable to the one
year period commencing June 1, 1999. In addition, the fee paid to each Director,
except for Messrs. Thompson, Amman, and 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 Messrs. Thompson, Amman, and Thames, who attends
a committee meeting is entitled to a 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.
82
<PAGE> 84
GTS maintains the Global TeleSystems Group, Inc. Second Amended and
Restated Non-Employee Directors' Stock Option Plan and Restricted Stock Plan
that permits directors to share in the growth of the value of GTS through the
grant and exercise of nonqualified stock options and restricted stock. See
"-- Global TeleSystems Group, Inc. Second Amended and Restated Non-Employee
Directors' Stock Option and Restricted Stock Plan."
GLOBAL TELESYSTEMS GROUP, INC. SECOND AMENDED AND RESTATED NON-EMPLOYEE
DIRECTORS' STOCK OPTION AND RESTRICTED STOCK PLAN
The purpose of the Global TeleSystems Group, Inc. non-employee directors'
stock option and restricted stock plan, which we refer to as the Directors'
Plan, is to permit eligible non-employee directors of GTS to share in the growth
of the value of GTS through the grant and exercise of nonqualified stock options
and restricted stock.
The total number of shares of GTS common stock presently reserved and
available for delivery under the Directors' Plan is 2,550,000. The Directors'
Plan is administered by the Board of Directors. Only directors of GTS who are
not employees of GTS or any subsidiary of GTS on the date on which an option or
restricted stock is to be granted are eligible to participate in the Directors'
Plan on such date.
On the date of each annual shareholders meeting, pursuant to the Directors'
Plan, each Director (except for Messrs. Thompson, Amman, and Thames) receives an
option to purchase a certain number of shares, determined by a formula where the
numerator is $60,000 and the denominator is equal to the fair market value of
GTS common stock on that date. This option vests and is exercisable immediately.
Additionally, pursuant to the Directors' Plan, each Director (except for Messrs.
Thompson, Amman, and Thames) receives a grant of restricted stock for each
committee of the Board of Directors on which he serve: each chairman of a
committee receives a grant of restricted shares of common stock equal to $5,000
divided by the fair market value of the common stock on the date of the annual
shareholders meeting; and each member of each committee receives a grant of
restricted shares of common stock equal to $2,500 divided by the fair market
value of the common stock on the date of the annual shareholders meeting. Such
restricted stock becomes free of restrictions upon the first to occur of the
following events: (a) the Director's death or total disability; (b) one year
from the grant date; or (c) a change of control transaction following which the
Director is not continued as on the Board of Directors of GTS or the survivor
company.
An option to purchase shares of GTS 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, and we refer to these
as "Initial Grants." A director's Initial Grant option represents 22,500 shares
of GTS common stock. The entire amount of Initial Grant options vests on the
first to occur of (a) the Director's death or total disability; (b) one year
from the grant date; or (c) a change of control transaction following which the
Director is not continued as a member of the Board of Directors of GTS or the
survivor company.
On the date of each annual meeting of GTS's shareholders after the Initial
Grant has been issued, an additional directors' option to purchase 9,000 shares
will be granted to the individuals who will serve as elected non-employee
directors of GTS during the next year, and we refer to these as "Subsequent
Grants." The entire amount of Subsequent Grant options vests on the first to
occur of (a) the Director's death or total disability; (b) one year from the
grant date; or (c) a change of control transaction following which the Director
is not continued as a member of the Board of Directors of GTS or the survivor
company.
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 common stock purchasable under a director's option will
be equal to 100% of the fair market value of GTS common stock on the date of
grant. Each directors' option will expire upon the earliest of (a) the tenth
anniversary of the date of grant, (b) one year after the non-employee director
ceases to serve as a director of GTS due to death or disability (except that, in
the case of disability, if the non-employee director dies within that one-year
period, the directors' options are 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
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that, if the non-employee director dies within that three-month period, the
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,
the directors' options are exercisable for a period of one year from the date of
such death). Each directors' option may be exercised in whole or in part by
giving written notice of exercise to GTS specifying the directors' option to be
exercised and the number of shares to be purchased. Such notice must be
accompanied by payment in full of the exercise price in cash or by surrender of
shares of GTS common stock or a combination thereof. Directors' options granted
under the Directors' Plan may not be sold, pledged, assigned or otherwise
disposed of in any manner other than by will or by the laws of descent and
distribution.
Directors' restricted stock are subject to certain terms and conditions
including those summarized below. The directors may vote their shares of
restricted stock on matters presented to shareholders of GTS common stock, but
may not sell, transfer, pledge or assign the restricted stock. The restricted
stock become free of restrictions on the first to occur of (a) the Director's
death or total disability; (b) one year from the grant date; or (c) a change of
control transaction following which the Director is not continued as a member of
the Board of Directors of GTS or the survivor company. Any stock dividends on
restricted stock are granted in the form of restricted stock. Prior to the
restricted stock becoming free of restrictions, a director would forfeit the
restricted stock upon termination of service from the chairmanship or membership
of the relevant committee, or termination of service from the Board of
Directors.
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 common stock
received as a result of such grant are subject to a right of first refusal by
GTS.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which GTS common stock may then be listed or quoted, or if
the Board of Directors determines in its discretion to seek such shareholder
approval.
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SUMMARY COMPENSATION TABLE
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, 1999, for the
years indicated.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------------
---------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)(10)
- --------------------------- ---- -------- -------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
H. Brian Thompson............ 1999 $468,461 $449,000 $51,040(3) 0 3,300,000(8) $6,466
Chairman and
Chief Executive Officer(1)
Robert Amman................. 1999 $312,307 $213,552 (4) 0 1,050,000(8) $5,532
President and Chief
Operating
Officer(1)
Robert Schriesheim........... 1999 $319,711 $168,100 (4) $1,647,600(7) 700,000(8) $ 936
Executive Vice President,
Corporate Development and
Chief Financial Officer(1)
Hans Peter Kohlhammer(2)..... 1999 $306,963 $169,474 $81,307(5) 0 43,302(8) 0
President of Business
Services
Gerard J. Caccappolo......... 1999 $232,542 $367,424 $52,681(6) 0 200,000(8) $4,000
President of Carrier 1998 191,042 57,750 83,125(6) 0 61,000(8) 4,000
Services
1997 173,750 52,500 32,043(6) 0 1,714(9) 4,000
</TABLE>
- ---------------
(1) Messrs. Thompson and Amman were elected to their positions in March 1999.
Mr. Schriesheim was elected Executive Vice President, Corporate Development
in February 1999, and was elected to the additional position of Chief
Financial Officer in September 1999.
(2) Mr. Kohlhammer joined the Company in March 1999 as a result of the Company's
acquisition of GTS (Europe) Ltd., formerly Esprit Telecom Group plc.
(3) The amount disclosed includes $24,127 related to spousal travel with the
remaining attributable to gross-up payments for certain tax liabilities.
(4) Perquisites and other personal benefits paid to the named executive officer
were less than the lesser of $50,000 and 10% of the total of salary and
bonus report for the named executive officer.
(5) The amount disclosed includes transportation and travel allowance of
$29,268, social security and medical payment of $21,988 and pension
arrangements of $28,684.
(6) Mr. Caccappolo received a cost of living allowance of $4,833, $13,373 and
$12,163 in 1999, 1998 and 1997, respectively, and resides in a company
apartment for which the company paid the equivalent of $15,466, $16,595 and
$16,109 per year in rent in 1999, 1998 and 1997, respectively. In 1999 and
1998, respectively, Mr. Caccappolo also received tax equalization payments
of $24,428 and $42,278 and a gross-up payment for certain tax liabilities of
$660 and $1,011. In 1998, Mr. Caccappolo received paid home leave of $3,660.
In addition, we provided Mr. Caccappolo with the use of a company car in
1999, 1998 and 1997.
(7) The dollar amount represents 60,000 shares of restricted stock granted on
April 5, 1999 when the closing price of the Company's common stock on the
Nasdaq National Market was $27.56. The restriction on 20,000 of the shares
will lapse on April 5, 2002; the restriction on the remaining 40,000 shares
will lapse on April 5, 2002 if certain performance levels are met, otherwise
the restriction on the remaining 40,000 shares will lapse on April 5, 2004.
(8) Shares of common stock underlying stock options awarded under the Stock
Option Plan.
(9) Stock options awarded under The Key Employee Stock Option Plan of Global
TeleSystems Europe B.V. which we refer to as the GTS Europe B.V. Stock
Option Plan.
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(10) Amounts disclosed hereunder represent the sum of premiums paid by GTS for
$1 million in group 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 Messrs. Thompson , Schriesheim
and Kohlhammer who did not participate in the 401(k) Plan. In each case in
which GTS paid 401(k) Plan contributions, $4,000 was paid in each of 1999,
1998 and 1997 to the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock option grants to the five
most highly compensated officers in 1999 under the Stock Option Plan.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR GRANT DATE
OPTIONS IN BASE EXPIRATION PRESENT
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE VALUE($)(4)
- ---- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
H. Brian Thompson............... 3,000,000 23.40% $27.21 03/26/09(1) $18,360,000
300,000 2.34% 29.13 12/10/09(1) 3,735,690
Robert Amman.................... 700,000 5.46% 27.21 03/26/09(1) 4,284,000
50,000 0.39% 23.19 09/15/09(1) 292,195
300,000 2.34% 29.13 12/10/09(1) 3,735,690
Robert Schriesheim.............. 500,000 3.90% 27.50 02/22/09(2) 3,014,700
200,000 1.56% 29.13 12/10/09(1) 2,490,460
Hans Peter Kohlhammer........... 496 0.00% 29.31 03/18/05(3) 984
150,000 1.17% 27.73 03/18/09(2) 1,553,310
50,000 0.39% 38.08 06/17/09(1) 517,575
100,000 0.78% 29.13 12/10/09(1) 1,245,230
Gerard J. Caccappolo............ 100,000 0.80% 38.08 06/17/09(1) 1,082,030
100,000 0.80% 29.13 12/10/09(1) 1,245,230
</TABLE>
- ---------------
(1) Represents options that vest over a three year term, 33% after one year and
one thirty-sixth every month thereafter.
(2) These options vest in February 2005, when financial results for 2004 are
expected to be publicly announced. If certain performance targets are met or
exceeded, these options could be fully exercisable in February 2002, when
financial results for 2001 are expected to be publicly announced.
(3) These options are 100% vested after one year.
(4) 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 rates between 4.95% and 6.03% and expected life of five years.
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 five most highly compensated officers during
1999, the number of options under the Stock Option Plan held by
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such persons at December 31, 1999, 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>
H. Brian Thompson........... -- -- -0-/3,300,000 -0-/24,306,000
Robert Amman................ -- -- 33,750/1,061,250 532,913/7,719,638
Robert Schriesheim.......... -- -- -0-/700,000 -0-/4,749,000
Hans Peter Kohlhammer....... -- -- 40,052/389,494 1,008,910/3,693,058
Gerard J. Caccappolo........ -- -- 12,500/309,500 142,250/2,564,110
</TABLE>
- ---------------
(1) Based on the closing price of $34.75 on the New York Stock Exchange of the
Common Stock on December 31, 1999.
THE GTS 401(k) PLAN
The GTS 401(k) Plan is a defined contribution retirement benefit plan that
is qualified for favorable tax treatment under Section 401 of the Code. All
employees of GTS, subject to certain regulatory qualifications, including the
five most highly compensated officers, who are at least 21 years of age and have
completed the minimum service requirement are eligible to participate in the
401(k) Plan. The 401(k) Plan participants may defer pre-tax income by
contributing to the plan up to the maximum amount permitted by law. After-tax
contributions are also permitted under the 401(k) Plan. GTS matches 50% of each
participant's pre-tax contribution to the 401(k) Plan up to 5% of the
participant's total compensation. In addition, GTS may, in its sole discretion
and in a nondiscriminatory manner, contribute additional amounts as profit
sharing to each participant's account. The amounts that are deposited into each
participant's account are invested among various investment options according to
the direction of the participant. Each participant's pre-tax and after-tax
contributions are immediately vested and nonforfeitable. GTS's matching
contribution and profit sharing allocations to each participant's account do not
vest until the participant has completed three years of service with GTS, at
which time the matching contribution and profit sharing allocations become 100%
vested. Each participant is eligible to begin receiving benefits under the
401(k) Plan on the first day of the month coincident with or following the
attainment of normal retirement age. There is no provision for early retirement
benefits under the 401(k) Plan.
THE GLOBAL TELESYSTEMS GROUP, INC. EQUITY COMPENSATION PLAN
The purpose of the Global TeleSystems Group, Inc. Equity Compensation Plan
is to attract, retain and motivate key employees, officers and eligible
independent contractors of GTS and to enable such individuals to own shares of
GTS common stock and to have a mutuality of interest with other shareholders of
GTS through the grant of restricted stock and other equity-based awards.
The total number of shares of common stock that may be issued or
transferred under the Equity Compensation Plan is four percent of the total
number of shares of common stock outstanding at the beginning of the calendar
year, subject to certain adjustments, which are described below. This threshold
number may be increased by the number of shares (a) that were issued under the
Equity Compensation Plan with respect to which no dividends were paid and (b)
that were subsequently forfeited, in accordance with the terms of the Equity
Compensation Plan.
The Equity Compensation Plan is administered by the Committee. The chief
executive officer of GTS has the authority to recommend the individuals to whom
awards will be granted, subject to approval by the Committee. The Committee has
full and binding authority to determine the fair market value of the GTS common
stock and the number of shares included in any awards, to establish terms and
conditions of any award, to interpret the Equity Compensation Plan, to prescribe
rules relating to the Equity Compensation Plan and to make all other
determinations necessary to administer the Equity Compensation Plan. The
Committee may condition the vesting of restricted stock upon the attainment of
specified performance goals or such other
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factors as the Committee may determine in its sole discretion. In the event that
the Committee determines, in its sole discretion, that an award of restricted
stock would not be appropriate with respect to any individual who has been
recommended for an award by the chief executive officer, the Committee has the
authority to grant to any such individual any other variety of equity-based
compensation award, including, but not limited to, phantom stock, phantom units,
stock appreciation rights, performance shares and performance units. The
Committee does not, however, have the authority to grant stock options pursuant
to the Equity Compensation Plan.
Grants under the Equity Compensation Plan are determined by the Committee
in its sole discretion. For this reason, it is not possible to determine the
benefits or amounts that will be received by any individual employee or group of
employees in the future. The Equity Compensation Plan will remain effective
until November 14, 2002, unless earlier terminated by GTS. No restricted stock
may be granted under the Equity Compensation Plan on or after November 14, 2002.
During a specified period set by the Committee commencing with the date of
any restricted stock award, the participant is not permitted to sell, transfer,
pledge or otherwise encumber shares of restricted stock. Within these limits,
the Committee, in its sole discretion, may provide for the lapse of such
restrictions or may accelerate or waive such restrictions in whole or in part,
based on service, performance and such other factors. Unless the Committee
specifically determines otherwise, a restricted stock award granted under the
Equity Compensation Plan vests one-third on the second anniversary of the date
of grant, one-third on the third anniversary of the date of grant and one-third
on the fourth anniversary of the date of grant.
The Committee may impose such other restrictions on shares of Common Stock
issued under the Equity Compensation Plan, including a right of first refusal by
GTS that requires the participant to offer GTS any shares that the participant
wishes to sell.
The Equity Compensation Plan provides that, in the event of a change to the
GTS common stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or exchange of
shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will preserve the value of outstanding
awards by making certain equitable adjustments in its discretion.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Equity Compensation Plan at any time, except that any such action will be
subject to the approval of GTS shareholders at the first annual meeting
following such action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
THE FOURTH AMENDED AND RESTATED 1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS
GROUP, INC.
The Fourth Amended and Restated 1999 Stock Option Plan of the Company (the
"Fourth and Amended and Restated Plan") provides for the grant of options to
employees, non-employee directors, and independent contractors of GTS and any
subsidiary or affiliate of GTS. Up to 18.5% of the outstanding shares of Common
Stock, from time to time, are authorized to be granted as options under the
Fourth Amended and Restated Plan. A total of approximately 34.1 million shares
of common stock were reserved for issuance to employees, non-employee directors
and independent contractors under the Fourth Amended and Restated Plan
representing 18.5% of the outstanding shares of Common Stock on December 31,
1999. A total of 1 million shares of Common Stock may be issued pursuant to
options qualifying for tax purposes as incentive options under the Fourth
Amended and Restated Plan.
The Fourth Amended and Restated Plan is administered by the Compensation
Committee (or a sub-committee thereof), which consists of not less than two
directors appointed by the Board of Directors. The Compensation Committee (or a
sub-committee) selects the employees, independent contractors and directors of
GTS and its subsidiaries and affiliates to whom options will be granted. Options
covering not more than 1.5 million shares of Common Stock may be granted to any
employee during any calendar year.
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The option exercise price under the Fourth Amended and Restated Plan may
not be less than the exercise price determined by the Compensation Committee (or
a sub-committee) (or 110% of the fair market value of the Common Stock on the
date of grant of the option in the case of an incentive option granted to an
optionee beneficially owning more than 10% of the outstanding Common Stock). The
maximum option term is 10 years and one day (or five years in the case of an
incentive option granted to an optionee beneficially owning more than 10% of the
outstanding Common Stock). Options become vested and exercisable at the time and
to the extent provided in the option agreement related to such option. The
Compensation Committee (or a sub-committee) has the discretion to accelerate the
vesting and exercisability of options.
There is a $100,000 limit on the value of stock (determined at the time of
grant) covered by incentive options that first become exercisable by an optionee
in any calendar year. No option may be granted more than 10 years after the
effective date of the Fourth Amended and Restated Plan. Generally, during an
optionee's lifetime, only the optionee (or a guardian or committee if the
optionee is incapacitated) may exercise an option except that, upon approval by
the Compensation Committee (or a sub-committee), nonqualified options may be
transferred to the spouse of the optionee and certain nonqualified options may
be granted or transferred to the GTS Employee Stock Option Plan Trust for the
benefit of one or more designated foreign employees, independent contractors or
directors. Incentive stock options are non-transferable except at death.
Payment for shares purchased under options granted pursuant to the Fourth
Amended and Restated Plan may be made either in cash or by exchanging shares of
Common Stock (which shares have been held by the optionee for at least six
months) with a fair market value of up to the total option exercise price and
cash for any difference. Options may be exercised by directing that certificates
for the shares purchased be delivered to a licensed broker-dealer as agent for
the optionee, provided that the broker-dealer tenders to GTS cash or cash
equivalents equal to the option exercise price plus the amount of any taxes that
GTS may be required to withhold in connection with the exercise of the option.
If an optionee's employment or service with GTS or a subsidiary or
affiliate terminates by reason of death, retirement or permanent and total
disability, his or her vested options may be exercised within one year after
such death, retirement or disability, unless otherwise provided with respect to
a particular option (but not later than the date the option would otherwise
expire). If the optionee's employment or service with GTS or a subsidiary or
affiliate terminates for any reason other than death, retirement or disability,
options held by such optionee terminate 90 days after such termination, unless
otherwise provided with respect to a particular option (but not later than the
date the options would otherwise expire), except that options terminate
immediately upon termination of an employee or independent contractor for
"cause" (as defined), unless the Compensation Committee (or a
sub-committee)determines otherwise. Each option would be exercisable to the
extent it had become vested before the termination of employment or service
(unless otherwise provided in the option agreement).
If the outstanding shares of Common Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of GTS, by reason of merger, consolidation, reorganization, recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend, spin-off or other distribution payable in capital stock, or
other increase or decrease in such shares without receipt of consideration by
GTS, an appropriate and proportionate adjustment will be made in the number and
kinds of shares subject to the Fourth Amended and Restated Plan, and in the
number, kinds and per share exercise price of shares subject to the unexercised
portion of options granted prior to any such change, in order to preserve the
value of any granted options. Any such adjustment in an outstanding option,
however, will be made without a change in the total price applicable to the
unexercised portion of the option, but with a corresponding adjustment in the
per share option price.
Upon any dissolution or liquidation of GTS, or upon a reorganization,
merger or consolidation in which GTS is not the surviving corporation, or upon
the sale of substantially all of the assets of GTS to another corporation, or
upon any transaction (including, without limitation, a merger or reorganization
in which GTS is the surviving corporation) approved by the board of directors
which results in any person or entity owning 80% or more of the total combined
voting power of all classes of stock of GTS, the Fourth Amended and Restated
Plan and the options issued thereunder will terminate, unless provision is made
in connection with
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such transaction for the continuation of the Fourth Amended and Restated Plan,
the assumption of such options or for the substitution for such options of new
options covering the stock of a successor corporation or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
the per share exercise price. In the event of such termination, all outstanding
options shall be exercisable in full during such period immediately prior to the
occurrence of such termination as the Board of Directors in its discretion shall
determine.
The board of directors may further amend the Fourth Amended and Restated
Plan with respect to shares of the Common Stock as to which options have not
been granted. However, GTS's stockholders must approve any amendment that would
(1) change the requirements as to eligibility to receive incentive options; or
(2) increase the maximum number of shares in the aggregate for which incentive
options may be granted (except for adjustments upon changes in capitalization);
or (3) otherwise to the extent required by applicable law, rule or regulation.
The board of directors at any time may terminate or suspend the Fourth
Amended and Restated Plan. Unless previously terminated, the Fourth Amended and
Restated Plan will terminate automatically on April 9, 2008. No termination,
suspension or amendment of the Fourth Amended and Restated Plan may, without the
consent of the person to whom an option has been granted, adversely affect the
rights of the holder of the option.
GTS EUROPE B.V. STOCK OPTION PLAN
In 1997, GTS Europe B.V. established a stock option plan to replace the
GTS-Hermes Plan for the purpose of incentivizing GTS Europe B.V. key employees.
The aggregate number of shares of GTS Europe B.V. stock subject to this new plan
is approximately 13% of the total shares of GTS Europe B.V. stock issued and
outstanding including options. During 1997, GTS Europe B.V. issued 10,166
options in replacement of those outstanding under a previous stock option plan,
as well as additional options to certain employees. The issuance of these
options resulted in a non-cash charge of $3.7 million of which $2.6 million was
recorded during the fourth quarter of 1997 and the remaining $1.1 million was
recognized in 1998.
EMPLOYMENT AGREEMENTS
GTS has employment agreements with each of the five most highly compensated
executive officers during 1999. Mr. Thompson's agreement provides that he will
serve in his position for an initial term commencing on March 22, 1999 and
ending on December 31, 2001. This initial term shall be extended for an
additional period expiring on March 31, 2005, unless either Mr. Thompson or the
Company gives notice of non-extension by September 1, 2001. Mr. Caccappolo's
agreement provides that he will serve in his position for an initial term
commencing on January 3, 1995 and ending on January 2, 1997. Since then, his
agreement has been extended for successive one-year periods, and is renewable
automatically for one-year terms, unless either the Company or Mr. Caccappolo
gives three months' notice of non-extension prior to the expiration of such
one-year extensions. Mr. Kohlhammer's agreement provides that he will serve in
his position for a term commencing on March 4, 1999 and ending on September 30,
2001. Messrs. Amman's and Schriesheim's agreements provide that they will serve
in their positions from March 22, 1999 and February 22, 1999, respectively,
until terminated under their agreements. The salary and bonus potential of each
of the five most highly compensated officers is provided for in each agreement
and may be increased at the discretion of the Compensation Committee of the
Board of Directors. In addition to salary and bonus, each of the five most
highly compensated officers is eligible to participate in the employee stock
option plan, to receive standard health and insurance benefits that are provided
to employees of GTS, to receive certain other fringe benefits and to be
reimbursed for all reasonable expenditures incurred in the execution of each
named executive officer's respective duties.
The employment agreements provide for severance payments in the event of
(a) termination without cause, as defined, or (b) resignation for good reason,
as defined. Severance arrangements for the five most highly compensated
executive officers are for a period of up to twenty-four months of base salary
and an imputed bonus. If the named executive officer is terminated for cause of
if he voluntarily terminates his
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employment other than for good reason, he shall not be entitled to any salary,
bonus or severance payments (other than accrued salary).
Each employment agreement includes noncompetition and nonsolicitation
clauses that are effective during the term of employment and for a period of up
to two years thereafter. In addition, the employment agreements include
covenants of confidentiality and nondisclosure. Any dispute arising under an
employment agreement must be resolved through arbitration, except that each
agreement also provides for specific performance and for a court injunction in
the event of a breach by the named executive officer of the covenants described
above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Bernard McFadden, a Director and Chairman of the Compensation Committee,
was paid $100,000 in consulting fees in 1999.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The role of the Compensation Committee is to oversee and direct the
development of executive compensation policies and programs that are consistent
with, explicitly linked to, and supportive of the strategic objectives of
growing the Company's businesses and maximizing shareholder value. The
Committee's specific responsibilities include determining the appropriate levels
of compensation, including salaries, annual incentives, long-term incentives and
employee benefits, for members of the Company's senior management, including
executive officers. The Company believes that a strong link should exist between
executive compensation and management's ability to maximize shareholder value.
This belief is adhered to by developing both short- and long-term incentive
compensation programs that provide competitive compensation and reflect Company
performance.
Compensation Philosophy
The four fundamental principles to which the Committee adheres in
discharging its responsibilities are as follows. First, the majority of annual
and long-term compensation for the Company's executive officers should be at
risk, with actual compensation levels correlating with the Company's actual
performance in certain key areas determined by the Committee. Second, over time,
incentive compensation of the Company's executive officers should focus more
heavily on long-term rather than short-term accomplishments and results. Third,
equity-based compensation should be used on an increasing basis so as to provide
executive officers with clear and direct links to the shareholders' interests.
Fourth, the overall executive compensation program should be competitive,
equitable and structured so as to ensure the Company's ability to attract,
retain, motivate and reward the talented executives who are essential to the
Company's continuing success. Total compensation, rather than individual
compensation elements, is the focus of the Company's intent to provide
competitive compensation opportunities.
The Committee believes that continued revenue growth as well as continued
improvement in other key financial and operating measures should be recognized
in considering compensation levels along with improvements in overall
effectiveness, productivity, return on investment and success of strategic
alliances and business acquisitions and combinations.
The Committee periodically meets with an outside compensation consultant to
evaluate how well the Company's executive compensation program adheres to this
philosophy and to evaluate the level and mix of salary, annual bonuses and
long-term incentives.
Compensation Elements
The Company's compensation program for executives consists of four
principal elements, each of which is vitally important in meeting the Company's
need to attract, retain, motivate and reward highly-qualified executives.
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<PAGE> 93
The four principal elements are:
Base Salaries
Base salaries for executive officers are generally set at levels that
reflect the competitive marketplace for companies that are of comparable size
and complexity and would be considered competitors of the Company in attracting
and retaining qualified executives. The salaries of the executive officers are
reviewed and approved by the Compensation Committee based on its assessments of
each executive's experience and performance and a comparison of salaries of
peers in other companies.
Annual Performance Incentives
Incentive awards have been made on a periodic basis to executive officers
on the basis of Company, business unit and individual performance relative to
budget in such areas as revenue, cash flow, operating income, operating margin
and the like. The Company intends to continue providing incentives in concert
with other compensation elements in order to maintain a competitive total
compensation program for its executive officers. The Committee reviews and
approves all performance measures and goals established under the annual and
long-term incentive plans. The Committee also approves all incentive payments to
executive officers.
Long-Term Incentives
The Company relies on stock options as the principal means of providing
long-term incentive compensation. Stock options have been, and will continue to
be, granted to executive officers under the Fourth Amended and Restated 1992
Stock Option Plan.
Benefits
Benefits offered to executive officers serve a different purpose than do
other elements of the total compensation program. In general, they provide for
retirement income and serve as a safety net against problems that can arise from
illness, disability or death. Benefits offered to executive officers are
basically those offered to other employees of the Company.
Evaluation Procedures
In determining matters regarding executive officer compensation (other than
the Chief Executive Officer), the Committee with the Chairman and Chief
Executive Officer reviews the President and Chief Operating Officer and the
other key executives including the executive officers, the respective areas of
authority and responsibility of the various executive officers, and the
performance and contribution of each to the efforts of the Company in meeting
its goals.
The Committee has confirmed that the compensation paid in 1999 to the named
executive officers is consistent with the Company's compensation philosophy and
objectives.
Compensation of the Chief Executive Officer
Decisions regarding the compensation of the Chairman and Chief Executive
Officer, H. Brian Thompson, were the responsibility of the Committee. Upon his
employment as Chairman and Chief Executive Officer, the Company entered into an
employment agreement with Mr. Thompson that established his initial annual base
salary at $600,000 and his annual target bonus at 140 percent of salary paid.
For the portion of 1999 during which Mr. Thompson served as Chairman and Chief
Executive Officer, salary payments to Mr. Thompson totaled $468,461. Mr.
Thompson was awarded bonuses totaling $449,000 for the performance year 1999,
which was less than his target bonus. This bonus reflected the Company's
performance in revenues, earnings and strategy development and execution. In
evaluating Mr. Thompson's compensation, the Committee and its compensation
consultant compared the Company's compensation practices and levels to those of
other companies involved in similar businesses, including but not limited to,
the companies included in the
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<PAGE> 94
Performance Graph. Based on this review, the Committee determined Mr. Thompson's
compensation to be appropriate.
Deductibility of Certain Executive Compensation
Beginning in 1994, the Omnibus Reconciliation Act of 1993 (the Act) limits
to $1 million the amount that may be deducted by a publicly-held corporation for
compensation paid to each of its named executive officers in a taxable year,
unless the compensation in excess of $1 million is "qualified performance-based
compensation." The Committee and the Company have determined that the Company's
practice is to design its short-term and long-term compensation plans to qualify
for the exemption from the deduction limitations of Section 162(m) of the
Internal Revenue Code and to be consistent with providing appropriate
compensation to executives. Shareholder approval of incentive compensation plans
and various provisions thereunder covering the executive officers has been
sought and obtained and will be sought in the future to continue to qualify
performance-based compensation for the exemption. Although it is the Company's
intent to qualify compensation for the exemption from the deduction limitations,
the Company's compensation practices have been and, will continue to be,
designed to serve the best interests of the shareholders regardless of the
whether specific compensation qualifies for the exemption.
Compensation Committee Members during 1999:
Bernard McFadden, Chairman
James W. Peet
Frank V. Sica
Adam Solomon
David Dey (no longer on the Committee as of July 1999)
Michael Greeley (resigned from Board in March 1999)
Stewart J. Paperin (no longer on the Committee as of July 1999)
93
<PAGE> 95
PERFORMANCE GRAPH
The following performance graph compares the percentage change in the
Company's cumulative total shareholder return on our common stock from February
5, 1998 (the date on which the common stock began trading on the Nasdaq National
Market) and ending on December 31, 1999 with the cumulative total return,
assuming reinvestment of dividends of the Standard & Poor's 500 Stock Index and
the Nasdaq Telecom Index.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
2/5/98 3/98 6/98 9/98 12/98 3/99 6/99 9/99 12/99
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global TeleSystems Group, Inc. $100.00 $171.16 $178.49 $123.57 $204.12 $204.80 $296.56 $144.39 $254.46
S & P 500 100.00 112.70 116.42 104.84 127.17 133.51 142.92 133.99 153.93
NASDAQ Telecommunications 100.00 119.34 126.21 111.70 154.37 191.82 203.93 189.02 268.82
</TABLE>
94
<PAGE> 96
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information ownership of our common
stock and rights to acquire common stock by (i) GTS stockholders that manage or
own, either beneficially or of record, five percent or more of the common 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, 1999. 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>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2) OWNED(1)
- ------------------------ ------------ ------------
<S> <C> <C>
AXA Assurances I.A.R.D. Mutuelle............................ 37,285,172(3) 20.21
9 Place Vendome
75001 Paris France
1290 Avenue of the Americas
New York, NY 10104
Putnam Investments.......................................... 14,542,789(4) 7.88
One Post Office Square
Boston, MA 02109
George Soros................................................ 11,998,094(5) 6.28
c/o Soros Fund Management LLC
888 Seventh Avenue, 31st Floor
New York, NY 10106
David Dey................................................... 31,972 *
Roger W. Hale............................................... 34,490 *
Bernard McFadden............................................ 100,572 *
Stewart J. Paperin.......................................... 69,572 *
W. James Peet............................................... 33,572 *
Jean Salmona................................................ 59,572 *
Frank V. Sica............................................... 1,572 *
Alan B. Slifka.............................................. 4,548,699(6) 2.47
Adam Solomon................................................ 122,129 *
Gerald W. Thames............................................ 1,817,688(7) *
H. Brian Thompson........................................... 1,139,389 *
Gerard J. Caccappolo........................................ 496,500 *
Robert J. Amman............................................. 297,084 *
Robert A. Schriesheim....................................... 167,667 *
Hans Peter Kohlhammer....................................... 90,548 *
Other officers.............................................. 1,923,418 1.04
All Directors and Executive Officers as a group (27
persons).................................................. 10,934,444
Total of above.................................... 74,760,499
</TABLE>
- ---------------
* Less than 1%
(1) The percentage of ownership for each beneficial owner is based upon
184,472,884 shares of GTS common stock issued and outstanding at December
31, 1999 and the number of warrants and stock options in common stock held
by such beneficial owner. Excluded from the calculation are: 33,210,047
shares of common stock issued under the GTS' option plans; and 8,772,626
shares of common stock pursuant to the exercise of stock option warrants.
(2) Includes shares of common stock issuable upon the exercise of stock options
and stock warrants within 60 days of December 31, 1999.
95
<PAGE> 97
(3) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13G filed in February 2000 with the
SEC. Number of shares as to which such holder has: sole voting power --
12,472,532 shares; shared voting power -- 23,073,348 shares; sole
dispositive power -- 37,189,669 shares; and shared dispositive
power -- 87,303 shares.
(4) Ownership information, that represents holdings of several separately
managed funds, is based on a Schedule 13G filed in February 2000 with the
SEC. Number of shares as to which such holder has: shared voting
power -- 187,971 shares; and shared dispositive power -- 14,542,789 shares.
(5) Ownership information, that represents holdings of several group members, is
based on a Schedule 13G filed in February 2000 with the SEC. Number of
shares as to which such holder has: sole voting power -- 11,998,094 shares;
and sole dispositive power -- 11,998,094 shares. As indicated within the
Schedule 13G, Mr. Soros may be deemed to have been the beneficial owner of
11,998,094 common shares. The number consists of (a) 8,660,562 shares
(including 6,666,666 shares subject to immediately exercisable warrants)
held for the account of Open Society Institute, (b) 1,948,398 shares held
for the account of Soros Hungary, (c) 1,313,698 shares held for the account
of Soros Charitable Foundation, and (d) 75,436 shares held for the account
of Soros Humanitarian.
(6) Includes 2,666,295 shares of common stock owned by Mr. Slifka, 1,139,876
shares of common stock held in various trusts, options to purchase 33,572
shares of common stock owned by Mr. Slifka, and 708,956 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).
(7) Includes 691,000 shares of common stock held in the "Thames Family
Foundation, Inc." and options to purchase 1,126,688 shares of common stock
owned by Mr. Thames.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a subscription agreement (the "Subscription
Agreement") dated as of April 6, 1999 with H. Brian Thompson, its Chairman and
Chief Executive Officer, in connection with Mr. Thompson's employment agreement
with the Company. The Subscription Agreement provides that Mr. Thompson purchase
$20 million of the Company's common stock valued at $27.17 per share, or a total
of 736,056 shares. The Subscription Agreement provides further that Mr. Thompson
pay for 368,028 of these shares for $10 million in cash and for 368,028 of these
shares using the proceeds of a loan in the principal amount of $10 million from
the Company. These arrangements were consummated in June 1999. In connection
with the loan, Mr. Thompson has delivered a secured promissory note to the
Company which bears interest at the Federal Mid-Term Rate and has a maturity of
six years.
The Company has entered into an employment agreement with Mr. Thames,
Executive Vice Chairman of the Board of Directors. The agreement provides that
he will hold this position until at least the 2000 annual shareholders meeting
and that he will perform such other reasonable duties and exercise such other
power and authority as may be reasonably delegated by the Board of Directors.
The agreement commenced March 21, 1999 and expires on October 31, 2001, unless
extended. The agreement provides that Mr. Thames will receive an annual salary
of $400,000 and a bonus for the fiscal years 1999 and 2000, or pro rated portion
thereof, in an amount not less than fifty percent of his salary for such year.
In addition to salary and bonus, Mr. Thames is also eligible to participate in
the employee stock option plan, to receive standard health and insurance
benefits that are provided to employees of GTS, to receive certain other fringe
benefits and to be reimbursed for all reasonable expenditures incurred in the
execution of his duties. If the Board of Directors were to appoint Mr. Thames to
another position, he would continue to receive his salary and bonus and benefits
for the remaining term of the agreement. If Mr. Thames were terminated without
cause, as defined in the agreement, or resigned for good reason, as defined in
the agreement, during the twenty-four month period following a change of
control, as defined in the agreement, he would receive severance in an amount of
up to thirty-six months of his then-current salary, continuation of certain
benefits and accelerated vesting of all stock options that would have otherwise
vested prior to October 31, 2001. Mr. Thames' agreement includes noncompetition
and nonsolicitation clauses that are effective during the term of his agreement
and for a period of up to one year thereafter. In addition, the employment
agreement includes covenants of confidentiality and nondisclosure. Any dispute
arising under Mr. Thames' employment agreement must be resolved through
arbitration.
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<PAGE> 98
Alan B. Slifka, the Vice Chairman of the board of directors, was paid
$66,666 in consulting fees in 1999. Bernard McFadden, a director of GTS, was
paid $100,000 in consulting fees in 1999.
Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 287,756 stock options
to purchase shares Common Stock that were granted in 1991 pursuant to a stock
option agreement that is not subject to any stock option plan. The options have
an exercise price of $0.267 per share and are fully vested. Any of the stock
options that remain unexercised after November 30, 2001 shall lapse and become
void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination. The shares of Common Stock underlying such
options have been registered under a registration statement that has been
declared effective by the SEC.
The Soros associates purchased $40 million of notes from us in 1996, which
notes bore interest at 10% per annum, in partial consideration of which (1) the
Soros associates received the right to designate, from time to time, one person
for nomination to the Board of Directors and (2) the affiliates received
warrants to purchase 8,888,886 shares of our common stock. Together with their
prior equity interests in GTS, these affiliates currently hold, on a fully
diluted basis (excluding shares underlying stock options), approximately 6.28%
of Common Stock. In accordance with the terms of the warrant agreement, the
exercise price of the warrants was reduced from $5.14 per share to $4.67 per
share as the outstanding debt had not been repaid prior to December 31, 1996. In
February 1998, we repaid the $40 million of notes, plus accrued interest, using
part of the proceeds of an offering of senior notes and the initial public
offering completed at that time. In addition, these affiliates collect a
monitoring fee of $40,000 per month. In 1999, the Soros associates exercised
warrants and 116,260 common shares were issued. Under certain agreements, these
affiliates have the right to co-invest with us in all of our 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this report:
1 Financial Statements
The following consolidated financial statements of the Company are
included in Part II, Item 8 of this report:
- Report of Ernst & Young LLP, Independent Auditors
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Operations for each of the Three Years
Ended December 31, 1999
- Consolidated Statements of Cash Flows for each of the Three Years
Ended December 31, 1999
- Consolidated Statements of Changes in Shareholders' Equity for each of
the Three Years Ended December 31, 1999
- Notes to Consolidated Financial Statements
2 Consolidated Financial Statement Schedules
We have furnished Schedule II -- Valuation and Qualifying Accounts on
Page 104.
All other schedules are omitted because they are not applicable or not
required, or because the required information is either incorporated herein
by reference or included in the financial statements or notes thereto
included in this report.
97
<PAGE> 99
b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
- -------------- -----------------
<S> <C>
November 2, 1999..................... Proposed offering of Global
TeleSystems Europe B.V. 10.5% and 11%
Senior Notes maturing 2006 and 2009,
respectively.
</TABLE>
c) Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
3.10*** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998.
3.11*** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12*** -- Certificate of Designation, of the Series A Preferred
Stock of the Company.
3.13**** -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
3.14* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on June 18, 1999.
4.1** -- Form of Specimen Stock Certificate for Common Stock of
the Registrant
4.2** -- Indenture dated as of July 14, 1997 between the Company
and The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
</TABLE>
98
<PAGE> 100
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York as Rights Agent.
4.7** -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto).
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
</TABLE>
99
<PAGE> 101
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 20,
1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 11,
1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 21,
1997
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated August 14,
1997
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
29, 1997
10.9** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc.
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets
Growth Fund, Inc.
10.11 -- Intentionally Omitted
</TABLE>
100
<PAGE> 102
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.12** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Capital International Emerging Markets Funds
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds
10.14** -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan
10.15** -- GTS-Hermes, Inc. 1994 Stock Option Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
10.17***** -- Employment Agreement dated as of April 1, 1999 between
the Company and H. Brian Thompson
10.18* -- Employment Agreement dated March 22, 1999 between the
Company and Robert Amman
10.19* -- Employment Agreement dated January 3, 1995 between the
Company and Gerard Caccappolo
10.20* -- Employment Agreement dated July 1, 1998 between Esprit
Telecom and Hans-Peter Kohlhammer
10.21* -- Employment Agreement dated February 22, 1999 between the
Company and Robert Schriesheim
10.22** -- SFMT, Inc. Equity Compensation Plan
10.23** -- Form of Non-Statutory Stock Option Agreement
10.24** -- Third Amended and Restated 1992 Stock Option Plan of
Global TeleSystems Group Inc. dated September 25, 1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement filed as Exhibit 10.31 to this
Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
</TABLE>
101
<PAGE> 103
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43*** -- Key Employee Stock Option Plan of Hermes Europe Railtel
B.V.
21.1* -- List of Subsidiaries of the Registrant
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of PricewaterhouseCoopers
23.3*** -- Report of PricewaterhouseCoopers Independent Accountants
24.1* -- Powers of Attorney (included on signature page to this
report)
27.1* -- Financial Data Schedule extracted from December 31, 1999
audited financial statements
99.1****** -- The Further Restated Shareholders Agreement, dated
October 7, 1999 between FLAG Atlantic Holdings Limited
and GTS Transatlantic Holdings, Ltd. (Portions of this
Exhibit are subject to a request for confidential
treatment filed by GTS with the Commission.)
99.2****** -- Bank Credit Agreement, dated as of October 8, 1999, among
FLAG Atlantic Limited, Barclays Capital, Westdeutshe
Landesbank Girozentrale, New York Branch, Dresdner Bank
AG, New York Branch, Barclays Bank Plc and the Lenders
listed therein. (Portions of this Exhibit are subject to
a request for confidential treatment filed by GTS with
the Commission.)
99.3****** -- Shareholder Pledge Agreement, dated as of October 8,
1999, among GTS Transatlantic Holdings, Ltd., FLAG
Atlantic Holdings Limited and Barclays Bank Plc.
</TABLE>
- ---------------
* Filed herewith.
102
<PAGE> 104
** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 6 to the Company's registration statement on Form S-1
dated February 5, 1998 (Commission File No. 333-36555)
*** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-K for the Year Ended December 31,
1998.
**** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 1 dated June 4, 1999 to the Company's registration
statement on Form S-3 (Commission File No. 333-78097)
***** Incorporated by reference to Exhibit No. 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
****** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's Current Report on Form 8-K filed with the Commission on
February 8, 2000.
(d) Schedules
Schedule II -- Valuation and Qualifying Accounts. The other financial
statement schedules of the Company have been omitted because the information
required to be set forth therein is not applicable or is shown in the Financial
Statements or Notes thereto.
103
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the County of
Arlington, Commonwealth of Virginia, on this 8th day of March, 2000.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ H. BRIAN THOMPSON
----------------------------------
Name: H. Brian Thompson
Title: Chairman and Chief
Executive Officer
Each person whose signature appears below constitutes and appoints, Robert
A. Schriesheim, Grier C. Raclin and Arnold Y. Dean and each of them singly, as
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him, and in his name, place and stead, in any and all
capacities to sign any and all amendments and supplements to this annual report
on Form 10-K and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 8th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ H. BRIAN THOMPSON Chairman and Chief Executive Officer (Principal
- ----------------------------------------------------- Executive Officer)
H. Brian Thompson
/s/ ROBERT J. AMMAN President and Director
- -----------------------------------------------------
Robert J. Amman
/s/ ROBERT A. SCHRIESHEIM Executive Vice President, Corporate Development and
- ----------------------------------------------------- Chief Financial Officer (Principal Financial
Robert A. Schriesheim Officer)
/s/ JEFFREY H. VON DEYLEN Senior Vice President, Finance (Principal
- ----------------------------------------------------- Accounting Officer)
Jeffrey H. Von Deylen
/s/ GERALD W. THAMES Executive Vice Chairman of the Board of Directors
- -----------------------------------------------------
Gerald W. Thames
/s/ ALAN B. SLIFKA Vice Chairman of the Board of Directors
- -----------------------------------------------------
Alan B. Slifka
/s/ DAVID DEY Director
- -----------------------------------------------------
David Dey
/s/ ROGER W. HALE Director
- -----------------------------------------------------
Roger W. Hale
</TABLE>
104
<PAGE> 106
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ BERNARD J. MCFADDEN Director
- -----------------------------------------------------
Bernard J. McFadden
/s/ STEWART J. PAPERIN Director
- -----------------------------------------------------
Stewart J. Paperin
Director
- -----------------------------------------------------
W. James Peet
/s/ JEAN SALMONA Director
- -----------------------------------------------------
Jean Salmona
/s/ FRANK V. SICA Director
- -----------------------------------------------------
Frank V. Sica
Director
- -----------------------------------------------------
Adam Solomon
</TABLE>
105
<PAGE> 107
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------- ---------- ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts at
12/31/99............................... 9,533 37,560 (2,956) 44,137
Allowance for doubtful accounts at
12/31/98............................... 6,474 7,474 (4,415) 9,533
Allowance for doubtful accounts at
12/31/97............................... 1,040 5,318 (178) 6,180
</TABLE>
The beginning balance for 1998 does not match the ending balance for 1997;
the difference reflects the activity for GTS (Europe) Ltd. for the three month
period ended December 31, 1997. The Company's consolidated balance sheet as of
December 31, 1997 represents the audited historical balance sheet of GTS
(Europe) Ltd. as of September 30, 1997 combined with GTS's historical balance
sheet as of December 31, 1997.
106
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
3.10*** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998.
3.11*** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12*** -- Certificate of Designation, of the Series A Preferred
Stock of the Company.
3.13**** -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
3.14* -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on June 18, 1999.
4.1** -- Form of Specimen Stock Certificate for Common Stock of
the Registrant
4.2** -- Indenture dated as of July 14, 1997 between the Company
and The Bank of New York (including the form of Senior
Subordinated Convertible Bond due 2000 as an exhibit
thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York as Rights Agent.
</TABLE>
<PAGE> 109
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
4.7** -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto).
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
10.2** -- Registration Rights Letter Agreement, dated as of January
19, 1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.3** -- Warrant Agreement, dated as of January 19, 1996, among
Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.4** -- Joint Venture Letter Agreement, dated January 19, 1996,
among Global TeleSystems Group, Inc., The Open Society
Institute and Chatterjee Fund Management, L.P.
10.5 -- Intentionally Omitted
10.6** -- Registration Rights Letter Agreement, dated June 6, 1996,
among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
</TABLE>
<PAGE> 110
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
10.8(e)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
16, 1996
10.8(f)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated December
30, 1996
10.8(g)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated May 13,
1997
10.8(h)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 20,
1997
10.8(i)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 11,
1997
10.8(j)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 21,
1997
10.8(k)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated August 14,
1997
10.8(l)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
29, 1997
10.9** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Emerging Markets Growth Fund, Inc.
10.10** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Emerging Markets
Growth Fund, Inc.
10.11 -- Intentionally Omitted
10.12** -- Registration Rights Letter Agreement, dated as February
2, 1996, between Global TeleSystems Group, Inc. and
Capital International Emerging Markets Funds
10.13** -- Warrant Agreement, dated as of February 2, 1996, between
Global TeleSystems Group, Inc. and Capital International
Emerging Markets Funds
10.14** -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan
10.15** -- GTS-Hermes, Inc. 1994 Stock Option Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.17***** -- Employment Agreement dated as of April 1, 1999 between
the Company and H. Brian Thompson
10.18* -- Employment Agreement dated March 22, 1999 between the
Company and Robert Amman
10.19* -- Employment Agreement dated January 3, 1995 between the
Company and Gerard Caccappolo
10.20* -- Employment Agreement dated July 1, 1998 between Esprit
Telecom and Hans-Peter Kohlhammer
10.21* -- Employment Agreement dated February 22, 1999 between the
Company and Robert Schriesheim
10.22** -- SFMT, Inc. Equity Compensation Plan
10.23** -- Form of Non-Statutory Stock Option Agreement
10.24** -- Third Amended and Restated 1992 Stock Option Plan of
Global TeleSystems Group Inc. dated September 25, 1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement filed as Exhibit 10.31 to this
Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43*** -- Key Employee Stock Option Plan of Hermes Europe Railtel
B.V.
21.1* -- List of Subsidiaries of the Registrant
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of PricewaterhouseCoopers
23.3*** -- Report of PricewaterhouseCoopers Independent Accountants
24.1* -- Powers of Attorney (included on signature page to this
report)
27.1* -- Financial Data Schedule extracted from December 31, 1999
audited financial statements
99.1****** -- The Further Restated Shareholders Agreement, dated
October 7, 1999 between FLAG Atlantic Holdings Limited
and GTS Transatlantic Holdings, Ltd. (Portions of this
Exhibit are subject to a request for confidential
treatment filed by GTS with the Commission.)
99.2****** -- Bank Credit Agreement, dated as of October 8, 1999, among
FLAG Atlantic Limited, Barclays Capital, Westdeutshe
Landesbank Girozentrale, New York Branch, Dresdner Bank
AG, New York Branch, Barclays Bank Plc and the Lenders
listed therein. (Portions of this Exhibit are subject to
a request for confidential treatment filed by GTS with
the Commission.)
99.3****** -- Shareholder Pledge Agreement, dated as of October 8,
1999, among GTS Transatlantic Holdings, Ltd., FLAG
Atlantic Holdings Limited and Barclays Bank Plc.
</TABLE>
- ---------------
* Filed herewith.
** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 6 to the Company's registration statement on Form S-1
dated February 5, 1998 (Commission File No. 333-36555)
*** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-K for the Year Ended December 31,
1998.
**** Incorporated by reference to the correspondingly numbered Exhibit to
Amendment No. 1 dated June 4, 1999 to the Company's registration
statement on Form S-3 (Commission File No. 333-78097)
***** Incorporated by reference to Exhibit No. 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
****** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's Current Report on Form 8-K filed with the Commission on
February 8, 2000.
<PAGE> 1
EXHIBIT 3.14
CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF
GLOBAL TELESYSTEMS GROUP, INC.
GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation, HEREBY
CERTIFIES AS FOLLOWS:
1. The name of the Corporation is Global TeleSystems Group, Inc. The
date of filing of its Certificate of Incorporation with the Secretary of State
of the State of Delaware was September 30, 1993.
2. This Certificate of Amendment sets forth amendments to the
Certificate of Incorporation of the Corporation that were duly adopted by the
vote of the holders of a majority of the outstanding stock of the Corporation
entitled to vote thereon in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
3. The first paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended to read as follows:
"FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 280,000,000 (two hundred
eighty million) shares, of which there shall be 270,000,000 (two
hundred seventy million) shares of common stock, par value $0.10 per
share, and 10,000,000 (ten million) shares of preferred stock, par
value $0.0001 per share."
IN WITNESS WHEREOF, GLOBAL TELESYSTEMS GROUP, INC. has caused this
certificate to be signed by Vimal Agarwal, its Vice President and Treasurer, and
attested by Arnold Y. Dean, its Assistant Secretary, this 18th day of June,
1999.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ Vimal Agarwal
------------------------------------
Name: Vimal Agarwal
Title: Vice President and Treasurer
ATTEST:
By: /s/ Arnold Y. Dean
- --------------------------
Name: Arnold Y. Dean
Title: Assistant Secretary
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective the 22th day of March,
1999 (the "Effective Date") is made by and between Global TeleSystems Group,
Inc, a Delaware corporation (the "Company") and Robert Amman (the "Executive").
RECITALS:
A. It is the desire of the Company to employ Executive as its
President and Chief Operating Officer ; and
B. Executive desires to commit to serve the Company on the
terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements set forth below, the parties hereto agree as
follows:
1. Certain Definitions.
(a) "Annual Base Salary" shall have the meaning set
forth in Section 5(a).
(b) "Board" shall mean the Board of Directors of the
Company.
(c) "Bonus" shall have the meaning set forth in
Section 5(b).
(d) The Company shall have "Cause" to terminate
Executive's employment hereunder upon Executive's
(i) failure to follow a legal order of the Board
or the Chief Executive Officer of the Company, other than any
such failure resulting from Executive's Disability, after
notice and reasonable opportunity for cure,
(ii) fraud, embezzlement, or any other similar
illegal act committed by the Executive in connection with the
Executive's duties as an executive of the Company or any
subsidiary or affiliate of the Company,
(iii) conviction of any felony or crime involving
moral turpitude which causes or may reasonably be expected to
cause substantial economic injury to or substantial injury to
the reputation of the Company or any subsidiary or affiliate
of the Company, or
(iv) willful or grossly negligent commission of
any other act or failure to act which causes or may reasonably
be expected (as of the time of such occurrence) to cause
substantial economic injury to or substantial injury to the
reputation of the Company or any subsidiary or affiliate of
the Company,
<PAGE> 2
including, without limitation, any material violation of the
Foreign Corrupt Practices Act, as described herein below.
(e) "Change in Control" shall mean any of the
following events:
(i) a report shall be filed with the Securities
and Exchange Commission pursuant to the Exchange Act of 1934
(the "Act), or successor law or provision, disclosing that any
"Person" (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company, or an
employee benefit plan sponsored by the Company or a subsidiary
of the Company is, or becomes the beneficial owner (as such
term is defined in Exchange Act Rule 13d-3), directly or
indirectly of, 25% or more of the outstanding voting stock of
the Company (or securities convertible into Company Stock)
(calculated as provided in Exchange Act Rule 13d-3(d) in the
case of rights to acquire Company Stock),
(ii) any such "Person", other than the Company or
a subsidiary of the Company, or a employee benefit plan
sponsored by the Company or a Subsidiary of the Company, shall
purchase shares pursuant to a tender offer or exchange offer
to acquire any Company Stock (or securities convertible into
Company Stock) for cash, securities or any other
consideration, provided that after consummation of the offer,
the person in question is the beneficial owner (as such term
is defined in Exchange Act Rule 13d-3), directly or
indirectly, of 20% or more of the outstanding voting stock of
the Company (calculated as provided in Exchange Act Rule
13d-3(d) in the case of rights to acquire Company Stock),
(iii) the stockholders of the Company shall
approve (A) any consolidation, share exchange or merger of the
Company (a "Change of Control Transaction") (1) in which the
stockholders of the Company immediately prior to such Change
of Control Transaction do not own at least a majority of the
voting power of the entity which survives/results from such
Change of Control Transaction, or (2) in which a shareholder
of the Company immediately before such Change of Control
Transaction, but who does not own a majority of the voting
stock of the Company immediately prior to such Change of
Control Transaction, owns a majority of the Company's voting
stock after such Change of Control Transaction; or (B) any
sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all
the assets of the Company, including stock held in subsidiary
corporations or interests held in subsidiary ventures, or
(iv) there shall have been a change in a majority
of the members of the Board within a 24-month period unless
the election or nomination for election by the Company's
stockholders of each new director during such 24-month period
was approved by the vote of two-thirds of the directors then
still in office who were directors at the beginning of such
24-month period; or
(v) the Company shall file a report with the
Securities and Exchange Commission on Form 8-K (or any
successor thereto), that a change in control of or over the
Company has occurred.
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(f) "Closing Price" shall mean the closing price in
United States Dollars ("$") of a share of Company Stock on the
principal exchange on which such shares are traded on the day in
question; if such exchange is in the United States, as reported in the
Wall Street Journal or, if such exchange is in Europe, as reported in
the Financial Times, with such price converted to $ utilizing the mean
of the bid and offered prices for $ in the local currency for the day
in question as reported in the Wall Street Journal.
(g) "Code" shall mean the Internal Revenue Code of
1986, as amended.
(h) "Committee" shall mean either the Compensation
Committee or a SubCommittee of such Committee duly appointed by the
Board.
(i) "Company" shall have the meaning set forth in the
preamble hereto.
(j) "Company Stock" shall mean the $.10 par value
common stock of the Company.
(k) "Contract Year" shall mean each twelve month
period beginning on the Effective Date or an annual anniversary
thereof.
(l) "Date of Termination" shall mean (i) if
Executive's employment is terminated by Executive's death, the date of
Executive's death and (ii) if Executive's employment is terminated
pursuant to Section 6(a)(ii) - (vi) the date specified in the Notice of
Termination.
(m) "Disability" shall mean the absence of Executive
from Executive's duties to the Company on a full-time basis for a total
of six months during any 12-month period as a result of incapacity due
to mental or physical illness which is determined to be reasonably
likely to extend beyond the completion of the Term and which
determination is made by a physician selected by the Company and
acceptable to Executive or Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably). A
Disability shall not be "incurred" hereunder until, at the earliest,
the last day of the sixth month of such absence.
(n) "Executive" shall have the meaning set forth in
the preamble hereto.
(o) "Extension Term" shall have the meaning set forth
in Section 2.
(p) "Good Reason" shall mean any of the following
events which is not cured by the Company within 15 days after written
notice thereof is given to the Company by Executive: (i) any failure to
pay Executive's Base Salary or Bonus when
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<PAGE> 4
due to Executive; (ii) any other material breach by the Company of any
material term of this Agreement; or (iii) any material adverse change
in Executive's job titles, duties, responsibilities, status, reporting
responsibilities or perquisites granted hereunder, without Executive's
consent. "Good Reason" shall cease to exist for an event on the 30th
day following the later of its occurrence or Executive's knowledge
thereof, unless Executive has given the Company notice thereof prior to
such date.
(q) "Grant Date" shall mean the date on which the
Committee acts to grant to Executive the Options described herein.
(r) "Initial Term" shall have the meaning set forth
in Section 2.
(s) "Notice of Termination" shall have the meaning
set forth in Section 6(b).
(t) "Options" shall have the meaning set forth in
Section 5(c).
(u) "Stock Option Plan" shall mean Fourth Amended and
Restated 1992 Stock Option Plan of Global TeleSystems Group, Inc. or
any successor plan.
(v) "Term" shall have the meaning set forth in
Section 2.
2. Employment Term. The Company hereby employs the
Executive, and the Executive hereby accepts employment by the Company, under the
terms and conditions hereof, for the period (the "Term") beginning on the
effective date hereof and ending upon Termination as set forth herein.
3. Position and Duties. Executive shall serve as
President and Chief Operating Officer of the Company, reporting to the Chief
Executive Officer, with such responsibilities, duties and authority as are
customary for such role. Executive shall devote all necessary business time and
attention, and employ Executive's reasonable best efforts, toward the
fulfillment and execution of all assigned duties, and the satisfaction of
defined annual and/or longer-term performance criteria.
4. Place of Performance. In connection with Executive's
employment during the Term, Executive shall initially be based at the Company's
principal executive headquarters in McLean, Virginia, USA but, upon obtaining
all necessary and appropriate authorizations, shall be seconded to the Company's
subsidiary, Global TeleSystems (UK) Ltd. ("GTS UK"), and be based at the
Company's executive offices in London, England, except for necessary travel on
the Company's business. Executive may be reassigned during the Term hereof to
another location identified as the principal executive or operations
headquarters of the Company in the Company's discretion.
5. Compensation and Related Matters.
(a) Annual Base Salary. During the Term Executive
shall receive a base salary at a rate of four hundred thousand dollars
($400,000) per annum (the "Annual
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<PAGE> 5
Base Salary"), less standard deductions, paid in accordance with the
Company's general payroll practices for executives, but no less
frequently than monthly. The Annual Base Salary shall compensate
Executive for any official position or directorship that Executive is
asked to hold in the Company or its affiliates as a part of Executive's
employment responsibilities. No less frequently than annually during
the Term, the Committee on advice of the Company's Chief Executive
Officer shall review the rate of Annual Base Salary payable to
Executive, and may, in their discretion, increase the rate of Annual
Base Salary payable hereunder; provided, however, that any increased
rate shall thereafter be the rate of "Annual Base Salary" hereunder.
(b) Bonus. Except as otherwise provided for herein,
for each fiscal quarterly compensation period (or other period
consistent with the Company's then-applicable normal employment
practices) during which Executive is employed hereunder on the last
day, Executive shall be eligible to receive a Bonus in an amount up to
one-quarter (or other pro-rata portion as appropriate) of 100% of
Executive's Base Salary pursuant to, and as set forth in, the terms of
the GTS Senior Executive Bonus Plan as such Plan may be amended from
time to time, plus such other bonus payments, if any, as shall be
determined by the Compensation Committee in its sole discretion.
(c) Stock Options. The Company has granted to
Executive options to purchase 350,000 shares of the Company's common
stock pursuant to the terms of the Stock Option Plan and an associated
Stock Option Agreement (such grant to be referred to herein as the
"Initial Option Grant" and such options to be referred to herein as the
"Initial Options"). The Company may grant Executive additional stock
options (when aggregated with the Initial Options, the "Options"), in
an amount, and on terms, to be determined by the Committee in its sole
discretion (after consultation with Executive). All Options shall
(i) have an exercise price equal to the Closing
Price on the Grant Date;
(ii) be granted pursuant to and subject to the
terms of the Stock Option Plan; and
(iii) be subject to the terms of an option
agreement containing the above terms, and other terms
substantially similar to the terms generally provided in the
option agreements of the Company's other senior managers
(except as otherwise modified herein).
(d) Benefits. Executive shall be entitled to receive
such benefits and to participate in such employee group benefit plans,
including life, health and disability insurance policies, financial
planning services and other benefits as are generally provided by the
Company to its executives of comparable level and responsibility in
accordance with the plans, practices and programs of the Company.
Executive shall be provided with financial planning services as per
Company practice for senior executives.
(e) Expenses. The Company shall reimburse Executive
for all
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reasonable and necessary expenses incurred by Executive in connection
with the performance of Executive's duties as an employee of the
Company. Such reimbursement is subject to the submission to the Company
by Executive of appropriate documentation and/or vouchers in accordance
with the customary procedures of the Company for expense reimbursement,
as such procedures may be revised by the Company from time to time
hereafter.
(f) Vacations. Executive shall be entitled to paid
vacation in accordance with the Company's vacation policy as in effect
from time to time. However, in no event shall Executive be entitled to
less than four (4) weeks vacation per Calendar Year. Executive shall
also be entitled to paid holidays and personal days in accordance with
the Company's practice with respect to same as in effect from time to
time.
(g) Benefits Upon Secondment. If and when Executive
is seconded to GTS UK, he shall be entitled to receive the additional
housing, travel, car allowance and other benefits set forth and
described in Attachment A hereto.
6. Termination.
(a) Executive's employment hereunder may be
terminated by the Company, on the one hand, or Executive, on the other
hand, as applicable, without any breach of this Agreement, under the
following circumstances
(i) Death. Executive's employment hereunder shall
terminate upon Executive's death.
(ii) Disability. If Executive has incurred a
Disability, the Company may give Executive written notice of
its intention to terminate Executive's employment. In such
event, Executive's employment with the Company shall terminate
effective on the 14th day after receipt of such notice by
Executive, provided that within the 14 days after such
receipt, Executive shall not have returned to full-time
performance of Executive's duties.
(iii) Cause. The Company may terminate
Executive's employment hereunder for Cause.
(iv) Good Reason. Executive may terminate
Executive's employment for Good Reason.
(v) Without Cause. The Company may terminate
Executive's employment hereunder without Cause after giving
Executive at least ninety (90) days written notice (the
"Company Notice Period").
(vi) Resignation without Good Reason. Executive
may resign Executive's employment without Good Reason after
giving the Company at least 180 days written notice
("Executive's Notice Period").
(b) Notice of Termination. Any termination of
Executive's
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employment by the Company or by Executive under this Section 6 (other
than termination pursuant to Paragraph 6(a)(i)) shall be communicated
by a written notice (the "Notice of Termination") to the other party
hereto indicating the specific termination provision in this Agreement
relied upon, setting forth in reasonable detail any facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated, and specifying a Date of
Termination which, except in the case of termination for Cause or
Disability, shall be at least ninety (90) days following the date of
such notice ( the "Notice Period"); provided, that Company may pay to
Executive all Salary, benefits and other rights due to Executive during
such Notice Period (or during the Executive Notice Period or Company
Notice Period, as applicable) instead of employing Executive during
such time.
(c) Upon Executive's Termination of employment with
the Company for whatever reason, he shall be deemed to have effectively
resigned from all executive, director or other positions with the
Company or its affiliates at the time of Termination, and shall return
all property owned by the Company and in Executive's possession at that
time.
7. Severance Payments. Other than as set forth below, no
payments or benefits shall be due to Executive in connection with a termination
of this Agreement other than Salary and Benefits earned prior to the date of
termination.
(a) Termination by Company without Cause or by
Executive for Good Reason. If Executive's employment shall be
terminated by the Company without Cause (pursuant to Section 6(a)(v),
or by the Executive for Good Reason (pursuant to Section 6(a)(iv)), and
subject to the Company's receipt of a general release in its customary
form, the Company shall
(i) pay to Executive (A) all base Salary due for
the period prior to termination and the prorated portion of
the unpaid Bonus to which Executive would otherwise be
entitled for the compensation period during which the
Termination occurred, plus (B) either a lump sum cash payment
as soon as practicable following the Date of Termination, or,
in the Company's discretion, in installments in accordance
with the Company's normal payroll practices an amount equal to
two (2) times Executive's then-current rate of Annual Base
Salary;
(ii) to the extent permitted by law and the
provisions of the applicable plans, the Company shall also
continue to provide Executive with all employee benefits and
perquisites which Executive was participating in or receiving
at the time of the termination of employment until the earlier
of two years from the Date of Termination or Executive's
receipt of comparable benefits from a successor employer; and
(iii) accelerate the vesting of that number of
the Initial Options sufficient to result, when aggregated with
all Initial Options that were vested prior to the time of
termination, in Executive's having vested Initial Options to
acquire
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(A) 50,000 shares of the Company's common stock; plus (B)
8,333 shares of the company's common stock or each full month
that Executive was employed by the Company (other than solely
as a director) after the effective date of this Agreement
prior to termination.
(b) Termination by Reason of Disability or Death. If
Executive's employment shall terminate by reason of Executive's
Disability (pursuant to Section 6(a)(ii)) or death (pursuant to Section
6(a)(i)), and subject (in the case of termination due to Executive's
disability) to the Company's receipt of a general release from
Executive in its customary form, the Company shall pay to Executive, in
a lump sum cash payment as soon as practicable following the Date of
Termination, all unpaid Base Salary due for the period prior to
Termination plus the prorated portion of the unpaid Bonus to which
Executive would otherwise be entitled for the compensation period of
termination and, if there is a period of time during which Executive is
not being paid Salary and not receiving long-term disability insurance
payments, the Committee may, in its discretion, determine that the
Company shall make interim payments to Executive until commencement of
disability insurance payments.
(c) Resignation by Executive Without Good Reason. If
Executive resigns from the Company at any time without Good Reason,
that Company shall pay to Executive all base Salary due for the period
prior to termination, and at the time of Termination shall accelerate
the vesting of unvested Initial Options in an amount sufficient to
result, when aggregated with all Initial Options that were vested prior
to the time of Termination, in Executive's having vested Initial
Options to acquire 50,000 shares of the Company's common stock plus
8,333 shares of the Company's common stock for each full month (i) that
Executive was employed by the Company (other than solely as a director)
after the effective date of this Agreement prior to termination, and
(ii) during Executive's Notice Period to the degree Executive is not
employed by the Company during such Executive Notice Period.
(d) Survival. The expiration or termination of the
Term shall not impair the rights or obligations of any party hereto
which shall have accrued hereunder prior to such expiration.
(e) Mitigation of Damages. In the event of any
termination of Executive's employment by the Company, Executive shall
not be required to seek other employment to mitigate damages, and any
income earned by Executive from other employment or self-employment
shall not be offset against any obligations of the Company to Executive
under this Agreement.
8. Competition.
(c) Executive shall not, at any time during the Term,
or for one year thereafter,
(d) without the prior written consent of the Board,
directly or indirectly through any other person or entity:
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(i) own, acquire in any manner any ownership
interest in (except as purely passive investments amounting to
no more than five percent of the voting equity), or serve as a
director, officer, employee, counsel or consultant of any
person, firm, partnership, corporation, consortia, association
or other entity that competes with the Company or any of its
affiliates or subsidiaries, in any geographic market in which
the Company either (A) offers or provides telecommunications
(which term hereafter shall be deemed to include voice, data
or internet communications) services to customers; (B)
operates or manages a provider of telecommunications services;
(C) has investments in a provider of telecommunications
services; or (D), to Executive's knowledge, has plans to
either operate a telecommunications carrier, offer a
telecommunications service, or invest in a telecommunications
carrier within the next twelve months,
(ii) solicit, entice, persuade or induce any
individual who currently is, or at any time during the
preceding twelve months shall have been, an officer, director
or employee of the Company, or any of its affiliates, to
terminate or refrain from renewing or extending such person's
employment with the Company or such subsidiary or affiliate,
or to become employed by or enter into contractual relations
with or consultant for any other individual or entity, and
Executive shall not approach any such employee for any such
purpose or authorize or knowingly cooperate with the taking of
any such actions by any other individual or entity, or
(iii) except in accordance with Executive's
duties on behalf of the Company, solicit, entice, persuade, or
induce any individual or entity which currently is, or at any
time during the preceding twelve months shall have been, a
customer, consultant, vendor, supplier, lessor or lessee of
the Company, or any of its subsidiaries or affiliates, to
terminate or refrain from renewing or extending its
contractual or other relationship with the Company or such
subsidiary or affiliate, and Executive shall not approach any
such customer, vendor, supplier, consultant, lessor or lessee
for such purpose or authorize or knowingly cooperate with the
taking of any such actions by any other individual or entity.
(e) Executive shall not at any time:
(i) other than when required in the ordinary
course of business of the Company, disclose, directly or
indirectly, to any person, firm, corporation, partnership,
association or other entity, any trade secret, or confidential
information concerning the financial condition, suppliers,
vendors, customers, lessors, or lessees, sources or leads for,
and methods of obtaining, new business, or the methods
generally of doing and operating the respective businesses of
the Company or its affiliates and subsidiaries to the degree
such secret or information incorporates information that is
proprietary to, or was developed specifically by or for, the
Company, except such information that is a matter of public
knowledge, was provided to Executive (without breach of any
obligation of confidence owed to the Company) by a third party
which is not an affiliate of the Company, or is required to be
disclosed by law or judicial or administrative process, or
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(ii) make any oral or written statement about the
Company and/or its financial status, business, compliance with
laws, personnel, directors, officers, consultants, services,
business methods or otherwise, which is intended or reasonably
likely to disparage the Company or otherwise degrade its
reputation in the business or legal community in which it
operates or in the telecommunications industry.
(f) Executive hereby represents that (i) Executive is
not restricted in any material way from performing Executive's duties
hereunder as the result of any contract, agreement or law; and (ii)
Executive's due performance of Executive's duties hereunder does not
and will not violate the terms of any agreement to which Executive is
bound.
(g) In the event any agreement in this Section 8
shall be determined by any court of competent jurisdiction to be
unenforceable by reason of its extending for too great a period of time
or over too great a geographical area or by reason of its being too
extensive in any other respect, it will be interpreted to extend only
over the maximum period of time for which it may be enforceable, and/or
over the maximum geographical area as to which it may be enforceable
and/or to the maximum extent in all other respects as to which it may
be enforceable, all as determined by such court in such action.
9. Injunctive Relief. It is recognized and acknowledged
by Executive that a breach of the covenants contained in Section 8 hereof will
cause irreparable damage to the Company and its goodwill, the exact amount of
which will be difficult or impossible to ascertain, and that the remedies at law
for any such breach will be inadequate. Accordingly, Executive agrees that in
the event of a breach of any of the covenants contained in Section 8 hereof, in
addition to any other remedy which may be available at law or in equity, the
Company will be entitled to specific performance and injunctive relief.
10. Non-Disparagement of Executive. The Company shall not
make any oral or written statement about Executive which is intended or
reasonably likely to disparage Executive or otherwise degrade Executive's
reputation in the business or legal community or in the telecommunications
industry.
11. Foreign Corrupt Practices Act. Executive agrees to
comply in all material respects with the applicable provisions of the U.S.
Foreign Corrupt Practices Act of 1977 ("CPA"), as amended, which provides
generally that: under no circumstances will foreign officials, representatives,
political parties or holders of public offices be offered, promised or paid any
money, remuneration, things of value, or provided any other benefit, direct or
indirect, in connection with obtaining or maintaining contracts or orders
hereunder. When any representative, employee, agent, or other individual or
organization associated with Executive is required to perform any obligation
related to or in connection with this Agreement, the substance of this section
shall be imposed upon such person and included in any agreement between
Executive and any such person. Failure by Executive to comply with the
provisions of the CPA
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shall constitute a material breach of this Agreement and shall entitle the
Company to terminate Executive's employment for Cause. Additionally, Executive
hereby acknowledges that as a condition for the Company to continue this
Agreement, Executive shall execute an acknowledgment that Executive has read "An
Explanation of the Foreign Corrupt Practices Act" and "Global TeleSystems Group,
Inc. Policy on Foreign Transactions," copies of which have been provided to
Executive. Executive also acknowledges that a condition precedent to the
effectiveness of this Agreement shall be the execution by Executive of the
"Addendum to the Global TeleSystems Group, Inc. Policy on Foreign Transaction,"
a copy of which has been provided to Executive. Additionally, and as a condition
for the Company to continue this Agreement, Executive shall be required from
time to time at the request of the Company to execute a certificate of
Executive's compliance with the aforementioned laws and regulations.
12. Purchases and Sales of the Company's Securities.
Executive has read and agrees to comply in all respects with the Company's
Policy Regarding the Purchase and Sale of the Company's Securities by Employees,
as such Policy may be amended from time to time. Specifically, and without
limitation, Executive agrees that Executive shall not purchase or sell stock in
the Company at any time (a) that Executive possesses material non-public
information about the Company or any of its businesses; and (b) during any
"Trading Blackout Period" as may be determined by the Company as set forth in
the Policy from time to time.
13. Indemnification. Executive shall be entitled to
indemnification set forth in the Company's Certificate of Incorporation to the
maximum extent allowed under the laws of the Commonwealth of Virginia and the
State of Delaware Corporations Act, and Executive shall be entitled to the
protection of any insurance policies the Company may elect to maintain generally
for the benefit of its directors and officers against all costs, charges and
expenses incurred or sustained by Executive in connection with any action, suit
or proceeding to which Executive may be made a party by reason of Executive's
being or having been a director, officer or employee of the Company or any of
its subsidiaries or Executive's serving or having served any other enterprise as
a director, officer or employee at the request of the Company (other than any
dispute, claim or controversy arising under or relating to this Agreement).
14. Notices. Any written notice required by this
Agreement will be deemed provided and delivered to the intended recipient when
(a) delivered in person by hand; or (b) three days after being sent via U.S.
certified mail, return receipt requested; or (c) the day after being sent via by
overnight courier, in each case when such notice is properly addressed to the
following address and with all postage and similar fees having been paid in
advance:
If to the Company: GTS Group, Inc.
C/o Global TeleSystems Group, Inc.
Attn.: Senior Vice President, Human Resources
1751 Pinnacle Drive
North Tower 12th Floor
McLean, VA 22102 USA
If to Executive: to Executive at the address set forth below
under Executive's signature.
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Either party may change the address to which notices, requests, demands and
other communications to such party shall be delivered personally or mailed by
giving written notice to the other party in the manner described above.
15. Binding Effect. This Agreement shall be for the
benefit of and binding upon the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and, where
applicable, assigns.
16. Entire Agreement. This Agreement, including
Attachment A hereto, constitutes the entire agreement between the listed parties
with respect to the subject matter described in this Agreement and supersedes
all prior agreements, understandings and arrangements, both oral and written,
between the parties with respect to such subject matter. This Agreement may not
be modified, amended, altered or rescinded in any manner, except by written
instrument signed by both of the parties hereto; provided, however, that the
waiver by either party of a breach or compliance with any provision of this
Agreement shall not operate nor be construed as a waiver of any subsequent
breach or compliance.
17. Severability. In case any one or more of the
provisions of this Agreement shall be held by any court of competent
jurisdiction or any arbitrator selected in accordance with the terms hereof to
be illegal, invalid or unenforceable in any respect, such provision shall have
no force and effect, but such holding shall not affect the legality, validity or
enforceability of any other provision of this Agreement provided that the
provisions held illegal, invalid or unenforceable does not reflect or manifest a
fundamental benefit bargained for by a party hereto.
18. Dispute Resolution and Arbitration.In the event that
any dispute arises between the Company and Executive regarding or relating to
this Agreement and/or any aspect of Executive's employment relationship with the
Company, AND IN LIEU OF LITIGATION AND A TRIAL BY JURY, the parties consent to
resolve such dispute through mandatory arbitration under the Commercial Rules of
the American Arbitration Association ("AAA"), before a single arbitrator in
McLean or Arlington, Virginia. The parties hereby consent to the entry of
judgment upon award rendered by the arbitrator in any court of competent
jurisdiction. Notwithstanding the foregoing, however, should adequate grounds
exist for seeking immediate injunctive or immediate equitable relief, any party
may seek and obtain such relief; provided that, upon obtaining such relief, such
injunctive or equitable action shall be stayed pending the resolution of the
arbitration proceedings called for herein. The parties hereby consent to the
exclusive jurisdiction in the state and Federal courts of or in the Commonwealth
of Virginia for purposes of seeking such injunctive or equitable relief as set
forth above. Any and all out-of-pocket costs and expenses incurred by the
parties in connection with such arbitration (including attorneys' fees) shall be
allocated by the arbitrator in substantial conformance with his or her decision
on the merits of the arbitration; provided, however, that in no event shall
Executive be required to pay attorneys' fees in an amount that exceeds the
amount incurred by Executive for Executive's attorneys' fees.
19. Choice of Law. Executive and the Company intend and
hereby acknowledge that jurisdiction over disputes with regard to this
Agreement, and over all aspects of the relationship between the parties hereto,
shall be governed by the laws of the Commonwealth of Virginia without giving
effect to its rules governing conflicts of laws.
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20. Section Headings. The section headings contained in
this Agreement are for reference purposes only and shall not affect in any
manner the meaning or interpretation of this Agreement.
21. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date and year first above written.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ H. Brian Thimpson
-------------------------------------
Name: H. Brian Thompson
Title: Chairman and Chief Executive Officer
EXECUTIVE
/s/ Robert Amman
-------------------------------------
Robert Amman
309 Blackland Road, N.W.
Atlanta, GA 30342
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ATTACHMENT A
Upon transfer to the U.K., the Executive is eligible for the following
expatriate benefits:
[X] Relocation of Executive and spouse to the U.K.
[X] Use of a furnished corporate apartment in the Greater London area
[X] Car allowance in line with local UK practice (presently UK PD 20,000
gross per annum, paid in monthly installments)
[X] A cost differential to base salary in consideration of the London
market
[X] A net relocation payment equal to three months' base salary
[X] Tax return preparation for the U.S. and U.K. for the years relevant to
foreign assignment(s)
[X] Repatriation of Executive and spouse to Atlanta, Georgia upon
completion of assignment in U.K.
NOTE:
Executive has elected to forego the cost differential and the net
relocation payment in consideration of receiving the use of a
central London corporate apartment.+
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, is made and entered into as of the third day of
January, 1995, by and between SFMT, Inc., a Delaware corporation (the
"Corporation"), and Gerard J. Caccappolo (the "Employer").
W I T N E S S E T H:
WHEREAS, the Employee has substantial experience in the
telecommunications industry in soles and marketing; and
WHEREAS, the Corporation desires to employ the Employee, and the
Employee desires to be employed by the Corporation, in accordance with the terms
and provisions herein contained;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Employment
(a) The Corporation hereby employs the Employee, and the Employee
hereby accepts such employment, on the terms, and subject to
the conditions herein contained.
(b) The Employee shall be secondment agreement be assigned to work
at SFMT-Hermes ("SFMT-Hermes"), a subsidiary of the
Corporation, or Hermes Europe Railtel B.V. ("Hermes Europe"),
a subsidiary of SFMT-Hermes, as the Vice President and
Director of Sales and Marketing of Hermes Europe. In his
capacity as Vice President and Director of Sales and Marketing
of Hermes Europe, the Employee shall report to and shall
perform such duties and exercise such power and authority as
may from time to time be delegated to him by Managing Director
of Hermes Europe.
(c) The Employee shall devote all of his business time and
attention and his best efforts to the performance of his
duties pursuant to this Employment Agreement.
(d) Initially, the Employee shall be required to reside in
Brussels and work from the Corporation's or Hermes' offices in
Brussels. The Corporation reserves the right to require that
the Employee will move to and reside in and operate from the
offices of the Corporation's or Hermes Europe in another city
within the region in which Hermes Europe operates.
<PAGE> 2
2. Term. The initial term of the employment of the Employee under this
Employment Agreement shall be two (2) years, commencing on January 3,
1995, and continuing, unless sooner terminated pursuant to Section 9 to
and including January 2, 1997. Thereafter this Agreement shall be
automatically renewed annually for successive one year periods, unless
either party hereto shall deliver written notice in accordance with
Section 9 to the other party at least three (3) months prior to the
date of termination of the initial term or any extension or renewal
thereof (the "Term") of its desire to terminate such employment (a
"Notice of Termination").
3. Compensation.
(a) During the initial Term, the Employee shall be paid a salary
at the rate of One Hundred Sixty Thousand Dollars ($160,000)
per annum, payable in accordance with the Corporation's
customary payroll practices for employees.
(b) Thereafter, at the end of each year Chief Executive Officer of
the Corporation shall review the salary of the Employee, and
shall make such adjustments to such salary as the Chief
Executive Officer shall, in its sole and absolute discretion,
deem appropriate.
(c) For the purposes of this Agreement, "Salary" shall mean any
payment by the corporation to the Employee pursuant to this
Section 3.
4. Bonus.
(a) After the Employee has been employed by the Corporation for a
period of eighteen (18) months, and as additional compensation
to the Employee hereunder, the Employee will be assessed for
eligibility to receive a discretionary bonus (the "Bonus) in
respect of the initial employment period. Subject to the
provisions of Section 4(b), the initial target for such Bonus,
based on the achievement by Hermes Europe of the objectives
shall be thirty percent (30%) of the Salary of the Employee
earned during the initial employment period. The first bonus
shall be in respect of two years (the "Initial Bonus"),
payable in accordance with Section 4(c). The potential Initial
Bonus shall be subject to the achievement of the performance
objectives set forth in the approved Hermes Europe Business
Plan.
(b) The formula or other method for determining the Bonus for the
Employee in each subsequent fiscal year shall be determined by
the Corporation and shall be based upon the performance of
Hermes Europe in such fiscal year
<PAGE> 3
as compared with the Hermes Europe approved business plan for
such fiscal years. The amount of the Bonus paid to the
Employee in respect of any fiscal year of the Corporation
shall be subject to the sole and absolute discretion of Chief
Executive Officer of the Corporation. The objectives for each
fiscal year and the amount of bonus for successful completion
of objectives (as a percentage of base salary or other formula
declared for the period) shall be established during the
period between twelve (12) and fifteen (15) months period to
the fiscal year for which such objectives apply (e.g., October
1 - December 31, 1994 for fiscal year 1996).
(c) All Bonuses in respect of any fiscal year of the Hermes Europe
shall be paid within thirty (30) days after the issuance of
the audited financial statements of Hermes Europe for such
fiscal year.
5. Equity Participation.
(a) SFMT-Hermes has adopted a Stock Option Plan (the "Option
Plan") for its senior executives. Subject to the provisions of
the Plan, SFMT-Hermes shall grant to the Employee options to
purchase shares of Capital Stock of SFMT-Hermes ("Capital
Stock"). The number of shares of Capital Stock which shall be
subject to the option shall be an amount equal to one and
one-half percent (1.5%) of the outstanding shares of
SFMT-Hermes to be determined at January 2, 1996. The options
granted to the Employee shall be granted and vest as follows:
(i) options to purchase 33.33% (one-third) of the shares
of Capital Stock shall be granted on January 3, 1996
and vest as at the close of business on January 2,
1997;
(ii) options to purchase 33.33% (one-third) of the shares
of Capital Stock shall be granted on January 3, 1997
and vest as at the close of business of January 2,
1998; and
(iii) options to purchase 33.33% (one-third) of the shares
of Capital Stock shall be granted on January 3, 1998
and vest as at the close of business on January 2,
1999.
6. Benefits.
(a) During the Term, the Employee shall be entitled to receive
such benefits and to participate in such employee group
benefit plans as are generally provided by the Corporation, or
made available by the Corporation, to its executive officers,
including without limitation, but subject to the
<PAGE> 4
conditions imposed by the carriers, any medical, health,
disability and life insurance policies.
(b) During the Term, the Corporation or Hermes Europe shall
provide to the Employee, at the Corporation's expense, use of
a late model automobile appropriate in the geographic location
of Employee's residence, and acceptable to the Corporation.
(c) During the Term, the Corporation or Hermes Europe shall
provide business class transportation to and from the United
States for one trip per annum for Employee and Employee's
immediate family living with Employee in Brussels.
(d) During the initial first two (2) years of the Term, the
Corporation or Hermes Europe shall provide to the Employee a
furnished residence in Brussels. The Corporation or Hermes
Europe shall provide for the relocation of Employee's
household goods to Brussels from their location in either
Paris or New Jersey; provided, Employee notifies the
Corporation in writing prior to January 2, 1996 of Employee's
election to have such household goods moved; provided,
further, that neither the Corporation nor Hermes Europe shall
provide for the relocation of Employee's household goods if
either the Corporation or Employee provides a Notice of
Termination in accordance with Section 2 of this Agreement on
or before July 2, 1996, or the employment of the Employee is
otherwise terminated. In the event that Employee elects to
have his household goods moved, the Corporation or Hermes
Europe shall provide an unfurnished apartment in the city in
which Employee is required to reside. Any relocation costs and
expenses shall be in accordance with the Corporation's
policies for relocation expenses; provided, however, that such
costs and expenses shall not exceed Employee's Salary for one
month.
(e) The Corporation or Hermes Europe shall pay to the Employee
during the Term an amount per annum as shall compensate the
Employee for tax equalization in connection with the
requirement that the Employee reside outside the United States
for so long as the Employee is required to live outside the
United States. Such tax equalization shall apply to Salary and
Bonus and any other payments made to Employee deemed taxable
in the foreign jurisdiction where Employee is required to
reside. SFMT will also be responsible for the preparation and
filing of your domestic and international income taxes.
(f) The Employee shall be paid an amount equal to Seven percent
(7%) of the Employee's Salary as a cost of living adjustment
in connection with
<PAGE> 5
requirement that the Employee reside in Brussels for so long
as the Employee is required to live in Brussels.
7. Expense Reimbursement.
(a) During the Term, the Corporation shall reimburse the Employee
for all reasonable expenditures actually and necessarily paid
or incurred by the Employee in the course of and pursuant to
the business of the Corporation. Such reimbursement shall be
subject to the submission to the Corporation by the Employee
of appropriate documentation and/or vouchers, and shall be
made in accordance with the customary procedures of the
Corporation for expense reimbursement, as may from time to
time be established.
(b) Should the Corporation provide Employee with a credit card,
Employee acknowledges complete personal responsibility for all
charges made on such credit card. Any charges received by the
Corporation for expenses not documented on a approved expense
report may be deducted by the Corporation from the Executives
payroll check. Upon termination of this Agreement, non
approved charges shall be deducted from the last payroll check
issued to the Employee.
8. Vacation. In each fiscal year of the Corporation during the Term, the
Employee shall be entitled to Four (4) weeks vacation time, which shall
not be cumulative from year to year without the prior written consent
of the Corporation or unless the Employee shall be unable to take such
vacation due to Employee's duties under this Agreement; provided,
however, that to the extent the Employee cannot take vacation time
during the Term due to his responsibilities under this Agreement, upon
termination, Employee shall be entitled to be compensated for accrued
but unused vacation time.
9. Termination.
(a) Notwithstanding anything to the contrary contained in this
Agreement, the Corporation shall at all time have the right to
terminate this Agreement and the employment of the Employee
hereunder for "Cause" by written notice to the Employee in
accordance with Section 15. For the purpose of this Agreement,
the term "Cause" shall mean any action of the Employee or any
failure to act by the Employee which constitutes:
(i) fraud, embezzlement or any felony in connection with
the Employee's duties as an executive officer of the
Corporation or any subsidiary or affiliate of the
Corporation, or willful misconduct or the commission
of any other act which causes or may reasonably be
expected to cause substantial economic or
<PAGE> 6
reputational injury to the Corporation or any such
subsidiary or affiliate of the Corporation, including
any violation of the Foreign Corrupt Practices Act,
as described in Section 13 of this Agreement;
(ii) continuing conflict of interest or continuing failure
to follow reasonable directions or instructions of
the Board of Directors or Chief Executive Officer of
the Corporation. A conflict of interest or a failure
to follow directions of the Board of Directors or the
Chief Employee Officer of the Corporation shall be
deemed to be continuing if the Employee shall have
received written notice thereof and shall have not
terminated the conflict of interest or failure to
follow directions within Thirty (30) days after
receipt of such notice; or
(iii) an extended period of absence by the Employee from
the performance of the obligations of the Employee
provided hereunder; which absence shall be for a
reason other than a disability, and which has not
been approved in writing advance by the Board of
Directors or the Chief Employee Officer of the
Corporation.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the Corporation, by written notice to the Employee,
shall at all times have the right to terminate this Agreement
and the employment of the Employee hereunder if the Employee
shall experience a "Total Disability." For the purpose of this
Agreement, the term "Total Disability" shall mean any mental
or physical illness, condition, disability or incapacity as
shall:
(i) prevent the Employee form reasonably discharging his
services and employment duties hereunder;
(ii) be attested to in writing by a physician acceptable
to the Corporation; and
(iii) continue during any period of Three (3) consecutive
months or for periods aggregating three months in any
twelve-month period.
A Total Disability shall be deemed to have occurred on the last day of
such applicable three-month period.
(c) This Agreement shall terminate automatically upon the date of
the death of the Employee.
<PAGE> 7
10. Payments upon Termination.
(a) If the Corporation shall terminate the employment of the
Employee under this Agreement pursuant to Section 9(a) hereof,
or if the employment of the Employee hereunder shall be
terminated by the Employee other than in accordance with
Section 2 hereof, then, in any such event, the Corporation
shall have no obligation to pay to the Employee his Salary or
any other compensation or benefits provided under this
Agreement for any period after the date of such termination
and the reimbursement of all expenses incurred by the Employee
prior to the date of such termination in accordance with
Section 7 hereof. Upon a termination pursuant to Section 9(a)
or by the Employee, all options and restricted shares granted
to Employee pursuant to Section 5 shall immediately be
canceled and no further options shall vest.
(b) If the employment of the Employee hereunder shall terminate
pursuant to Sections 9(b) or (c) hereof, if the employment of
the Employee shall be terminated by the Corporation in
accordance with Section 2 hereof, or if the Employee shall be
terminated by the Corporation other than in accordance with
the provisions of this agreement, the Corporation shall pay to
the Employee or his Estate, as the case may be, the Salary and
Bonus for the fiscal year in which such termination occurs,
prorated for the number of weeks during which the Employee was
employed by the Corporation during such fiscal year.
(c) In the event that the Corporation terminates the employment of
the Employee by delivering notice in accordance with Section
2, or for any reason other than those set forth in Section 9
above, the Employee shall receive as severance an amount equal
to the greater of (i) three (3) months salary, and (ii) the
amount of salary that would have been payable to the Employee
from the date of Notice of Termination until the end of the
Term, had the Corporation not delivered such Notice of
Termination. Such severance pay shall be paid in equal monthly
installments, commencing, the month following such
termination, and shall be payable in accordance with the
Corporation's customary practices for employees.
(d) In the event that the employment of the Employee is terminated
due to a Total Disability or the death of the Employee in
accordance with Section 9(b) or 9(c) hereof, then the Employee
or his designated beneficiary, as the case may be, shall be
entitled to receive such amounts as are provided for in any
disability policy of life insurance policy provided by the
Corporation for the benefit of the Employee.
<PAGE> 8
11. Covenants of the Employee. In order to induce the Corporation to enter
into this Agreement and employ and Employee hereunder, the Employee
hereby covenants and agrees as follows:
(a) During the Term and for a period of twelve (12) months
thereafter, the Employee shall not, without the prior written
consent of the Corporation:
(i) directly or indirectly acquire or own in any manner
any interest in any person, firm, partnership,
corporation, association or other entity which
competes with the Corporation or any of its
affiliates; or
(ii) be employed by, or serve as an employee, agent,
officer, director of, any person, firm, partnership,
corporation association which competes with the
Corporation or any of its affiliates or subsidiaries.
(b) The Employee shall not at any time, other than in the ordinary
course of business of the Corporation, when and if required,
disclose, directly or indirectly, to any person, firm,
corporation, partnership, association or other entity, any
confidential information relating to the Corporation or any of
its affiliates or subsidiaries, or any information concerning
the financial condition, suppliers customers, lessors,
lessees, sources of leads for and methods of obtaining new
business or the methods generally of doing and operating the
respective businesses of the Corporation, its affiliates and
subsidiaries, except to the extent that such information is a
matter of public knowledge or is required to be disclosed by
law or judicial or administrative process.
(c) During the Term and for a period of twelve (12) months
thereafter, the Employment shall not, without the prior
written consent of the Corporation, directly or indirectly
through any other individual or entity:
(i) solicit, entice, persuade or induce any individual
who currently is, or at any time during the Term
shall be, an employee of the Corporation, or any of
its affiliates, to terminate or refrain from renewing
or extending such person's employment with the
Corporation or such subsidiary or affiliate, or to
become employed by or enter into contractual
relations with any other individual or entity, and
the Employee shall not approach any such employee for
any such purpose or authorize or knowingly cooperate
with the taking of any such actions by any other
individual or entity; or
<PAGE> 9
(ii) except in accordance with the Employee's duties
hereunder on behalf of the Corporation, solicit,
entice, persuade, or induce any individual or entity
which currently is, or at any time during the Term
shall be, a customer, supplier, lessor or lessee of
the corporation, or any of its subsidiaries of
affiliates, to terminate or refrain from renewing or
extending its contractual or other relationship with
the Corporation or such subsidiary or affiliate, and
the Employee shall not approach any such customer,
supplier, lessor or lessee for such purpose or
authorize or knowingly cooperate with the taking of
any such actions by any other individual or entity.
12. Specific Performance. The Employee acknowledges that a breach or
violation by the Employee of the covenants or agreements contained in
Section 11 of this Agreement would cause irreparable harm and damage
tot he Corporation if such provisions are not specifically enforced,
the monetary amount of which would be impossible to ascertain.
Therefore, the performance and to obtain an injunction from any court
of competent jurisdiction enjoining and restraining any breach or
violation of any or all of the covenants and agreements contained in
Section 11 of this Agreement by the Employee and/or his employees,
associates, partners or agents, or entities controlled by one or more
of them, either directly or indirectly. Such remedies shall be
cumulative and not exclusive and shall be in addition to whatever other
rights or remedies the Corporation shall have for damages for a breach
by the Employee of the covenants or agreements contained in Section 11
or elsewhere in this Agreement.
13. Foreign Corrupt Practices Act. The Employee agrees to comply in all
respects with the U.S. Foreign Corrupt Practices Act of 1977 (the
"FCPA"), as amended, which provides generally that: under no
circumstances will foreign officials, representatives, political
parties or holders of public offices be offered, promised or paid any
money, remuneration, things of value, or provided any other benefit,
direct or indirect, in connection with obtaining or maintaining
contracts or orders hereunder. The Executive's failure to comply in all
respects with the provisions of the FCPA shall constitute a material
breach by him of his obligations hereunder and shall entitle SFMT to
terminate this Agreement immediately. A copy of the Corporation's FCPA
policy is annexed hereto as Exhibit A.
14. No Delegation. The Employee shall not delegate his employment
obligations under this Agreement to any other person.
15. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and sent by facsimile, with appropriate
confirmation of receipt, certified mail, return receipt requested, or
overnight courier to the following addresses:
<PAGE> 10
If to the Corporation: SFMT, Inc.
477 Madison Avenue, 8th Floor
New York, New York 10022
Attention: General Counsel
Fax: 212-371-9552
If to the Employee 1 Highview Terrace
Madison, New Jersey 07940
Either party may change the address to which notices, requests, demands and
other communications to such party shall be delivered personally or mailed by
giving notice thereof to the other party hereto in the manner herein provided.
Notices shall be deemed given at the time of receipt.
16. Deductions and Withholding. The Employee acknowledges and agrees that
the Company shall be entitled to withhold from the Employee's
compensation hereunder, including Salary and Bonus and other payments
made pursuant to the Agreement, all applicable taxes that are due to
the appropriate jurisdictions, and pay this withholding to the
appropriate tax authorities, consistent with the tax equalization
treatment described in Section 6(e) herein. Tax equalization, applied
in the context of monthly withholding, shall be reconciled at year end.
17. Binding Effect. This Agreement shall e for the benefit of the binding
upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where
applicable, assigns.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements,
both oral and written, between the parties hereto with respect to such
subject matter. This Agreement may not be modified, amended, altered or
rescinded in any manner, except by written instrument signed by both of
the parties hereto; provided, however, that the waiver by any party of
compliance by any other party with respect to any provision hereof or
of any breach by such other party need be signed only by the party
waiving such provision or breach; provided, further, that the waiver by
either party hereto of a breach or compliance with any provision of
this Agreement shall not operate nor be construed as a waiver of any
subsequent breach or compliance.
19. Severability. In case any one or more of the provisions of this
Agreement shall be held by any court of competent jurisdiction so be
illegal, invalid or unenforceable in any respect such provision shall
be of no force and effect, but the illegality, invalidity or
unenforceability of such provision shall have no effect upon
<PAGE> 11
and shall not impair the enforceability of any other provision of this
Agreement, but this Agreement shall be construed as if such illegal,
invalid or unenforceable provision had never been contained herein.
20. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within New York.
21. Arbitration. Any and all disputes, controversies and claims arising out
of or relating to this Agreement, shall be settled and determined by
arbitration conducted before a panel of three arbitrators in New York
in accordance with the rule of the American Arbitration Association
then in effect. The arbitrators' award shall be final and binding upon
the Corporation and the Employee, and judgment confirming such
arbitration may be entered thereon in any court having jurisdiction
over such proceedings.
22. Section Headings. The section headings contained in this Agreement are
for reference purposes only and shall not affect in any manner the
meaning or interpretation of this Agreement.
23. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
SFMT, INC.
by: /s/ Neil Molberger
-------------------------------
/s/ Gerard J. Caccappolo
-------------------------------
Gerard J. Caccappolo
<PAGE> 1
EXHIBIT 10.20
ESPRIT TELECOM UK LIMITED
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 1st July, 1998 by and between Esprit
Telecom Group Plc (the "Company"), and Dr. Hans-Peter Kohlhammer ("Employee")
(jointly, the "Parties").
WHEREAS, the Company desires to employ Employee, and Employee desires
to become an employee of the Company, all on the terms and conditions set forth
herein; and
NOW, THEREFORE, in consideration of the promises and the mutual
agreements made herein, the Company and Employee agree as follows:
1. Employment.
(a) Position and Location. The Company shall employ Employee in an
Executive Management Team position, reporting to Chief
Executive Officer. Employee will be based at the Company's
office in Reading, U.K. travelling to other locations as
reasonably required in the performance of his/her duties.
(b) Commencement and Period of Employment. The employment contract
shall become effective as of 1st October, 1998 and shall be
continued until 30th September, 2001. If it is the intention
of the parties to conclude a further contract beyond 30th
September 2001, agreement should be reached no later than 31st
March, 2001.
(c) Hours of Work. Normal hours of work are 09.00 until 17.00 hrs
Monday to Friday, with a 30 minute meal break each day. No
payment will normally be made for any additional hours worked.
(d) Duties. Except as expressly authorized by the Company, during
the Employment Period Employee shall render his/her business
services solely in the performance of such duties as
Management shall assign to him, and shall be engaged
substantially full time with the Company. The Company may
direct Employee to perform services for, or on behalf of, the
Company or any affiliate of the Corporation (collectively, the
"Group"). Employee shall use his best efforts to promote the
interests and welfare of the Group.
(e) Shareholder Agreement. Employee shall at all times comply with
Company policies regarding share trading, particularly those
regarding insider trading.
<PAGE> 2
2. Compensation, Fringe Benefits, and Holidays.
(a) Base Compensation. The Company shall pay Employee a base
salary at the rate of (pound)140,000 per year in monthly
installments paid into a bank account designated by the
Employee. Performance will be subject to a review annually
commencing 1st January 2000.
(b) Bonus. For the 1998/1999 fiscal year, Employee will be
eligible for an incentive bonus of 60% base salary based on
meeting all the following targets:
Revenue: o 212,000,000.00
Total Gross Profit: o 61,500,000.00
EBIT: o 1,500,000.00
Minimum eligibility for the bonus payment is 85% of all
targets being met. There is no ceiling to the potential
payout. A graduated scale is utilized to determine the payout
level.
(c) Expenses and Travel. Employee will be required to work away
from the office from time to time, including working overseas
if necessary. The Company will reimburse reasonable expenses
incurred, provided that the arrangements are made by or with
the agreement of the Company. When working overseas, the
Company will take out any necessary insurance.
(d) Holidays. In addition to normal public holidays, Employee will
be entitled to twenty five (25) days' paid holiday in each
calendar year. This entitlement accrues pro rata throughout
each year and Employee's entitlement for 1998 will therefore
be 6 days. Employee's holidays are to be taken as agreed with
Management, after having given at least two weeks' prior
notice.
The holiday year commences on 1st January and ends on 31st
December.
Any holiday not taken at the end of each calendar year will
normally be forfeited and no payment in lieu of any unused
entitlement will be made. However, subject to approval by the
C.E.O. a maximum of 10 days may be carried over from year to
year.
(e) Medical Insurance. The Employee is entitled to free private
medical cover and, if married, cover is extended to the
Employee's immediate family.
(f) Life Assurance. The Employee is eligible to join the Company's
non-contributory Life Assurance scheme.
(g) Sick Pay. The Company operates a Sick Pay Scheme which
provides the following benefits:
2
<PAGE> 3
Up to 10 days paid absence in any 12 month period, thereafter
75% of salary for up to 6 months continuous absence. After 6
months continuous absence 75% of salary subject to acceptance
by the Company's insurers. Employee is required to notify the
Company immediately of any absence and to provide a Sickness
Certificate signed by a Doctor after an absence of 7 days
including non-working days.
(h) Health & Safety. Employee will be required to take reasonable
care with regard to health and safety and to cooperate with
the Company in complying with the requirements of the Health &
Safety at Work Act 1974.
(i) Company Car. Owing to the nature of the Employee's duties, the
company will provide a car allowance of (pound)550 per month.
In line with the Company's Car Policy this requires the
Employee to have a car for business use when required.
(j) Supplemental housing and Transportation Allowance. Employee
will be eligible to receive an allowance of (pound)500 per
month to cover air travel costs incurred from Germany to the
U.K. and accommodation costs when employee is required to
attend the Reading offices. The amount of this allowance will
be reviewed annually.
(k) Employee Stock Ownership Programme. The Corporation has
developed an employee stock ownership programme to allow
qualified employees of any Group company to earn and to
purchase ordinary shares of the Corporation on preferential
terms or conditions. Employee is entitled to participate in
such programme on terms in accordance with the Corporation's
regular practice for employees.
(l) Management Share Option Plan. Employee will be eligible to
participate in a special Management Share Option plan created
for key personnel integral to the building of the business
over the next three years, the details of which are as
follows:
140,000 ordinary shares (20,000 ADSs) are being set-aside in
your name with a maturity date of 26th February, 2001.
The exercise price for these ADSs is $17.75
The conditions that must be met before these options can be
executed are:
You must be an employee in good standing with Esprit Telecom
on 26th February, 2001 and the actual value of the ADSs must
have increased by at lest 50% to $26,625 per seven (7) shares
or one ADS.
3
<PAGE> 4
(m) Option Package. The Company undertakes that it will procure at
the first meeting of the Board of Directors after the date of
this Agreement that the following Options will be granted
subject to the Specified Conditions.
52,500 ordinary shares (7,500 ADSs) will be vested on 1st
October, 1998
52,500 ordinary shares (7,500 ADSs) will vest every six months
commencing 1st April, 1999 until 1st October, 2001.
The exercise price shall be US$17.75 per Option.
The Specified Conditions are: (1) each "Option" represents 7
ordinary shares of the Company (equal to 1 ADS); (2) unvested
Options shall lapse immediately upon early termination of this
Agreement by either the Employee or the Company; and (3)
Options may be exercisable up to 5 years from the vesting date
upon payment of the exercise price as directed by the Company.
3. Trade Secrets. During the Employment Period, and after the termination
of Employee's employment for any reason, Employee shall not use or
disclose any of the Group's trade secrets or other confidential
information. The term "trade secrets or other confidential information"
includes, by way of example, matters of a technical nature, such as
scientific, trade, and engineering secrets, "know-how," formulae,
secret processes or machines, inventions, computer programs (including
documentation of such programs), and research projects, and matters of
a business nature, such as proprietary information about costs,
profits, markets, sales, lists of customers and other information of a
similar nature, to the extent not available to the public, and plans
for future development. After termination of Employee's employment by
the Company for any reason, Employee shall not use or disclose trade
secrets or other confidential information, unless such information
becomes a part of the public domain other than through a breach of this
Agreement or is disclosed to Employee by a third party who is entitled
to receive and disclose such information.
4. Return of Documents and Property. Upon the termination of Employee's
employment by the Company for any reason, or at any time upon the
request of the Company, Employee (or his/her heirs or personal
representatives) shall deliver to the Company (a) all documents and
materials containing trade secrets or other confidential information
relating to the Group's business and affairs, and (b) all documents,
materials, and other property belonging to the Group, which in either
case are in the possession or under the control of Employee.
5. Discoveries and Works. All discoveries and works made or conceived by
Employee during his/her employment by the Company, jointly or with
others, that relate to the Group's activities shall be owned by the
Group. The term "discoveries and works" includes, by way of example,
inventions, computer programs (including documentation of such
programs), technical improvements, processes, drawings, and works of
authorship. Employee shall (a) promptly notify, make full disclosure
to, and execute and
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deliver any documents requested by, the Company to evidence or better
assure title to such discoveries and works in the Group, (b) assist the
Group in obtaining or maintaining for itself, at its own expense,
patents, copyrights, trade secret protection, or other protection of
any and all such discoveries and works, and (c) promptly execute,
whether during his/her employment by the Company or thereafter, all
applications or other endorsements necessary or appropriate to maintain
patents and other rights for the Group and to protect the Group's title
thereto. Any discoveries and works which, within six months after the
termination of Employee's employment by the Company for any reason, are
made, disclosed, reduced to a tangible or written form or description,
or are reduced to practice by Employee and which pertain to the
business carried on or products or services being sold or developed by
the Group at the time of such termination shall, as between Employee
and the Group, be presumed to have been made during Employee's
employment by the Company.
6. Termination.
(b) Without Cause. In the event the Company elects to terminate
this Agreement without cause, the Company shall pay to
Employee on the effective date of his/her termination the full
amount of any unpaid salary and commission/bonuses, payment
for the sale of Employee's interest in any shares of the
Corporation in accordance with the Corporation's Articles of
Association, payment for unused vacation accrued to that date
and any payments required by law. Such payment shall be made
less such deductions that are required by law and in full and
final settlement of all and any claims which Employee may have
against the Company or the Group arising out of or in
connection with his/her employment with the Company and its
termination. Such payment will not affect Employee's
continuing obligations under Section 3 and, if applicable,
Section 12. Nothing in this paragraph shall affect Employee's
statutory rights relating to dismissal.
(c) With Cause. In the event the Company terminates this Agreement
for cause, no payment shall be made under paragraph (b) above,
and Employee's unvested rights, if any, hereunder shall cease
as of the effective date of the termination. For the purposes
of this Agreement, the Company shall have cause to terminate
Employee's employment thereunder if Employee:
(i) Is unable to perform his/her duties by reason of ill
health or injury for 120 days (whether consecutive or
not) in any period of 52 consecutive weeks;
(ii) Becomes of unsound mind or is involuntarily committed
to an institution pursuant to any statute relating to
mental health;
(iii) Is convicted of a criminal offence other than one
which in the opinion of Management does not affect
his/her position as an employee of the Company,
bearing in mind the nature of his duties and the
capacity in which he is employed; or
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<PAGE> 6
(iv) Is guilty of any serious default or misconduct in
connection with or affecting the business of the
Company or commits any serious breach of his/her
obligations under this Agreement.
(a) If the Company wishes to terminate Employee's employment or if
Employee wishes to leave its employment, the Company may
require Employee not to attend for work for a period of no
more than thirty (30) days from the date he/she is requested
not to attend for work.
7. Disability. Employee agrees that if he/she is unable to perform his/her
duties for the Group as a result of ill health or injury he/she will
upon request submit him/herself to a medical examination at the
Company's expense by a suitably qualified person of its choice. If that
person is unable to confirm that Employee is fit to perform his/her
duties or if there are factors which such person considers are relevant
to the performance of those duties, Employee shall cooperate ensuring
the prompt delivery of all reports to the Company.
8. Assignment. Employee's rights and obligations under this Agreement
shall not be assignable by Employee. The Company's rights and
obligations under this Agreement shall not be assignable by the Company
except as incident to the transfer, by merger or otherwise, of all or
substantially all of the business of the Company. In the event of any
such assignment by the Company, all rights of the Company hereunder
shall inure to the benefit of the assignee.
9. Notices. Any notice required or permitted under this Agreement shall be
deemed to have been effectively made or given if in writing and
personally delivered or mailed properly addressed in sealed envelope,
postage prepaid by certified or registered mail. Unless otherwise
changed by notice, notice shall be properly addressed to Employee if
addressed to:
Dr. Hans-Peter Kohlhammer
Rosenweg 5
95326 Kulmbach
Germany
and properly addressed to the Company if addressed to:
Esprit Telecom Group plc
Minerva House
Valpy Street
Reading
Berkshire RG1 1AR
Attention: Chief Executive Officer
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10. Amendment and Waiver. This Agreement may not be amended without the
written agreement of the Parties. The waiver by any Party hereto of a
breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other breach.
11. Miscellaneous. This Agreement constitutes the entire agreement, and
supercedes all prior agreements of the Parties hereto relating to the
subject matter hereof, and there are no written or oral terms or
representations made by either Party other than those contained herein.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by English Law, and the Parties hereto
irrevocably submit to the non-exclusive jurisdiction of the English
Courts. If any provision of this Agreement is held to be invalid or
unenforceable by a court of competent jurisdiction, the Parties intend
and agree that such invalidity or unenforceability shall not affect the
remaining provisions. The headings contained herein are for reference
purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12. No Competition.
(a) Whilst Employee is employed by the Company and for a period of
twelve (12) months after the termination of his/her employment
with the Company, however it arises and irrespective of its
cause or manner, Employee shall not (except with the prior
written consent of Management) directly or indirectly and
whether on his/her own behalf or for another to do or attempt
to do any of the following:
(i) solicit or accept the custom of a Customer for the
purpose of the supply of Relevant Goods or Services;
(ii) give advice or provide services with a view to
asserting or enabling another person, company,
business entity or other organization to solicit the
custom of a Customer for the purpose of the supply of
Relevant Goods or Services;
(iii) communicate with an employee in a manner calculated
or likely to cause that employee to leave or end or
seek to leave or end his or her position or
relationship with the Company or the Group for the
purpose of being involved in or concerned with either
the supply of Relevant Services or a business which
competes with or is similar to a Relevant Business,
regardless of whether or not such communication would
be in breach of any contract; or
(iv) employ, engage the services of or work directly or
indirectly with an employee of the purpose of either
the supply of Relevant Goods or Services or a
business which competes with or is similar to the
Relevant Business; and
(b) Whilst Employee is employed by the Company and for a period of
three (3) month after the termination of his/her employment
with the Company, however it
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<PAGE> 8
arises and irrespective of its cause or manner, Employee shall
not (except with the prior written consent of Management)
directly or indirectly and whether on his/her own behalf or on
another do or attempt to do any of the following:
(i) undertake or carry on either alone or in partnership
or be employed engaged or interested in any capacity
whatsoever in any business directly competitive with
the Relevant Business in any territory where the
Company is at the time of such cessation carrying on
or actively seeking to carry on the Relevant
business;
(ii) invite, procure, negotiate or accept the supply of
Relevant Goods or Services from a Supplier;
(iii) stop or inhibit a Supplier from supplying, or affect
the terms on which a Supplier will supply Relevant
Goods or Services to the Company or the Group for the
purpose of the Relevant Business;
(c) For the purpose of this Section:
(i) "Customer" means a person, company, business entity
or other organization who was at any time during the
Relevant Period a customer or client of the Company
or the Group (whether or not Relevant Goods or
Services were actually provided during such period)
or with whom the Company or the Group was negotiating
to supply goods or services for the purpose of the
Relevant Business at the time of expiry of the
Relevant Period;
(ii) "Supplier means a person, company, business entity or
other organization who was at any time during the
Relevant Period:
(A) supplied goods or services specifically
designed and/or manufactured for the Company
or the Group for the purpose of the Relevant
Business; or
(B) had agreed or was negotiating to make such
supplies at the time of expiry of the
Relevant Period;
(iii) "Relevant Goods or Services" means goods or services
identical or similar to or competitive with those
which;
(A) the Company or the Group was supplying or
actively and directly seeking to supply to a
Customer as described in Section 7(b)(i) for
the purpose of the Relevant Business; or
(B) the Supplier was supplying or had agreed to
supply or was actively and directly
negotiating to supply as described in
Section 7(b)(ii)
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<PAGE> 9
and which were being supplied by that
Supplier to the Company or the Group for the
purpose of the Relevant Business;
(iv) "Relevant Business" means the business being carried
on or actively sought to be carried on by the Company
or the Group at the date of termination of Employee's
employment in which, pursuant to his/her duties,
Employee has had direct personal involvement at any
time during the Relevant Period;
(v) "employee" means a person who is employed by or who
renders personal or other services to the Company or
the Group in the Relevant Business and who was so
employed or so rendered services at any time during
the Relevant Period; and
(vi) "Relevant Period" means the period of one year ending
on the day Employee ceases to be employed by the
Company.
(d) The subclause or part of such subclause of this Section
constitutes an entirely separate and independent restriction.
If any restriction is held to be invalid or unenforceable by a
court of competent jurisdiction, it is intended and understood
by the Company and Employee that such invalidity or
unenforceability will not affect the remaining restrictions.
The parties have executed this Agreement on the day and year first above
written.
ESPRIT TELECOM UK LIMITED
/s/ David L. Oertle
---------------------------------
DAVID L. OERTLE
Chief Executive Officer
1st July, 1998
EMPLOYEE SIGNATURE
/s/ Hans-Peter Kohlhammer
- -------------------------------
Dr. Hans-Peter Kohlhammer
Date: 1 July 1998
--------------------------
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<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective the 22nd day of February,
1999 (the "Effective Date") is made by and between Global TeleSystems Group,
Inc., a Delaware corporation (the "Company") and Robert A. Schriesheim (the
"Executive").
RECITALS:
A. It is the desire of the Company to assure itself of the
services of Executive by engaging Executive as its Executive Vice-President and
Chief Corporate Development Officer; and
B. Executive desires to commit to serve the Company on the
terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements set forth below, the parties hereto agree as
follows:
1. Certain Definitions.
(a) "Annual Base Salary" shall have the meaning
set forth in Section 5(a).
(b) "Board" shall mean the Board of Directors of
the Company.
(c) "Bonus" shall have the meaning set forth in
Section 5(b).
(d) The Company shall have "Cause" to terminate
Executive's employment hereunder upon Executive's
(i) failure to follow a legal order of the
Board or the Chief Executive Officer of the Company, other
than any such failure resulting from Executive's Disability,
after notice and reasonable opportunity for cure,
(ii) fraud, embezzlement, or any other similar
illegal act committed by the Executive in connection with the
Executive's duties as an executive of the Company or any
subsidiary or affiliate of the Company,
(iii) conviction of any felony or crime
involving moral turpitude which causes or may reasonably be
expected to cause substantial economic injury to or
substantial injury to the reputation of the Company or any
subsidiary or affiliate of the Company, or
(iv) willful or grossly negligent commission
of any other act or failure to act which causes or may
reasonably be expected (as of the time of such occurrence) to
cause substantial economic injury to or substantial injury to
the reputation of the Company or any subsidiary or affiliate
of the Company,
<PAGE> 2
including, without limitation, any material violation of the
Foreign Corrupt Practices Act, as described herein below.
(e) "Change in Control" shall mean any of the
following vents:
(i) a report shall be filed with the
Securities and Exchange Commission pursuant to the Exchange
Act of 1934 (the "Act"), or successor law or provision,
disclosing that any "Person" (within the meaning of Section
13(d) of the Act), other than the Company or a subsidiary of
the Company, or an employee benefit plan sponsored by the
Company or a subsidiary of the Company is, or becomes the
beneficial owner (as such term is defined in Exchange Act Rule
13d-3), directly or indirectly of, 25% or more of the
outstanding voting stock of the Company (or securities
convertible into Company Stock) (calculated as provided in
Exchange Act Rule 13d-3(d) in the case of rights to acquire
Company Stock),
(ii) any such "Person", other than the Company
or a subsidiary of the Company, or a employee benefit plan
sponsored by the Company or a Subsidiary of the Company, shall
purchase shares pursuant to a tender offer or exchange offer
to acquire any Company Stock (or securities convertible into
Company Stock) for cash, securities or any other
consideration, provided that after consummation of the offer,
the person in question is the beneficial owner (as such term
is defined in Exchange Act Rule 13d-3), directly or
indirectly, of 20% or more of the outstanding voting stock of
the Company (calculated as provided in Exchange Act Rule
13d-3(d) in the case of rights to acquire Company Stock),
(iii) the stockholders of the Company shall
approve (A) any consolidation, share exchange or merger of the
Company (a "Change of Control Transaction") (1) in which the
stockholders of the Company immediately prior to such Change
of Control Transaction do not own at least a majority of the
voting power of the entity which survives/results from such
Change of Control Transaction, or (2) in which a shareholder
of the Company immediately before such Change of Control
Transaction, but who does not own a majority of the voting
stock of the Company immediately prior to such Change of
Control Transaction, owns a majority of the Company's voting
stock after such Change of Control Transaction; or (B) any
sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all
the assets of the Company, including stock held in subsidiary
corporations or interests held in subsidiary ventures, or
(iv) there shall have been a change in a
majority of the members of the Board within a 24-month period
unless the election or nomination for election by the
Company's stockholders of each new director during such
24-month period was approved by the vote of two-thirds of the
directors then still in office who were directors at the
beginning of such 24-month period; or
(v) the Company shall file a report with the
Securities and
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<PAGE> 3
Exchange Commission on Form 8-K (or any successor thereto),
that a change in control of or over the Company has occurred.
(f) "Closing Price" shall mean the closing price in
United States Dollars ("$") of a share of Company Stock on the
principal exchange on which such shares are traded on the day in
question; if such exchange is in the United States, as reported in the
Wall Street Journal or, if such exchange is in Europe, as reported in
the Financial Times, with such price converted to $ utilizing the mean
of the bid and offered prices for $ in the local currency for the day
in question as reported in the Wall Street Journal.
(g) "Code" shall mean the Internal Revenue Code of
1986, as amended.
(h) "Committee" shall mean either the Compensation
Committee or a SubCommittee of such Committee duly appointed by the
Board.
(i) "Company" shall have the meaning set forth in
the preamble hereto.
(j) "Company Stock" shall mean the $.10 par value
common stock of the Company.
(k) "Contract Year" shall mean each twelve month
period beginning on the Effective Date or an annual anniversary
thereof.
(l) "Date of Termination" shall mean (i) if
Executive's employment is terminated by Executive's death, the date of
Executive's death and (ii) if Executive's employment is terminated
pursuant to Section 6(a)(ii)-(vi) the date specified in the Notice of
Termination.
(m) "Deemed Bonus" shall mean seventy-five percent
(75%) of the rate of Executive's Annual Base Salary for such year.
(n) "Disability" shall mean the absence of
Executive from Executive's duties to the Company on a full-time basis
for a total of six months during any 12-month period as a result of
incapacity due to mental or physical illness which is determined to be
reasonably likely to extend beyond the completion of the Term and which
determination is made by a physician selected by the Company and
acceptable to Executive or Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably). A
Disability shall not be "incurred" hereunder until, at the earliest,
the last day of the sixth month of such absence.
(o) "Executive" shall have the meaning set forth in
the preamble hereto.
(p) "Extension Term" shall have the meaning set
forth in Section 2.
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<PAGE> 4
(q) "Good Reason" shall mean any of the following
events which is not cured by the Company within 15 days after written
notice thereof is given to the Company by Executive: (i) any failure to
pay Executive's Base Salary or Bonus when due to Executive; (ii) any
other material breach by the Company of any material term of this
Agreement; or (iii) any material adverse change in Executive's job
titles, duties, responsibilities, status, reporting responsibilities or
perquisites granted hereunder, without Executive's consent. "Good
Reason" shall cease to exist for an event on the 30th day following the
later of its occurrence or Executive's knowledge thereof, unless
Executive has given the Company notice thereof prior to such date.
(r) "Grant Date" shall mean the date on which the
Committee acts to grant to Executive the Options described herein.
(s) "Initial Term" shall have the meaning set forth
in Section 2.
(t) "Notice of Termination" shall have the meaning
set forth in Section 6(b).
(u) "Options" shall have the meaning set forth in
Section 5(c).
(v) "Stock Option Plan" shall mean Fourth Amended
and Restated 1992 Stock Option Plan of Global TeleSystems Group, Inc.
or any successor plan.
(w) "Term" shall have the meaning set forth in
Section 2.
2. Employment Term. The Company hereby employs the
Executive, and the Executive hereby accepts his employment, under the terms and
conditions hereof, for the period (the "Term") beginning on the effective date
hereof and ending upon Termination as set forth herein.
3. Position and Duties. Executive shall serve as Executive
Vice-President and Chief Corporate Development Officer of the Company, reporting
to the Chief Executive Officer, with such responsibilities, duties and authority
as are customary for such role. Executive shall devote all necessary business
time and attention, and employ Executive's reasonable best efforts, toward the
fulfillment and execution of all assigned duties, and the satisfaction of
defined annual and/or longer-term performance criteria.
4. Place of Performance. In connection with Executive's
employment during the Term, Executive shall be based at the Company's offices in
or near McLean, Virginia, except for necessary travel on the Company's business,
but may be reassigned during the Term hereof to another location identified as
the principal executive or operational headquarters of the Company.
5. Compensation and Related Matters.
(a) Annual Base Salary. During the Term, Executive
shall receive a base salary at a rate not less than $375,000 per annum
(the "Annual Base Salary"), less
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<PAGE> 5
standard deductions, paid in accordance with the Company's general
payroll practices for executives, but no less frequently than monthly.
The Annual Base Salary shall compensate Executive for any official
position or directorship that Executive is asked to hold in the Company
or its affiliates as a part of Executive's employment responsibilities.
No less frequently than annually during the Term, the Committee on
advice of the Company's Chief Executive Officer shall review the rate
of Annual Base Salary payable to Executive, and may, in their
discretion, increase the rate of Annual Base Salary payable hereunder;
provided, however, that any increased rate shall thereafter be the rate
of "Annual Base Salary" hereunder.
(b) Bonus. Except as otherwise provided for herein,
for each fiscal quarterly compensation period (or other period
consistent with the Company's then-applicable normal employment
practices) during which Executive is employed hereunder on the last
day, Executive shall be eligible to receive a Bonus in an amount up to
one-quarter (or other pro-rata portion as appropriate) of 75% of
Executive's Base Salary pursuant to, and as set forth in, the terms of
the GTS Senior Executive Bonus Plan as such Plan may be amended from
time to time, plus such other bonus payments, if any, as shall be
determined by the Compensation Committee in its sole discretion
(i) Stock Options. The Company has granted to
Executive options (Options") to purchase 250,000 shares
("Option Shares") in the Company pursuant to the terms of the
Stock Option Plan and an associated Stock Option Agreement.
(d) Restricted Shares. The Company has granted to
Executive, pursuant to the Company Equity Compensation Plan, 30,000
Restricted Shares, which shall be subject to restrictions on their sale
as set forth in an associated Restricted Shares Grant Letter.
(e) Benefits. Executive shall be entitled to
receive such benefits and to participate in such employee group benefit
plans, including life, health and disability insurance policies, and
financial planning services as are generally provided by the Company to
its executives of comparable level and responsibility in accordance
with the plans, practices and programs of the Company.
(f) Expenses. The Company shall reimburse Executive
for all reasonable and necessary expenses incurred by Executive in
connection with the performance of Executive's duties as an employee of
the Company. Such reimbursement is subject to the submission to the
Company by Executive of appropriate documentation and/or vouchers in
accordance with the customary procedures of the Company for expense
reimbursement, as such procedures may be revised by the Company from
time to time hereafter.
(g) Vacations. Executive shall be entitled to paid
vacation in accordance with the Company's vacation policy as in effect
from time to time. However, in no event shall Executive be entitled to
less than four (4) weeks vacation per Calendar Year. Executive shall
also be entitled to paid holidays and personal days in accordance with
the Company's practice with respect to same as in effect from time to
time.
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<PAGE> 6
(h) Relocation. The Company acknowledges that you
will retain your principal residence in Chicago until at least August
1, 2000 and the Company will pay the expenses of required travel
between your principal residence and the company's corporate offices in
Virginia until that time or a later date that is mutually agreed-upon
by the Company and the Executive. Upon relocation, you will relocate
your principal residence to the area immediately surrounding either the
Company's executive headquarters in Virginia or the operational
headquarters in London, as specified by the Chief Executive Officer.
Should your family remain in Chicago at the time of your relocation,
the Company will provide you the use of a furnished corporate apartment
near the relevant office. Should your family relocate with you at that
time, or agree to relocate with you at a later time mutually agreed
between you and the Company, the Company will pay the expense of moving
your family and normal household goods in accordance with the normal
relocation programs of the Company and you will receive a one-time-only
payment equal to three times your normal monthly compensation,
including all taxes normally due thereon. In addition, if you relocate
pursuant to the Company's request to London, you will receive benefits
normally made available to ex-patriate employees, including a housing
allowance, a car allowance, tuition reimbursement and tax equalization
in accordance with the Company's normal programs.
6. Termination.
(a) Executive's employment hereunder may be
terminated by the Company, on the one hand, or Executive, on the other
hand, as applicable, without any breach of this Agreement, under the
following circumstances
(i) Death. Executive's employment hereunder
shall terminate upon Executive's death.
(ii) Disability. If Executive has incurred a
Disability, the Company may give Executive written notice of
its intention to terminate Executive's employment. In such
event, Executive's employment with the Company shall terminate
effective on the 14th day after receipt of such notice by
Executive, provided that within the 14 days after such
receipt, Executive shall not have returned to full-time
performance of Executive's duties.
(iii) Cause. The Company may terminate
Executive's employment hereunder for Cause.
(iv) Good Reason. Executive may terminate
Executive's employment for Good Reason.
(v) Without Cause. The Company may terminate
Executive's employment hereunder without Cause.
(vi) Resignation without Good Reason.
Executive may resign Executive's employment without Good
Reason upon 90 days written notice to the Company.
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<PAGE> 7
(b) Notice of Termination. Any termination of
Executive's employment by the Company or by Executive under this
Section 6 (other than termination pursuant to Paragraph 6(a)(i)) shall
be communicated by a written notice (the "Notice of Termination") to
the other party hereto indicating the specific termination provision in
this Agreement relied upon, setting forth in reasonable detail any
facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated, and specifying
a Date of Termination which, except in the case of termination for
Cause or Disability, shall be at least ninety (90) days following the
date of such notice ( the "Notice Period"); provided that the Company
may pay to Executive all Salary, benefits and other rights due to
Executive during such Notice Period instead of employing Executive
during such Notice Period.
(c) Upon Executive's Termination of employment with
the Company for whatever reason, he shall be deemed to have effectively
resigned from all executive, director or other positions with the
Company or its affiliates at the time of Termination, and shall return
all property owned by the Company and in Executive's possession at that
time.
7. Severance Payments. Other than as set forth below, no
payments or benefits shall be due to Executive in connection with a termination
of this Agreement other than Salary and Benefits earned prior to the date of
termination.
(a) Termination without Cause or for Good Reason.
If Executive's employment shall be terminated by the Company without
Cause (pursuant to Section 6(a)(v)), or by the Executive for Good
Reason (pursuant to Section 6(a)(iv)), and subject to the Company's
receipt of a general release in its customary form, the Company shall
(i) pay to Executive (A) all base Salary due
for the period prior to termination, plus (B) either a lump
sum cash payment as soon as practicable following the Date of
Termination, or, in the Company's discretion, in twenty-four
(24) monthly installments in accordance with the Company's
normal payroll practices, an amount equal to two (2) times the
sum of (i) Executive's then-current rate of Annual Base Salary
and (ii) the Bonus Executive was awarded in the prior year
(the "Bonus Portion"), provided that such Bonus Portion shall
not be less than 60% of Executive Deemed Bonus and provided
further that, if Executive's employment shall be so terminated
by the Company within two years after a Change of Control,
such Bonus Portion shall not be less than two (2) times
Executive's Deemed Bonus;
(ii) accelerate the vesting of the Options
referred to in Paragraph 5(c) hereof as are necessary to
result in Executive's having after such acceleration, when
considered with such Options vesting prior to such
acceleration, not less than the greater of (a) 125,000 or (b)
the sum of (x) that portion already vested and (y) an
additional 83,250 options;
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<PAGE> 8
(iii) accelerate the removal of restrictions
on the Restricted Shares referred to in Paragraph 5(d) hereof
as are necessary to result in Executive's having after such
acceleration, when considered with such Restricted Shares
having had their restriction removed prior to such
acceleration, a minimum of 24,000 Restricted Shares no longer
subject to such restrictions;
(iv) continue to provide Executive with all
employee benefits and perquisites which Executive was
participating in or receiving at the time of termination of
employment until the earlier of two years from the Date of
Termination or Executive's receipt of comparable benefits from
a successor employer;
(v) pay the cost of up to 24 months, as
required, of executive-level out-placement services (including
the use of an office and secretarial support); and
(v) if Executive has relocated his primary
residence as set forth in Paragraph 5(h) hereof, pay the cost
of relocating the household furnishings and personal effects
of Executive (and, if applicable, his family) to Chicago at
any time up to six (6) months after termination.
(b) Termination by Reason of Disability or Death.
If Executive's employment shall terminate by reason of Executive's
Disability (pursuant to Section 6(a)(ii)) or death (pursuant to Section
6(a)(i)), and subject (is the case of a termination due to Executive's
disability) to the Company's receipt of a general release in its
customary form, the Company shall pay to Executive, in a lump sum cash
payment as soon as practicable following the Date of Termination, all
unpaid Base Salary due for the period prior to Termination plus the
prorated portion of the unpaid Bonus to which Executive would otherwise
be entitled for the compensation period of termination and, if there is
a period of time during which Executive is not being paid Salary and
not receiving long-term disability insurance payments, the Committee
may, in its discretion, determine that the Company shall make interim
payments to Executive until commencement of disability insurance
payments.
(c) Survival. The expiration or termination of the
Term shall not impair the rights or obligations of any party hereto
which shall have accrued hereunder prior to such expiration.
8. Parachute Payments.
(d) If it is determined (as hereafter provided)
that by reason of any payment or Option vesting occurring pursuant to
the terms of this Agreement (or otherwise under any other agreement,
plan or program) upon a Change in Control (collectively a "Payment")
the Executive would be subject to the excise tax imposed by Code
Section 4999 or successor provision (the "Parachute Tax"), then the
Executive shall be entitled to receive an additional payment or
payments (a "Gross- Up Payment") in an amount such that, after payment
by the Executive of all taxes (including any Parachute Tax) imposed
upon the Gross- Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Parachute Tax imposed upon the Payment.
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(e) Subject to the provisions of Section 8(a)
hereof, all determinations required to be made under this Section 8,
including whether a Parachute Tax is payable by the Executive and the
amount of such Parachute Tax and whether a Gross-Up Payment is required
and the amount of such Gross-Up Payment, shall be made by the
nationally recognized firm of certified public accountants (the
"Accounting Firm") used by the Company prior to the Change in Control
(or, if such Accounting Firm declines to serve, the Accounting Firm
shall be a nationally recognized firm of certified public accountants
selected by the Executive). The Accounting Firm shall be directed by
the Company or the Executive to submit its preliminary determination
and detailed supporting calculations to both the Company and the
Executive within 15 calendar days after the determination date, if
applicable, and any other such time or times as may be requested by the
Company or the Executive. If the Accounting Firm determines that any
Parachute Tax is payable by the Executive, the Company shall pay the
required Gross-Up Payment to, or for the benefit of, the Executive
within five business days after receipt of such determination and
calculations. If the Accounting Firm determines that no Parachute Tax
is payable by the Executive, it shall, at the same time as it makes
such determination, furnish the Executive with an opinion that he has
substantial authority not to report any Parachute Tax on his federal
tax return. Any good faith determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company
and the Executive absent a contrary determination by the Internal
Revenue Service or a court of competent jurisdiction; provided,
however, that no such determination shall eliminate or reduce the
Company's obligation to provide any Gross-Up Payments that shall be due
as a result of such contrary determination. As a result of the
uncertainty in the application of Code Section 4999 at the time of any
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments that will not have been made by the Company should
have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts
or fails to pursue its remedies pursuant to Section 8(f) hereof and the
Executive thereafter is required to make a payment of any Parachute
Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its
determination and detailed supporting calculations to both the Company
and the Executive as promptly as possible. Any such Underpayment shall
be promptly paid by the Company to, or for the benefit of, the
Executive within five business days after receipt of such determination
and calculations.
(f) The Company and the Executive shall each
provide the Accounting Firm access to and copies of any books, records
and documents in the possession of the Company or the Executive, as the
case may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation
and issuance of the determination contemplated by Section 8(b) hereof.
(g) The federal tax returns filed by the Executive
(or any filing made by a consolidated tax group which includes the
Company) shall be prepared and filed on a basis consistent with the
determination of the Accounting Firm with respect to the
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<PAGE> 10
Parachute Tax payable by the Executive. The Executive shall make proper
payment of the amount of any Parachute Tax, and at the request of the
Company, provide to the Company true and correct copies (with any
amendments) of his federal income tax return as filed with the Internal
Revenue Service, and such other documents reasonably requested by the
Company, evidencing such payment. If prior to the filing of the
Executive's federal income tax return, the Accounting Firm determines
in good faith that the amount of the Gross-Up Payment should be
reduced, the Executive shall within five business days pay to the
Company the amount of such reduction.
(h) The fees and expenses of the Accounting Firm
for its services in connection with the determinations and calculations
contemplated by Sections 8(b) and (d) hereof shall be borne by the
Company. If such fees and expenses are initially advanced by the
Executive, the Company shall reimburse the Executive the full amount of
such fees and expenses within five business days after receipt from the
Executive of a statement therefor and reasonable evidence of his
payment thereof.
(i) In the event that the Internal Revenue Service
claims that any payment or benefit received under this Agreement
constitutes an "excess parachute payment" within the meaning of Code
Section 280G(b)(1), or successor provision, the Executive shall notify
the Company in writing of such claim. Such notification shall be given
as soon as practicable but not later than 10 business days after the
Executive is informed in writing of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to
the expiration of the 30 day period following the date on which the
Executive gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall (i) give the Company any information reasonably
requested by the Company relating to such claim; (ii) take such action
in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including without
limitation, accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company and reasonably
satisfactory to the Executive; (iii) cooperate with the Company in good
faith in order to effectively contest such claim; and (iv) permit the
Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including, but not limited to, additional interest
and penalties and related legal, consulting or other similar fees)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for and against for any
Parachute Tax or income tax or other tax (including interest and
penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses.
(j) The Company shall control all proceedings taken
in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may,
at its sole option, either direct the Executive to pay the tax claimed
10
<PAGE> 11
and sue for a refund or contest the claim in any permissible manner and
the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive on an interest-free basis, and shall
indemnify and hold the Executive harmless, on an after tax basis, from
any Parachute Tax (or other tax including interest and penalties with
respect thereto) imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and provided,
further, that if the Executive is required to extend the statue of
limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which
a corporate deduction would be disallowed pursuant to Code Section 280G
or successor provision, and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority. In addition, no position
may be taken nor any final resolution be agreed to by the Company
without the Executive's consent if such position or resolution could
reasonably be expected to adversely affect the Executive unrelated to
matters covered hereto.
(k) If, after the receipt by Executive of an amount
advanced by the Company in connection with the contest of the Parachute
Tax claim, the Executive receives any refund with respect to such
claim, the Executive shall promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after
taxes applicable thereto); provided, however, if the amount of that
refund exceeds the amount advanced by the Company the Executive may
retain such excess. If, after the receipt by the Executive of an amount
advanced by the Company in connection with a Parachute Tax claim, a
determination is made that the Executive shall not be entitled to any
refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest the denial of such refund
prior to the expiration of 30 days after such determination such
advance shall be deemed to be in consideration for services rendered
after the Date of Termination.
9. Competition.
(a) Executive shall not, at any time during the
Term, or for one year thereafter, without the prior written consent of
the Board, directly or indirectly through any other person or entity:
(i) own, acquire in any manner any ownership
interest in (except as purely passive investments amounting to
no more than five percent of the voting equity), or serve as a
director, officer, employee, counsel or consultant of any
person, firm, partnership, corporation, consortia, association
or other entity that competes with the Company or any of its
affiliates or subsidiaries, in any geographic market in which
the Company either (A) offers or provides telecommunications
(which term hereafter shall be deemed to include voice, data
or internet communications) services to customers; (B)
operates or manages a
11
<PAGE> 12
provider of telecommunications services; (C) has investments
in a provider of telecommunications services; or (D), to
Executive's knowledge, has plans to either operate a
telecommunications carrier, offer a telecommunications
service, or invest in a telecommunications carrier within the
next twelve months,
(ii) solicit, entice, persuade or induce any
individual who currently is, or at any time during the
preceding twelve months shall have been, an officer, director
or employee of the Company, or any of its affiliates, to
terminate or refrain from renewing or extending such person's
employment with the Company or such subsidiary or affiliate,
or to become employed by or enter into contractual relations
with or consultant for any other individual or entity, and
Executive shall not approach any such employee for any such
purpose or authorize or knowingly cooperate with the taking of
any such actions by any other individual or entity, or
(iii) except in accordance with Executive's
duties on behalf of the Company, solicit, entice, persuade, or
induce any individual or entity which currently is, or at any
time during the preceding twelve months shall have been, a
customer, consultant, vendor, supplier, lessor or lessee of
the Company, or any of its subsidiaries or affiliates, to
terminate or refrain from renewing or extending its
contractual or other relationship with the Company or such
subsidiary or affiliate, and Executive shall not approach any
such customer, vendor, supplier, consultant, lessor or lessee
for such purpose or authorize or knowingly cooperate with the
taking of any such actions by any other individual or entity.
(b) Executive shall not at any time:
(iv) other than when required in the ordinary
course of business of the Company, disclose, directly or
indirectly, to any person, firm, corporation, partnership,
association or other entity, any trade secret, or confidential
information concerning the financial condition, suppliers,
vendors, customers, lessors, or lessees, sources or leads for,
and methods of obtaining, new business, or the methods
generally of doing and operating the respective businesses of
the Company or its affiliates and subsidiaries to the degree
such secret or information incorporates information that is
proprietary to, or was developed specifically by or for, the
Company, except such information that is a matter of public
knowledge, was provided to Executive (without breach of any
obligation of confidence owed to the Company) by a third party
which is not an affiliate of the Company, or is required to be
disclosed by law or judicial or administrative process, or
(v) make any oral or written statement about
the Company and/or its financial status, business, compliance
with laws, personnel, directors, officers, consultants,
services, business methods or otherwise, which is intended or
reasonably likely to disparage the Company or otherwise
degrade its reputation in the business or legal community in
which it operates or in the telecommunications industry;
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<PAGE> 13
provided that nothing in this Section 9(b) shall be construed
so as to prevent Executive from using, in connection with his
employment for himself or an employer other than the Company,
knowledge that was acquired by him during the course of his
employment with the Company and which is generally known to
persons of his experience in other companies in the same
industry;
(c) Executive hereby represents that (i) Executive
is not restricted in any material way from performing Executive's
duties hereunder as the result of any contract, agreement or law; and
(ii) Executive's due performance of Executive's duties hereunder does
not and will not violate the terms of any agreement to which Executive
is bound.
(d) In the event any agreement in Section 9 hereof
shall be determined by any court of competent jurisdiction to be
unenforceable by reason of its extending for too great a period of time
or over too great a geographical area or by reason of its being too
extensive in any other respect, it will be interpreted to extend only
over the maximum period of time for which it may be enforceable, and/or
over the maximum geographical area as to which it may be enforceable
and/or to the maximum extent in all other respects as to which it may
be enforceable, all as determined by such court in such action.
10. Injunctive Relief. It is recognized and acknowledged by
Executive that a breach of the covenants contained in Section 9 hereof will
cause irreparable damage to the Company and its goodwill, the exact amount of
which will be difficult or impossible to ascertain, and that the remedies at law
for any such breach will be inadequate. Accordingly, Executive agrees that in
the event of a breach of any of the covenants contained in Section 9 hereof, in
addition to any other remedy which may be available at law or in equity, the
Company will be entitled to specific performance and injunctive relief.
11. Mutual Non-Disparagement. Neither the Company nor
Executive shall make any oral or written statement about the other party which
is intended or reasonably likely to disparage the other party, or otherwise
degrade the other party's reputation in the business or legal community or in
the telecommunications industry.
12. Foreign Corrupt Practices Act. Executive agrees to
comply in all material respects with the applicable provisions of the U.S.
Foreign Corrupt Practices Act of 1977 ("CPA"), as amended, which provides
generally that: under no circumstances will foreign officials, representatives,
political parties or holders of public offices be offered, promised or paid any
money, remuneration, things of value, or provided any other benefit, direct or
indirect, in connection with obtaining or maintaining contracts or orders
hereunder. When any representative, employee, agent, or other individual or
organization associated with Executive is required to perform any obligation
related to or in connection with this Agreement, the substance of this section
shall be imposed upon such person and included in any agreement between
Executive and any such person. Failure by Executive to comply with the
provisions of the CPA shall constitute a material breach of this Agreement and
shall entitle the Company to terminate Executive's employment for Cause.
Additionally, Executive hereby acknowledges that as a condition for the Company
to continue this Agreement, Executive shall execute an
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<PAGE> 14
acknowledgment that Executive has read "An Explanation of the Foreign Corrupt
Practices Act" and "Global TeleSystems Group, Inc. Policy on Foreign
Transactions," copies of which have been provided to Executive. Executive also
acknowledges that a condition precedent to the effectiveness of this Agreement
shall be the execution by Executive of the "Addendum to the Global TeleSystems
Group, Inc. Policy on Foreign Transaction," a copy of which has been provided to
Executive. Additionally, and as a condition for the Company to continue this
Agreement, Executive shall be required from time to time at the request of the
Company to execute a certificate of Executive's compliance with the
aforementioned laws and regulations.
13. Purchases and Sales of the Company's Securities.
Executive has read and agrees to comply in all respects with the Company's
Policy Regarding the Purchase and Sale of the Company's Securities by Employees,
as such Policy may be amended from time to time. Specifically, and without
limitation, Executive agrees that Executive shall not purchase or sell stock in
the Company at any time (a) that Executive possesses material non-public
information about the Company or any of its businesses; and (b) during any
"Trading Blackout Period" as may be determined by the Company as set forth in
the Policy from time to time.
14. Indemnification. Executive shall be entitled to
indemnification set forth in the Company's Certificate of Incorporation to the
maximum extent allowed under the laws of the Commonwealth of Virginia and the
State of Delaware Corporations Act, and Executive shall be entitled to the
protection of any insurance policies the Company may elect to maintain generally
for the benefit of its directors and officers against all costs, charges and
expenses incurred or sustained by Executive in connection with any action, suit
or proceeding to which Executive may be made a party by reason of Executive's
being or having been a director, officer or employee of the Company or any of
its subsidiaries or Executive's serving or having served any other enterprise as
a director, officer or employee at the request of the Company (other than any
dispute, claim or controversy arising under or relating to this Agreement).
15. Notices. Any written notice required by this Agreement
will be deemed provided and delivered to the intended recipient when (a)
delivered in person by hand; or (b) three days after being sent via U.S.
certified mail, return receipt requested; or (c) the day after being sent via by
overnight courier, in each case when such notice is properly addressed to the
following address and with all postage and similar fees having been paid in
advance:
If to the Company: Global TeleSystems Group, Inc.
Attn.: Senior Vice President for Human Resources
1751 Pinnacle Drive
North Tower 12th Floor
McLean, VA 22102 USA
If to Executive: to Executive at the address set forth below under
Executive's signature.
Either party may change the address to which notices, requests, demands and
other communications to such party shall be delivered personally or mailed by
giving written notice to the other party in the manner described above.
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16. Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.
17. Entire Agreement. This Agreement constitutes the entire
agreement between the listed parties with respect to the subject matter
described in this Agreement and supersedes all prior agreements, understandings
and arrangements, both oral and written, between the parties with respect to
such subject matter. This Agreement may not be modified, amended, altered or
rescinded in any manner, except by written instrument signed by both of the
parties hereto; provided, however, that the waiver by either party of a breach
or compliance with any provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or compliance.
18. Severability. In case any one or more of the provisions
of this Agreement shall be held by any court of competent jurisdiction or any
arbitrator selected in accordance with the terms hereof to be illegal, invalid
or unenforceable in any respect, such provision shall have no force and effect,
but such holding shall not affect the legality, validity or enforceability of
any other provision of this Agreement provided that the provisions held illegal,
invalid or unenforceable does not reflect or manifest a fundamental benefit
bargained for by a party hereto.
19. Dispute Resolution and Arbitration. In the event that
any dispute arises between the Company and Executive regarding or relating to
this Agreement and/or any aspect of Executive's employment relationship with the
Company, AND IN LIEU OF LITIGATION AND A TRIAL BY JURY, the parties consent to
resolve such dispute through mandatory arbitration under the Commercial Rules of
the American Arbitration Association ("AAA"), before a single arbitrator in
McLean or Alexandria, Virginia. The parties hereby consent to the entry of
judgment upon award rendered by the arbitrator in any court of competent
jurisdiction. Notwithstanding the foregoing, however, should adequate grounds
exist for seeking immediate injunctive or immediate equitable relief, any party
may seek and obtain such relief; provided that, upon obtaining such relief, such
injunctive or equitable action shall be stayed pending the resolution of the
arbitration proceedings called for herein. The parties hereby consent to the
exclusive jurisdiction in the state and Federal courts of or in the Commonwealth
of Virginia for purposes of seeking such injunctive or equitable relief as set
forth above. Any and all out-of-pocket costs and expenses incurred by the
parties in connection with such arbitration (including attorneys' fees) shall be
allocated by the arbitrator in substantial conformance with his or her decision
on the merits of the arbitration; provided, however, that in no event shall
Executive be required to pay attorneys' fees in an amount that exceeds the
amount incurred by Executive for Executive's attorneys' fees.
20. Choice of Law. Executive and the Company intend and
hereby acknowledge that jurisdiction over disputes with regard to this
Agreement, and over all aspects of the relationship between the parties hereto,
shall be governed by the laws of the Commonwealth of Virginia without giving
effect to its rules governing conflicts of laws.
21. Section Headings. The section headings contained in
this Agreement are for reference purposes only and shall not affect in any
manner the meaning or interpretation of this Agreement.
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22. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date and year first above written.
GLOBAL TELESYSTEMS GROUP, INC.
By: /s/ Eileen Sweeney
Name: Eileen Sweeney
Title: Senior VP - Human Resources
EXECUTIVE
/s/ Robert A. Schriesheim
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EXHIBIT 21.1
SCHEDULE OF WHOLLY OWNED SUBSIDIARIES
COMPANY NAME COUNTRY
1. GTS Group, Inc. Delaware
2. GTS Carrier Services, Inc. Delaware
3. San Francisco/Moscow Teleport, Inc. Delaware
4. GTS Equipment, Inc. Delaware
5. SFMT, Inc. Delaware
6. GTS Financial Services, Inc. Delaware
7. SFMT-China, Inc. Delaware
8. Global TeleSystems, Inc. Delaware
9. GTS European Telecommunications Corp. Delaware
10. GTS-Czech, Inc. Delaware
11. C-Datacom International, Inc. Delaware
12. GTS-Europe South, Inc. Delaware
13. GTS-Carrier Services, Inc. Delaware
14. GTS-Hungaro, Inc. Delaware
15. GTS-Poland, Inc. Delaware
16. GTS Wholesale Services, Inc. Delaware
17. GTS Transpacific Ventures Limited Delaware
18. GTS-India, Inc. Delaware
19. GTS-Bulgaria, Inc. Delaware
20. GTS CitiNet, Inc. Delaware
21. GTS European Business Access Services, Inc. Delaware
22. GTS-Hungary Holding, Inc. Delaware
23. GTS-Romania, Inc. Delaware
24. Global Telesystems (Property) Limited United Kingdom
25. NetCom Internet Ltd. United Kingdom
26. Global TeleSystems (Belgium) S.A. Belgium
27. GTS S.A.M. Monaco
28. GTS Wholesale Services S.A.M. Monaco
29. GTS TransAtlantic Carrier Services, Ltd. Bermuda
30. GTS TransAtlantic Holdings Ltd. Bermuda
31. GTS TransAtlantic Carrier Services (UK) Ltd. United Kingdom
32. NetSource Europe asa Norway
33. Global TeleSystems Group Norge AS Norway
34. NetSource Sverige AB Sweden
35. GTS Danmark AS Denmark
36. GTS Benelux BV Netherlands
37. Westcom Gesellschaft fur Telekommunikation GmbH Germany
38. GTS Business Services (Ireland) Ltd. Ireland
39. NetSource Phone System AB Sweden
40. NetSource Communication AB Sweden
41. NetSource Beltegoed BV Netherlands
42. GTS Benelux Sarl Luxembourg
43. NS Invest IV AS Norway
44. NS Invest III AS Norway
<PAGE> 2
SCHEDULE OF WHOLLY OWNED SUBSIDIARIES
COMPANY NAME COUNTRY
45. NS Invest II AS Norway
46. Global TeleSystems (Europe) Limited United Kingdom
47. Esprit Telecom Networks, Ltd. United Kingdom
48. Telecom Europa Limited United Kingdom
49. Global TeleSystems (Jersey) Ltd. Jersey
50. Esprit Telecom International Ltd. Jersey
51. Global TeleSystems (UK) Limited United Kingdom
52. Esprit Telecom Holdings Ltd. United Kingdom
53. Icomnet SA BVI
54. Esprit Telecom Management Ltd. Jersey
55. Esprit Telecom Europe B.V. Netherlands
56. Global TeleSystems Holdings GmbH Germany
57. Global TeleSystems (Espana) SA Spain
58. Global TeleSystems (Nederland) BV Netherlands
59. Esprit Telecom France SA France
60. GTS Italia Srl Italy
61. Omnicom SA France
62. Omnicom Direct SA Spain
63. Omnicom Spa Italy
64. GTS Business Services (Switzerland) SA Switzerland
65. Jean Rondeaux SCI France
66. Swift Global Netherlands BV Netherlands
67. Interaktieve Media Services BV Netherlands
68. IMS Plus Beheer BV Netherlands
69. Global TeleSystems (Deutschland) GmbH Germany
70. Global TeleSystems Technical Services GmbH Germany
71. Global TeleSystems Netzwerk GmbH & CoKg Germany
72. Plusnet Management GmbH Germany
73. GTS Telecom Management Services (Ireland) Ltd. Ireland
74. GTS European Holding Spain, S.L. Spain
75. GTS Access Services (Spain) S.L. Spain
76. GTS Services (Italy) srl Italy
77. GTS Finland OY Finland
78. GTS Business Services (UK) Ltd. United Kingdom
79. GTS Business Services (Ireland) Ltd. Ireland
80. GTS Business Services (Portugal) LDA Portugal
81. SFM Teleport (Switzerland) AG Switzerland
82. GTS Business Services (Germany) GmbH Germany
83. GTS Business Services (France) sarl France
84. GTS Business Services (Italy) srl Italy
85. Global TeleSystems (Sverige) AB Sweden
86. GTS Business Services (Netherlands) B.V. Netherlands
87. GTS Business Services (Spain) S.L. Spain
88. GTS Business Services GmbH Austria
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SCHEDULE OF WHOLLY OWNED SUBSIDIARIES
COMPANY NAME COUNTRY
89. Global TeleSystems (Norge) AS Norway
90. GTS Business Services (Denmark) A/S Denmark
100. SC GTS Romania SRL Romania
101. GTS Bulgaria EOOD Bulgaria
102. GTS CzechCom s.r.o. Czech Republic
103. GTS CzechNet s.r.o. Czech Republic
104. GTS Czech a.s. Czech Republic
105. NetForce s.r.o. Czech Republic
106. GTS INEC s.r.o. Czech Republic
107. GTS INEC s.r.o. Slovakia
COMPANY'S VENTURES
COMPANY NAME COUNTRY
108. Global TeleSystems Europe B.V. Netherlands
109. Global TeleSystems Europe Holdings B.V. Netherlands
110. GTS Transatlantic Limited Ireland
111. GTS Network Services (Belgium) B.V.B.A. Belgium
112. Hermes Europe Railtel (US) Inc. Delaware
113. GTS Carrier Services (Spain) S.L. Spain
114. GTS Carrier Services (Switzerland) GmbH Switzerland
115. GTS Support Services (Belgium) BVBA Belgium
116. GTS Carrier Services (Germany) GmbH Germany
117. GTS Carrier Services (France) Sarl France
118. GTS Carrier Services (Italy) s.r.l. Italy
119. GTS Carrier Services (Denmark) Aps Denmark
120. GTS Carrier Services (Ireland) Ltd. Ireland
121. GTS Network (Ireland) Ltd. Ireland
122. GTS Carrier Services (Czech) s.r.o. Czech Republic
123. GTS Carrier Services (Vienna) GmbH Austria
124. GTS Carrier Services (Sweden) AB Sweden
125. GTS Carrier Services (UK) Limited United Kingdom
126. Ebone A/S Denmark
127. Global TeleSystems (Denmark) AS Denmark
128. FLAG Atlantic Limited Bermuda
129. FLAG Atlantic USA Limited Delaware
130. FLAG Atlantic UK Limited United Kingdom
131. FLAG Atlantic (France) sarl France
132. GTS-Ukraine Ukraine
133. GTS Hungary Telecommunications Ltd. Hungary
134. GTS Central European Holding & Advisory JSC Hungary
135. DataNet Telecom Ltd. Hungary
136. PST Sp. zoo Poland
3
<PAGE> 4
COMPANY'S VENTURES
COMPANY NAME COUNTRY
137. Jatel Sp. z.o.o. Poland
138. ProNet Communications Sp. z.o.o. Poland
139. ATOM S.A. Poland
140. IT Communications S.A. Poland
141. Internet Technologies Polska Sp. z.o.o. Poland
142. Dattel a.s. Czech Republic
143. Sitel-VSAT s.r.o. Slovakia
144. MetroNet Czech Republic
145. Fincom-Terrex, Spol, s.r.o. Czech Republic
146. AGIS Telekomunikace s.r.o. Czech Republic
147 Dattel Kabel a.s. Czech Republic
148. INNET s.r.o. Czech Republic
149. SA Telcom Kazakhastan
150. Sovam Teleport Kiev Division, LLC Ukraine
151. TeleRoss Russia
152. EDN Sovintel Russia
153. TeleRoss-Irkutsk Russia
154. TeleRoss-Ufa Russia
155. TeleRoss-Novosibirsk Russia
156. TeleRoss-Vladivostok Russia
157. TeleRoss-Tiumen Russia
158. TeleRoss-Khabarovsk Russia
159. TeleRoss-Volgograd Russia
160. GT Equipment Services, Inc. Delaware
161. SFMT-CIS, Inc. Delaware
162. Golden Telecom, Inc. Delaware
163. GTS Finance, Inc. Delaware
164. SFMT-Datacom, Inc. Delaware
165. Sovinet, Inc. Delaware
166. GTS-Vox Limited United Kingdom
167. SFMT-Rusnet, Inc. Delaware
168. TeleRoss -Ekaterinburg Russia
169. TeleRoss-Nizhny Novgorod Russia
170. TeleRoss-Archangelsk Russia
171. TeleRoss-Voronezh Russia
172. TeleRoss-Samara Russia
173. TeleRoss-Komi Russia
174. TeleRoss-Kubanelectrosviaz Russia
175. Golden TeleServices, Inc. Delaware
176. TeleSystems Services, Inc. Delaware
177. GTS Mobile Services, Inc. Delaware
178. Golden Telecom Group, Inc. Delaware
179. GTS Ukrainian TeleSystems LLC Delaware
180. Golden Telecom Ukraine
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COMPANY'S VENTURES
COMPANY NAME COUNTRY
181. CellUkraine Limited Delaware
182. LLC Invest Holding Ukraine
183. Vostok Mobile B.V. Netherlands
184. Vostok Mobile Trade Russia
185. AltaySviaz Russia
186. Penza Mobile Russia
187. Astrahan Mobile Russia
188. Votec Mobile Russia
189. Chuvashi Mobile Russia
190. Lipetsk Mobile Russia
191. Archangelsk Mobile Networks Russia
192. Saratov Mobile Russia
193. Volgograd Mobile Russia
194. Murmansk Mobile Network Russia
195. Parma Mobile Russia
196. Primtelephone Russia
197. BashUnicel Russia
198. Mar Mobile Russia
199. Novgorod Telecommunications Russia
200. Unicel Ivanovo Russia
201. Unicel Bryansk Russia
202. Unicel Kostroma Russia
203. Unicel Orel Russia
204. Unicel Yaroslavl Russia
205. GTS China Investments, L.L.C. Delaware
206. American China Investment Corp. Canada
207. Beijing Tianmu Satellite Communications China
Technology Co., Ltd.
208. Shanghai Global Intelligent TeleSystems Co., Ltd. China
209. Shanghai V-Tech Telecommunications and China
Engineering LLC
5
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration
Statements (Forms S-1 No. 333-45915) (Forms S-3 No. 333-70871, No. 333-78097,
No. 333-83307 and No. 333- 70885) and (Forms S-8 No. 333-45669, No. 333-47573
and No. 333-81267), of our report dated February 4, 2000 with respect to the
consolidated financial statements and schedule of Global TeleSystems Group,
Inc., included in this Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 6, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Forms S-8 (No. 333-45669 and No. 333-47573) of Global TeleSystems
Group, Inc. of our report dated March 3, 1999 relating to the consolidated
financial statements of Esprit Telecom Group plc, which is incorporated by
reference in this Annual Report of Global TeleSystems Group, Inc. on Form 10-K
for the year ended December 31, 1999.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers
London, England
March 3, 2000
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