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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GLOBAL TELESYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 94-3068423
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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4121 WILSON BOULEVARD
EIGHTH FLOOR
ARLINGTON, VA 22203
(703) 236-3100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
GRIER C. RACLIN, ESQ.
4121 WILSON BOULEVARD
EIGHTH FLOOR
ARLINGTON, VA 22203
(703) 236-3710
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________________ .
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] _____________________ .
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2)(3) REGISTRATION FEE(4)
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Common Stock, par value $.10 per share, issuable
as dividends on the 7 1/4% Cumulative
Convertible Preferred Stock.................... 20,000,000 $3.625 $72,500,000 $19,140
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(1) Rights to purchase Series A Preferred Stock of GTS, which are also being
registered hereunder, were issued in a number equal to the shares of Common
Stock being registered hereby for no additional consideration and therefore,
no registration fee for such rights is required. Prior to the occurrence of
certain events, such rights will not be exercisable or endorsed separately
from the Common Stock. When exercisable, each such right shall entitle the
owner to purchase from GTS one one-thousandth of a share of Series A
Preferred Stock.
(2) Estimated solely for the purpose of calculating the registration fee for
20,000,000 shares of common stock pursuant to Rule 457(c) under the
Securities Act, such that the market price per share of Common Stock is
based on the average of the high and low prices reported in the consolidated
reporting system on the New York Stock Exchange on September 27, 2000.
(3) 3,000,000 shares of common stock, or $94,605,000 aggregate amount,
previously registered pursuant to Registration Statement No. 333-78097, is
being included in the Prospectus filed with this Registration Statement. Ten
million Depositary Shares, each representing 1/100 of a share of 7 1/4%
Cumulative Convertible Preferred Stock and 100,000 shares of 7 1/4%
Cumulative Convertible Preferred Stock were also registered pursuant to
Registration Statement No. 333-78097.
(4) The Registrant previously paid $26,301 as the registration fee for the
3,000,000 shares on May 6, 1999 pursuant to Registration Statement No.
333-78097.
Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, the Prospectus which is a part of this Registration
Statement is a combined Prospectus relating also to Registration Statement No.
333-78097 and constitutes Post-Effective Amendment No. 1 to Registration
Statement No. 333-78097.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BE COME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 3, 2000
PROSPECTUS
DATED , 2000
10,000,000 DEPOSITARY SHARES EACH REPRESENTING 1/100 OF A SHARE OF 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 100,000 SHARES OF 7 1/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK, AND 23,000,000 SHARES OF COMMON STOCK ISSUABLE ON
CONVERSION OF, OR PAYABLE AS DIVIDENDS ON, THE DEPOSITARY SHARES OR THE 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK.
[GLOBAL LOGO] GLOBAL TELESYSTEMS, INC.
The selling stockholders listed under "Selling Stockholders" in this
prospectus intend to offer and sell from time to time, up to 10,000,000
depositary shares, 100,000 shares of our cumulative convertible preferred stock
and 37,492,000 shares of our common stock.
Holders of the depositary shares are entitled to a quarterly cash payment
of $.90625 per depositary share (equivalent to a rate of 7 1/4% per year per
depositary share) on March 15, June 15, September 15 and December 15 of each
year, commencing on June 15, 1999. The depositary shares have a liquidation
preference of $50 per share (equivalent to a liquidation preference of $5,000
per share of convertible preferred stock).
The depositary shares (and the corresponding convertible preferred stock)
are convertible at your option into shares of our common stock at any time
unless previously redeemed, at a conversion rate of 1.4492 shares of common
stock per depositary share (equivalent to a conversion value of 144.92 shares of
common stock per share of preferred stock).
We may redeem the shares of the convertible preferred stock and the
corresponding depositary shares, on or after March 15, 2002, in whole or in
part. Upon a change of control event, each holder of convertible preferred stock
(and the corresponding depositary shares) may require us to repurchase all or a
portion of such holder's convertible preferred stock (and the corresponding
depositary shares).
INVESTING IN THE DEPOSITARY SHARES, PREFERRED STOCK AND COMMON STOCK
INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 4 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000
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TABLE OF CONTENTS
PAGE
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Forward-Looking Statements.................................. i
Summary..................................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 23
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends........................................... 23
Selling Stockholders........................................ 24
Dividend Policy............................................. 28
Industry Overview........................................... 29
Business.................................................... 31
Description of Capital Stock................................ 45
Description of Depositary Shares............................ 52
Description of Convertible Preferred Stock.................. 58
Shares Eligible for Future Sale............................. 69
Tax Considerations.......................................... 70
Plan of Distribution........................................ 76
Legal Matters............................................... 77
Experts..................................................... 77
Where You Can Find More Information......................... 77
Incorporation of Information We File with the SEC........... 78
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements as to how we may
perform in the future. We have based these forward-looking statements on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks, uncertainties and assumptions about us,
including, among other things:
- our need for additional, substantial financing;
- risk of delay in implementing our business plan;
- heightened competition; and
- political, economic and legal changes in the markets where we operate.
These forward-looking statements are principally contained in the following
sections of the prospectus:
- Risk Factors; and
- Business.
In addition, in those and other portions of this prospectus, the words and
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimated", "intends", "plans", "projection" and "outlook" are
intended to identify forward-looking statements. These statements should be
viewed with caution.
These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. In making these
forward-looking statements in this prospectus, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1998. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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SUMMARY
OUR COMPANY
We are a leading independent provider of broadband, Internet, data and
voice services to businesses, other high usage customers and carriers across
Europe. We market our services through our European operations.
OUR SERVICES
We offer a portfolio of bundled voice, data and Internet services to
small-to-medium sized enterprises, and pan-European companies in 18 European
countries. 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.
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, 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.
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 enables us to further penetrate our customer base.
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-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.
OUR NETWORK
In Europe, at June 30, 2000, our network had 58 carrier points of presence
in 38 cities, 35 Internet Protocol nodes in 24 cities and 42 switches in 34
cities. The fiber optic network spans approximately 17,500 kilometers and 14
countries. We also have leased capacity from Europe to the United States from
third parties. We have purchased a dedicated fiber pair on the FLAG Atlantic-1
transatlantic fiber optic link. We expect to begin offering unprotected services
in the first quarter of 2001 and fully protected services in the second quarter
of 2001 over this fiber pair. 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 connecting the New York City
area to our European network. In addition, five intracity fiber networks were
operational as of June 30, 2000. In order to meet and support the continuous
increase in bandwidth requirements of our current and future customers, we are
upgrading the transmission
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equipment used on our fiber optic network to increase our network's transmission
capacity. In addition, we intend to develop an additional ring on our network
connecting the core cities of London, Paris, Amsterdam, Frankfurt, Dusseldorf
and Brussels with cable duct that will accommodate up to 144 fibers. We also
plan to install transmission equipment on a second, currently installed fiber
pair on a number of existing routes in our network to expand our transmission
capacity on those routes. At June 30, 2000, we had data and Web-hosting
facilities in London, Paris, Frankfurt and Amsterdam.
BUSINESS STRATEGY
Our goal is to become Europe's premier 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 Tier 1 Internet protocol backbone, our position
as a leading pan-European supplier of communications services to small- and
medium-sized businesses, and a large base of carrier and Internet service
provider customers. 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
- Leverage our 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
- Develop intracity fiber networks
- Expand and enhance the transatlantic capacity of our network
- Build or deploy data- and Web-hosting centers to support Web-based
services
- Enhance brand name recognition
MANAGEMENT CHANGE
On September 19, 2000, we announced that H. Brian Thompson had resigned as
Chairman and Chief Executive Officer. Robert J. Amman, our President and Chief
Operating Officer, was elected by our Board of Directors to replace Mr. Thompson
as Chairman and Chief Executive Officer.
NEED FOR ADDITIONAL FINANCING
We have announced that, based on current plans, which include a $500
million cash capital program for 2001, in order to be fully-funded through 2001,
we will require $250 million of additional financing over our existing resources
and the proceeds of a $550 million multi-currency bank facility (the "Facility")
entered into on July 14, 2000 by our indirect subsidiary, Global TeleSystems
Europe Holdings B.V. Of the $550 million under the Facility, $275 million is
available currently, of which the borrower has borrowed 200 million Euros. The
remaining $275 million will be available when certain licenses and rights of way
relating to our network have been transferred to the borrower (collectively, the
"Conditions Subsequent"). We expect that the Conditions Subsequent will be
completed during the time period required by the lenders under the Facility
(nine months from entry into the Facility in the case of licenses and rights of
way in France and the United Kingdom and six months from entry into the Facility
in the case of licenses
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and rights of way in other countries), but borrowed funds will have to be repaid
within 90 days of the expiration of these periods if the Conditions Subsequent
are not satisfied.
In addition, we expect that the required $250 million in additional
financing could be raised through debt or equity financing (which may be
convertible into our common stock) or through the proceeds of the sale of its
shares of common stock in Golden Telecom, our 62.5%-held subsidiary, which
operates in Russia and other countries of the Commonwealth of Independent
States, or our 50% interest in Flag Atlantic Limited, which is building a
transatlantic fiber optic link between Europe and the United States, or some
combination of these alternatives. There can be no assurance that we will be
successful in satisfying the Conditions Subsequent or in raising the additional
$250 million. If we are not successful, we expect to evaluate our available
strategic options at that time.
We have also determined that, in connection with the migration of certain
functions currently based in the United States to Europe. We expect to dispose
of our web hosting center that is under construction in Northern Virginia. The
functions of the hosting center and accompanying network operation center, which
were scheduled to open in the fourth quarter of 2000, will be conducted in
Europe.
RESTRUCTURING INITIATIVE
In August 2000, we adopted a plan of restructuring our business operations.
This plan of restructuring is focused on separating our non-core business from
our core strategic businesses and streamlining operations, including headcount
reductions/redeployment, reductions at our corporate headquarters location, the
centralization of finance and billing operations and sales office consolidation.
These actions are expected to result in the reduction by the end of 2000 of
approximately 400 positions from our staffing levels. We expect that we will
record a one-time charge of between $15 million to $20 million for employee
severance and lease termination costs in the third quarter of 2000.
We expect that there will be additional costs associated with the
resignation of Mr. Thompson.
We maintain our principal offices at 4121 Wilson Boulevard, 8th floor,
Arlington, VA 22203, and our telephone number is (703) 236-3100.
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RISK FACTORS
Investing in our depositary shares, convertible preferred stock or common
stock will provide you with an equity ownership interest in GTS. As a holder of
depositary shares or common stock, you may be subject to risks inherent in our
business. The value of your investment may increase or decline and could result
in a loss. You should carefully consider the following factors relating to us as
well as other information contained in this prospectus before deciding to invest
in these securities.
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 not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;
- may be less flexible in planning for, or reacting to, changes in our
business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and
- will have more debt than some of our competitors, which may place us at a
competitive disadvantage with respect to such competitors.
If we fail to make the required payments or to comply with our debt
covenants, we will default on our debt. A default would permit our debtholders
to accelerate the maturity of the debt, which in turn could cause defaults under
our other debt.
SUBSTANTIAL ADDITIONAL CAPITAL IS REQUIRED TO EXPAND OUR NETWORK AND MEET OTHER
WORKING CAPITAL NEEDS
We have announced that, based on current plans, which include a $500
million cash capital program for 2001, in order to be fully-funded through 2001,
we will require $250 million of additional financing over our existing resources
and the proceeds of a $550 million multi-currency bank facility entered into on
July 14, 2000 by our indirect subsidiary, Global TeleSystems Europe Holdings
B.V. Of the $550 million under the facility, $275 million is available
currently, of which the borrower has borrowed 200 million Euros. The remaining
$275 million will be available when certain licenses and rights of way relating
to our network have been transferred to the borrower. We expect that such
conditions subsequent will be completed during the time period required by the
lenders under the Facility (nine months from entry into the Facility in the case
of licenses and rights of way in France and the United Kingdom and six months
from entry into the Facility in the case of licenses and rights of way in other
countries), but borrowed
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funds will have to be repaid within 90 days of the expiration of these periods
if the conditions subsequent are not satisfied.
In addition, we expect that the required $250 million in additional
financing could be raised through debt or equity financing (which may be
convertible into our common stock) or through the proceeds of the sale of its
shares of common stock in Golden Telecom, our 62.5%-held subsidiary, which
operates in Russia and other countries of the Commonwealth of Independent
States, or our 50% interest in Flag Atlantic Limited, which is building a
transatlantic fiber optic link between Europe and the United States, or some
combination of these alternatives. There can be no assurance that we will be
successful in satisfying the conditions subsequent to the bank facility or in
raising the additional $250 million. If we are not successful, we expect to
evaluate our available strategic options at that time.
We will require significant amounts of capital to develop and expand our
network, including 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. We
cannot assure you that additional financing will be available on terms
acceptable to us or at all. If we fail to obtain this financing, we might have
to implement cash conservation measures and 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 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.
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
continue to 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.
COVENANTS IN OUR DEBT AGREEMENTS MAY RESTRICT OUR ABILITY TO BOLSTER OUR
LIQUIDITY AND RESTRICT OUR OPERATIONS
The covenants in our currently outstanding debt may materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. Among other things, these covenants
limit our ability to:
- incur additional debt;
- pay dividends or make certain other restricted payments;
- limit our ability to use our assets as collateral for loans;
- dispose of our assets;
- enter into transactions with affiliates; or
- consolidate, merge or sell all or substantially all of our assets and the
assets of our subsidiaries.
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
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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 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 ISPs,
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 ISPs 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.
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For more information on the competitors for our customers, see
"Business -- Competition."
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 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 will have a negative
effect on our pricing power and 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.
Our revenues and costs are also dependent upon factors that are not within our
control, including:
- regulatory changes;
- changes in technology;
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- 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 or that we
will be able to generate funds or raise financing to cover such costs.
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. See "Business -- Our European Operations," and
"Business -- Our Network Infrastructure."
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 which we
designed it for. Additionally, we may be unable to allocate the funds necessary
to upgrade our network as technological improvements in telecommunications
equipment are introduced. This could harm our competitive position relative to
other more technologically advanced networks. See "Business -- Broadband
Services" and "Business -- Our Network Infrastructure."
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 expand our offering of e-business services and focus on our
strategic core business of selling bundled data, Internet protocol and
voice services to pan-European small-to-medium sized and larger
businesses;
- our plan to develop and offer seamless connectivity between Europe and
the United States;
- our plan to construct intracity fiber networks in sixteen major European
cities by year-end 2001;
- our plan to establish data- and Web-hosting centers in up to 13 major
European cities by year-end 2001;
- our plan to construct, or to engage in capacity swaps to implement, an
additional ring connecting London, Paris, Amsterdam, Frankfurt,
Dusseldorf and Brussels;
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- 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.
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
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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
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. For example,
the stock options that we have previously granted to senior management are
currently no longer compensatory based on recent declines in the market value of
our common stock.
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 carryforwards 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.
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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.
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 approval 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 (e.g.
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
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will be established on the basis of member states' existing legislation which
may not provide us with the same protections from liability.
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 and during 2000 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.
ANY U.S. JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE ENFORCEABLE IN OTHER
COUNTRIES
Substantially all of our assets are located outside the U.S. As a result,
it will be necessary for you to comply with non-U.S. laws in order to enforce
judgments obtained in a U.S. court (including those with respect to federal
securities law claims) against the non-U.S. assets of our operating companies.
We cannot assure you that any U.S. judgments would be enforced under any such
non-U.S. laws.
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OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED
We do not expect to pay any cash dividends in the foreseeable future. Also,
our ability to pay dividends is limited under the terms of indentures governing
certain of our outstanding debt securities. If we raise any capital in the
future, we may be restricted from paying dividends under the terms of such
financings. In addition, the decision on August 17, 1998 by the Russian
government and the Central Bank of Russia to devalue the ruble and other actions
that the Russian government may take in the future may restrict the ability of
the ventures in Russia to declare and pay dividends, and, in turn the ability of
Golden Telecom to declare and pay dividends to its shareholders, including us.
SUBSTANTIAL RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE AND DILUTE
YOUR OWNERSHIP INTEREST
We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our common stock in the public
market pursuant to 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,
several registration statements covering the resale of approximately 72 million
shares of our common stock. Additionally, three registration statements on Form
S-8 cover the resale of shares of common stock issued to employees, officers and
directors under our employee benefit plans.
Furthermore, sales of shares of our common stock that will be effected
under this prospectus or otherwise in order to satisfy the quarterly dividend
under our convertible preferred stock may also dilute your ownership interest
and have an adverse effect on the market price for our common stock.
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 business strategy or
deliver on announced service innovations;
- concerns about our liquidity;
- negative developments pertaining to other companies in the
telecommunications sector;
- general market conditions;
- fluctuations in our quarterly and annual operating results;
- announcements by us or our competitors of new contracts, technological
innovations or new products;
- changes in government regulations; and
- political and economic development in emerging markets (including Russia
and the other independent countries of the CIS).
WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN
CONTROL, AND THEREFORE MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON
STOCK
We have adopted anti-takeover provisions that could delay or prevent a
third party from gaining control of us in a transaction that our board of
directors had not negotiated and approved, even if such change in control would
be beneficial to you. These anti-takeover provisions could depress the market
price of our common stock. These anti-takeover provisions include:
- Section 203 of the Delaware General Corporation Law, which prohibits a
business combination between a corporation and an interested stockholder
within three years of the stockholder becoming an "interested
stockholder" except in limited circumstances.
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- provisions of our charter and by-laws, including:
- a classified board of directors serving staggered three-year terms;
- restrictions on who may call a special meeting of stockholders;
- a prohibition on stockholder action by written consent;
- restrictions on the removal of directors;
- supermajority voting requirements with respect to certain amendments to
our charter;
- the authority to issue shares of preferred stock and to determine the
rights without stockholder approval; and
- a shareholders' rights plan.
For a more comprehensive discussion of the provisions of our charter and
by-laws affecting our capital stock, see "Description of Capital
Stock -- Certain Charter and By-law Provisions."
NO PUBLIC MARKETS FOR OUR DEPOSITARY SHARES AND CONVERTIBLE PREFERRED STOCK
The purchase price of the depositary shares is substantially higher than
the net tangible book value per share of our common stock. Investors purchasing
depositary shares under this prospectus will therefore incur immediate and
substantial net tangible book value dilution. To the extent that stock options
or warrants (currently outstanding or subsequently granted) to purchase our
common stock or preferred stock are exercised, there will be further dilution.
There is no public or other trading market for the depositary shares
offered by this prospectus or the corresponding shares of convertible preferred
stock, and we cannot assure you that any market will develop or be sustained in
the future. The initial purchasers have advised us that they do not intend to
make a market in convertible preferred stock or the common stock into which such
shares are convertible after the consummation of this offering.
WE MAY BE PRECLUDED FROM PAYING CASH DIVIDENDS ON THE CONVERTIBLE PREFERRED
STOCK
Our ability to pay any dividends is subject to applicable provisions of
state law. Our ability to pay cash dividends on the convertible preferred stock
will be subject to the terms of the indenture governing our 9 7/8% senior notes
and any other debt of ours which is outstanding. Under this indenture, we may
not pay cash dividends unless, among other things, the ratio of our total debt
to our annualized operating cash flow is less than or equal to 6.0 to 1.0. We
currently do not meet this ratio and will not be able to pay cash dividends
until we experience significant improvements in our operating cash flow.
However, the certificate of designations for the convertible preferred stock
allows us, at our option, to pay dividends on the convertible preferred stock in
cash, common stock or a combination thereof. If we pay all or a portion of a
dividend in our common stock, we must deliver to the depositary a sufficient
number of shares that, upon resale by the depositary, will result in net cash
proceeds to the depositary to make the quarterly dividend payments in cash to
the holders of the depositary shares.
Additionally, the ranking of the convertible preferred stock with respect
to the payment of dividends and upon liquidation, dissolution or winding up may
prevent us from paying cash dividends. The convertible preferred stock will rank
junior in right of payment to all of our existing and future senior securities,
including our 9 7/8% senior notes due 2005 and our 5 3/4% senior subordinated
debentures due 2010. In the event that we do not have sufficient funds to pay
both our debt service and accrued dividends on the convertible preferred stock,
we will first limit or stop paying such cash dividends until all amounts due on
our senior securities are paid.
Also, we may, without your consent, dilute your ability to receive
dividends or amounts payable on dissolution by increasing the authorized number
of shares of preferred stock or issuing series of preferred stock ranking on a
parity with the convertible preferred stock.
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SIGNIFICANT STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS
At December 31, 1999, the Open Society Institute, Soros Foundation Hungary,
Soros Charitable Foundation, Soros Humanitarian Foundation, Winston Partners II
LLC, Winston Partners II LDC and Chatterjee Fund Management, L.P., which we
collectively refer to as the Soros associates, beneficially owned approximately
6% of our common stock. In addition, two persons who are affiliated with the
Soros associates serve on our board. As a result, this stockholder group may
significantly influence decisions which stockholders must approve and other
decisions relating to the management of business.
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.
RISKS RELATED TO GOLDEN TELECOM
Golden Telecom, our 62.5%-held subsidiary, generates substantially all its
revenues from operations in Russia, Ukraine and other countries of the
Commonwealth of Independent States. All companies operating in the Commonwealth
of Independent States, including Golden Telecom, face significant political,
economic, regulatory, legal and tax risks, as described below. As a foreign
controlled company, Golden Telecom faces additional 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 GOLDEN TELECOM'S 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.
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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 development. Such a disruption could discourage
foreign and local investment and spending, in which case demand for Golden
Telecom's services could decrease and its results of operations could
deteriorate.
THE LACK OF CLEAR JURISDICTIONAL BOUNDARIES BETWEEN CENTRAL, REGIONAL, AND
LOCAL AUTHORITIES IN RUSSIA CREATE A VOLATILE OPERATING ENVIRONMENT
The relatively new constitutional system adopted by Russia in 1993 does not
specifically delineate jurisdictional divisions between central, regional and
local authorities and during the past several years, regional and local
authorities have acquired a measure of autonomy. Since assuming power, President
Putin has attempted to reassert central control over Russia's numerous and
diverse regions. To the extent that regional and local authorities resist any
realignment of power, President Putin's assertion of central authority may lead
to tensions or even destabilizing conflict between federal authorities in Moscow
and powerful political and financial figures in the regions. In this
environment, businesses that operate in Russia's regions are subject to
sometimes inconsistent and conflicting demands from central, regional and local
authorities, especially in areas concerning state revenue collection.
ECONOMIC INSTABILITY IN RUSSIA AND UKRAINE COULD ADVERSELY AFFECT THE DEMAND
FOR GOLDEN TELECOM'S SERVICES AND ITS ABILITY TO COLLECT INVOICES
After August 1998, the Russian and Ukrainian economies entered into an
economic crisis that was exacerbated by political instability. Although the
political situation in Russia may have recently stabilized somewhat as
demonstrated by the December 1999 Duma elections, the resignation of former
President Yeltsin, and the election of President Putin, if the political
situations in the countries in which Golden Telecom operates do not stabilize
and if their economies do not strengthen, we expect that demand for Golden
Telecom's services will remain depressed. The failure and subsequent stagnation
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 were unable to pay Golden Telecom's invoices or
maintain their telecommunication services, and Golden Telecom's revenues have
suffered accordingly. Demand for Golden Telecom's services may remain depressed
if the Russian and Ukrainian political and economic situations do not improve.
THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT GOLDEN TELECOM'S ABILITY TO
CONVERT RUBLES TO HARD CURRENCY AND MANAGE CASH FLOWS
The Russian government's default on its obligations to make payments on its
internal debt in August 1998 triggered a substantial decline in the value of the
ruble and the bankruptcy of a number of prominent Russian banks and businesses.
As a result, the value of the ruble against the US dollar fell significantly,
and this decline has negatively affected, and continues to affect, our financial
performance. Our consolidated and non-consolidated entities recorded an
aggregate $13.1 million pre-tax charge in the third quarter of 1998, and $5.3
million in fiscal year 1999. These charges related primarily to foreign currency
exchange losses for ruble-denominated net monetary assets with the remainder
associated with estimates for uncollectible accounts receivable and
unrecoverable cash deposits. Continued decline in the value of the ruble would
negatively affect Golden Telecom's results of operations and could require it to
record another significant pre-tax charge.
The ruble is generally non-convertible outside Russia, so Golden Telecom's
ability to hedge against further devaluation by converting to other currencies
is significantly limited. Within Russia, Golden Telecom's ability to convert
rubles into other currencies is subject to rules that increasingly restrict the
purposes for which conversion and payment in foreign currencies are allowed.
Another default on Russia's sovereign debt could lead to greater protectionism
and stricter controls on currency conversion.
Golden Telecom manages intercompany liquidity through a cash-collateralized
debt facility offered through a Western bank operating under a Russian banking
license. If it loses access to this facility or a
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similar hard currency facility, its ability to manage our liquidity position and
foreign exchange risk may suffer.
FLUCTUATIONS IN THE GLOBAL ECONOMY MAY ADVERSELY EFFECT RUSSIA'S ECONOMY AND
OUR BUSINESS
Russia's economy is vulnerable to market downturns, volatile currency
fluctuations and economic recessions in other parts of the world. As has
happened in the past, financial problems or an increase in the perceived risks
associated with investing in emerging economies could dampen foreign investment
in Russia and adversely effect the Russian economy. Additionally, as Russia
produces and exports large amounts of oil in the world market for hard currency,
the Russian economy is especially vulnerable to world oil prices and a steep
decline in world oil prices could disrupt the Russian economy or cause
significant state budgetary shortfalls. These developments could severely limit
Golden Telecom's access to capital and could adversely affect the purchasing
power of our customer base.
REORGANIZATIONS OF THE RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS INDUSTRIES MAY
INCREASE COMPETITION
Russia
The Russian government has structured the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, our partner in Sovintel, and
most of our other principal joint venture partners. During the last several
quarters the Russian business press has reported that, Rostelecom may 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's network;
- Golden Telecom's business relationships with its joint venture partners,
which make up a major component of its 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 our
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 expected that if 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 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.
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RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS POLICIES COULD RESTRICT GOLDEN
TELECOM'S OPERATIONS
Russian and Ukrainian telecommunications regulations govern the procurement
and continuing validity of Golden Telecom licenses and the terms and conditions
under which Golden Telecom provides services. Changes to these regulations may
make it prohibitively expensive for Golden Telecom to provide services or
otherwise frustrate the implementation of its business plans causing a material
adverse effect on its 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. In addition, the recently
appointed Minister of Communications has publicly stated that he will review the
efficacy of wholly owned foreign subsidiaries operating in the
telecommunications industry. Any change to current government regulations or
policies that negatively affects Golden Telecom's ownership structure of its
subsidiaries or its licenses or its ability to obtain licenses in the future
would restrict its operations in Russia.
It may be difficult and prohibitively expensive for Golden Telecom to
comply with applicable Russian telecommunications regulations related to state
surveillance of communications traffic. For example, the Russian Communications
Law provides that telecommunications in Russia are confidential and may only be
intercepted by a court order. Nevertheless, Golden Telecom is subject to SORM,
the Russian acronym for the surveillance system operated partly by the
government agency responsible for electronic surveillance. Regulations
applicable to SORM require telecommunications networks to enable state
monitoring of electronic traffic. Full compliance with SORM to monitor voice and
data traffic may be extremely burdensome and expensive. Noncompliance with SORM
may lead to the administration of fines, penalties, or the revocation of Golden
Telecom's operating licenses.
Ukrainian regulatory authorities have established mandatory tariff
guidelines for fixed operator services. The national carrier, Ukrtelekom and its
joint venture, Utel, charge settlement fees in excess of the mandatory
guidelines. In addition, the mandatory guidelines set tariffs in local currency
units and the guidelines do not adjust to reflect the creeping devaluation of
the local currency. Consequently, the pricing structure in Golden Telecom BTS 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 Golden Telecom's
Ukrainian licenses.
Until recently, Ukrainian legislation had prohibited the establishment and
operation of telecommunications ventures in which foreign investors own more
than 49%. We do not believe that this prohibition extended 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. This direct and indirect investment in Golden Telecom (Ukraine)
totals 69%. Golden Telecom (Ukraine), in turn, recently acquired 99% of Sovam
Teleport Ukraine. If Ukrainian authorities determine that the prohibition
against foreign participation extended to indirect holdings, Golden Telecom
would have been in violation of this legislation. Similarly, if Ukrainian
authorities reenact the prohibitive legislation against foreign ownership of
telecommunications ventures, Golden Telecom could be found to be in violation of
the prohibition. The consequences of this violation are unpredictable and may
include fines, license suspension or revocation, or an order to divest a portion
of Golden Telecom's holdings.
SPECIAL FEES AND TAXES LEVIED AGAINST TELECOMMUNICATIONS OPERATORS COULD
ADVERSELY AFFECT GOLDEN TELECOM'S RESULTS OF OPERATIONS
In May 1999, the Cabinet of Ministers of Ukraine passed a resolution which
would, if enforced, effectively increase Golden Telecom's monthly frequency use
fees from $25,000 per month to $250,000 per month for the period July-December
1999. However, this resolution was suspended prior to implementation. Further,
in November 1999 the Arbitration Court of Ukraine found the implementation of
the frequency use fee, under which Golden Telecom has been paying $25,000 per
month, to be non-compliant with Ukrainian legislation. As a result of this
finding, Golden Telecom has not paid the fee since
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December 1999 and initiated litigation to recover frequency fees previously
paid. Golden Telecom has been successful in the litigation thus far, but
regulatory authorities have enacted new legislation that provides for the
payment of frequency fees. The amount payable under the new legislation has yet
to be determined, but Golden Telecom's results of operations could deteriorate
if the fees are substantially in excess of the amounts previously budgeted for
frequency fees.
A number of industry-specific taxes have been directed at the cellular
industry in Ukraine. For example, the Ukrainian parliament passed legislation
introducing a 6% "pension tax" on cellular calls. The enforcement of this law,
which became effective on August 19, 1999, or the enactment of other similar
industry-specific legislation may have a material adverse effect on demand for
Golden Telecom's services and on its results of operations.
THE PRESENCE OF AND THE FIGHT AGAINST ORGANIZED CRIME MAY ADVERSELY AFFECT
GOLDEN TELECOM'S OPERATIONS
When customers fail to make full payment for services rendered after
several requests for payment, it is Golden Telecom's policy to terminate their
services until full payment is received. Golden Telecom believes that some of
these customers, particularly those with links to organized crime, may
physically endanger its employees or damage its properties, especially those in
remote regions of Russia where police protection may be limited. So long as
organized crime in Russia and Ukraine remains pervasive, Golden Telecom believes
that its employees may be subjected to threats of violence, its property may be
damaged, and Golden Telecom may subject to threats of extortion.
In addition, Golden Telecom's cellular businesses tend to have a high
profile in the regions in which they operate and are perceived to be
cash-intensive. Golden Telecom has encountered situations where local criminal
elements have attempted to exert pressure on its management and to siphon money
out of the ventures through unauthorized activities. Any of these activities
could have a material adverse effect on Golden Telecom's ability to provide
services and on its financial results.
Growing social and political pressure for the government to eliminate
corruption and organized crime could precipitate extraordinary government
security measures that could increase Golden Telecom's costs, lead to more
restrictive and comprehensive government regulatory oversight of its businesses
and otherwise adversely affect its operations.
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 our 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 and has
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resulted in unpredictable regulatory enforcement. For example, pursuant to the
Russian Communications Law, Minsvyaz, the Ministry of Communications, 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 and jurisdictional boundaries are unclear.
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. Similarly, Golden Telecom's licenses may not be
renewed on the same terms and conditions as preexisting licenses. 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 has
yet to be defined but may be substantial, and we cannot predict whether failure
to comply will lead to the revocation of Golden Telecom's license.
GOLDEN TELECOM MAY BE UNABLE TO ENFORCE ITS RIGHTS DUE TO CONFUSION IN THE
LAWS AND LEGAL STRUCTURES OF THE COUNTRIES WHERE IT OPERATES
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 our joint venture partners or other parties, or if we are 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.
GOLDEN TELECOM'S RUSSIAN AND UKRAINIAN TAX BURDENS MAY BE SIGNIFICANTLY
GREATER THAN CURRENTLY ANTICIPATED
It is possible that Golden Telecom's Russian taxes may be greater than the
estimated amount that it has expensed to date and paid or accrued. Because of
the need for additional sources of budgetary finance, Russian tax authorities
have become increasingly aggressive in their interpretation of the tax law and
its many ambiguities, as well as in their enforcement and collection activities.
Foreign companies are often forced to negotiate their tax bills with tax
inspectors who demand higher taxes than applicable law appears to provide. Any
additional tax liability, as well as any unforeseen changes in the tax law,
could have a material adverse effect on Golden Telecom's future results of
operations or cash flows in a particular period. Under Russian accounting and
tax norms, financial statements of Russian companies are not consolidated for
tax purposes. As a result, each Russian-registered entity in the Golden Telecom
group pays its own Russian taxes and the profits or losses in any single entity
cannot be offset against the profits and losses in any other entity. Golden
Telecom's overall effective tax rates may increase or its financial results may
worsen as it expands its operations and if it is unable to implement an
effective corporate structure that minimizes the effect of these accounting and
tax norms.
Russian tax authorities are conducting an examination of potential tax
liabilities in connection with some of Golden Telecom's cellular operations. We
cannot assure you that this examination will not result in a fine or a
revocation or suspension of Golden Telecom's cellular licenses.
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THE IMPLEMENTATION OF RUSSIA'S NEW TAX CODE MAY INCREASE GOLDEN TELECOM'S
EFFECTIVE TAX RATE AND ADVERSELY AFFECT ITS RESULTS OF OPERATIONS
Russia
Russia introduced the first part of its new Tax Code in 1999 and it is
expected that the second part will be introduced in the near future. The
implementation of this new code is in process but during the transition period
and until appropriate regulations consistent with the new code are promulgated,
there is likely to a period of confusion and ambiguity as tax inspectors and
taxpayers become acquainted with the new code and the regulations that will
guide its implementation and interpretation. We cannot assure you that the new
Tax Code will not result a greater tax burden for Golden Telecom's Russian
operations or that its tax planning to date will not be frustrated by the new
code, either of which could cause a material adverse effect in Golden Telecom's
operating results and cash flows.
As Russian tax legislation becomes increasingly sophisticated and as issues
with capital flight remain unresolved, state bodies may introduce new
legislation designed to minimize tax-avoidance schemes, such as transfer
pricing, that have been abused in the past by Russian-registered companies.
Additionally, Russian legislators may attempt to collect revenue generated from
outside of Russia, but with a strong nexus to Russian nationals or
Russian-registered entities, by introducing into the Tax Code concepts such as
"controlled foreign company." As a result of these measures, Golden Telecom's
tax burden could increase and its financial results may suffer.
Ukraine
Ukrainian tax law is similarly unpredictable. The constitution prohibits
retroactive legislation, and the tax code requires new tax laws to be adopted no
later than six months prior to the beginning of the next fiscal year.
Nevertheless, sudden shifts in tax law and policy and retroactive legislation
are common. For example, we are currently allowed to deduct losses in hryvna,
the Ukrainian currency, on hard currency borrowings. This allowance resulted in
a significant tax benefit in 1998. Recent decisions by the tax authorities,
however, make it unclear as to whether this tax benefit will continue to be
available. If this tax benefit is removed, we will be subject to significantly
higher tax liability from hryvna exchange gains.
THE MILITARY EVENTS IN CHECHNYA MAY AFFECT THE RUSSIAN POLITICAL AND ECONOMIC
SITUATION AND THE DEMAND FOR GOLDEN TELECOM'S SERVICES
In November 1999, Russian military forces advanced into Chechnya in a
revival of the civil war that raged between 1994 and 1996. An escalation of
military activities in Chechnya or the spread of such activities to other areas
of the northern Caucasus could discourage foreign investment in the markets
where Golden Telecom operates, thereby decreasing demands for its services.
These events and western reaction to such events may give rise to increased
Russian nationalism, and Russian attitudes towards Western foreign direct
investment and business relationships with Western suppliers such as ourselves
may worsen. These factors could lead to decreased demand for Golden Telecom's
services.
GOLDEN TELECOM COMPETES WITH ESTABLISHED COMPETITORS WHO MAY HAVE GREATER
RESOURCES THAN IT DOES
Golden Telecom's competitors include incumbent Russian and Ukrainian
operators and other large international telecommunications providers doing
business in the Commonwealth of Independent States. Its competitors may have
substantially greater resources, closer ties to governmental authorities and
longer operating histories. These advantages may give them a competitive edge
over alternative providers like Golden Telecom. This competition may result in a
loss of customers, falling prices and a decline in revenues.
Golden Telecom competes with large established national carriers, some of
which are powerful companies with political connections, as well as joint
ventures of large international operators doing business in Russia and Ukraine.
Such ventures include Global One and Combelga in Russia and Utel in Ukraine.
Other competitors of Golden Telecom are alliances among telecommunications
companies,
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companies that own equipment and networks, companies that purchase and resell
the services of other carriers, Internet service providers and other providers
of bundled services. Golden Telecom may also face increasing competition from
wireless telephone companies and satellite companies. Many of these competitors,
including the Russian incumbent operators, have established customer bases and
extensive brand name recognition and possess greater financial, management and
other resources. Our and Golden Telecom's results of operation would suffer if
Golden Telecom is unable to keep up with the increasing levels of competition in
the countries where it operates.
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 our
joint ventures to provide us with interconnection with local networks,
regulatory and marketing expertise, and familiarity with the local 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 us 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 Golden
Telecom's 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 these 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, until recently Ukrainian legislation restricted the level of
foreign ownership in the telecommunications industry. These regulations, if
revived, 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.
GOVERNMENT INTERACTION WITH GOLDEN TELECOM'S CURRENT AND FORMER PARTNERS COULD
HAVE ADVERSE SPILLOVER EFFECTS ON US
The interactions between government authorities and Golden Telecom's past
or current partners may create problems for us and Golden Telecom. For example,
we are aware that U.S. and Russian authorities are reviewing the activities of
our former partners in GTS-Vox, the holding company which previously owned our
interest in TCM, prior to TCM's merger into our wholly owned subsidiary,
TeleRoss, and the activities of certain individuals employed or formerly
employed by two Moscow-based telecommunications companies unaffiliated with
Golden Telecom or us. We and certain of our and Golden Telecom's employees have
been requested by those 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 initial and subsequent sale of our partners' interest in GTS-Vox
to us, including issues concerning Russian antimonopoly and securities filings
and the commercial relationship between TCM and the local telephone network in
Moscow.
Our involvement in the authorities' review of our former partners'
activities could result in a diversion of management's time and resources or the
deterioration in our relationship with our partners. The review could lead to
the imposition of administrative fines or other penalties and forfeitures of
assets, including the loss of our ownership interest in the assets that
constituted TCM prior to its merger into TeleRoss.
GOLDEN TELECOM'S PARTNERS ARE OFTEN ALSO ITS COMPETITORS
Notwithstanding Golden Telecom's agreements with its joint venture
partners, they sometimes compete directly with our 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.
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Similarly, most of Golden Telecom's regional partners across Russia offer local
and long distance services in competition with its 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 were 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
leading to a worsening of its operating results.
GOLDEN TELECOM'S TARGETED CUSTOMERS MAY NOT SELECT A PRIVATELY OWNED, FOREIGN
CONTROLLED ENTITY FOR THEIR COMMUNICATIONS NEEDS
Before 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 systems 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 may refuse to select a service provider that is controlled
by foreign investors. Because Golden Telecom is controlled by foreign investors,
Golden Telecom may occasionally be unable to reach its targeted customers.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the securities.
The securities are being sold by the stockholders described in "Selling
Stockholders". We will pay for all expenses necessary to register the securities
offered under this prospectus except for selling commissions and underwriting
discounts, if any.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Because of our historic losses, we have experienced a deficiency of
earnings available to cover fixed charges throughout our existence. The
deficiency of earnings available to cover fixed charges has been computed by
adding loss from continuing operations before income taxes minus fixed charges.
Fixed charges consist of interest on all indebtedness and amortization of
discount on all indebtedness.
QUARTER ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- ------- ------- ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Deficiencies of earnings available to cover
fixed charges................................. $(279.8) $(598.8) $(235.3) $(132.3) $(74.8) $(41.6)
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SELLING STOCKHOLDERS
STOCKHOLDERS SELLING CONVERTIBLE PREFERRED SHARES
We issued and sold 100,000 shares of convertible preferred stock
(represented by 10,000,000 depositary shares) to Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers Inc. as
initial purchasers on April 19, 1999 at a purchase price of $5,000 per share (or
$50 per depositary share). The initial purchasers sold our convertible preferred
stock in transactions exempt from the registration requirements of the
Securities Act, to persons that the initial purchasers reasonably believed to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act).
The registration statement of which this prospectus is a part has been
filed under Rule 415 under the Securities Act to afford the holders of the
convertible preferred stock the opportunity to sell their securities in public
transactions rather than under an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to take advantage of that
opportunity, a holder of the convertible preferred stock must notify us of its
intention to sell securities and provide other information about itself and the
securities it is selling as required by the Securities Act.
No holder may offer or sell securities under this prospectus until we have
been notified and until any supplement for the prospectus has been filed or an
amendment to the registration statement has become effective. Additional holders
of convertible preferred stock will be added to the prospectus at their request
and after they have provided us with any information we have requested. We will
from time to time supplement and amend the prospectus to the registration
statement, as applicable, to add additional holders of convertible preferred
stock and to reflect the required information.
The following table describes the holders of convertible preferred stock
which have requested to be included in this prospectus. The holders of
convertible preferred stock may, from time to time, also receive shares of
common stock in the event payment of dividends on the depositary shares or the
convertible preferred stock is made with shares of common stock and such common
stock is not sold by the depositary to pay dividends in cash. This common stock
may also be offered and sold under this prospectus. The information in the
following table has been obtained from the holders of convertible preferred
stock identified in the table. Unless disclosed in the footnotes to the table,
no holder of convertible preferred stock has held any position, office or had
any other material relationship with us, our predecessor or any of our
affiliates during the past three years. All of the shares of convertible
preferred stock are registered in the name of "Cede & Co." on the books of the
transfer agent for the convertible preferred stock.
SHARES OF
DEPOSITARY PREFERRED
SHARES OWNED STOCK OWNED SHARES OF COMMON
AND OFFERED AND OFFERED STOCK THAT MAY BE
NAME OF CONVERTIBLE PREFERRED SELLING STOCKHOLDER HEREBY HEREBY SOLD(1)
- ------------------------------------------------- --------------- ------------ -----------------
Abbott Laboratories Annuity Retirement Plan......... 3,180 0 4,608
Agway Inc. Employees' Retirement Trust.............. 1,730 0 2,507
AIM Balanced Fund................................... 100,000 0 144,920
AIM VI Balanced Fund................................ 1,000 0 1,449
AIM Charter Fund.................................... 250,000 0 362,300
AIM VI Growth & Income.............................. 58,000 0 84,054
Alexandra Global Investment Fund I Ltd. ............ 64,000 0 92,749
Alta Partners Holdings, LDC......................... 35,000 0 50,722
Ameritech Pension Trust............................. 7,710 0 11,173
Arkansas Teachers Retirement........................ 57,300 0 83,039
Arpeggio Fund, LP................................... 2,500 0 3,623
AXP Bond Fund, Inc.................................. 12,700 0 18,405
AXP Utilities Income Fund, Inc...................... 250,000 0 362,300
AXP Variable Portfolio -- Bond Fund................. 5,600 0 8,116
AXP Variable Portfolio -- Managed Fund.............. 19,400 0 28,114
Banc of America Securities.......................... 100,000 0 144,920
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SHARES OF
DEPOSITARY PREFERRED
SHARES OWNED STOCK OWNED SHARES OF COMMON
AND OFFERED AND OFFERED STOCK THAT MAY BE
NAME OF CONVERTIBLE PREFERRED SELLING STOCKHOLDER HEREBY HEREBY SOLD(1)
- ------------------------------------------------- --------------- ------------ -----------------
Bank America Pension Plan........................... 25,000 0 36,230
Bank Trust Trustee for Chrysler Corp. Emp. #1
Pension Plan dated 4-1-89......................... 116,200 0 168,397
Baptist Health of So Florida........................ 4,300 0 6,232
Bear, Stearns & Co. Inc............................. 102,500 0 148,543
Black Diamond Offshore, Ltd......................... 21,250 0 30,796
BNP Arbitrage SNC................................... 10,000 0 14,492
BNY Hamilton Equity Income Fund..................... 100,000 0 144,920
Boston Museum of Fine Art........................... 3,000 0 4,348
Boulder Capital Inc. ............................... 140,000 0 202,888
Boulder II Limited.................................. 23,500 0 34,056
California Public Employees' Retirement System;
Nominee Name: Surfboard & Co...................... 100,000 0 144,920
Cap Arbitrage....................................... 34,500 0 49,997
Chartwell Dividend & Income Fund.................... 20,000 0 28,984
Chase Manhattan NA Trustee for IBM Retirement Plan
dated 12-18-45.................................... 170,500 0 247,089
Chrysler Corporation Master Retirement Trust........ 93,700 0 135,790
CIBC World Markets Corp............................. 55,000 0 79,706
CIBC World Markets International Arbitrage Corp..... 60,000 0 86,952
Continental Assurance Company....................... 2,500 0 3,623
Continental Casualty Company........................ 17,500 0 25,361
Credit Suisse First Boston Corporation.............. 64,000 0 92,749
Deephaven Domestic Convertible Trading Ltd. ........ 20,000 0 28,984
Deeprock & Co. ..................................... 15,000 0 21,738
Delaware PERS....................................... 30,500 0 44,201
Deutsche Bank Securities............................ 1,040,167 0 1,507,410
Donaldson, Lufkin & Jenrette Securities Corp. ...... 10,000 0 14,492
Double Black Diamond Offshore LDC................... 35,940 0 52,084
Duckbill & Co. ..................................... 42,500 0 61,591
Engineers Joint Pension Fund........................ 9,400 0 13,622
Equity Profile...................................... 300,000 0 434,760
Forest Alternative Strategies Fund Series A-5I...... 4,000 0 5,797
Forest Alternative Strategies Fund Series A-5M...... 1,500 0 2,174
Forest Alternative Strategies Fund Series B-3....... 1,200 0 1,739
Forest Fulcrum Fund LP.............................. 57,000 0 82,604
Forest Global Convertible Fund Series A-5........... 79,500 0 115,211
Forest Investment Management LLC.................... 147,000 0 213,032
Forest Performance Fund LP.......................... 2,500 0 3,623
Fortis Equity Portfolios, Inc. -- Fortis Growth &
Income Fund....................................... 6,300 0 9,130
Fortis Series Fund, Inc. -- Growth & Income
Series............................................ 43,700 0 63,330
Franklin & Marshall College......................... 8,900 0 12,898
General Motors Employees Global Group Pension
Trust............................................. 35,000 0 50,722
GLG Market Neutral Fund............................. 110,000 0 159,412
Global Bermuda Limited Partnership.................. 16,000 0 23,187
GMOTORS ARBGRAA..................................... 27,500 0 39,853
Goldman Sachs and Company........................... 198,000 0 286,942
Greyhound Lines, Inc. Amalgamated Transit Union
National Local.................................... 1,300 0 1,884
Gryphon Domestic III, LLC........................... 12,100 0 17,535
Hamilton Partners Limited........................... 50,000 0 72,460
Highbridge International LLC........................ 367,000 0 531,856
25
30
SHARES OF
DEPOSITARY PREFERRED
SHARES OWNED STOCK OWNED SHARES OF COMMON
AND OFFERED AND OFFERED STOCK THAT MAY BE
NAME OF CONVERTIBLE PREFERRED SELLING STOCKHOLDER HEREBY HEREBY SOLD(1)
- ------------------------------------------------- --------------- ------------ -----------------
ICI American Holdings Trust......................... 13,250 0 19,202
Investcorp SAM Fund Limited......................... 22,100 0 32,027
Jackson Investment Fund Ltd......................... 16,500 0 23,912
Julius Baer Securities.............................. 13,700 0 19,854
JMG Convertible Investments, L.P.................... 135,000 0 195,642
J.P. Morgan & Co. Inc............................... 85,000 0 123,182
J.P. Morgan Securities, Inc. ....................... 25,000 0 36,230
KA Investments LDC.................................. 20,000 0 28,984
Kellner, DiLeo & Co................................. 26,700 0 38,694
LDG Limited......................................... 5,000 0 7,246
Lehman Brothers Inc................................. 1,800 0 2,609
LLT Limited......................................... 8,000 0 11,594
Mainstay Convertible Fund........................... 25,000 0 36,230
Mainstay VP Convertible Portfolio................... 5,000 0 7,246
McMahan Securities Company, L.P..................... 15,000 0 21,738
Merrill Lynch Pierce Fenner & Smith Inc............. 162,250 0 235,133
Monumental Life Insurance Company................... 55,000 0 79,706
Moore Global Investments, Ltd. ..................... 36,000 0 52,171
Motion Picture Industry Health Plan -- Active
Member Fund....................................... 11,500 0 16,666
Motion Picture Industry Health Plan -- Retiree
Member Fund....................................... 5,800 0 8,405
Nalco Chemical Retirement........................... 6,750 0 9,782
New York Life Insurance Company..................... 60,000 0 86,952
New York Life Insurance and Annuity Corporation..... 20,000 0 28,984
Nicholas-Applegate Convertible Fund................. 12,200 0 17,680
OCM Convertible Trust............................... 107,700 0 156,079
Onex Industrial Partners Limited.................... 86,500 0 125,356
Oppenheimer Convertible Securities Fund............. 85,000 0 123,182
Oppenheimer Equity Income Fund...................... 12,500 0 18,115
Oppenheimer Main Street Growth & Income Fund
Variable Annuity.................................. 25,000 0 36,230
Pacific Life Insurance Company...................... 30,000 0 43,476
Pell Rudman Trust Company........................... 28,825 0 41,773
Penn Treaty Network America Insurance Company....... 7,800 0 11,304
Peoples Benefit Life Insurance Company.............. 50,000 0 72,460
Physicians Life..................................... 4,000 0 5,797
Pilgrim Convertible Fund............................ 62,700 0 90,865
Prudential Securities............................... 110,000 0 159,412
Putnam Diversified Income Trust..................... 137,070 0 198,642
Putnam Funds Trust -- Putnam High Trust II.......... 76,760 0 111,241
Putnam High Yield Advantage Fund.................... 102,295 0 148,246
Putnam High Yield Fixed Income Fund, LLC............ 5,450 0 7,898
Putnam High Yield Trust............................. 127,905 0 185,360
Putnam Managed High Yield Trust..................... 5,060 0 7,333
Putnam Master Income Trust.......................... 16,450 0 23,839
Putnam Premier Income Trust......................... 41,120 0 59,591
Putnam Strategic Income Fund........................ 10,970 0 15,898
Putnam Variable Trust -- Putnam VT Diversified
Income Fund....................................... 24,670 0 35,752
RAM Trading Ltd. ................................... 60,000 0 86,952
Putnam Variable Trust -- Putnam VT High Yield
Fund.............................................. 54,170 0 78,503
Remington Investment Strategies, L.P. .............. 135,000 0 195,642
26
31
SHARES OF
DEPOSITARY PREFERRED
SHARES OWNED STOCK OWNED SHARES OF COMMON
AND OFFERED AND OFFERED STOCK THAT MAY BE
NAME OF CONVERTIBLE PREFERRED SELLING STOCKHOLDER HEREBY HEREBY SOLD(1)
- ------------------------------------------------- --------------- ------------ -----------------
Rhapsody Fund, LP................................... 3,300 0 4,782
Robertson Stephens.................................. 19,000 0 27,535
Salomon Smith Barney Inc. .......................... 80,150 0 116,153
San Diego Ctny Convertible.......................... 60,000 0 86,952
San Diego City Retirement........................... 24,900 0 36,085
SoundShore Holdings Ltd. ........................... 170,000 0 246,364
SoundShore Opportunity Holding Fund Ltd............. 10,000 0 14,492
Southport Management Partners, L.P.................. 15,000 0 21,738
Southport Partners International, Ltd............... 30,000 0 43,476
Starvest Combined Portfolio......................... 21,000 0 30,433
St. Thomas Trading, Ltd............................. 3,333 0 4,830
State of Connecticut Combined Investment Funds...... 110,200 0 159,702
State Employees' Retirement Fund of the State
of Delaware....................................... 32,700 0 47,389
State of Oregon Equity.............................. 150,000 0 217,380
State Street Bank Custodian for GE Pension Trust.... 61,600 0 89,271
Strategic Global Fund -- High Yield Fixed Income
(Putnam) Fund..................................... 3,290 0 4,768
Straus-Gept L.P..................................... 5,500 0 7,971
Straus Partners L.P................................. 16,000 0 23,187
Straus-Spelman Partners L.P......................... 3,500 0 5,072
Sunrise Partners LLC................................ 125,000 0 181,150
The Gabelli Global Convertible Securities Fund...... 6,000 0 8,695
The Northwestern Mutual Life Insurance Company...... 90,000 0 130,428
TQA Arbitrage Fund, L.P............................. 15,000 0 21,738
TQA Leverage Fund, L.P.............................. 15,000 0 21,738
TQA Vantage Fund, Ltd. ............................. 25,000 0 36,230
TQA Vantage Plus Fund, Ltd. ........................ 10,000 0 14,492
Travelers Series Inc. -- Putnam Diversified Income
Portfolio......................................... 5,760 0 8,347
Tribeca Investments L.L.C........................... 372,500 0 539,827
Triton Capital Investments, LTD..................... 135,000 0 195,642
Vanguard Convertible Securities Fund, Inc........... 73,400 0 106,371
Van Kampen Convertible Securities Fund.............. 13,850 0 20,071
Van Kampen Harbor Fund.............................. 76,200 0 110,429
Van Kampen Utility Fund............................. 27,100 0 39,273
Wake Forest University.............................. 22,200 0 32,172
Warburg Dillon Read LLC............................. 155,000 0 224,626
White River Securities LLC.......................... 102,500 0 148,543
Worldwide Transactions, Ltd......................... 2,810 0 4,072
Zeneca Holdings Trust............................... 13,250 0 19,202
The Bank of New York(2)............................. 0 0 up to 23,000,000
Any other holder of Securities or future transferee
from any such holder.............................. 897,885 0 1,301,216
Totals.............................................. 10,000,000 0 up to 37,492,000
- ---------------
(1) Assumes conversion of the full amount of depositary shares held by such
holder at the rate of 1.4492 shares of common stock per depositary share.
The conversion rate and the number of shares of common stock issuable upon
conversion of the depositary shares is subject to adjustment under certain
circumstances. See "Description of Convertible Preferred Stock -- Conversion
Rights." Accordingly, the number of shares of common stock issuable upon
conversion of the depositary shares may increase or decrease from time to
time. Fractional shares will not be issued upon conversion of the depositary
shares; any fractional shares will be rounded up, or at our option, cash
will be paid in lieu of the fractional shares. The above conversion rate,
and accordingly, the number of shares of
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common stock has been adjusted to account for our two-for-one common stock
split approved by our board of directors in the second quarter of 1999. The
stock split was effected in the form of a stock dividend on July 21, 1999 to
shareholders of record as of the close of business on July 1, 1999.
(2) Acting as depositary of these shares of common stock, which it will promptly
resell on behalf of the holders of depositary shares in order to make any
necessary quarterly dividend payments in cash to such holders.
Because the selling stockholders may, pursuant to this prospectus, offer
all or some portion of the depositary shares, preferred stock or the common
stock issuable upon conversion of the depositary shares, no estimate can be
given as to the number of the depositary shares or the common stock issuable
upon conversion of the depositary shares that will be held by the selling
stockholders upon termination of any such sales.
In addition, the selling stockholders identified above may have sold,
transferred or otherwise disposed of all or a portion of their depositary shares
since the date on which they provided the information regarding their depositary
shares, in transactions exempt from the registration requirements of the
Securities Act.
Only selling stockholders identified above who have complied with the
conditions to being included as selling stockholders and who beneficially own
the depositary shares set forth opposite each such selling stockholder's name in
the foregoing table on the effective date of the Registration Statement may sell
such depositary shares pursuant to this prospectus. We may from time to time, in
accordance with the Registration Rights Agreement, include additional selling
stockholders in supplements to this prospectus.
DIVIDEND POLICY
We have not paid any dividend on our common stock and do not intend to pay
dividends in the foreseeable future. In addition, the indenture governing our
9 7/8% notes currently prohibits the payment of 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,
our leverage ratio does not exceed 6.0 to 1.0 and such restricted payments do
not exceed certain amounts.
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INDUSTRY OVERVIEW
EUROPEAN TELECOMMUNICATIONS MARKET
Liberalization in the European telecommunications markets has proceeded
rapidly since the late 1980's. Historically, the European public
telecommunications operators monopolized the provision of telecommunications
services in their home markets and designed their networks according to national
rather than continental and international considerations. Between 1990 and 1997,
however, the European Union implemented a series of directives designed to open
up the telecommunications markets to competition. These directives required
member states to implement legislation liberalizing their respective
telecommunications markets to permit alternative telecommunications companies
both to provide telecommunications services and to access the existing
telecommunications infrastructure controlled by these national and regional
providers. In response to these European regulatory changes, a number of new
interests, including our company, have emerged to compete with the European
public telecommunications operators.
INTERNET INDUSTRY
The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information and
conduct business electronically. The Internet originated with the ARPAnet, a
restricted network that was created in 1969 by the United States Department of
Defense Advanced Research Projects Agency to provide efficient and reliable long
distance data communications among the disparate computer systems used by
government-funded researchers and academic organizations. The networks that
comprise the Internet, or its backbone, are connected in a variety of ways,
including by public switched telephone networks and by high speed, dedicated
leased lines. Communications on the Internet are enabled by Internet Protocol or
IP, which is a market-based standard computer language broadly adopted on the
Internet and elsewhere that allows computers with different architectures and
operating systems software to communicate with each other on the Internet.
Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an Internet service provider became more prevalent.
Internet service providers offer access, e-mail, customized content and other
specialized services and products aimed at allowing both commercial and
residential customers to obtain information from, transmit information to, and
utilize resources available on the Internet.
Internet service providers generally operate networks composed of dedicated
lines leased from public telecommunications operators, local access providers
and internet service providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
Internet service provider switching equipment by facilities obtained by the
customer or the Internet service provider from either public telecommunications
operators or local access providers through a dedicated access line or the
placement of a circuit-switched local telephone to the Internet service
provider.
The Internet is quickly becoming the supporting platform for the emergence
of e-business (the use of Internet technologies to perform key business
communications processes). We believe that a wide variety of businesses will
increasingly use the Internet to communicate, improve operating efficiencies and
transact commerce in secure, reliable and cost-effective ways. Applications and
services that enable the transition to e-business platforms are typically
distributed through the Internet and supported by infrastructure such as data-
and Web-hosting centers.
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IP COMMUNICATIONS TECHNOLOGY
There are two widely used switching technologies in currently deployed
communications networks: circuit-switching systems and packet-switching systems.
Circuit-switch based communications systems establish a dedicated channel for
each communication (such as a telephone call for voice or fax), maintain the
channel for the duration of the call and disconnect the channel at the
conclusion of the call. Packet-switch based communications systems format the
information to be transmitted, such as e-mail, voice, fax and data, into a
series of shorter digital messages called "packets." Each packet consists of a
portion of the complete message plus the addressing information to identify the
destination and return address.
Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, some
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by the Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communication transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.
Initiatives are under way to develop technology to address these
disadvantages of packet-switch based systems. We believe that the evolving IP
standard will remain a primary focus of these development efforts. We expect the
benefits of these efforts to be improved communications, reduced latency and
declining networking hardware costs.
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35
BUSINESS
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. In May 2000, we changed our name to
Global TeleSystems, Inc. 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.
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. In February 2000, GTS completed its acquisition of
Netcom Internet Limited ("Netcom"), 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.
The former Ebone, GTS (Europe) Ltd., NetSource, Omnicom, InTouch and Netcom
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 62.5% of the common stock of Golden Telecom.
In August 2000, we adopted a plan of restructuring our business operations.
This plan of restructuring is focused on separating our non-core business from
our core strategic businesses and streamlining operations, including headcount
reductions/redeployment, reductions at our corporate headquarters location, the
centralization of finance and billing operations and sales office consolidation.
The non-core activities consist primarily of prepaid calling cards, residential
voice services and reseller services. These actions are expected to result in
the reduction by the end of 2000 of approximately 400 positions from our
staffing levels. We expect that we will record a one-time charge of between $15
million to $20 million for employee severance and lease termination costs in the
third quarter of 2000. We expect that there will be additional costs associated
with the resignation of H. Brian Thompson described below.
On September 19, 2000, H. Brian Thompson resigned as Chairman and Chief
Executive Officer. Robert J. Amman, our President, was elected by our board of
directors as Chairman and Chief Executive Officer.
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
31
36
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 small-and medium-sized and larger business customers, with a
sales and distribution network spanning 20 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, InTouch
and Netcom and the growth of our Central European operations, we have built a
unified pan-European sales and distribution network. 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 data and IP 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.
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
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
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37
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 have announced that, based on current plans, which include a $500
million cash capital program for 2001, in order to be fully-funded through 2001,
we will require $250 million of additional financing over our existing resources
and the proceeds of a $550 million multi-currency bank facility (the "Facility")
entered into on July 14, 2000 by our indirect subsidiary, Global TeleSystems
Europe Holdings B.V. Of the $550 million under the Facility, $275 million is
available currently, of which the borrower has borrowed 200 million Euros. The
remaining $275 million will be available when certain licenses and rights of way
relating to our network have been transferred to the borrower (collectively, the
"Conditions Subsequent"). We expect that the Conditions Subsequent will be
completed during the time period required by the lenders under the Facility
(nine months from entry into the Facility in the case of licenses and rights of
way in France and the United Kingdom and six months from entry into the Facility
in the case of licenses and rights of way in other countries), but borrowed
funds will have to be repaid within 90 days of the expiration of these periods
if the Conditions Subsequent are not satisfied.
In addition, we expect that the required $250 million in additional
financing could be raised through debt or equity financing (which may be
convertible into our common stock) or through the proceeds of the sale of its
shares of common stock in Golden Telecom, Inc., our 62.5%-held subsidiary, which
operates in Russia and other countries of the Commonwealth of Independent
States, or our 50% interest in Flag Atlantic Limited, which is building a
transatlantic fiber optic link between Europe and the United States, or some
combination of these alternatives. There can be no assurance that we will be
successful in satisfying the Conditions Subsequent or in raising the additional
$250 million. If we are not successful, we expect to evaluate our available
strategic options at that time.
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 may develop this additional
ring through capacity swaps with other telecommunications providers. 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 six such networks in Paris, Budapest, Prague, Berlin,
Geneva and Stockholm. In addition, we expect to deploy City Enterprise
Networks deployed in eight additional cities. 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,
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38
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 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.
- 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 had established data- and Web-
hosting capability in London, Amsterdam, Frankfurt and Paris. We intend
to deploy up to nine additional data- and Web-hosting centers by year end
2001. 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.
Restructuring Initiative
In August 2000, we adopted a plan of restructuring our business operations.
This plan of restructuring is focused on separating our non-core business from
our core strategic businesses and streamlining operations, including headcount
reductions/redeployment, reduction at our corporate headquarters location, the
centralization of finance and billing operations and sales office
consolidations. These actions are expected to result in the reduction by the end
of 2000 of approximately 400 positions from our staffing levels. We expect that
we will record a one-time charge of between $15 million to $20 million for
employee severance and lease termination costs in the third quarter of 2000. We
expect that there will be additional costs associated with Mr. Thompson's
resignation.
OUR EUROPEAN OPERATIONS
Overview
We offer a portfolio of bundled voice, data and Internet services to
pan-European small-to-medium sized and larger enterprises in 20 European
countries. We expect that our customer base will increasingly include large
companies with complex communications needs. We are also one of the leading
European
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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.
We seek to capitalize on the increasing demand in Europe for e-business
services and data and IP 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.
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 customers of these
services. 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.
Data, Internet-related and Voice Services
We currently offer data and e-business services as well as national and
international direct and indirect access services for voice communications. We
continue to expand our service offerings to provide our customers with a full
range of tailored telecommunications services.
Data, e-Business and Other Services. We currently offer dial-up and
dedicated Internet access and international private leased circuits in 83 cities
in 18 countries in Western and Central Europe. 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
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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. 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.
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.
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.
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- 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.
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.
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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, providers and second carriers or resellers. Resales of
wholesale traffic will enable us to benefit from greater purchasing power 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.
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. This trend has continued 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
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eligible for a credit against charges otherwise 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, as of June 30, 2000, our network has 58
carrier points of presence in 38 cities, 35 Internet protocol nodes in 24 cities
and 42 switches in 34 cities. Our fiber optic network spans approximately 17,500
kilometers and 14 countries. In addition, six 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
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of multiple waves of light over a single fiber optic strand, thereby increasing
network capacity. By using current dense wavelength 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 are implementing
on our core network routes, and dependent 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 42 voice
switches in 34 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
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switches with up-to-date software and ensure their compatibility with the large
number of signaling systems in use in the European and United States markets.
Using least-cost routing technologies, each switch is programmed to select the
most cost-efficient route or carrier for the required destination. We also
employ dynamic compression equipment to improve utilization of our most costly
transmission lines.
Network Capacity
Our pan-European fiber optic network includes Ciena 40 dense wavelength
division multiplexing systems on a substantial majority of our routes. 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, 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 may develop this additional ring through
capacity swaps with other telecommunications providers. 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 six City Enterprise Networks in Paris, Budapest,
Prague, Berlin, Geneva and Stockholm. We expect to deploy intracity fiber
networks deployed in the following seven additional cities: Frankfurt, London,
Madrid, Amsterdam, Milan, Zurich and Vienna. We are also evaluating construction
of City Enterprise Networks in additional cities.
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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.
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. We may determine to sell our interest in this joint venture,
but would not expect such a sale would adversely affect our contracted capacity
on FLAG-Atlantic-1.
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.
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
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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.
As of June 30, 2000, we had established 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 by year end
2001. 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. We are constructing, and had planned to open, a
Web-hosting center and accompanying network operation center in Northern
Virginia during the fourth quarter of 2000. We expect to dispose of this center
as part of our plan to migrate certain functions based in the U.S. to Europe.
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 integrated 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.
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
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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.
On October 2, 2000, Golden Telecom announced that it had reached an
agreement to acquire 18 percent of MCT Corp. in exchange for all the shares in
Vostok Mobile B.V., a wholly owned subsidiary which owns all of Golden Telecom's
interests in its Russian cellular operations.
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.
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DESCRIPTION OF CAPITAL STOCK
As of June 30, 2000, our authorized capital stock consists of 540,000,000
shares of common stock, par value $0.10 per share, of which approximately
198,803,089 shares were issued and outstanding, and 10,000,000 shares of
preferred stock, par value $0.0001 per share, of which 100,000 were issued and
outstanding as 7 1/4% cumulative convertible preferred stock. For a discussion
of the risks associated with these additional issuances of stock, see "Risk
Factors -- Substantial resales of our common stock may depress our stock price
and dilute stockholders' ownership interest following conversion of your
debentures."
The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares we issue does not purport to be
complete and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the Certificate of Incorporation and By-laws, and to
the applicable provisions of the General Corporation Law of the State of
Delaware, which we refer to as the DGCL.
OUR COMMON STOCK
Holders of common stock are entitled to one vote for one share held of
record on all matters upon which shareholders have the right to vote. There are
no cumulative voting rights. All issued and outstanding shares of common stock
are, and the offered shares, when issued and paid for, will be, validly issued,
fully paid and non-assessable. Holders of common stock are entitled to all
dividends that are declared from time to time by the board of directors out of
funds legally available for that purpose. For more information, we refer you to
"Dividend Policy." Upon dissolution, holders of common stock are entitled to
share pro rata in our assets remaining after payment in full of all of our
liabilities and obligations, including payment of the liquidation preference, if
any, of any preferred stock then outstanding.
OUR PREFERRED STOCK
The board of directors may authorize the issuance of one or more series of
preferred stock having rights, including voting, conversion and redemption
rights, and preferences, including dividend and liquidation preferences, that
our board of directors may determine, without further action by our
stockholders.
The issuance of preferred stock by the board of directors could adversely
affect the rights of the holders common stock. For example, the issuance of
preferred stock could result in a series of securities outstanding that would
have preferences over the common stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, have all the rights
appurtenant to the common stock. As of June 30, 2000, we have authorized 200,000
shares of Series A junior participating preferred stock, par value $.0001 per
share. Other than our convertible preferred stock, no other series of preferred
stock has been issued. There are no issued and outstanding shares of Series A
preferred stock and no Series A preferred stock is being offered by this
prospectus. A right to purchase shares of Series A preferred stock, however, is
attached to each share of common stock. We have authorized 200,000 shares of
Series A preferred stock initially for issuance upon exercise of those rights.
The units of Series A preferred stock that may be acquired upon exercise of
the rights will be nonredeemable and subordinate to any other shares of
preferred stock that we may issue. Each unit of Series A preferred stock will
have a minimum preferential quarterly dividend of $.01 per unit or any higher
per share dividend declared on the common stock. In the event of liquidation,
the holder of a unit of Series A preferred stock will receive a preferred
liquidation payment equal to the greater of $.01 per unit and the per share
amount paid in respect of a share of common stock.
Each unit of Series A preferred stock will have one vote, voting together
with the common stock. The holders of units of Series A preferred stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Series A preferred stock are in arrears for six fiscal quarters.
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In the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each unit of Series A preferred stock will
be entitled to receive the per share amount paid in respect of each share of
common stock. The rights of holders of the Series A preferred stock to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions. Because of
the nature of the Series A preferred stock's dividend, liquidation and voting
rights, the economic value of one unit of Series A preferred stock that may be
acquired upon the exercise of each right is expected to approximate the economic
value of one share of common stock.
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation). A corporation may indemnify that person if he or she is or was a
director, officer, employee or agent of the corporation. A corporation may also
indemnify that person if he or she is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. That person may recover
the following from the corporation:
- expenses (including attorneys' fees);
- judgments;
- fines; and
- amounts paid in settlement actually and reasonably incurred by him or her
in connection with any action, suit or proceeding if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
or her conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
person serving in any capacity described above who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor.
This person may recover expenses (including attorneys' fees) actually and
reasonably incurred in connection with the defense or settlement of the action
or suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation.
However, no indemnification shall be made in respect of any claim, issue or
matter as to which this person shall have been adjudged to be liable but in view
of all the circumstances of the case, this person is fairly and reasonably
entitled to indemnity for the expenses which the Court of Chancery or such other
court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders,
- for acts or omission not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the DGCL (relating to unlawful payment of dividends
and unlawful stock purchase and redemption), or
- for any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation provides that our directors shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director provided, however, that such exculpation from liabilities is
not permitted with respect to liability arising from items described in the
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preceding paragraph. Our Certificate of Incorporation and our By-laws further
provide that we will indemnify our directors and officers to the fullest extent
permitted by the DGCL.
Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Provisions of the Certificate of
Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest, although certain of such provisions in the By-laws are subject to
final approval by our board of directors. Such provisions may also adversely
affect prevailing market prices for the common stock which is discussed in the
section "Risk Factors -- We have anti-takeover provisions that could delay or
prevent a change in control, even if it would benefit shareholders."
Classified Board of Directors and Related Provisions. Our Certificate of
Incorporation provides that our board of directors be divided into three classes
of directors serving staggered three-year terms. The classes of directors
(designated class I, class II and class III) shall be, as nearly as possible,
equal in number. Accordingly, one-third of our board of directors will be
elected each year.
- The terms of the initial class I directors terminated at the 1998 annual
meeting of stockholders and those directors were re-elected to a
three-year term terminating on the date of the 2001 annual meeting of
stockholders.
- The term of the initial class II directors terminated at the 1999 annual
meeting of stockholders and those directors were re-elected to a
three-year term terminating on the date of the 2002 annual meeting of
stockholders.
- The term of the initial class III directors terminated at the 2000 annual
meeting of stockholders and those directors were re-elected to a
three-year term terminating on the date of the 2003 annual meeting of
stockholders.
At each annual meeting of stockholders beginning in 1998, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a three-year term. The classified board provision may prevent a party who
acquires control of a majority of our outstanding voting stock from obtaining
control of the board of directors until the second annual shareholders meeting
following the date that party obtains the controlling interest.
Subject to the rights of the holders of any series of preferred stock or
any other class of our capital stock (other than common stock) then outstanding,
directors may only be removed for cause by a majority vote of our holders of
capital stock issued and outstanding and entitled to vote generally in the
election of directors, voting together as a single class.
No Shareholder Action by Written Consent; Special Meetings. Our
Certificate of Incorporation prohibits shareholders from taking action by
written consent in lieu of an annual or special meeting, and thus shareholders
may take action at an annual or special meeting called in accordance with our
By-laws. Our Certificate of Incorporation and By-laws provide that special
meetings of shareholders may only be called only by the Chairman of the board of
directors, the Chief Executive Officer or a majority of the board of directors.
Special meetings may not be called by the shareholders, except as permitted by
the shareholder rights By-law described below.
Amendments to the Certificate of Incorporation. The provisions of the
Certificate of Incorporation described above may not be amended, altered,
changed or repealed without the affirmative vote of the holders of at least 75%
of the shares of our capital stock issued and outstanding and entitled to vote.
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SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder." An interested stockholder is
defined as a person who, together with any affiliates or associates of that
person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder becomes an interested stockholder.
Section 203 further provides that under certain circumstances, business
combinations are allowed, such as when:
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder,
- the interested stockholder acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also officers
or by certain employee stock plans) in the transaction in which it
becomes an interested stockholder, or
- the business combination is approved by a majority of the board of
directors and by the affirmative vote of 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
In addition, our Certificate of Incorporation grants the board of directors
the authority to issue up to 10,000,000 shares of preferred stock in one or more
series and to determine the rights, voting powers, dividend rate, conversion
rights, redemption price, liquidation preference and other terms of the issued
preferred stock without any further vote or action by the stockholders. The
provisions of Section 203 of the DGCL described above and our Certificate of
Incorporation, and any issuance of preferred stock with voting or conversion
rights, may adversely affect your voting power and may have the effect of
delaying or preventing a change of control of GTS or adversely affect the market
price of our common stock.
SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
Shareholder Rights Plan
We have entered into a rights agreement. In connection with the rights
agreement, our board of directors declared a distribution of one right for each
outstanding share of common stock, each share of common stock offered by this
prospectus and each share of our common stock issued (including shares
distributed from treasury) thereafter and prior to a distribution date. Each
right will entitle the registered holder, subject to the terms of the rights
agreement, to purchase from us one one-thousandth of a share or a unit of Series
A preferred stock at a purchase price of $75 per unit, subject to adjustment.
Initially, the rights will attach to all certificates representing shares
of outstanding common stock, and no separate rights certificates will be
distributed. The rights will separate from the common stock and the distribution
date will occur upon the earlier of:
- 10 days following a public announcement that a person or group of
affiliated or associated persons (other than us, any of our subsidiaries
or any of our employee benefit plans or such subsidiary) has acquired,
obtained the right to acquire, or otherwise obtained beneficial ownership
of 15% or more of the then outstanding shares of common stock, and
- 10 business days (or such later date determined by action of the board of
directors prior to such time as any person makes such announcement)
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of the then
outstanding shares of common stock.
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The Soros associates and Alan B. Slifka and his affiliates are excluded from
being an acquiring person described above under the rights agreement unless they
increase the aggregate percentage of their ownership interest in us to 20%.
Until a distribution date:
- the rights will be evidenced by common stock certificates and will be
transferred with and only with such common stock certificates,
- new common stock certificates issued after date of consummation of the
offerings in July 1998 (also including shares distributed from treasury)
will contain a notation incorporating the rights agreement by reference,
and
- the surrender for transfer of any certificates representing outstanding
common stock will also constitute the transfer of the rights associated
with the common stock represented by those certificates.
The rights will not be exercisable until a distribution date and will
expire at the close of business on the tenth anniversary of the rights agreement
unless we redeem them earlier.
In the event that:
- we are the surviving corporation in a merger with an acquiring person
described above and shares of common stock shall remain outstanding,
- a person becomes an acquiring person,
- an acquiring person engages in one or more "self-dealing" transactions as
set forth in the rights agreement, or
- during such time as there is an acquiring person, an event occurs which
results in that person's ownership interest being increased by more than
1% (e.g., by means of a recapitalization),
then, in each such case, each holder of a right (other than such person) will
thereafter have the right to receive, upon exercise, units of Series A preferred
stock (or, in some circumstances, our common stock, cash, property or other
securities) having a value equal to two times the exercise price of the right.
The exercise price is the purchase price multiplied by the number of units of
Series A preferred stock issuable upon exercise of a right prior to the events
described in this paragraph.
In the event that, at any time following a stock acquisition date:
- we are acquired in a merger or other business combination transaction and
we are not the surviving corporation (other than a merger described in
the preceding paragraph),
- any person consolidates or merges with us and all or part of our common
stock is converted or exchanged for securities, cash or property of any
other person, or
- 50% or more of our assets or earning power is sold or transferred,
each holder of a right (other than an acquiring person) shall thereafter have
the right to receive, upon exercise, common stock of the ultimate parent of such
person having a value equal to two times the exercise price of the right.
The purchase price payable, and the number of units of Series A preferred
stock issuable, upon exercise of the rights are subject to adjustment from time
to time to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A preferred stock,
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- if holders of the Series A preferred stock are granted certain rights or
warrants to subscribe for Series A preferred stock or convertible
securities at less than the current market price of the Series A
preferred stock, or
- upon the distribution to the holder of the Series A preferred stock of
evidences of indebtedness, cash or assets (excluding regular quarterly
cash dividends) or of subscription rights or warrants (other than those
referred to above).
At any time until ten business days following a stock acquisition date,
either
- 75% of our board of directors, or
- a majority of our board of directors and a majority of the continuing
directors,
may redeem the rights in whole, but not in part, at a nominal price. Immediately
upon the action of a majority of our board of directors ordering the redemption
of the rights, the rights will terminate and the only right of the holders of
rights will be to receive the redemption price. As used in the rights agreement,
a continuing director means any person (other than a person attempting to
acquire us or an affiliate or associate of such a person or a representative of
such person or of any such affiliate or associate) who was a director prior to
the date of the rights agreement and any person (other than an acquiring person
or an affiliate or associate of an acquiring person or a representative of an
acquiring person or of any such affiliate or associate) nominated for selection
or elected to the board of directors pursuant to the approval of a majority of
the continuing directors.
At its option, either:
- 75% of our board of directors, or
- a majority of our board of directors and a majority of the continuing
directors, may exchange each right for (1) one unit of Series A preferred
stock or (2) such number of units of Series A preferred stock as will
equal the spread between the market price of each unit to be issued and
the purchase price of such unit set forth in the rights agreement.
None of the provisions of the rights agreement may be amended without the
approval of either:
- 75% of our board of directors, or
- a majority of our board of directors and a majority of the continuing
directors, may exchange each right for (1) one unit of Series A preferred
stock or (2) such number of units of Series A preferred stock as will
equal the spread between the market price of each unit to be issued and
the purchase price of such unit set forth in the rights agreement.
Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all our outstanding shares of common stock for cash or
marketable securities at a price that is at least 40 percent greater than the
average closing price of such shares on the principal exchange on which those
shares are listed during the 30 days prior to the date on which the offer is
first published or sent to security holders and the board of directors opposes
such offer, the holders of more than 50% of the outstanding shares of common
stock may, at any time subsequent to the date that is nine calendar months after
the date of an offer, call a special meeting of the stockholders,
notwithstanding the provisions described in "-- Certain Charter and By-law
Provisions -- No Shareholder Action by Written Consent; Special Meetings," at
which meeting stockholders may be asked to vote upon a proposal to request that
the board of directors amend the rights agreement to exempt such offer from the
terms of the rights agreement; but, if prior to the expiration of the nine-month
period, the board of directors determines that it is in the best interests of
the shareholders to undertake efforts to sell us, that period shall be extended
as long as the board of directors continues its efforts to solicit, evaluate and
negotiate alternative bids to acquire us. If the proposal to amend the rights
agreement is approved by a vote of 70% of the votes cast for or against such
proposal at such meeting of stockholders at which a quorum is present, the board
of directors shall amend the rights
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agreement to exempt such offer from its terms no later than 60 days after the
date of such stockholders' meeting.
"Marketable securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.
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DESCRIPTION OF DEPOSITARY SHARES
Each depositary share represents 1/100 of a share of convertible preferred
stock deposited under the deposit agreement dated as of April 23, 1999, among
GTS, The Bank of New York as depositary, and all holders from time to time of
depositary receipts issued under the deposit agreement. Subject to the terms of
the deposit agreement, each owner of a depositary share is entitled,
proportionately, to all the rights, preferences and privileges of the shares of
convertible preferred stock represented by those depositary shares (including
dividend, conversion, voting, and liquidation rights), and is subject to all of
the limitations of the fractional shares of convertible preferred stock
represented by those depositary shares, which are summarized above under
"Description of Convertible Preferred Stock" or "Description of Capital Stock."
The depositary shares are evidenced by depositary receipts.
As more fully described below, the holders of the depositary shares
- have the option to convert the convertible preferred stock represented by
those depositary shares into our common stock,
- are entitled to receive dividends, and
- are entitled to vote in certain circumstances.
DTC will act as securities depositary for the depositary shares.
The following summary of the terms and provisions of the deposit agreement,
depositary shares and depositary receipts is not intended to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the deposit agreement, copies of the form of deposit agreement may be
obtained from us or the depositary upon request.
ISSUANCE OF DEPOSITARY RECEIPTS AND WITHDRAWAL OF CONVERTIBLE PREFERRED STOCK
Immediately following our issuance of the convertible preferred stock, we
deposited the convertible preferred stock with the depositary, which then issued
and delivered the depositary receipts to the initial purchasers. Depositary
receipts will be issued evidencing only whole depositary shares.
Upon surrender of depositary receipts at the corporate office of the
depositary, the owner of the depositary shares evidenced on those shares is
entitled to delivery, at that corporate office, of certificates evidencing the
number of shares of convertible preferred stock (but only in whole shares) and
any money and other property represented by those depositary receipts. If the
depositary receipts delivered by the holder evidence a number of depositary
shares in excess of the number of whole shares of convertible preferred stock to
be withdrawn, the depositary will deliver to the holder at the same time a new
depositary receipt evidencing the excess number of depositary shares.
We do not expect that there will be any public trading market for the
convertible preferred stock except as represented by the depositary shares. In
addition, we do not expect that there will be any public market initially for
the depositary shares.
CONVERSION PROVISIONS
As described under "Description of Convertible Preferred
Stock -- Conversion Rights," the convertible preferred stock may be converted,
in whole or in part, into shares of our common stock at the option of the
holders of the convertible preferred stock. The depositary shares may, at the
option of holders of the depositary shares, be converted into shares of our
common stock on the same terms and conditions as the convertible preferred
stock, except that the number of shares of common stock received upon conversion
of each depositary share will be equal to the number of shares of our common
stock received upon conversion of each share of convertible preferred stock
divided by 100.
To effect that type of optional conversion, a holder of depositary shares
must deliver depositary receipts evidencing the depositary shares to be
converted, together with a written notice of conversion and a proper assignment
of the depositary receipts to us, to any transfer agent for the depositary
shares, or in
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blank (and, if applicable, payment of an amount equal to the dividend payable on
those depositary shares), to the depositary or its agent.
Each optional conversion of depositary shares will be deemed to have been
taken place immediately prior to the close of business on the date on which the
described requirements are satisfied. The conversion shall be at the conversion
rate in effect at that time and on that date, adjusted to reflect the fact that
100 depositary shares are the equivalent of one share of convertible preferred
stock.
To the extent that depositary shares are converted into shares of our
common stock and all of those shares of our common stock cannot be distributed
to the record holders of depositary receipts without creating fractional
interests in those shares, the depositary may, with our consent, sell those
shares of common stock, and the net proceeds of any sale shall be distributed or
made available for distribution to the record holders that would otherwise have
received fractional interest in those shares of common stock.
PAYMENT AND CONVERSION
All amounts payable in cash with respect to the depositary shares will be
payable in United States dollars at our office or agency maintained for that
purpose within the City of New York or, at our option, payment of dividends and
additional dividends (if any) may be made by check mailed to the holders of the
depositary shares at their addresses listed in the register of holders of the
depositary shares maintained by the transfer agent, but we will make all cash
payments with respect to depositary shares the holders of which have given wire
transfer instructions to us by wire transfer of immediately available funds to
the accounts specified by those holders.
Any payment on the depositary shares due on any day that is not a business
day need not be made on that day, but may be made on the succeeding business day
with the same force and effect as if made on the due date.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash
distributions received on the convertible preferred stock to the record holders
of depositary shares in proportion, insofar as possible, to the number of
depositary shares owned by those holders, subject to obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to the depositary. If we pay all or any part of a dividend in our
common stock, we must deliver to the depositary a sufficient number of shares
that, upon resale by the depositary, will result in net cash proceeds to the
depositary to make the quarterly dividend payments in cash to the holders of
depositary shares.
All shares of common stock received by the depositary from us or dividends
on the convertible preferred stock will be promptly resold by the depositary on
behalf of the holders of the depositary shares and the holders of the depositary
shares will not receive any of those shares. If the proceeds from that resale do
not result in a sufficient amount of cash to pay a dividend, we will promptly
provide cash to the depositary in an amount equal to the difference between the
amount of the dividend and the proceeds received from such resale.
In the event of a distribution other than cash in respect of the
convertible preferred stock, the depositary will distribute property received by
it to the record holders of depositary shares in proportion, insofar as
possible, to the number of depositary shares owned by that holder, subject to
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the depositary, unless the depositary
determines that it is not feasible to make a distribution, in which case the
depositary may, with our approval, sell the property and distribute the net
proceeds from the sale to the holders.
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RECORD DATE
Whenever:
- any cash dividend or other cash distribution shall become payable or,
instead, any common stock distributed, any other distribution shall be
made, or any rights, preferences, or privileges shall be offered with
respect to the convertible preferred stock, or
- the depositary shall receive notice of any meeting at which holders of
convertible preferred stock are entitled to vote or of which holders of
convertible preferred stock are entitled to notice,
the depositary shall, in each instance, fix a record date (which shall be the
same date as the record date for the convertible preferred stock) for the
determination of the holders of depositary receipts (1) who shall be entitled to
receive the dividend, distribution, rights, preferences, or privileges, or the
net proceeds of the sale thereof or (2) who shall be entitled to give
instructions for the exercise of voting rights at the meeting or to receive
notice of the meeting.
VOTING OF CONVERTIBLE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of convertible
preferred stock are entitled to vote, the depositary will mail the information
contained in the notice of meeting to the record holders of depositary shares.
Each record holder of depositary shares on the record date (which will be the
same date as the record date for the convertible preferred stock) will be
entitled to instruct the depositary as to the exercise of voting rights
pertaining to the number of shares of convertible preferred stock (or fraction
thereof) represented by that holder's depositary shares. The depositary will
endeavor, insofar as practicable, to vote the number of shares of convertible
preferred stock (or fractions thereof) represented by those depositary shares in
accordance with those instructions, and we have agreed to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so. The depositary will abstain from voting the convertible preferred stock
to the extent it does not receive specific written instructions from the holders
of depositary shares representing that convertible preferred stock.
Each depositary share shall entitle the holder to instruct the depositary
to cast 1/100 of the vote of a share of convertible preferred stock on each
matter submitted to a vote of our preferred stockholders.
AMENDMENT OF DEPOSIT AGREEMENT
The form of depositary receipts and any provision of the deposit agreement
may at any time be amended by agreement between us and the depositary. However,
any amendment that materially and adversely alters the rights of the holders of
depositary shares will not be effective unless that amendment has been approved
by the holders of at least 66 2/3% of the depositary shares then outstanding.
Every holder of depositary receipts at the time any amendment of that type
becomes effective shall be deemed to consent and agree to the amendment and to
be bound by the deposit agreement.
CHARGES OF DEPOSITARY
We will pay all transfer and other taxes and governmental charges that
arise solely from the existence of the depositary arrangements and the initial
deposit of the convertible preferred stock. Holders of depositary shares will
pay all other transfer and other taxes and governmental charges, and, in
addition, any other charges expressly provided in the deposit agreement to be
for their accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY; TERMINATION OF THE DEPOSIT AGREEMENT
The depositary may resign at any time by delivering to us notice of its
election to do so, and we may at any time remove the depositary. Any resignation
or removal will take effect upon the appointment of a successor depositary and
its acceptance of appointment. A successor depositary will be appointed by us
within 45 days after delivery of the notice of resignation or removal.
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The deposit agreement may be terminated by us or by the depositary if:
- there has been a final distribution in respect of the convertible
preferred stock in connection with any liquidation, dissolution or
winding up of GTS and such distribution has been distributed to the
holders of depositary receipts, or
- each share of convertible preferred stock shall have been converted into
shares of our common stock.
BOOK-ENTRY-ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
DTC will continue to act as securities depository for the depositary
shares. The information in this section concerning DTC and DTC's book-entry
system is based upon information obtained from DTC. The depositary shares will
be issued only as fully-registered depositary receipts registered in the name of
Cede & Co. (as nominee for DTC). One or more fully-registered global depositary
receipts will be issued, evidencing in the aggregate the total number of
depositary shares, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under to the provisions of Section 17A of the Exchange Act. DTC holds
securities that its participants deposit with DTC. DTC also facilitates the
settlement among participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thus eliminating the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Access to the DTC system is also available to other
indirect participants such as securities brokers and dealers, banks and trust
companies that clear through or maintain a direct or indirect custodial
relationship with a direct participant.
Purchases of depositary shares within the DTC system must be made by or
through direct participants, which will receive a credit for the depositary
shares on DTC's records. The ownership interest of each actual purchaser of a
depositary share, which shall be referred to as a beneficial owner, is in turn
to be recorded on the direct or indirect participants' records. Beneficial
owners will not receive written confirmation from DTC of their purchases, but
beneficial owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the direct or indirect participants through which the beneficial owners
purchased depositary shares. Transfers of ownership interests in depositary
shares are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners.
DTC has no knowledge of the actual beneficial owners of the depositary
shares; DTC's records reflect only the identity of the direct participants to
whose accounts those depositary shares are credited, which may or may not be the
beneficial owners. The participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to those will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Dividend payments on the depositary shares will be made to DTC. DTC's
practice is to credit direct participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on that payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of that
participant and not of DTC or us, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of dividends to DTC
is our responsibility, disbursement of payments described above to direct
participants is the responsibility of
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DTC, and disbursement of those payments to the beneficial owners is the
responsibility of direct and indirect participants.
No depositary shares evidenced by global depositary receipts may be
exchanged in whole or in part for depositary receipts registered, and no
transfer of global depositary receipts in whole or in part may be registered, in
the name of any person other than DTC or any nominee of DTC unless DTC has
notified us that it is unwilling or unable to continue as depositary for such
global depositary receipts. All depositary shares evidenced by one or more
global depositary receipts will be registered in the names that DTC directs.
The laws of some jurisdictions require that certain potential purchasers of
depositary shares take physical delivery of the depositary shares they purchase
in definitive form. These laws may impair the ability to transfer beneficial
interests in depositary shares so long as the depositary shares are evidenced by
global depositary receipts.
As long as DTC, or its nominee, is the registered owner of the global
depositary receipts, DTC or its nominee, as the case may be, will be considered
the sole owner and holder of the global depositary receipts and all depositary
shares for all purposes under the depositary shares. Except in the limited
circumstances referred to above, owners of beneficial interests in global
depositary shares will not be entitled to have the global depositary receipts
evidencing their shares or their depositary shares registered in their names,
will not receive or be entitled to receive physical delivery of depositary
shares in exchange for the depositary receipts and will not be considered to be
owners or holders of such global depositary receipts or any depositary shares
for any purpose under the depositary shares.
MISCELLANEOUS
The depositary will, with our approval, appoint a registrar for
registration of the depositary receipts or depositary shares in accordance with
any requirements of any applicable stock exchange on which the depositary
receipts or the depositary shares are listed. The registrar will maintain books
at the corporate office for the registration and registration of transfer of
depositary receipts or at any other place that is approved by us and of which
the holders of depositary receipts are given reasonable notice.
We will deliver to the depositary and the depositary will forward to
holders of depositary shares all notices and reports required by law, the rules
of any national securities exchange on which the convertible preferred stock,
the depositary shares or the depositary receipts are listed or are required by
our amended certificate of incorporation or by-laws to be furnished by us to
holders of the convertible preferred stock.
Neither the depositary nor we will be liable if either is prevented by law
or certain other circumstances beyond its control from or delayed in performing
its obligations under the deposit agreement. Neither the depositary nor we
assume any obligation or will be subject to any liability under the deposit
agreement to holders of depositary receipts other than to use its best judgment
and good faith in the performance of such duties as are specifically set forth
in the deposit agreement. The depositary will not be obligated to appear in,
prosecute or defend any legal proceeding in respect of any depositary shares or
any shares of convertible preferred stock unless satisfactory indemnity is
furnished. We and the depositary may rely on advice of counsel or accountants,
or information provided by persons presenting shares of convertible preferred
stock for deposit, holders of depositary shares or other persons believed to be
authorized or competent and on documents believed to be genuine.
The depositary will act as transfer agent and registrar for, and paying
agent for the payment of dividends with respect to, the depositary shares.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The owners of the depositary shares will be treated for federal income tax
purposes as if they were the owners of the shares of convertible preferred stock
which they represent. Accordingly, the tax treatment for the owners of the
depositary shares will be the same as the tax treatment for the owners of shares
of convertible preferred stock described below. In addition, no gain or loss
will be recognized on the withdrawal of shares of convertible preferred stock in
exchange for depositary shares under the deposit agreement, an owner's tax basis
in the withdrawn shares of convertible preferred stock will be the same as the
tax basis in the depositary shares surrendered, and the owner's holding period
of the withdrawn securities will include the period during which the owner held
the surrendered depositary shares.
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DESCRIPTION OF CONVERTIBLE PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the convertible preferred
stock offered under this prospectus. The terms of the convertible preferred
stock are contained in the Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions which shall be referred to as
the certificate of designations. This summary is not intended to be complete and
is subject to, and qualified in its entirety by reference to, the certificate of
designations, including the definitions contained in those certificates of
certain terms used below. Copies of the certificate of designations will be made
available as set forth under "Available Information."
Under the certificate of designations, 100,000 shares of convertible
preferred stock with a liquidation preference of $5,000 per share have been
authorized for issuance. The convertible preferred stock is fully paid and
nonassessable, and the holders have no preemptive rights in connection with
those shares. Each depositary share represents 1/100 of a share of convertible
preferred stock. We do not expect that there will be any trading market for the
convertible preferred stock except as represented by the depositary shares.
The convertible preferred stock:
- ranks junior in right of payment to all of our existing and future debt
obligations and to each senior class or series of our capital stock, and
pari passu or senior to all of our other capital stock
- has a liquidation preference of $5,000 per share ($50 per depositary
share) plus accrued and unpaid dividends and additional dividends,
- is convertible at the option of the holder into shares of our common
stock at a rate of 144.92 shares of common stock per share of convertible
preferred stock (1.4492 shares of common stock per depositary share) and
is subject to restrictions as described below, and
- is redeemable in whole or in part, at our option at any time on or after
March 15, 2002 at the prices described below, plus accrued and unpaid
dividends, if any, to the redemption date.
The holders of convertible preferred stock (and the corresponding
depositary shares):
- will have no voting rights except as required by law and as specified in
the certificate of designation unless the events described below happen,
and
- may require, upon a change of control event, us to repurchase all of a
portion of his or her convertible preferred stock (and the corresponding
depositary shares).
There can be no assurance that any trading market for the depositary shares
will develop. If any such market does develop, the liquidation preference of the
convertible preferred stock per depositary share is not necessarily the price at
which depositary shares will actually trade, and the depositary shares may trade
at lower prices. The market price of the depositary shares can be expected to
fluctuate with changes in the financial markets and economic conditions, the
market price of our common stock, our financial condition and prospects and
other factors that generally influence the market prices of securities. See
"Risk Factors -- Absence of Public Market for Convertible Preferred Stock and
Depositary Shares."
The transfer agent for the convertible preferred stock is The Bank of New
York unless and until we select a successor. The offices of the transfer agent
are located in New York City at 101 Barclay Street, New York, New York 10286.
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RANKING
The convertible preferred stock will rank:
- junior in right of payment to all of our existing and future debt
obligations upon our liquidation, dissolution or winding up, including
the 9 7/8% Senior Notes due 2005 and the 5 3/4% Convertible Senior
Subordinated Debentures due 2010,
- junior in right of payment to each class or series of our capital stock
that has terms which expressly provide that the class or series of
capital stock will rank senior to the convertible preferred stock as to
dividends and upon our liquidation, dissolution or winding up, which
shall be referred to as senior capital stock,
- pari passu in right of payment with each class of capital stock or series
of preferred stock, established by our board of directors that has terms
which expressly provide that the class or series will rank on a parity
with the convertible preferred stock as to dividend rights and upon our
liquidation, winding up or dissolution, which shall be referred to as
parity capital stock and
- senior in right of payment to our common stock and any of our capital
stock that expressly provides that it will be junior to the convertible
preferred stock, which shall be referred to as junior capital stock.
The certificate of designations provides that we may not, without the
consent of the holders of at least 66 2/3% of the outstanding shares of
convertible preferred stock, authorize, create (by way of reclassification or
otherwise) or issue any senior capital stock or any obligation or security
convertible or exchangeable into or evidencing a right to purchase, shares of
any class or series of senior capital stock.
DIVIDENDS
The holders of shares of the convertible preferred stock are entitled to
receive cumulative preferential dividends, when, as and if dividends are
declared by the board of directors out of our funds legally available for that
purpose, from the issue date of the convertible preferred stock accruing at the
rate of $3.625 per depositary share ($362.50 per share of convertible preferred
stock) per annum, or $.90625 per depositary share ($90.625 per share of
convertible preferred stock) per quarter, payable quarterly in arrears on March
15, June 15, September 15 and December 15 of each year or, if any such date is
not a business day, on the next succeeding business day (each of which shall be
referred to as a dividend payment date), to the holders of record as of the next
preceding March 1, June 1, September 1 and December 1 (each of which shall be
referred to as a record date).
Accrued but unpaid dividends, if any, may be paid on the dates determined
by the board of directors. The cash necessary to pay dividends on the depositary
shares will come from our dividend payments on the convertible preferred stock
which, at our option, may be paid in cash, common stock or a combination of cash
and common stock; but we will be obligated to make our dividend payments in cash
if the common stock paid as a dividend would not, at the time the dividend
payment is made, be freely transferable under the Securities Act.
If we pay all or any part of a dividend in common stock, we must deliver to
the depositary a sufficient number of shares of common stock that, upon resale
by the depositary or its nominee, will result in net cash proceeds to allow the
depositary to make the quarterly dividend payments in cash to the holders of the
depositary shares. All shares of common stock received by the depositary from us
as dividends on the convertible preferred stock will be promptly resold by the
depositary or its nominee on behalf of the holders of the depositary shares and
the holders of the depositary shares will not receive any shares.
If the proceeds from the resale do not result in a sufficient amount of
cash to pay a dividend, we will promptly provide cash to the depositary in an
amount equal to the difference between the amount of the dividend and the
proceeds received from the resale. Dividends payable on the convertible
preferred stock (and the corresponding depositary shares) will be computed on
the basis of a 360-day year of twelve 30-day months and will be deemed to accrue
on a daily basis.
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The term "closing price" means on any day the reported last sale price on
that day or in case no sale takes place on that day, the average of the reported
closing bid and ask prices on the principal national securities exchange (which
shall include the Nasdaq National Market) on which that stock is listed or
admitted to trading (and if the common stock is listed or admitted to trading on
more than one U.S. national or non-U.S. securities exchange, we shall determine,
in our reasonable discretion, the principal securities exchange on which our
common stock is listed or admitted to trading) or, if not listed or admitted to
trading on any securities exchange, the average of the closing bid and ask
prices as furnished by any independent registered broker-dealer firm, selected
by us for that purpose, in each case adjusted for any stock split during the
relevant period.
Dividends on the convertible preferred stock (and the corresponding
depositary shares) accrue whether or not we have earnings or profits, whether or
not there are funds legally available for the payment of dividends and whether
or not dividends are declared. Dividends accumulate to the extent they are not
paid on the dividend payment date for the quarter to which they relate.
Accumulated unpaid dividends accrue and cumulate dividends at the yearly rate
contained on the cover page of this prospectus. The certificate of designations
provides that we will take all actions required or permitted under Delaware law
to permit the payment of dividends on the convertible preferred stock.
No dividend whatsoever shall be declared or paid on, or any sum set apart
for the payment of dividends on, any outstanding share of the convertible
preferred stock (and the corresponding depositary shares) with respect to any
dividend period unless all dividends for all preceding dividend periods have
been declared and paid upon, or declared and a sufficient sum set apart for the
payment of that dividend upon, all outstanding shares of convertible preferred
stock.
Unless full cumulative dividends on all outstanding shares of convertible
preferred stock due for all past dividend periods shall have been declared and
paid, or declared and a sufficient sum for the payment thereof set apart, then:
- no dividend (other than, in the case of junior capital stock, a dividend
payable solely in shares of junior capital stock or options, warrants or
rights to purchase junior capital stock) shall be declared or paid upon,
or any sum set apart for the payment of dividends upon, any shares of
parity capital stock or junior capital stock,
- no other distribution shall be declared or made upon, or any sum set
apart for the payment of any distribution upon, any shares of junior
capital stock,
- no shares of parity capital stock or junior capital stock or any
warrants, rights, calls or options exercisable for or convertible into
any parity capital stock or junior capital stock shall be purchased,
redeemed or otherwise acquired or retired for value (excluding an
exchange for shares of other parity capital stock or junior capital stock
or a purchase, redemption or other acquisition from the proceeds of a
substantially concurrent sale of parity capital stock or junior capital
stock) by us or any of our subsidiaries, and
- no monies shall be paid into or set apart or made available for a sinking
or other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of parity capital stock or junior
capital stock or any warrants, rights, calls or options exercisable for
or convertible into any parity capital stock or junior capital stock by
us or any of our subsidiaries.
Holders of the convertible preferred stock (and the corresponding depositary
shares) will not be entitled to any dividends, whether payable in cash, property
or stock, in excess of the full cumulative dividends as herein described.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any parity capital stock for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for that payment is set apart for that payment on the
convertible preferred stock. If full dividends are not so paid, the convertible
preferred stock will share dividends pro rata with the parity capital stock.
Dividends on account of arrears and dividends in connection with any optional
redemption
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may be declared and paid at any time, without reference to any regular dividend
payment date, to holders of record on that date, not more than 45 days prior to
the payment of the dividends, as may be fixed by our board of directors.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
our affairs and after payment in full of our outstanding debt obligations and
the liquidation preference (and any accrued and unpaid dividends) on any senior
capital stock, each holder of shares of the convertible preferred stock (and the
corresponding depositary shares) will be entitled to payment out of our assets
available for distribution of an amount equal to the liquidation preference per
share of the convertible preferred stock (or per depositary share) held by that
holder, plus accrued and unpaid dividends and additional dividends (if any) to
the date fixed for that liquidation before any distribution is made on any
junior capital stock, including, without limitation, our common stock. After
payment in full of the liquidation preference and all accrued and unpaid
dividends and additional dividends (if any), to which holders of convertible
preferred stock (and the corresponding depositary shares) are entitled, those
holders will not be entitled to any further participation in any distribution of
our assets.
However, neither the voluntary sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or our assets nor our consolidation or merger
with or into one or more corporations will be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of GTS, unless the sale,
conveyance, exchange, transfer, consolidation or merger shall be in connection
with our liquidation, dissolution or winding up.
The certificate of designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the convertible
preferred stock, although the liquidation preference will be substantially in
excess of the par value of the shares of the convertible preferred stock.
VOTING RIGHTS
Holders of record of shares of the convertible preferred stock (and the
corresponding depositary shares) have no voting rights, except as required by
law and as provided in the certificate of designations. The certificate of
designations provides that upon the accumulation of accrued and unpaid dividends
on the outstanding convertible preferred stock in an amount equal to six full
quarterly dividends, whether or not consecutive (such an event and any event
with a similar effect under the terms of any other series of preferred stock
upon which like rights have been conferred, shall be referred to as a voting
rights triggering event), the number of members of our board of directors will
be immediately and automatically increased by two (unless previously increased
under the terms of any other series of preferred stock upon which like rights
have been conferred). Subsequently, the holders of a majority of the outstanding
shares of convertible preferred stock, voting together as a class (pro rata,
based on liquidation preference) with the holders of any other series of
preferred stock upon which like rights have been conferred and are exercisable,
will be entitled to elect two members to our board of directors. Voting rights
arising as a result of a voting rights triggering event will continue until the
time at which all dividends in arrears on the convertible preferred stock are
paid in full. However, this right to elect directors will expire when the number
of shares of convertible preferred stock outstanding is reduced to 10% or less
of the shares issued under this prospectus.
In addition, as provided above under "-- Ranking" we may not authorize,
create (by way of reclassification or otherwise) or issue any senior capital
stock, or any obligation or security convertible into or evidencing the right to
purchase any senior capital stock, without the affirmative vote or consent of
the holders of 66 2/3% of the then outstanding shares of the convertible
preferred stock.
The owners of depositary shares are entitled to direct the voting of the
shares of convertible preferred stock represented by their depositary shares.
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CONVERSION RIGHTS
The convertible preferred stock is convertible at the option of the holder,
into shares of common stock at any time, unless previously redeemed or
repurchased, at a conversion rate of 1.4492 shares of common stock per
depositary share (144.92 shares of common stock per share of the convertible
preferred stock) equivalent to a conversion price of $34.50 per share of common
stock, subject to the adjustments described below.
The right to convert a share of the convertible preferred stock called for
redemption or delivered for repurchase will terminate at the close of business
on the redemption date for those convertible preferred stock or the repurchase
date, as the case may be. Convertible preferred stock (and the corresponding
depositary shares) for which a holder has delivered a change of control purchase
notice, as described below, exercising the option of that holder to require us
to purchase those convertible preferred stock (and the corresponding depositary
shares) may be converted only if that notice is withdrawn by a written notice of
withdrawal delivered by the holder to the paying agent prior to the close of
business on the business day prior to the change of control purchase date in
accordance with the certificate of designations.
The right of conversion attaching to any depositary share may be exercised
by the holder of that depositary share by delivering the depositary share to be
converted to the office of the conversion agent, accompanied by a signed and
completed notice of conversion in form reasonably satisfactory to the conversion
agent. The conversion date will be the date on which the depositary share and
the signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, we will issue and deliver to the
conversion agent a certificate or certificates for the number of full shares of
common stock issuable upon conversion, with any fractional shares rounded up to
full shares or, at our option, payment in cash instead of any fraction of a
share, based on the closing price of the common stock on the trading day
preceding the conversion date.
Notwithstanding the above, if a number of depositary shares that is not
divisible by 100 (without remainder) is submitted for conversion, any fractional
share otherwise issuable upon the conversion will be rounded down. Such
certificate or certificates will be delivered by the conversion agent to the
appropriate holder on a book-entry basis or by mailing certificates evidencing
the additional shares to the holders at their respective addresses set forth in
the register of holders maintained by the transfer agent. All shares of common
stock issuable upon conversion of the depositary shares will be fully paid and
nonassessable and will rank equal with the other shares of common stock
outstanding from time to time. No payment or adjustment will be made for
dividends or distributions with respect to shares of common stock issued upon
conversion of depositary shares.
Except as otherwise provided in the certificate of designations, dividends
accrued shall not be paid on depositary shares converted; but dividends accrued
through March 15, 2002 shall be paid on any depositary shares called for
redemption and converted before March 15, 2002. If any holder surrenders a
depositary share for conversion between a record date and the related dividend
payment date, then notwithstanding the conversion, the dividend payable on the
dividend payment date will be paid to the holder on the record date. However, in
that event, unless the depositary share has been called for redemption, the
depositary share, when surrendered for conversion, must be accompanied by
delivery by the holder of a check or draft payable in an amount equal to the
dividend payable on the dividend payment date on the portion so converted.
Holders of common stock issued upon conversion will not be entitled to receive
any dividends payable to holders of common stock as of any record time before
the close of business on the conversion date.
Under current federal law, a holder delivering depositary shares for
conversion will not be required to pay any taxes or duties in respect of the
issue or delivery of common stock on conversion but will be required to pay any
tax or duty that may be payable in respect of any transfer involved in the issue
or delivery of the shares of common stock in a name other than that of the
holder of the depositary shares. Certificates representing shares of common
stock will not be issued or delivered unless all taxes and duties, if any,
payable by the holder have been paid.
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The conversion rate is subject to adjustment in certain events, including,
without duplication:
- the issuance of shares of common stock as a dividend or distribution on
the common stock,
- the subdivision or combination of the outstanding common stock,
- the issuance to all or substantially all holders of common stock of
rights or warrants to subscribe for or purchase common stock (or
securities convertible into common stock) at a price per share less than
the then current market price per share,
- the distribution to all or substantially all holders of common stock of
shares of our capital stock (other than common stock), evidences of
indebtedness or other non-cash assets (including securities of any
company other than GTS),
- the distribution to all or substantially all holders of common stock of
rights or warrants to subscribe for its securities (other than those
referred to in the third bullet point above), and
- the distribution to all or substantially all holders of common stock of
cash in an aggregate amount that (together with all other cash
distributions to all or substantially all holders of common stock made
within the preceding 12 months not triggering a conversion rate
adjustment) exceeds an amount equal to 12.5% of our market capitalization
on the business day immediately preceding the day on which we declare the
distribution.
We from time to time may reduce the conversion price by any amount for any
period of time if the period is at least 20 days or any longer period required
by law and if the reduction is irrevocable during the period; but the conversion
price may not be less than the par value of a share of common stock. No
adjustment of the conversion price or the corresponding conversion rate will be
required to be made until the cumulative adjustments amount to 1.0% or more of
the conversion price or the corresponding conversion rate.
We will provide to holders of the depositary shares reasonable notice of
any event that would result in an adjustment to the conversion rate under the
foregoing paragraph so as to permit the holders to effect a conversion of
depositary shares into shares of common stock prior to the occurrence of that
event.
If at any time we make a distribution of property to our stockholders that
would be taxable to such stockholders as a dividend for United States federal
income tax purposes (e.g., distributions of evidences of indebtedness or our
assets of, but generally not stock dividends on common stock or rights to
subscribe for common stock) and, under the antidilution provisions of the
certificate of designations, the number of shares into which the convertible
preferred stock is convertible is increased, that increase may be considered for
United States federal income tax purposes to be the payment of a taxable
dividend to holders of the depositary shares. See "Certain U.S. Federal Income
Tax Considerations -- Adjustment of Conversion Price."
"Market price," as of any date, means the average of the daily closing
price for the five consecutive trading days ending on such date.
"Trading day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day
on which securities are not traded on the applicable securities exchange or in
the applicable securities market.
REDEMPTION
Optional Redemption
The convertible preferred stock (and corresponding depositary shares) may
not be redeemed prior to March 15, 2002. The convertible preferred stock (and
corresponding depositary shares) may be redeemed, in whole or in part, at our
option on or after March 15, 2002, at the redemption prices specified below
(expressed as percentages of the liquidation preference for those shares), in
each case, together with accrued and unpaid dividends and additional dividends
(if any), to the date of redemption (which shall be
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referred to as a redemption date), upon not less than 15 nor more than 60 days'
prior written notice, during the 12-month period commencing on March 15 of each
of the years listed below:
REDEMPTION
YEAR RATE
- ---- ----------
2002........................................................ 105.075%
2003........................................................ 104.350%
2004........................................................ 103.625%
2005........................................................ 102.900%
2006........................................................ 102.175%
2007........................................................ 101.450%
2008........................................................ 100.725%
2009 and thereafter......................................... 100.000%
On and after any redemption date, provided that we have made available at
the office of the transfer agent a sufficient amount of cash to effect the
redemption, dividends will cease to accrue on the convertible preferred stock
(and corresponding depositary shares) called for redemption (except that, in the
case of a redemption date after a record date and prior to the related dividend
payment date, holders of convertible preferred stock (and corresponding
depositary shares) on the record date will be entitled on that dividend payment
date to receive the dividend payable on their shares, as described above), their
shares shall no longer be deemed to be outstanding and all rights of the holders
of those shares as holders of convertible preferred stock (and corresponding
depositary shares) shall cease except the right to receive the cash deliverable
upon such redemption, without interest from the redemption date.
TRANSFER AGENT, PAYING AGENT, CONVERSION AGENT
We have initially appointed the transfer agent to act as the paying agent
and conversion agent. We may at any time terminate the appointment of any paying
agent or conversion agent and appoint additional or other paying agents and
conversion agents, provided that until the convertible preferred stock (and the
corresponding depositary shares) has been delivered to us for cancellation, or
moneys sufficient to pay the liquidation preference and accrued dividends and
additional dividends (if any) on the convertible preferred stock (and the
corresponding depositary shares) have been made available for payment and either
paid or returned to us as provided in the certificate of designations, it will
maintain an office or agency in the Borough of Manhattan in The City of New York
for surrender of convertible preferred stock (and the corresponding depositary
shares) for conversion.
Dividends payable on the convertible preferred stock (and the corresponding
depositary shares) on any redemption date or repurchase date that is a dividend
payment date will be paid to the holders of record as of the immediately
preceding record date.
All moneys held by us or deposited with any paying agent in trust for the
payment of the liquidation preference and dividends or additional dividends (if
any) on any shares of the convertible preferred stock (and the corresponding
depositary shares) which remain unclaimed at the end of two years after the
payment has become due and payable will be repaid to us, and the holder of those
shares of the convertible preferred stock (and the corresponding depositary
shares) will thereafter be entitled to look only to us for payment.
CHANGE OF CONTROL
In the event of a change of control, each holder will have the right to
require us to purchase all or a portion of his or her convertible preferred
stock (which shall be referred to as a change of control offer) as of the date
that is 30 business days after the occurrence of that change of control (which
shall be referred to as a change of control purchase date) for a purchase price
equal to 100% of the liquidation preference together with accrued and unpaid
dividends to but not including the change of control purchase date. We will not
pay any funds under a change of control offer before we repurchase all
securities ranking senior to
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the convertible preferred stock and requiring repurchase under the change of
control provisions governing those senior securities.
Within 10 business days after the occurrence of a change of control, we
shall mail to all holders of record of the depositary shares a notice of the
change of control describing, among other things, the terms and conditions, and
the procedures required for exercise of, the holder's right to require the
purchase of that holder's convertible preferred stock. To exercise the purchase
right upon a change of control, the holder of a depositary share will be
required to deliver, on or before the 10th day prior to the change of control
purchase date, written notice to us (or an agent designated by us for that
purpose) of the holder's acceptance (which shall be referred to as a change of
control purchase notice), together with the certificates evidencing the
depositary share with respect to which the offer is being accepted, duly
endorsed for transfer.
If a holder does not exercise the right to require us to purchase his or
her convertible preferred stock, each share of his or her convertible preferred
stock (and the corresponding depositary shares) shall thereafter be convertible
into the right to receive the consideration receivable as a result of the change
of control by a holder of the number of shares of common stock into which his or
her convertible preferred stock was convertible immediately prior to the change
of control.
A change of control shall be deemed to have occurred if:
- any person or group, other than the permitted holders, is or becomes
owner, directly or indirectly, of shares of our capital stock
representing 50% or more of the total voting power of all shares of our
capital stock of or has the power, directly or indirectly, to elect a
majority of the members of our board of directors;
- we consolidate with, or merge with or into, another person or we dispose
of all or substantially all of our assets, or any person consolidates
with, or merges with or into, GTS, other than under a transaction in
which the person or persons that "beneficially owned," directly or
indirectly, shares of our capital stock of representing a majority of the
total voting power of all classes of our capital stock immediately prior
to that transaction, "beneficially own," directly or indirectly, shares
of our capital stock representing a majority of the total voting power of
all classes of capital stock of the surviving or transferee person;
- during any consecutive two year period, individuals who at the beginning
of the period constituted our board of directors (together with any new
directors whose election by our board of directors or whose nomination
for election by our stockholders was approved by a vote of a majority of
the directors then still in office who were either directors at the
beginning of that period or whose election or nomination for election was
previously so approved) cease for any reason (other than by action of the
permitted holders) to constitute a majority of our board of directors
then in office; or
- we shall liquidate or dissolve.
For purposes of this definition,
- "group" has the meaning under Section 13(d) and 14(d) of the Exchange Act
or any successor provision to either of the above, including any group
acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(1) under the Exchange Act, and
- a "beneficial owner" shall be determined in accordance with Rule 13d-3
under the Exchange Act promulgated by the SEC under the Exchange Act,
except that the number of shares of our capital stock entitling the holders of
those shares to vote generally in the election of directors shall be deemed to
include, in addition to all outstanding shares of our capital stock of entitling
the holders of those shares to vote generally in the election of directors and
unissued shares deemed to be held by the person with respect to which the change
of control determination is being made, all unissued shares deemed to be held by
all other persons.
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"Unissued shares" means shares of capital stock not outstanding that
are subject to options, warrants, rights to purchase, or conversion
privileges exercisable within 60 days of the date of determination of a
change of control and that, upon issuance, will entitle the holders of
those shares to vote generally in the election of directors.
For purposes of the definition of "change of control," "permitted holders"
means:
- Alan B. Slifka and any entity controlled by him,
- one or more of George Soros, Soros Fund Management LLC, Purnendu
Chatterjee or Chatterjee Management Company or affiliates of any of them,
and any person or entity for which any such person or entity acts as
investment advisor or investment manager, and
- charitable organizations controlled by or affiliated with any of the
persons named in the above two clauses.
Notwithstanding the above, a change of control will be deemed not to have
occurred:
- if the last sale price of the common stock for any five trading days
during the ten trading days immediately preceding the change of control
is at least equal to 105% of the conversion price in effect immediately
preceding the change of control or
- if at least 90% of the consideration (excluding cash payments for
fractional shares or cash payments for appraisal rights) in the
transaction or transactions constituting the change of control consists
of shares of common stock or securities convertible into shares of common
stock that are, or upon issuance will be, traded on a national securities
exchange.
AMENDMENT, SUPPLEMENT AND WAIVER
We may amend the certificate of designations with the consent of the
depositary, who will consent if so instructed by the holders of a majority of
the depositary shares then outstanding, (including consents obtained in
connection with a tender offer or exchange offer for the convertible preferred
stock or the corresponding depositary shares) and any past default or failure to
comply with any provisions of the certificate of designations may also be waived
with the consent of those holders.
Notwithstanding the above, however, without the consent of each holder
affected, an amendment or waiver may not (with respect to any shares of the
convertible preferred stock held by a non-consenting holder):
- alter the voting rights with respect to the convertible preferred stock
or reduce the number of shares of the convertible preferred stock whose
holders must consent to an amendment, supplement or waiver,
- reduce the liquidation preference of any share of the convertible
preferred stock or adversely alter the provisions with respect to the
redemption of the convertible preferred stock,
- reduce the rate of or change the time for payment of dividends on any
share of the convertible preferred stock,
- waive a default in the payment of dividends or additional dividends (if
any) on the convertible preferred stock,
- make any share of the convertible preferred stock payable in money other
than U.S. dollars,
- make any change in the provisions of the certificate of designations
relating to waivers of the rights of holders of the convertible preferred
stock to receive the liquidation preference, dividends or additional
dividends (if any) on the convertible preferred stock, or
- make any change in the above amendment and waiver provisions.
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Notwithstanding the above, without the consent of any holder of the
convertible preferred stock, we may (to the extent permitted by Delaware law)
amend or supplement the certificate of designations to cure any ambiguity,
defect or inconsistency, to provide for uncertificated shares of the convertible
preferred stock in addition to or in place of certificated shares of the
convertible preferred stock or to make any change that would provide any
additional rights or benefits to the holders of the convertible preferred stock
or to make any change that the board of directors determines, in good faith, is
not materially adverse to holders of the convertible preferred stock.
ADDITIONAL INFORMATION
Anyone who receives a copy of this prospectus may obtain a copy of the
certificate of designations or the registration rights agreement without charge
by writing to Global TeleSystems, Inc., 4121 Wilson Boulevard, 8th Floor,
Arlington, Virginia 22203, Attention: General Counsel.
SHELF REGISTRATION; ADDITIONAL DIVIDENDS
On April 19, 1999, we entered into the registration rights agreement with
the initial purchasers and the depositary. Under the registration rights
agreement, we filed a registration statement with the SEC on May 6, 1999, which
was declared effective on June 7, 1999. This registration statement constitutes
a post-effective amendment to the earlier registration statement. Each
depositary share or share of the convertible preferred stock or common stock
issuable upon conversion of those securities or paid as dividends on those
securities until the earlier of:
- the date on which that depositary share or share of convertible preferred
stock or common stock has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement, or
- the date on which that depositary share or share of convertible preferred
stock or common stock is eligible to be distributed to the public under
Rule 144(k) under the Securities Act
shall be referred to as a transfer restricted security.
The registration rights agreement provides that we will use our
commercially reasonable best efforts to maintain the effectiveness of the shelf
registration statement until all depositary shares, shares of convertible
preferred stock and shares of common stock issued upon conversion of those
securities or as dividends on those securities that are not held by affiliates:
- may be resold without restriction under Rule 144(k) under the Securities
Act, or
- have been sold under the shelf registration statement
subject to the our right to notify holders that the prospectus ceases to be
accurate and complete as a result of material business developments for up to
180 days during any two-year period, however (1) no single period may exceed 60
days and (2) those periods, in the aggregate, may not exceed 90 days in any
calendar year.
If the shelf registration statement ceases to be effective or usable in
connection with resales of transfer restricted securities during the periods
specified in the registration rights agreement (that event will be referred to
as a registration default), then we will pay to each holder of the convertible
preferred stock which are transfer restricted securities (and the corresponding
depositary shares), with respect to the first 90-day period immediately
following the occurrence of a registration default, additional dividends in an
amount equal to $0.25 per year per depositary share ($25.00 per year per $5,000
in liquidation preference of the convertible preferred stock) held by that
holder (which shall be referred to as additional dividends). The amount of the
additional dividends will increase by an additional $0.25 per year per
depositary share ($25.00 per year per $5,000 in liquidation preference of the
convertible preferred stock) with respect to any subsequent period until all
registration defaults have been cured. We will pay all accrued additional
dividends on each dividend payment date.
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The cash necessary to pay additional dividends may be paid at our option in
cash, common stock or a combination of cash and common stock; but we must pay
additional dividends in cash if the common stock paid as additional dividends
would not, at the time the payment for additional dividends is made, be freely
transferable under the Securities Act. If we pay all or any part of any
additional dividends in common stock, we must deliver to the depositary a
sufficient number of shares of common stock that, upon resale by the depositary
or its nominee, will result in net cash proceeds to the depositary to pay the
additional dividends in cash to the holders of the depositary shares.
All shares of common stock received by the depositary from us as additional
dividends will be promptly resold by the depositary or its nominee on behalf of
the holders of the depositary shares, and the holders of the depositary shares
will not receive any such shares. If the proceeds from a resale do not result in
a sufficient amount of cash to pay the additional dividends, we will promptly
provide to the depositary cash in an amount equal to the difference between the
amount of the additional dividends and the proceeds received from the resale on
the common stock by the depositary. Following the cure of a registration
default, the accrual of additional dividends will cease. Notwithstanding
anything to the contrary herein contained, during any period, we will not be
required to pay additional dividends with respect to more than one registration
default.
This summary of certain provisions of the registration rights agreement is
not complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the registration rights agreement, a copy of which is
available upon request to us.
REISSUANCE
Shares of the convertible preferred stock redeemed for or converted into
common stock or otherwise acquired by us will assume the status of authorized
but unissued preferred stock and may thereafter be reissued in the same manner
as the other authorized but unissued preferred stock, but not as the convertible
preferred stock.
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SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 2000, 198,803,089 shares of common stock were outstanding,
excluding
- approximately 37.6 million shares of common stock that are issuable
pursuant to exercisable warrants and the exercise of options under GTS'
option plans,
- approximately 16.9 million shares of common stock into which the 5 3/4%
convertible senior subordinated debentures are convertible,
- approximately 14.5 million shares of our common stock issuable on
conversion of the convertible preferred stock, not including an
indeterminate number of shares of common stock, may be issued as
dividends on the convertible preferred stock or as a result of
anti-dilution provisions of the convertible preferred stock.
We have filed five shelf registration statements which the SEC has declared
effective, covering approximately 72 million shares of our common stock. Three
registration statements on Form S-8 cover the resale of shares of our common
stock issued to employees, officers and directors under our employee benefit
plans.
We cannot predict what effect, if any, that future sales of common stock or
the availability of common stock for sale will have on the market price for
common stock. Sales of large numbers of shares of common stock in the public
market pursuant to an effective registration statement under the Securities Act,
or the perception that sales could occur, may have an adverse effect on the
market price for common stock. See "Risk Factors -- Substantial resales of our
common stock may depress our stock price and dilute your ownership interest."
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TAX CONSIDERATIONS
The following is a summary of the material United States federal income and
estate tax considerations with respect to the ownership and disposition of
shares of our convertible preferred stock and shares of our common stock. This
summary is based on the Internal Revenue Code of 1986, as amended, existing and
proposed Treasury regulations thereunder and administrative and judicial
interpretations thereof (all as of the date hereof and all of which are subject
to change, possibly with retroactive effect). This summary does not address all
United States federal income and estate tax consequences that may be relevant to
a holder in light of its particular circumstances or to certain holders that may
be subject to special treatment under United States federal income tax laws,
such as banks, insurance companies, tax-exempt entities and certain United
States expatriates. Furthermore, the following discussion does not discuss any
aspects of foreign, state or local taxation.
For purposes of this summary, you are a "United States Holder" if you are a
beneficial owner of convertible preferred stock or common stock that for United
States federal income tax purposes is:
- a citizen of the United States or an individual who is a resident of the
United States,
- a corporation or partnership created or organized under the laws of the
United States or any political subdivision thereof,
- an estate, the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust, if both (1) a court within the United States is able to exercise
primary supervision over the administration of the trust, and (2) one or
more United States persons have the authority to control all substantial
decisions of the trust.
You are a "Non-United States Holder" if you are a beneficial owner or
convertible preferred stock or common stock and you are not a United States
Holder.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT ITS OWN TAX ADVISER WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF
OWNING AND DISPOSING OF SHARES OF OUR CONVERTIBLE PREFERRED STOCK AND SHARES OF
COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR OTHER TAXING JURISDICTION.
UNITED STATES HOLDERS
The Convertible Preferred Stock
We have the option of making certain dividend payments to you by issuing
shares of our common stock to the depositary, who will distribute the cash
proceeds of their sale to you (together with any top up payment, if necessary).
For United States federal income tax purposes, we will treat the payment of such
proceeds (together with any such top up payments) as the payment of a cash
dividend to you by us, although no assurances can be given that the Internal
Revenue Service will not assert different treatment.
Dividends. If you are a United States Holder, dividends paid to you on the
convertible preferred stock will be taxable as ordinary income to the extent of
our current or accumulated earnings and profits as determined for United States
federal income tax purposes. To the extent a dividend is not attributable to our
current or accumulated earnings and profits, that dividend will first reduce
your tax basis in the convertible preferred stock, and then be treated as
capital gain to the extent that the amount exceeds that basis. We do not believe
that we have current or accumulated earnings and profits at this time.
Accordingly, until such time as we have current or accumulated earnings and
profits for United States federal income tax purposes, dividends paid on the
convertible preferred stock will reduce your tax basis in the convertible
preferred stock or be treated as capital gain.
Dividends Received Deduction. Dividends on the convertible preferred stock
will not be eligible for the dividends received deduction unless and until we
have current or accumulated earnings and profits for United States federal
income tax purposes. At that time, subject to certain exceptions and
limitations, if
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you are a corporation, you may be entitled to a dividends received deduction
equal to 70 percent of the amount of any dividend attributable to our current or
accumulated earnings and profits. However, this deduction may be restricted,
eliminated or offset by other tax rules that limit the availability of the
dividends received deduction.
The dividends received deduction is reduced if you have incurred
indebtedness that is directly attributable to your investment in the convertible
preferred stock or do not meet certain holding requirements. Under the holding
period requirements, you must hold the convertible preferred stock for more than
45 days during the 90 day period surrounding the ex-dividend date or, in the
event of certain arrearages, 90 days during the 180 day period surrounding the
ex-dividend date. For these purposes, the holding period does not include any
period during which you have diminished your risk of loss with respect to the
convertible preferred stock.
Further, if a dividend
- equals or exceeds five percent of your adjusted tax basis in the
convertible preferred stock (treating all dividends having ex-dividend
dates within an 85-day period as one dividend) or
- exceeds 20 percent of your adjusted tax basis in the convertible
preferred stock (treating all dividends having ex-dividend dates within a
365-day period as one dividend),
the dividend may constitute an "extraordinary dividend" that requires you to
reduce your adjusted tax basis in the convertible preferred stock by the amount
of the dividend excluded from income under the dividends received deduction
provisions.
You should also consider the effect of the corporate alternative minimum
tax, which imposes a minimum tax of 20 percent of a corporation's alternative
minimum taxable income for a taxable year. For purposes of the corporate
alternative minimum tax, alternative minimum taxable income is increased by 75
percent of the amount by which a corporation's adjusted current earnings in the
taxable year exceeds its alternative minimum taxable income prior to the
addition of an item. The amount of any dividend on the convertible preferred
stock that is included in adjusted current earnings will not be reduced by any
dividends received deduction that is allowed with respect to such dividend.
Sale or Other Disposition. Subject to the discussion in the following
paragraph, you generally will recognize capital gain or loss on a sale or other
disposition of your convertible preferred stock in an amount equal to the
difference between your amount realized and your adjusted tax basis in the
convertible preferred stock. Your adjusted tax basis will initially be your
cost, and will be reduced by any dividends you receive on the convertible
preferred stock to the extent such dividends are not attributable to our current
or accumulated earnings and profits. If you are an individual United States
Holder and your holding period for the convertible preferred stock is more than
one year, capital gains in respect of that stock will be subject to tax at a
maximum rate of 20 percent.
Redemption. A redemption or other purchase by us of your convertible
preferred stock for cash will be treated, depending on the facts and
circumstances, as (1) a distribution on our stock or (2) a taxable exchange of
your convertible preferred stock.
Such a transaction will be treated as a taxable exchange of your
convertible preferred stock if the transaction results in either:
- a complete termination of your interest in our stock,
- in general, a greater than 20 percent decrease in your percentage
ownership in our voting stock, or
- a "meaningful reduction" (as determined under Section 302 of the Code) of
your interest in our stock.
In determining whether any of these has occurred, you will be deemed to own
stock that is owned by persons that are treated as related to you for United
States federal income tax purposes or that is the subject of an option held by
you (including your conversion option) or by such a related person.
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If the redemption or other purchase is not treated as a taxable exchange,
the amounts received by you will be treated in the same manner as dividends paid
on the convertible preferred stock, as described above.
Conversion. The conversion by you of your convertible preferred stock into
common stock will not give rise to the recognition of income, gain or loss at
the time of conversion, assuming that you do not receive cash from us at that
time and that none of the common stock you receive is attributable to accrued
but unpaid dividends. Cash received in lieu of fractional shares of common stock
will be treated as if you received the fractional share and exchanged it for
cash; the excess, if any, of such cash over your adjusted tax basis attributable
to the fractional share should be treated as capital gain. You will have an
aggregate adjusted tax basis in the common stock that is equal to your aggregate
adjusted tax basis in your convertible preferred stock at the time of
conversion.
The Common Stock
Dividends on the common stock will be taxable to you in the manner and
under the circumstances described for dividends on the convertible preferred
stock above. If you are a corporation, you will be eligible for the dividends
received deduction in the manner and under the circumstances described with
respect to the convertible preferred stock above, and generally subject to the
same limitations. In addition, upon a redemption, sale or other disposition by
you of the common stock, you will be taxable in the same manner and under the
circumstances described for the convertible preferred stock above. Your holding
period of common stock received on conversion will include your holding period
for the preferred convertible stock in respect of which the common stock was
received, and your initial tax basis in such stock will be as described in
"Conversion" above.
NON-UNITED STATES HOLDERS
Dividends
If you are a Non-United States Holder, dividends that are paid to you by a
United States corporation and that are not effectively connected with a trade or
business carried on by you in the United States (and, if one or more of certain
tax treaties apply, are not attributable to a permanent establishment in the
United States maintained by you) generally are subject to United States
withholding tax at a rate of 30%. An exemption from such withholding exists with
respect to dividends paid to you by a United States corporation if at least 80%
of the gross income derived by such corporation (either directly or through
certain of its subsidiaries) during the applicable testing period is "active
foreign business income," as defined in section 861 of the Code (which shall be
referred to as an 80/20 company). Under the provisions of the Code applicable to
80/20 companies, the proportion of such company's dividends equal to such
company's total gross income from foreign sources over its total gross income is
exempt from United States withholding tax. At present, we believe that we
qualify as an 80/20 company.
However, the 80% active foreign business income test is applied on a
periodic basis, and our operations and business plans may change in subsequent
taxable years. Therefore, we cannot assure you of our future status as an 80/20
company. If, for any period or periods, we fail to satisfy the applicable
requirements, then, for payments made prior to January 1, 2000, the withholding
agent generally would be required to withhold tax from all distributions paid on
the common stock regardless of our earnings and profits. For payments made after
January 1, 2000, a withholding agent may elect not to withhold on a distribution
to the extent it is not paid out of current or accumulated earnings and profits,
based on our reasonable estimate of the extent to which the distribution will be
out of such earnings and profits. You could, however, apply for refunds if your
stock's share of our earnings and profits is less than the amount of the
distributions. Additionally, the rate of withholding may be reduced to the
extent provided by a tax treaty between the United States and the country of
which you are a resident for tax purposes.
In order to claim the benefit of an applicable tax treaty rate, you may
have to file with us or our dividend paying agent an exemption or reduced treaty
rate certificate or letter in accordance with the terms of such treaty. Under
United States Treasury regulations currently in effect, for purposes of
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determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, we ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, as of January
1, 2000, if you seek a reduced rate of withholding under an income tax treaty,
you generally would be required to provide to us a valid Internal Revenue
Service Form W-8 certifying that you are entitled to benefits under an income
tax treaty. The final regulations also provide special rules for determining
whether, for purposes of assessing the applicability of an income tax treaty,
dividends paid to a Non-United States Holder that is an entity should be treated
as being paid to the entity itself or to the persons holding an interest in that
entity. If you are eligible for a reduced withholding rate, you may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
In the case of dividends that are effectively connected with your conduct
of a trade or business with the United States (and, if an income tax treaty
applies, attributable to a United States permanent establishment that you
maintain), you generally will be subject to regular United States federal income
tax in the same manner as if you were a United States Holder. If you are a
non-United States corporation receiving effectively connected dividends, you
also may be subject to an additional "branch profits tax" which is imposed,
under certain circumstances, at a rate of 30% (or such lower rate as may be
specified by an applicable treaty) of your "effectively connected earnings and
profits," subject to certain adjustments.
Conversion
The conversion by you of your convertible preferred stock into common stock
will not give rise to the recognition of income, gain or loss at the time of
conversion, assuming that you do not receive cash from us at that time. Cash
received in lieu of fractional shares of common stock will be treated as if you
received the fractional share and exchanged it for cash; the excess, if any, of
such cash over your adjusted tax basis attributable to the fractional share
should be treated as capital gain and taxable in the manner described below.
Gain on Disposition of Our Stock
You generally will not be subject to United States federal income tax with
respect to gain realized on a sale or other disposition of our stock unless
- the gain is effectively connected with a trade or business that you carry
on in the United States (and, if an income tax treaty applies,
attributable to a United States permanent establishment that you
maintain) or
- if you are a non-resident alien individual and hold the common stock as a
capital asset, you are present in the United States for 183 or more days
in the taxable year of the disposition and certain other conditions are
met.
ADJUSTMENT TO CONVERSION RATIO
Adjustments to the conversion ratio of the convertible preferred stock may
result in a dividend to you pursuant to Section 305 of the Code if the
adjustment has the effect of increasing your proportionate interest in our
earnings and profits or assets. Such dividend would be taxable to you in the
manner described below depending on whether you are a United States Holder or a
Non-United States Holder. In general, anti-dilution adjustments are not treated
as resulting in deemed distributions. However, adjustments considered to
compensate for taxable cash or property distributions to other shareholders
would result in a taxable deemed distribution to you.
FEDERAL ESTATE TAX
An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in our stock will be required
to include the value thereof in his gross estate for
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United States federal estate tax purposes, and may be subject to United States
federal estate tax unless an applicable estate tax treaty provides otherwise.
Estates of non-resident aliens are generally allowed a statutory credit which
generally has the effect of offsetting the United States federal estate tax
imposed on the first $60,000 of the taxable estate.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under the United States Treasury regulations, we must report annually to
the Internal Revenue Service and to you the amount of dividends paid to you and
any tax withheld with respect to such dividends. These information reporting
requirements apply regardless of whether withholding is not required because the
dividends were effectively connected with a trade or business in the United
States that you carry on or withholding was reduced by an applicable income tax
treaty. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which you are a resident under the provisions of an applicable income tax treaty
or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to:
- dividends paid to you if you are subject to the 30% withholding discussed
above (or that are not so subject because a tax treaty applies that
reduces such 30% withholding), or
- under current law, dividends paid to you at an address outside of the
United States.
However, as of January 1, 2000, you generally will be subject to United States
withholding tax at a 31% rate unless certain certification procedures (or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are satisfied, directly or
through a foreign intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of our stock to
beneficial owners that are not "exempt recipients" and that fail to provide in
the manner required certain identifying information.
The payment of the proceeds of the disposition of our stock to or through
the United States office of a broker is subject to both backup withholding and
information reporting unless the disposing holder, under penalty of perjury,
certifies as to its status as a Non-United States Holder or otherwise
establishes an exception. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office of
a non-United States broker.
However, information reporting requirements (but probably, prior to January
1, 2000, not backup withholding) will apply to a payment of disposition proceeds
outside the United States if the payment is made through an office outside the
United States of a broker that is one of the following:
- a United States person,
- a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States;
- a "controlled foreign corporation" for United States federal income tax
purposes, or
- effective January 1, 2000, but probably not prior to such date, a foreign
broker that is either (1) a foreign partnership, one or more of whose
partners are United States persons who, in the aggregate, hold more than
50% of the income or capital interest in the partnership at any time
during its tax year, or (2) a foreign partnership engaged at any time
during its tax year in the conduct of a trade or business in the United
States, and such broker fails to maintain documentary evidence that the
holder is a Non-United States Holder and that certain conditions are met,
or that the holder otherwise is entitled to an exemption.
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Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
The above discussion is included for general information only. Accordingly,
each prospective purchaser is urged to consult his or her tax advisor with
respect to the United States federal income tax and estate tax consequences of
the ownership and disposition of our convertible preferred and common stock,
including the application and effect of the laws of any state, local, foreign,
or other tax jurisdiction.
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PLAN OF DISTRIBUTION
We will not receive any of the proceeds from the sale of the securities
offered under this prospectus. You may sell the securities directly from time to
time to purchasers. Alternatively, you may from time to time offer the
securities through brokers, dealers or agents who may receive compensation in
the form of discounts, concessions or commissions from you and/or the purchasers
of the securities. You and any brokers, dealers or agents who participate in the
sale of the securities may be considered "underwriters," and any profits on the
sale of the securities by them and any discounts, commissions or concessions
received by any such brokers, dealers or agents might be considered underwriting
discounts and commissions under the Securities Act. To the extent you may be
considered underwriters, you may be subject to certain statutory liabilities of
the Securities Act, including, but not limited to, Section 11, 12 and 17 of the
Securities Act and Rule 10b-5 under the Exchange Act.
You may sell the securities offered under this prospectus from time to time
in one or more transactions at fixed prices, at prevailing market prices at the
time of sale, at varying prices determined at the time of sale or at negotiated
prices. The securities may be sold in different ways including by one or more of
the following methods:
- a block trade in which the broker or dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction,
- purchases by a broker or dealer as principal and resale by that broker or
dealer for its account pursuant to this prospectus,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers,
- an exchange distribution in accordance with the rules of that exchange,
- face-to-face transactions between sellers and purchasers without a
broker-dealer, and
- through the writing of options.
At any time a particular offer of the securities is made, a revised
prospectus or prospectus supplement, if required, will be distributed which will
contain the amount and type of securities being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commissions and other items constituting compensation from you
selling securities and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. A prospectus supplement and, if necessary, a
post-effective amendment to the registration statement of which this prospectus
is a part, will be filed with the SEC to reflect the disclosure of additional
information with respect to the distribution of the securities. In addition, the
securities covered by this prospectus may be sold in private transactions or
under Rule 144 rather than under this prospectus.
To the best of our knowledge, there are currently no plans, arrangements or
understandings between any holders and any broker, dealer, agent or underwriter
regarding the sale of the securities. There is no assurance that any holder will
sell any or all of the securities offered under this prospectus or that any
holder will not transfer, devise or gift the securities by other means not
described in this prospectus.
You and any other person participating in such distribution will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
the Exchange Act, including, Regulation M, which may limit the timing of
purchases and sales of any of the securities by you and any other such person.
Furthermore, under Regulation M under the Exchange Act, any person engaged in
the distribution of the securities may not simultaneously engage in
market-making activities with respect to the particular securities being
distributed for certain periods prior to the commencement of or during such
distribution. All of the above may affect the marketability of the securities
and the availability of any person or entity to engage in market-making
activities with respect to the securities.
Under the registration rights agreement entered into in connection with our
offer and sale of the depositary shares, we and the holders selling securities
under this prospectus will be indemnified by the
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other against specific liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection with those
liabilities.
We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the securities to the public other than
commissions, fees and discounts of underwriters, brokers, dealers and agents.
If we pay all or any part of a dividend in our common stock, we must
deliver to the depositary a sufficient number of shares that, upon resale by the
depositary, will result in net cash proceeds to the depositary to make the
quarterly dividend payments in cash to the holders of depositary shares. All
shares of common stock received by the depositary from us or dividends on the
convertible preferred stock will be promptly resold by the depositary on behalf
of the holders of the depositary shares and the holders of the depositary shares
will not receive any of those shares. This common stock may be resold by the
depositary under this prospectus as described above.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for us
by Arnold Y. Dean, our Deputy General Counsel.
EXPERTS
The consolidated financial statements and schedules of Global TeleSystems
Group, Inc. at December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999 appearing in Global TeleSystems Group, Inc.'s
Annual Report (Form 10-K) for the year ended December 31, 1999, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference are based in part
on the report of PricewaterhouseCoopers, independent accountants. Such
consolidated financial statements and schedules referred to above are included
in reliance upon such reports given upon the authority of such firms as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may read and copy these reports, proxy statements
and other information at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at 7 World Trade Center, 13th floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
also obtain copies of this material at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, Washington, D.C. 20549. You
may obtain copies from the Public Reference Room by calling the SEC at (800)
732-0330. In addition, we are required to file electronic versions of such
material with the SEC through the SEC's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Our common stock is listed on The New York Stock Exchange, the Frankfurt Stock
Exchange and Easdaq.
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INCORPORATION OF INFORMATION WE FILE WITH THE SEC
This prospectus incorporates certain documents about us by reference which
are not presented in this prospectus or delivered with this prospectus. We
incorporate by reference the documents listed below which were filed with the
SEC under the Exchange Act:
- our Quarterly Reports on Form 10-Q for the three month periods ended June
30, and March 31, 2000;
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1999; and
- our Current Reports on Form 8-K filed on January 31, 2000, February 8,
2000, August 10, and September 21, 2000.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all the
depositary shares offered by this prospectus have been sold:
- reports filed under Sections 13(a) and (c) of the Exchange Act;
- definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and
- any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Global TeleSystems, Inc.
4121 Wilson Boulevard
Eighth Floor
Arlington, VA 22203
(703) 236-3100
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by GTS in
connection with the offering of the securities being hereby registered.
ITEM
----
SEC Registration Fee........................................ $19,140*
Accounting Fees and Expenses................................ 10,000
Legal Fees and Expenses..................................... 5,000
Printing Expenses........................................... 5,000
Miscellaneous............................................... 360
-------
TOTAL............................................. $39,500
=======
- ---------------
* $26,301 of the registration fee was paid on May 16, 1999 in connection with
the filing of a registration statement (SEC File No. 333-78097). $19,140 of
the registration fee is being paid herewith.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
GTS' Certificate of Incorporation (the "Certificate") provides that the
GTS' Directors shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director provided, however,
that such exculpation from liabilities is not permitted with respect to
liability arising
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from items described in clauses (i) through (iv) in the preceding paragraph. The
Certificate and the GTS' By-Laws further provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by the
DGCL.
The directors and officers of GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.
ITEM 16. EXHIBITS
(a) Exhibits:
The following is a list of exhibits filed as a part of this registration
statement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1******* -- Indenture relating to the 10 1/2% Senior Notes due 2006,
dated as of November 24, 1999, between Global TeleSystems
Europe B V and United States Trust Company of New York,
as Trustee
1.2******* -- Indenture relating to the 11% Senior Notes due 2009,
dated as of November 24, 1999, between Global TeleSystems
Europe B V and United States Trust Company of New York,
as Trustee
1.3******* -- Registration Rights Agreement, dated as of November 24,
1999, between Global TeleSystems Europe B V and Initial
Purchasers
2.1*** -- Offer Agreement dated as of December 8, 1998 between the
Registrant and Esprit Telecom Telecom Group plc
2.2*** -- Irrevocable Undertaking by Walter Anderson dated as of
December 8, 1998
2.3*** -- Irrevocable Undertaking by Apax Funds Nominees Limited
dated as of December 8, 1998
2.3(a)*** -- Amendment to the Irrevocable Undertaking by Apax Funds
Nominees Limited dated as of December 8, 1998, dated
December 12, 1998
2.4*** -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
dated as of December 8, 1998
2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
3.10+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998
3.11+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12+ -- Certificate of Designation of the Series A Preferred
Stock of Global TeleSystems Group, Inc.
3.13++++++ -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
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 Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of Senior Subordinated Convertible
Bond due 2000 as an exhibit thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York, as Rights Agent
4.7+ -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto)
4.8++ -- Indenture dated as of July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.10***** -- Registration Rights Agreement dated as of April 23, 1999
by and among Global TeleSystems Group, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
Inc.
5.1# -- Opinion of Arnold Y. Dean, Deputy General Counsel of the
Registrant respecting the Securities registered hereby.
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
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 Global TeleSystems Group, Inc., 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.
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
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
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
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14+ -- Restated and Amended Global TeleSystems Group, Inc.
Non-Employee Directors' Stock Option Plan
10.15+ -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
10.17+++++++ -- Employment Agreement dated as of April 1, 1999 between
the Company and H. Brian Thompson
10.18++++++++ -- Employment Agreement dated as of March 22, 1999 between
the Company and Robert Amman
10.19++++++++ -- Employment Agreement dated as of January 3, 1995 between
the Company and Gerard Caccappolo
10.20++++++++ -- Employment Agreement dated as of July 1, 1998 between
Esprit Telecom and Hans Peter Kohlhammer
10.21++++++++ -- Employment Agreement dated as of 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 as of September 25,
1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement incorporated by reference as
Exhibit 10.31 to this Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
II-6
89
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43++ -- Master Agreement, dated June , 1998 between Ebone
Holding Association, Ebone A/S, Hermes Europe Railtel
Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
II-7
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent
10.56***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc., and Apax Funds
Nominees Limited and Warburg, Pincus Ventures, L.P. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc.,
Dresdner Kleinwort Benson North American LLC, BT Alex.
Brown Incorporated, Lehman Brothers Inc., Prudential
Securities Incorporated, ING Baring Furman Selz LLC,
BancBoston Robertson Stephens Inc., CIBC Oppenheimer
Corp., ABN AMRO Incorporated, Arnhold and S.
Bleichroeder, Inc. and Credit Suisse First Boston
Corporation.
10.57***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc. and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated,
and Lehman Brothers Inc.
10.58***** -- Agreement for the transfer of Omnicom Shares dated as of
April 14, 1999 by and among Alain Nicolazzi, Florent
Martenne-Duplan, Philippe Ait Yahia and various other
Omnicom shareholders and Esprit Telecom Holdings, Limited
and Global TeleSystems Group, Inc.
12.1# -- Statement Re: Computation of Deficiency of Earnings
Available to Cover Fixed Charges and Preferred Stock
Dividends
21.1++++++++ -- List of Subsidiaries of the Registrant
23.1# -- Consent of Ernst & Young LLP, Independent Auditors
23.2# -- Consent of PricewaterhouseCoopers, Independent
Accountants
23.3# -- Consent of Arnold Y. Dean, Deputy General Counsel of the
Registrant (included in his opinion delivered under
Exhibit No. 5.1)
24.1# -- Powers of Attorney (included on signature page to
registration statement No. 333-78097)
II-8
91
- ---------------
# Filed herewith.
* Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1998, filed on
March 23, 1999.
** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-36555), filed on
September 26, 1997.
*** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-4 (File No. 333-68511), filed on
December 8, 1998.
**** Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Annual Report on Form 20-F for the year ended
September 30, 1998, filed on December 24, 1998.
***** Incorporated by reference to the corresponding exhibit to our Current
Report on Form 8-K, dated April 14, 1999 and filed on April 28, 1999
****** Incorporated by reference to the corresponding exhibit to our
Quarterly Report on Form 10-Q for the three month period ended March
31, 1999, filed on May 17, 1999
******* Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Europe B V Registration Statement on Form S-4/A (File No.
333-94339), filed on February 2, 2000.
+ Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1997, filed on
March 31, 1998.
++ Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-52733), filed on May
14, 1998.
+++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-4 (File No.
333-9292), filed on August 13, 1998.
++++ Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.
+++++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-1 (File No.
333-8012), filed on December 10, 1997.
++++++ Reserved
+++++++ Incorporated by reference to Exhibit No. 10 to the Company's Report on
Form 10-Q for the quarter ended March 31, 1999.
++++++++ Incorporated by reference to the correspondingly numbered Exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the forms of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
II-9
92
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
II-10
93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Arlington, Commonwealth of Virginia, on this 3rd day of October, 2000.
GLOBAL TELESYSTEMS, INC.
By: /s/ GRIER C. RACLIN
----------------------------------
Name: Grier C. Raclin
Title: Executive Vice President,
Chief Administrative
Officer and General
Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 3rd day of October, 2000.
SIGNATURE TITLE
--------- -----
* Chairman, President and Chief
- ----------------------------------------------------- Executive Officer (principal
Robert J. Amman executive officer)
* Executive Vice President-
- ----------------------------------------------------- Corporate Development and Chief
Robert A. Schriesheim Financial Officer (principal
financial and accounting
officer)
* Executive Vice Chairman of the
- ----------------------------------------------------- Board of Directors
Gerald W. Thames
* Vice Chairman of the Board of
- ----------------------------------------------------- Directors
Alan B. Slifka
* Director
- -----------------------------------------------------
David Dey
* Director
- -----------------------------------------------------
Roger Hale
* Director
- -----------------------------------------------------
Bernard McFadden
* Director
- -----------------------------------------------------
Stewart J. Paperin
* Director
- -----------------------------------------------------
W. James Peet
II-11
94
SIGNATURE TITLE
--------- -----
* Director
- -----------------------------------------------------
Jean Salmona
* Director
- -----------------------------------------------------
Frank V. Sica
Director
- -----------------------------------------------------
Adam Solomon
By: /s/ GRIER C. RACLIN
- ------------------------------------
Grier C. Raclin
Attorney-in-Fact
II-12
95
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1******* -- Indenture relating to the 10 1/2% Senior Notes due 2006,
dated as of November 24, 1999, between Global TeleSystems
Europe B V and United States Trust Company of New York,
as Trustee
1.2******* -- Indenture relating to the 11% Senior Notes due 2009,
dated as of November 24, 1999, between Global TeleSystems
Europe B V and United States Trust Company of New York,
as Trustee
1.3******* -- Registration Rights Agreement, dated as of November 24,
1999, between Global TeleSystems Europe B V and Initial
Purchasers
2.1*** -- Offer Agreement dated as of December 8, 1998 between the
Registrant and Esprit Telecom Telecom Group plc
2.2*** -- Irrevocable Undertaking by Walter Anderson dated as of
December 8, 1998
2.3*** -- Irrevocable Undertaking by Apax Funds Nominees Limited
dated as of December 8, 1998
2.3(a)*** -- Amendment to the Irrevocable Undertaking by Apax Funds
Nominees Limited dated as of December 8, 1998, dated
December 12, 1998
2.4*** -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
dated as of December 8, 1998
2.5*** -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
dated as of December 8, 1998
2.6*** -- Irrevocable Undertaking by Sir Robin Biggam dated as of
December 8, 1998
2.7*** -- Irrevocable Undertaking by John McMonigall dated as of
December 8, 1998
2.8*** -- Irrevocable Undertaking by Roy Merritt dated as of
December 8, 1998
2.9*** -- Irrevocable Undertaking by David Oertle dated as of
December 8, 1998
2.10*** -- Irrevocable Undertaking by Michael Potter dated as of
December 8, 1998
2.11*** -- Irrevocable Undertaking by Dominic Shorthouse dated as of
December 8, 1998
3.1** -- Certificate of Incorporation of SFMT, Inc.
3.2** -- Certificate of Correction to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on October 8, 1993
3.3** -- Certificate of Ownership and Merger Merging San
Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
with the Delaware Secretary of State on November 3, 1993
3.4** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on January 12, 1995
3.5** -- Certificate of Amendment to the Certificate of
Incorporation of SFMT, Inc., filed with the Delaware
Secretary of State on February 22, 1995
3.6** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on October 16, 1996
3.7** -- By-laws of SFMT, Inc.
3.8** -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc., filed
with the Delaware Secretary of State on December 1, 1997
3.9** -- Form of Amended and Restated By-laws of Global
TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
filed as Exhibit 3.7)
96
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.10+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on January 29, 1998
3.11+ -- Certificate of Amendment to the Certificate of
Incorporation of Global TeleSystems Group, Inc. filed
with the Delaware Secretary of State on February 9, 1998.
3.12+ -- Certificate of Designation of the Series A Preferred
Stock of Global TeleSystems Group, Inc.
3.13++++++ -- Certificate of Designation of the 7 1/4% Cumulative
Convertible Preferred Stock of Global TeleSystems Group,
Inc.
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 Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of Senior Subordinated Convertible
Bond due 2000 as an exhibit thereto)
4.3** -- Registration Rights Agreement, dated as of July 14, 1997,
between Global TeleSystems Group, Inc. and UBS Securities
LLC.
4.4** -- Indenture dated as of August 19, 1997 between Hermes
Europe Railtel B.V. and The Bank of New York (including
the form of 11 1/2% Senior Note due 2007 as an exhibit
thereto)
4.5** -- Registration Rights Agreement dated as of August 19, 1997
between Hermes Europe Railtel B.V. and Donaldson, Lufkin
& Jenrette Securities Corporation, UBS Securities LLC,
and Lehman Brothers, Inc.
4.6** -- Form of Rights Agreement between Global TeleSystems
Group, Inc. and The Bank of New York, as Rights Agent
4.7+ -- Indenture dated as of February 10, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York
(including the form of 9 7/8% Senior Notes due 2005 as an
exhibit thereto)
4.8++ -- Indenture dated as of July 8, 1998 between Global
TeleSystems Group, Inc. and The Bank of New York relating
to the Company's 5 3/4% Convertible Senior Debentures due
2010
4.9*** -- Registration Rights Agreement dated as of December 8,
1998 by and among the Registrant, Apax Funds Nominees
Limited and Warburg, Pincus Ventures, L.P.
4.10***** -- Registration Rights Agreement dated as of April 23, 1999
by and among Global TeleSystems Group, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
Inc.
5.1# -- Opinion of Arnold Y. Dean, Deputy General Counsel of the
Registrant respecting the Securities registered hereby.
10.1** -- Senior Note Purchase Agreement, dated as of January 19,
1996, among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.
10.1(a)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
97
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1(b)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated June 6, 1996
10.1(c)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 23, 1996
10.1(d)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 16, 1996
10.1(e)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 11, 1997
10.1(f)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated July 29, 1997
10.1(g)** -- Amendment to Senior Note Purchase Agreement dated January
19, 1996 among Global TeleSystems Group, Inc., The Open
Society Institute and Chatterjee Fund Management, L.P.,
dated September 29, 1997
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 Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.7** -- Warrant Agreement, dated as of June 6, 1996, between
Global TeleSystems Group, Inc., The Open Society
Institute, Winston Partners II LDC and Winston Partners
II LLC
10.8** -- Senior Note Purchase Agreement, dated as of February 2,
1996, between Global TeleSystems Group, Inc. and Emerging
Markets Growth Fund, Inc.
10.8(a)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996 (see Exhibit No. 10.1(b))
10.8(b)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated June 6,
1996
10.8(c)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated July 25,
1996
10.8(d)** -- Amendment to Senior Note Purchase Agreement, dated as of
February 2, 1996, between Global TeleSystems Group, Inc.
and Emerging Markets Growth Fund, Inc., dated September
10, 1996
98
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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+ -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
Plan
10.16** -- Restricted Stock Grant letter, dated as of January 1,
1995
10.17+++++++ -- Employment Agreement dated as of April 1, 1999 between
the Company and H. Brian Thompson
10.18++++++++ -- Employment Agreement dated as of March 22, 1999 between
the Company and Robert Amman
10.19++++++++ -- Employment Agreement dated as of January 3, 1995 between
the Company and Gerard Caccappolo
10.20++++++++ -- Employment Agreement dated as of July 1, 1998 between
Esprit Telecom and Hans Peter Kohlhammer
99
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.21++++++++ -- Employment Agreement dated as of 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 as of September 25,
1997
10.25** -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
Option Grant
10.26** -- Agreement on the Creation and Functions of the Joint
Venture of EDN Sovintel, dated June 18, 1990
10.27** -- Stock Purchase Agreement among Global TeleSystems Group,
Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
Limited, and MTU-Inform, dated September 6, 1995
10.28** -- Certificate of Registration of Revised and Amended
Foundation Document in the State Registration of
Commercial Organizations, dated May 30, 1996
10.29** -- Agreement on the Creation and Functions of the Joint
Venture Sovam Teleport, dated May 26, 1992
10.30** -- Amended and Restated Joint Venture Agreement between GTS
Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
Erik Jennes, dated July 6, 1995
10.31** -- Amended and Restated Shareholders' Agreement between HIT
Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
Hermes Europe Railtel B.V., dated July, 1997
10.31(a)** -- Shareholders' Agreement among the Hermes Europe Railtel,
B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
Swed Carrier (incorporated by reference to Exhibit 10.1
to the Hermes Europe Railtel B.V.'s Registration
Statement on Form S-4 (File No. 333-37719) filed on
December 11, 1997) (supersedes the Amended and Restated
Shareholders' Agreement incorporated by reference as
Exhibit 10.31 to this Registration Statement)
10.32** -- Company Agreement between The Societe National de
Financement, GTS S.A.M. and The Principality of Monaco,
dated September 27, 1995
10.33** -- Joint Venture Agreement between SFMT-Hungaro Inc. and
Montana Holding Vagyonkezelo Kft., dated December 23,
1993
10.34** -- Joint Venture and Shareholders' Agreement among Gerard
Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
and Microsystem Telecom Rt., dated August 5, 1994
10.35** -- Agreement on the Establishment of Limited Liability
Company between SFMT-Czech, Inc. and B&H s.r.o., dated
July 12, 1994
10.36** -- Formation of the Equity Joint Venture between GTS and
SSTIC, dated April 12, 1995
10.37** -- Contract to Establish the Sino-foreign Cooperative Joint
Venture Beijing Tianmu Satellite Communications
Technology Co., Ltd, amended, by and between China
International Travel Service Telecom Co., Ltd. and
American China Investment Corporation, dated March 27,
1996
10.38** -- Joint Venture Contract between GTS TransPacific Ventures
Limited and Shanghai Intelligence Engineering, Inc.,
dated March 28, 1996
10.39** -- Agreement between Global TeleSystems Group, Inc. and
Cesia S.A., dated June 21, 1997
100
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.40** -- Consulting Agreement between SFMT, Inc. and Alan B.
Slifka, dated March 1, 1994
10.41** -- Consulting Agreement between Global TeleSystems Group,
Inc. and Bernard J. McFadden, dated August 15, 1996
10.42** -- Consulting Agreement between CESIA S.A. and Hermes Europe
Railtel B.V., dated June 20, 1997
10.43++ -- Master Agreement, dated June , 1998 between Ebone
Holding Association, Ebone A/S, Hermes Europe Railtel
Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
10.44+++ -- Plusnet Acquisition Agreement between Esprit Telecom
Group plc and Plusnet Gesellschaft fur Netzwerk Services
GmbH
10.45**** -- Press Announcement of Esprit Telecom Group plc, dated
December 8, 1998, announcing the signing of a definitive
offer agreement with Global TeleSystems Group, Inc.
10.46++++ -- Form of Undertaking of shareholders of NetSource ASA made
in connection with the acquisition of NetSource ASA by
Global TeleSystems Group, Inc.
10.47++++ -- Form of Amendment Agreement to the Undertaking of
shareholders of NetSource ASA made in connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.48++++ -- Form of Waiver Agreement in made connection with the
acquisition of NetSource ASA by Global TeleSystems Group,
Inc.
10.49++++ -- Form of Waiver Agreement with certain shareholders of
NetSource ASA made in connection with the acquisition of
NetSource ASA by Global TeleSystems Group, Inc.
10.50+++++ -- Indenture dated as of December 18, 1997 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
2007 and 11 1/2% DM Senior Notes due 2007
10.51+++ -- Indenture dated as of June 24, 1998 between Esprit
Telecom Group plc, as Issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent, relating to the
Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
2008 and 11% DM Senior Notes due 2008
10.52*** -- Supplemental Indenture, dated December 23, 1998 of
$230,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.53*** -- Supplemental Indenture, dated December 23, 1998 of DM
125,000,000 11 1/2% Senior Notes due 2007, supplementing
the indenture dated as of December 18, 1997, between
Esprit Telecom Group plc, as issuer, and The Bank of New
York, as Trustee, Registrar and Paying Agent
10.54*** -- Supplemental Indenture, dated December 23, 1998 of DM
150,000,000 11% Senior Notes due 2008, supplementing the
indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer and The Bank of New York, as
Trustee, Registrar and Paying Agent
101
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.55*** -- Supplemental Indenture, dated December 23, 1998 of
$150,000,000 10 7/8% Senior Notes due 2008, supplementing
the indenture dated as of June 24, 1998, between Esprit
Telecom Group plc, as issuer, and The Bank of New York,
as Trustee, Registrar and Paying Agent
10.56***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc., and Apax Funds
Nominees Limited and Warburg, Pincus Ventures, L.P. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc.,
Dresdner Kleinwort Benson North American LLC, BT Alex.
Brown Incorporated, Lehman Brothers Inc., Prudential
Securities Incorporated, ING Baring Furman Selz LLC,
BancBoston Robertson Stephens Inc., CIBC Oppenheimer
Corp., ABN AMRO Incorporated, Arnhold and S.
Bleichroeder, Inc. and Credit Suisse First Boston
Corporation.
10.57***** -- Purchase Agreement dated as of April 19, 1999 by and
among Global TeleSystems Group, Inc. and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated,
and Lehman Brothers Inc.
10.58***** -- Agreement for the transfer of Omnicom Shares dated as of
April 14, 1999 by and among Alain Nicolazzi, Florent
Martenne-Duplan, Philippe Ait Yahia and various other
Omnicom shareholders and Esprit Telecom Holdings, Limited
and Global TeleSystems Group, Inc.
12.1# -- Statement Re: Computation of Deficiency of Earnings
Available to Cover Fixed Charges and Preferred Stock
Dividends
21.1++++++++ -- List of Subsidiaries of the Registrant
23.1# -- Consent of Ernst & Young LLP, Independent Auditors
23.2# -- Consent of PricewaterhouseCoopers, Independent
Accountants
23.3# -- Consent of Arnold Y. Dean, Deputy General Counsel of the
Registrant (included in his opinion delivered under
Exhibit No. 5.1)
24.1# -- Powers of Attorney (included on signature page to
registration statement No. 333-78097)
- ---------------
# Filed herewith.
* Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1998, filed on
March 23, 1999.
** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-36555), filed on
September 26, 1997.
*** Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-4 (File No. 333-68511), filed on
December 8, 1998.
**** Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Annual Report on Form 20-F for the year ended
September 30, 1998, filed on December 24, 1998.
***** Incorporated by reference to the corresponding exhibit to our Current
Report on Form 8-K, dated April 14, 1999 and filed on April 28, 1999
****** Incorporated by reference to the corresponding exhibit to our
Quarterly Report on Form 10-Q for the three month period ended March
31, 1999, filed on May 17, 1999
******* Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Europe B V Registration Statement on Form S-4/A (File No.
333-94339), filed on February 2, 2000.
102
+ Incorporated by reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended December 31, 1997, filed on
March 31, 1998.
++ Incorporated by reference to the corresponding exhibit to our
Registration Statement on Form S-1 (File No. 333-52733), filed on May
14, 1998.
+++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-4 (File No.
333-9292), filed on August 13, 1998.
++++ Incorporated by reference to the corresponding exhibit to the Global
TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.
+++++ Incorporated by reference to the corresponding exhibit to the Esprit
Telecom Group plc Registration Statement on Form F-1 (File No.
333-8012), filed on December 10, 1997.
++++++ Reserved
+++++++ Incorporated by reference to Exhibit No. 10 to the Company's Report on
Form 10-Q for the quarter ended March 31, 1999.
++++++++ Incorporated by reference to the correspondingly numbered Exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.