<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997.
REGISTRATION NO. 333-34281
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
RSL COMMUNICATIONS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 4813 N/A
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
----------------------
CLARENDON HOUSE
CHURCH STREET
HAMILTON HM CX BERMUDA
(441) 295-2832
(ADDRESS AND TELEPHONE NUMBER OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
ITZHAK FISHER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RSL COMMUNICATIONS, N. AMERICA, INC.
767 FIFTH AVENUE, SUITE 4300
NEW YORK, NY 10153
(212) 317-1800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------------
Copies to:
ROBERT L. KOHL, ESQ. WILLIAM P. ROGERS, JR., ESQ.
MARK D. FISCHER, ESQ. CRAVATH, SWAINE & MOORE
ROSENMAN & COLIN LLP WORLDWIDE PLAZA
575 MADISON AVENUE 825 EIGHTH AVENUE
NEW YORK, NY 10022 NEW YORK, NY 10019
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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. / /
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 effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------------
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 BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET TO FORM S-1
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
-------------------------------------- -------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus.......................... Forepart of the Registration
Statement and Outside Front Cover
Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front and Outside Back Cover
Pages; Available Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed
Charges............................. Prospectus Summary; Risk Factors;
Selected Consolidated Financial Data
4. Use of Proceeds....................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price....... Underwriting
6. Dilution.............................. Dilution
7. Selling Security Holders.............. (1)
8. Plan of Distribution.................. Outside Front Cover; Underwriting
9. Description of Securities to be
Registered.......................... Outside Front Cover; Description of
Capital Stock; Underwriting
10. Interests of Named Experts and
Counsel............................. (1)
11. Information with Respect to the
Registrant.......................... Outside Front Cover; Prospectus
Summary; Dividend Policy;
Capitalization; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Relationships
and Related Transactions; Principal
Shareholders; Shares Eligible for
Future Sale; Description of Capital
Stock; Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities (1)
</TABLE>
- ------------------------
(1) Omitted from Prospectus because the item is inapplicable or the answer is in
the negative.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. offering of shares of Common Stock (the 'U.S.
Prospectus') and one to be used in connection with a concurrent international
offering of shares of Common Stock (the 'International Prospectus'). The U.S.
Prospectus and the International Prospectus are identical except that they
contain different front and back cover pages and different descriptions of the
plan of distribution (contained under the caption 'Underwriting' in each of the
U.S. and International Prospectuses). The form of U.S. Prospectus is included
herein and is followed by those pages to be used in the International Prospectus
which differ from, or are in addition to, those in the U.S. Prospectus. Each of
the pages for the International Prospectus included herein is labeled 'Alternate
Page for International Prospectus.'
<PAGE>
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 SEPTEMBER 5, 1997
[LOGO]
7,200,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the 7,200,000 Class A common shares, par value $.00457 per share (the
'Class A Common Stock'), offered by RSL Communications, Ltd. (the 'Company'),
5,760,000 shares are being offered hereby in the United States (the 'U.S.
Offering') and 1,440,000 shares are being offered in a concurrent international
offering outside the United States (the 'International Offering' and, together
with the U.S. Offering, the 'Offerings'). The initial public offering price and
the aggregate underwriting discount per share will be identical for both
Offerings. See 'Underwriting.'
The shares of Class A Common Stock offered hereby are being sold by the
Company.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. It is currently anticipated that the initial public
offering price of the Class A Common Stock will be between $19.00 and $22.00 per
share. For factors considered in determining the initial public offering price,
see 'Underwriting.'
As of the date of this Prospectus, the Company has two classes of authorized
common shares, the Class A Common Stock and Class B common shares (the 'Class B
Common Stock', and together with the Class A Common Stock, the 'Common Stock').
The holders of both classes of Common Stock have identical rights, except that
(i) holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to 10 votes per share, (ii) shares
of Class B Common Stock are convertible at any time at the option of the holders
into shares of Class A Common Stock on a share-for-share basis and (iii) shares
of Class B Common Stock may only be transferred to other original holders of
Class B Common Stock and certain related parties. The Company also has
outstanding convertible preferred shares (the 'Preferred Stock') which will be
automatically converted into shares of Class B Common Stock on a share-for-share
basis upon the closing of the Offerings. See 'Description of Capital Stock.'
SEE 'RISK FACTORS' BEGINNING ON PAGE 13 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Company has filed an application for quotation of the Class A Common
Stock on the Nasdaq National Market under the symbol 'RSLC.'
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ------------
<S> <C> <C> <C>
Per Share...... $ $ $
Total (3)...... $ $ $
</TABLE>
- ------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
'Underwriting.'
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 864,000 shares of Class A Common Stock at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, the Company has granted the
International Underwriters a similar option with respect to an additional
216,000 shares of Class A Common Stock as part of the concurrent
International Offering. If such options are exercised in full, the total
initial public offering price, underwriting discount and proceeds to the
Company will be , and , respectively. See
'Underwriting.'
----------------------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery through the facilities of The
Depository Trust Company on or about September , 1997, against payment
therefor in immediately available funds.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SBC WARBURG DILLON READ INC.
----------------------
The date of this Prospectus is September , 1997.
<PAGE>
[On the inside front cover is a map showing the Company's European
operations, switching facilities (current and planned), the existing and planned
circuit links between such switches and the Company's Internet gateways (current
and planned), and photos of RSL phone cards from around the world. On the inside
of the gatefold is a global map showing the sites of the Company's switches
(current and planned) and the existing and planned cable and satellite links
between such switches and a list of the Company's operating agreements.]
2
<PAGE>
----------------------
FOOTNOTES TO FOREGOING MAPS
<TABLE>
<S> <C>
+ The Company is negotiating to purchase ownership interests in the
identified undersea fiber optic cables.
++ The Company intends to install switches in the identified markets.
* The Company intends to lease international circuits in the identified
markets.
** The Company has signed non-binding agreements with local entities in the
identified markets to install Internet gateways.
*** A single operating agreement applies to each of these countries.
</TABLE>
There can be no assurances that the Company will complete any purchase of
undersea fiber optic cables, any negotiation of a lease for international
circuits or any installation of switches or Internet gateways.
----------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
----------------------
The Company intends to furnish to its members (hereinafter referred to as
'shareholders') annual reports containing audited consolidated financial
statements, prepared in accordance with United States generally accepted
accounting principles ('U.S. GAAP'), examined and reported upon by its
independent auditors.
The consolidated financial statements of the Company (the 'Consolidated
Financial Statements') and the notes thereto appearing elsewhere in this
Prospectus are presented in accordance with U.S. GAAP, and amounts originally
measured in foreign currencies for all periods presented have been translated
into U.S. dollars in accordance with the methodology set forth in Note 3 to the
Consolidated Financial Statements of the Company.
----------------------
In this Prospectus, references to 'dollars' and '$' are to United States
dollars. For purposes of the balance sheet data included in this Prospectus,
conversions of foreign currencies to U.S. dollars have been calculated on the
basis of exchange rates in effect on the balance sheet dates. Conversions of
foreign currencies to U.S. dollars in the pro forma and historical financial
information included herein have been calculated, for purposes of the statements
of operations, on the basis of average exchange rates over the periods
presented. Exchange rates per United States dollar as of certain dates for
certain currencies are set forth below.
<TABLE>
<CAPTION>
RATE AS OF RATE AS OF RATE AS OF RATE AS OF
CURRENCY DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997 AUGUST 29, 1997
- --------------------- ----------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Australian Dollar.... (1) 1.26 1.33 1.37
British Pound........ .65 .58 .60 .62
Dutch Guilders....... (1) 1.74 1.96 2.03
Finnish Markka....... 4.37 4.60 5.19 5.45
French Franc......... 4.95 5.19 5.87 6.09
German Mark.......... 1.44 1.54 1.74 1.81
Swedish Krona........ 6.64 6.89 7.73 7.89
Danish Krone......... (1) (1) 6.63 6.84
</TABLE>
- ------------------
(1) The Company had no business activity in these countries during the periods
indicated.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements and the notes
thereto, appearing elsewhere in this Prospectus. Unless the context otherwise
requires, the term 'Company' means RSL Communications, Ltd., a Bermuda
corporation, its predecessors and all of its subsidiaries. Unless otherwise
indicated in this Prospectus, all information in this Prospectus, including all
adjusted and pro forma financial information, has been adjusted to give
retroactive effect to the Recapitalization described below in this Summary and
under the heading 'Description of Capital Stock.' Industry data used throughout
this Prospectus was obtained from industry publications and has not been
independently verified by the Company. Certain of the information contained in
this Prospectus, including information with respect to the Company's plans and
strategy for its business and related financing, are forward-looking statements.
For a discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see 'Risk Factors.' Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the over-allotment options granted to the U.S. and International Underwriters.
THE COMPANY
OVERVIEW
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of international and domestic telephone services to
both carrier and commercial accounts. These services include international long
distance calling to over 200 countries and calling card, private line and
value-added telecommunications services. The Company focuses on providing
international long distance voice services to small and medium-sized businesses
in key markets. The Company currently has revenue generating operations in the
United States, the United Kingdom, France, Germany, Sweden, Finland, the
Netherlands, Denmark and Australia. The Company is in the process of commencing
operations through its investments in majority-owned entities in Italy, Austria,
Venezuela and Japan, and through its 30% investment in a Portuguese
telecommunications company. In 1995, approximately 62% of all international long
distance telecommunications minutes originated in these markets. The Company
plans to expand its operations and network into additional key markets which
account for a significant portion of the world's remaining international
traffic. The Company's consolidated revenues for the year ended December 31,
1996 were $113.3 million and for the six months ended June 30, 1997 were $109.4
million.
The Company was formed by Ronald S. Lauder and Itzhak Fisher in 1994 to
capitalize on the opportunities created by the growth, deregulation and
profitability of the international long distance market. The Company has grown
rapidly through acquisitions, strategic investments and joint ventures, as well
as through the start-up of its own operations in key markets. The Company began
its operations in the United States in order to establish a presence in the
largest and one of the most deregulated telecommunications markets in the world,
and has since expanded its presence to key European countries in anticipation of
continued telecommunication deregulation in the European Union (the 'EU'). In
order to pursue opportunities in Latin America, the Company recently formed a
joint venture with entities controlled by the Cisneros Group of Companies (the
'Cisneros Group'), a privately held conglomerate with significant interests in,
among other things, the Latin American media and communications industry. The
Company intends to continue to expand rapidly by establishing or acquiring
operations in additional countries as they deregulate, including countries in
Asia.
The Company's strategic objective is to create a low-cost facilities-based
global network that provides high quality international telecommunications
services to small and medium-sized businesses in key markets. The Company
employs a 'first to market' entry strategy to establish a presence in targeted
markets ahead of full deregulation by (i) investing in new or existing
facilities-based networks (which are then integrated into the Company's existing
network) while (ii) developing multiple marketing and distribution channels for
telecommunications services.
4
<PAGE>
ADVANCED AND LOW COST NETWORK INFRASTRUCTURE
The core of the Company's operations is 'RSL-NET,' its integrated digital
telecommunications network, which is being developed to minimize the overall
transmission costs of carrying telecommunications traffic while maintaining high
('toll') quality. RSL-NET is comprised of (i) the Company's owned facilities,
which consist of international and domestic switches and ownership interests in
international fiber optic cables, (ii) operating agreements to exchange traffic
directly with telecommunications carriers in other countries and (iii)
transmission capacity leased from other carriers and satellite providers. The
connection of the Company's switching facilities is a critical element of
RSL-NET. This connection allows the Company to bypass the costs associated with
transporting the international portion of a call through a third party carrier,
which provides the Company with an advantage in applying least cost routing for
calls which are originated and terminated utilizing the Company's switches. All
of the Company's current switches, other than its switches in Australia and
Portugal, are directly or indirectly linked. The Company's existing
international gateway switches conform to international signaling and
transmission standards provided for in International Telegraph and Telephone
Consultative Committee ('CCITT') recommendations and allow the Company to
interconnect its network to existing government-owned post, telegraph and
telephone monopolies ('PTT') and carrier networks around the world while
maintaining quality and dependable services. The Company presently has eight
international gateway switches located in New York, Los Angeles, London,
Stockholm, Paris, Frankfurt, Helsinki and Sydney, and eight domestic switches in
Rotterdam, Amsterdam, New York, London, Lisbon, Melbourne, Brisbane and Caracas.
The Company generally utilizes state-of-the-art Ericsson AXE-10 switches for its
international gateway switches. The Company believes that a single switch
platform allows the Company to develop new services and upgrade network software
on a more efficient basis when compared to other global carriers which may
employ multiple switch technologies. The Company is also pursuing alternative
transmission technologies such as the Internet in order to minimize its
operating costs. See 'Recent Developments--Acquisition of Delta Three' and
'Business--Internet Telephony Operation.'
DEVELOPMENT OF MARKETING AND DISTRIBUTION CHANNELS
The Company is developing a wide range of marketing and distribution
channels in order to expand its customer base, particularly in its target market
of small to medium-sized businesses. The Company markets its products and
services through (i) its direct sales forces; (ii) networks of independent
agents and distributors; and (iii) telemarketing organizations. The Company's
services are currently marketed independently by the Company's local operations
in each country ('Local Operators'). The Company is in the process of developing
a universal brand name to provide uniformity of image and to create worldwide
name recognition for the Company.
MARKET OPPORTUNITY
The international long distance public switched telecommunications market,
consisting of telephone calls between countries, generated an estimated $55
billion in revenue and 60.3 billion minutes of use in 1995 and is currently
recognized as one of the fastest growing and most profitable segments of the
long distance telecommunications industry. The Company currently has
significantly less than a 1% share of this market. International long distance
minutes are projected to grow between approximately 10% and 17% per annum
through the year 2000, with growth spurred by (i) the continued deregulation of
telecommunications markets throughout the world, (ii) increased capacity,
improved quality and lower operating costs attributable to technological
improvements, (iii) the expansion of telecommunications infrastructure and (iv)
the globalization of the world's economies and free trade. International
settlement rates (the rates paid to other carriers to terminate an international
call) have declined over the past five years and, in connection with a recent
U.S. Federal Communications Commission (the 'FCC') initiative to balance the
U.S. settlement deficit, are expected to continue to decline. The costs for
leased transmission capacity have also declined and are expected to continue to
decline. Furthermore, the trend towards deregulation is expected to further
reduce carriers' costs of originating and terminating calls by allowing carriers
in some jurisdictions to interconnect with the domestic public switched
telephone network ('PSTN') in each deregulated market. However, these are
forward looking statements and there can be no assurances in this regard.
5
<PAGE>
COMPANY OPERATIONS
Each of the Company's operations is at a different stage of development.
The following table shows the Company's principal operations by country, the
principal subsidiary conducting such operations, the percentage of each such
subsidiary owned by the Company, the date of acquisition or start-up of such
operations and the date each such operation began (or is anticipated to begin)
generating revenues (which may, in certain circumstances, have been prior to the
Company's acquisition of such operation):
<TABLE>
<CAPTION>
COMPANY'S DATE OF
PERCENTAGE ACQUISITION OR COMMENCEMENT OF
COUNTRY OPERATING ENTITY OWNERSHIP START-UP DATE(1) OPERATIONS(2)
- --------------- ----------------------------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
United States RSL COM U.S.A., Inc................ 92%(3) March 1995 May 1990
United Kingdom RSL COM Europe Ltd................. 100% August 1995 May 1996
Sweden RSL COM Sweden AB.................. 100% November 1995 May 1996
Finland RSL COM Finland OY................. 100% November 1995 May 1996
France RSL COM France S.A................. 100% May 1996 January 1994
Germany RSL COM Deutschland GmbH........... 100% May 1996 November 1993
The Netherlands Belnet Nederland B.V............... 75%(4) October 1996 October 1995
Australia RSL COM Australia Pty. Ltd......... 100% October 1996 April 1997
Denmark RSL Denmark A/S.................... 75%(4) November 1996 May 1997
Japan RSL COM Japan K.K.................. 100% March 1997 January 1998(5)
Portugal Maxitel Servicos e Gestao de
Telecomunicacoes, SA............. 30% April 1997 November 1997(5)
Italy DECADE Communications S.r.l.(6).... 85%(7) August 1997 January 1998(5)
Venezuela Sprintel de Venezuela C.A.(8)...... 51%(9) August 1997 January 1998(5)
Austria Newtelco Telekom AG(10)............ 50%(7)(11) August 1997 January 1998(5)
</TABLE>
- ------------------------
(1) Acquisition date refers to the Company's initial purchase of an interest in
the operating entity.
(2) Such date refers to the date upon which the operating entity began or is
currently expected to begin generating revenues from the sale of its
facilities-based international telecommunications services, although
certain of the operating entities may have been generating revenues from
other activities prior to the date of the Company's investment therein.
(3) The Company owns 92% of International Telecommunications Group, Ltd.
('ITG'), which in turn owns 100% of RSL COM U.S.A., Inc. (formerly known as
International Telecommunications Corporation) ('RSL USA'). In September
1995, the Company gained majority control of ITG and began consolidating
its U.S. operations into RSL USA. The Company acquired its 92% interest in
ITG over a 26 month period commencing March 1995 and has entered into an
agreement with one of the minority shareholders of ITG, and is negotiating
with ITG's remaining minority shareholders, to acquire the remaining
interests in ITG. Each such transaction is expected to close on or prior to
the closing of the Offerings. ITG in turn owns 100% of Cyberlink, Inc.
('Cyberlink'), which was acquired in a series of transactions from
September 1995 through March 1997.
(4) The Company currently owns 75% of Belnet Nederland B.V. ('RSL
Netherlands'), which in turn owns 100% of RSL Denmark A/S; however, the
sole minority shareholder of RSL Netherlands has agreed to exchange his
entire interest in RSL Netherlands for cash and shares of Class A Common
Stock, effective upon the closing of the Offerings, at which time the
Company will own 100% of each of RSL Netherlands and RSL Denmark A/S.
(5) Such date refers to the anticipated date of commencement of operations. The
projected dates are forward-looking statements and, in the event the
Company does not timely receive regulatory approvals, switches cannot be
installed or become operational on a timely basis or the Company is unable
to hire necessary personnel, among other reasons, there can be no assurance
that such operations will commence generating revenues on such dates, if at
all.
(6) The Company intends to change the name of DECADE Communications S.r.l. to
RSL COM Italy S.r.l. ('RSL Italy').
(7) The minority shareholders of these operating entities have the right, but
not the obligation, to exchange their ownership interests in each
respective subsidiary entity for shares of Class A Common Stock or, under
certain circumstances, cash, at the Company's option. Any such exchange
would result in an increase in the Company's ownership interest in the
relevant subsidiary of up to 100%. The rights held by the minority
shareholders of RSL Italy currently are not exercisable. The minority
shareholder of Newtelco Telekom AG ('RSL Austria') has waived its current
right to exchange his rights in connection with the Offerings.
(8) The Company intends to change the name of Sprintel de Venezuela C.A. to RSL
COM Venezuela C.A.
(9) The Company owns 51% of RSL Communications Latin America, Ltd. ('RSL Latin
America'), which in turn currently owns 49% of Sprintel de Venezuela C.A.
('Sprintel'). The remaining 51% interest in Sprintel will be transferred to
RSL Latin America upon receipt of the required approval of the appropriate
regulatory authorities. The minority shareholder of RSL Latin America has
the right, including in connection with the Offerings, to exchange its 49%
ownership interest in RSL Latin America for either shares of Class A Common
Stock or cash, at the Company's option. The minority shareholder has waived
such right in connection with the Offerings.
(10) The Company intends to change the name of Newtelco Telekom AG to RSL
Austria AG.
(11) The Company currently owns 50% of RSL Austria. Upon completion of the
requisite corporate formalities, which is expected to occur in September
1997, the Company will own 90% of RSL Austria.
6
<PAGE>
COMPANY STRATEGY
The Company's strategic objective is to create a low-cost facilities-based
global network that provides high quality international telecommunications
services to small and medium-sized businesses in key markets. The key elements
of the Company's strategy to achieve this objective are as follows:
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
is currently recognized as one of the fastest growing and most profitable
segments of the long distance industry. The Company provides a broad array of
international and domestic services, but focuses on providing services to end-
users which generate significant calling traffic between countries to capitalize
on (i) the continued growth of international traffic and (ii) the margin
opportunity created by the high end-user rates currently maintained by PTTs and
other dominant carriers.
ESTABLISH OPERATIONS IN KEY MARKETS
The Company establishes operations in markets that (i) originate or
terminate significant levels of international traffic and (ii) are, or are in
the process of being, deregulated. The Company has structured its Local
Operators to be managed independently and expects its Local Operators to be
separately profitable, while benefiting from the centralized strategic,
financial and network support provided by the Company.
ENTER MARKETS EARLY
The Company seeks to enter new markets ahead of full deregulation in an
attempt to gain competitive advantages over carriers which attempt to enter a
market after deregulation is complete. These advantages include (i) the
development of multiple sales channels and the establishment of a customer base
prior to widespread competition, (ii) the early acquisition of scarce
experienced technical and marketing personnel and distribution channels and
(iii) the achievement of name recognition as one of the early competitors to the
incumbent PTTs. The Company employs multiple marketing and distribution
channels, including direct sales forces, telemarketing organizations, agents and
resellers, while also forming marketing alliances with other service providers,
such as Internet service providers and mobile service providers.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 in international
telephone calls per month. The Company believes that this segment offers
significant market opportunities because it has traditionally been underserved
by the major global telecommunications carriers and the PTTs. The Company
believes that in most markets, small and medium-sized businesses account for a
significant percentage of international calling traffic and will continue to do
so in the future.
DEVELOP A COST COMPETITIVE GLOBAL NETWORK
Most of the Local Operators have network switching facilities, known as
points of presence ('POPs'), to provide international voice and other
telecommunications services in their markets. By integrating its current and
future POPs into RSL-NET, the Company believes that it will be able to
originate, transport and terminate traffic utilizing its own network, thereby
bypassing the high costs associated with the transport of the international
portion of a call through a third party carrier. This is expected to enable the
Company to reduce significantly its operating costs for calls that originate and
terminate in markets in which the Company has Local Operators, as well as its
overall operating costs.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. The Company is continuously reviewing acquisition
opportunities, and seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier,
7
<PAGE>
experience with additional or emerging telecommunications products and
technologies and/or experienced management. In addition, the Company seeks to
enter into strategic alliances which the Company believes will enhance its
ability to expand and grow its business. For example, the Company has recently
entered into a joint venture with the Cisneros Group and a strategic alliance
with L.M. Ericsson A.B. ('Ericsson'), a leading global provider of
telecommunications equipment, and has acquired a majority interest in Delta
Three, Inc. ('Delta Three'), a telecommunications provider utilizing the
Internet and networks based on Internet Protocols to provide telecommunications
services. See '--Recent Developments.'
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has retained a number of experienced management personnel in
the telecommunications industry, many of whom have had significant experience
with incumbent providers, as well as early competitors in deregulating markets.
As a result, the Company believes that it is well positioned to manage the rapid
growth of its customer base and network infrastructure.
MANAGE NETWORK INVESTMENTS
The Company seeks to manage the investment of capital within its network on
an incremental basis in order to maximize the efficiency of its capital
expenditures program. In general, the Company transmits traffic by leasing
capacity on a variable cost per minute basis until it believes that a direct
investment in facilities or a fixed cost lease arrangement between countries or
on a particular route is warranted. When the cost of owning facilities is
justified relative to leasing facilities and the Company invests in such
facilities, the Company generally experiences higher gross margins and lower
overall transmission costs.
RECENT DEVELOPMENTS
ACQUISITION OF MAJORITY INTEREST IN DELTA THREE
In July 1997, the Company acquired a majority interest in Delta Three.
Delta Three utilizes the Internet, traditionally a device for data
communications, as a transmission medium for voice communications. The service
offered by Delta Three allows customers to place long distance and international
phone calls using standard telephones, without requiring any additional
equipment. Delta Three also provides wholesale call termination services to
other telecommunications service providers.
The Company and Delta Three also entered into a services agreement pursuant
to which, among other things, Delta Three provides the Company with discounted
carrier telephony services and the Company provides Delta Three with termination
services at preferred rates and the co-location of Delta Three's Internet
gateway servers with the Company's facilities. The Company believes that the
acquisition of a majority interest in Delta Three positions the Company at the
forefront of the rapidly emerging Internet telephony industry. See
'Business--Other Operations.'
PRIVATE PLACEMENT OF NOTES AND EXCHANGE OFFER
In October 1996, the Company and RSL Communications PLC (the 'Note
Issuer'), a wholly owned subsidiary of the Company, completed the private
offering (the 'Debt Offering') of 300,000 units, each unit consisting of one
12 1/4% Senior Note due 2006 of the Note Issuer guaranteed by the Company and
one warrant to purchase 3.975 shares of Class A Common Stock at $0.0457 per
share (the 'Warrants'). The units were sold for an aggregate purchase price of
$300.0 million. In May 1997, in accordance with the indenture governing such
notes (the 'Indenture'), the Company and the Note Issuer consummated an exchange
offer pursuant to which the notes issued in the Debt Offering were exchanged for
substantially identical notes registered under the Securities Act of 1933, as
amended (the 'Securities Act'). The notes issued in the Debt Offering and the
exchange offer are referred to collectively as the 'Notes.'
8
<PAGE>
PENDING ACQUISITIONS
The Company is currently engaged in negotiations with several parties in
various markets with respect to potential strategic acquisitions and alliances
and recently executed a non-binding letter of intent to make a significant
investment to acquire a controlling interest in a facilities-based long distance
carrier in the United States. There can be no assurance, however, that the
Company will successfully complete any of these transactions.
THE RECAPITALIZATION
Prior to the consummation of the Offerings, the Company will revise its
capital structure (the 'Recapitalization'), in part to (i) effect a 2.19-for-one
stock split for each outstanding share of each class of Common Stock and each
outstanding share of Preferred Stock, (ii) increase the number of authorized
shares of its Class A Common Stock and Class B Common Stock to an aggregate of
200,000,000 shares, (iii) increase the number of authorized shares of its
Preferred Stock to 30,000,000 and (iv) eliminate the Company's Class C common
shares.
CERTAIN MINORITY INTERESTHOLDER RIGHTS
The Company has granted to a number of minority shareholders of ITG, RSL
Netherlands, RSL Austria, RSL Italy, Delta Three, RSL Latin America and
PrimeCall Services B.V. ('PrimeCall Europe') and officers of certain of its
other subsidiaries (the 'Minority Interestholders') options which allow the
Minority Interestholders to exchange their shares or interests in the respective
subsidiary for shares of the Class A Common Stock (the 'Roll-Up Rights').
Certain of the Minority Interestholders have waived their Roll-Up Rights,
and the Company has or intends to enter into agreements with other Minority
Interestholders in connection with their exercise or waiver of their rights. See
'Shares Eligible for Future Sale' for a detailed discussion of the Minority
Interestholders' exercise or waiver of Roll-Up Rights.
Additionally, the Company has granted to a number of Minority
Interestholders certain piggyback registration rights with respect to shares of
Class A Common Stock acquired pursuant to an exercise of their Roll-Up Rights.
HEADQUARTERS
The Company's headquarters are located at Clarendon House, Church Street,
Hamilton HM CX Bermuda (telephone number: 441-295-2832). The Company also
maintains executive offices with respect to some of its operations at 767 Fifth
Avenue, Suite 4300, New York, New York 10153 (telephone number: 212-317-1800).
9
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Class A Common Stock offered by the
Company(1):
U.S. Offering.................... 5,760,000 shares
International Offering........... 1,440,000 shares
Total....................... 7,200,000 shares
Common Stock to be Outstanding
after the Offerings(1):
Class A Common Stock(2).......... 8,657,094 shares
Class B Common Stock(3)(4)....... 30,772,953 shares
Total(2)(3)(4).............. 39,430,047 shares
Use of Proceeds.................... The Company intends to use the net proceeds
from the Offerings for (i) strategic merger
and acquisition activities, including
certain potential acquisitions which the
Company currently is pursuing, (ii) the
purchase of additional interests in
international cable systems and additional
transmission and switching equipment, (iii)
the purchase of minority interests in its
subsidiaries and (iv) working capital
purposes relating to the expansion of the
Company's operations. Depending on the size
and timing of any acquisitions, the Company
may also use a portion of such proceeds to
reduce its outstanding debt, including
prepayment of a portion of the principal
amount of the Notes.
Voting Rights(5)................... The holders of Class A Common Stock are
entitled to one vote per share. The holders
of Class B Common Stock are entitled to 10
votes per share.
Proposed Nasdaq National Market
symbol........................... RSLC
</TABLE>
- ------------------
(1) Assumes the Underwriters' over-allotment options are not exercised. See
'Underwriting.' If the Underwriters exercise such over-allotment options in
full, the number of shares of Class A Common Stock sold in the U.S. Offering
and the International Offering will be 6,624,000 and 1,656,000,
respectively.
(2) Does not include (i) 2,792,888 shares of Class A Common Stock issuable upon
the exercise of outstanding stock options (including 1,333,327 shares
issuable upon the exercise of currently exercisable options and stock
options expected to be issued in connection with the exercise of certain
Roll-Up Rights), (ii) 2,750,000 shares of Class A Common Stock to be
reserved for issuance pursuant to future option grants under the Company's
proposed stock option and compensation plans, (iii) 30,772,953 shares of
Class A Common Stock issuable upon the conversion of the shares of Class B
Common Stock (which includes Class B Common Stock to be issued upon the
conversion of the Preferred Stock), (iv) 459,900 shares of Class A Common
Stock issuable upon the conversion of the same number of shares of Class B
Common Stock which are issuable upon the exercise of warrants issued to
Ronald S. Lauder, the Chairman of the Company and the Company's largest and
controlling shareholder (the 'Lauder Warrants'), (v) 1,192,455 shares of
Class A Common Stock issuable on exercise of the Warrants, and (vi) 307,884
shares of Class A Common Stock which are expected to be issued to the
Minority Interestholders upon the exercise of their Roll-Up Rights (assuming
an initial public offering price of $20.50 per share). See 'Certain
Relationships and Related Transactions' and 'Shares Eligible for Future
Sale.'
(3) Shares of the Class B Common Stock are convertible at any time into shares
of the Class A Common Stock on a share-for-share basis.
(4) Includes 20,244,066 shares issuable upon conversion of the outstanding
shares of Preferred Stock. The outstanding shares of Preferred Stock will be
automatically converted into shares of Class B Common Stock on a
share-for-share basis upon the closing of the Offerings.
(5) Holders of Preferred Stock are entitled to a number of votes equal to the
number of votes to which the underlying shares of Class B Common Stock would
be entitled. The outstanding shares of Preferred Stock will be automatically
converted into shares of Class B Common Stock upon the closing of the
Offerings.
RISK FACTORS
See 'Risk Factors' for a discussion of certain risks that should be
considered in connection with an investment in the Class A Common Stock offered
hereby.
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<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary consolidated financial data
for the Company for each of the three years in the period ended December 31,
1996 and for the six month periods ended June 30, 1996 and 1997, which have been
derived from the Consolidated Financial Statements and notes thereto. The
information as of and for the year ended December 31, 1994 was derived from the
Consolidated Financial Statements of the Company's predecessor entity, ITG. The
Company's 1996 and 1995 and the Company's predecessor's 1994 Historical
Financial Statements have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein.
In the opinion of management, the unaudited Consolidated Financial
Statements have been prepared on the same basis as the audited Consolidated
Financial Statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the full year. The Company has experienced rapid growth
over the periods set forth below, which rate may not necessarily continue.
Accordingly, the financial and operating results set forth below may not be
indicative of future performance.
The pro forma consolidated statement of operations data for the year ended
December 31, 1996 include the historical results of operations for the Company
and are prepared as though the acquisitions of RSL Netherlands and the
businesses of Sprint in France and Germany had occurred on January 1, 1996. The
summary consolidated financial and operating data presented below should be read
along with 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Consolidated Financial Statements and the related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------- JUNE 30,
PREDECESSOR HISTORICAL HISTORICAL PRO FORMA -------------------
1994 1995(1) 1996 1996 1996 1997
----------- ---------- ---------- --------- -------- --------
($ IN THOUSANDS, EXCEPT LOSS PER SHARE) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues........................... $ 4,702 $ 18,617 $ 113,257 $ 124,236 $ 39,764 $109,361
Cost of services................... (4,923) (17,510) (98,461) (106,157) (35,657) (96,631)
----------- ---------- ---------- --------- -------- --------
Gross profit (loss)................ (221) 1,107 14,796 18,079 4,107 12,730
Selling, general and administrative
expense.......................... (2,395) (9,639) (38,893) (41,700) (13,656) (35,271)
Depreciation and amortization...... (240) (849) (6,655) (9,228)(2) (2,175) (8,947)
----------- ---------- ---------- --------- -------- --------
Loss from operations............... (2,856) (9,381) (30,752) (32,849) (11,724) (31,488)
Interest income.................... -- 173 3,976 3,976 80 7,224
Interest expense................... (225) (194) (11,359) (11,359) (635) (18,860)
Other income (expense)............. -- -- (288) (288) -- 6,883(3)
Foreign currency transaction gain
(loss)........................... -- -- 758 758 -- (268)
Minority interest.................. -- -- (180) (389) -- (229)
Income taxes....................... -- -- (395) (395) -- (439)
----------- ---------- ---------- --------- -------- --------
Net loss........................... $(3,081) $ (9,402) $ (38,240) $ (40,546) $(12,279) $(37,177)
----------- ---------- ---------- --------- -------- --------
----------- ---------- ---------- --------- -------- --------
Loss per share(4)(5)............... $(15.41) $ (3.65) $ (11.24) $ (11.92) $ (4.19) $ (7.43)
Weighted average number of shares
of Common Stock outstanding(5)... 200 2,576 3,401 3,401 2,928 5,003
OTHER FINANCIAL DATA:
EBITDA(6).......................... $(2,616) $ (8,532) $ (23,807) $ (23,540) $ (9,549) $(16,155)
Capital expenditures(7)............ 1,126 6,074 23,880 26,162 4,887 13,609
Cash (used in) provided by
operating
activities....................... (1,987) 3,554 (10,475) -- (8,177) (46,828)
Cash (used in) provided by
investing
activities....................... (478) (16,537) (225,000) -- (15,408) 27,461
Cash (used in) provided by
financing
activities....................... 2,888 18,143 335,031 -- 24,308 (2,620)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(8)................... $ 81,301 $ 205,386
Marketable securities.......................... 50,797 50,797
Restricted marketable securities............... 84,728 84,728
Total assets................................... 436,200 560,285
Short-term debt and current portion of capital
lease obligations............................ 9,055 2,006
Long-term debt and capital lease obligations... 318,088 312,222
Shareholders' equity........................... 18,650 155,650
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in ITG in
September 1995, the Company began to consolidate ITG's operations. From
March 1995 (the date of the Company's initial investment) to September 1995,
the Company accounted for its investment in ITG using the equity method of
accounting.
(2) Pro forma depreciation and amortization expense reflect approximately $2.1
million of additional amortization of goodwill, using an amortization period
of 15 years, recognized in connection with the Company's acquired
subsidiaries.
(3) Other income includes the reversal of certain liabilities accrued in
connection with the Company's obligations under an agreement that required
the Company to meet a carrier vendor's minimum usage requirements, which
agreement was entered into by a subsidiary of the Company prior to the
Company's acquisition of such subsidiary. During May 1997, the Company
renegotiated the contract with this carrier vendor resulting in the
elimination of approximately $7.0 million of previously accrued charges.
(4) Loss per share is calculated by dividing the loss attributable to the Common
Stock by the weighted average number of shares of Common Stock outstanding.
Shares issuable pursuant to outstanding stock options, exchange rights,
Roll-Up Rights and warrants are not included in the loss per share
calculation as their effect is anti-dilutive.
(5) Loss per share and the weighted average number of shares outstanding do not
give effect to the Recapitalization.
(6) EBITDA consists of loss before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure commonly used in
the telecommunications industry. It is presented to enhance an understanding
of the Company's operating results and is not intended to represent cash
flow or results of operations in accordance with U.S. GAAP for the periods
indicated. The Company's use of EBITDA may not be comparable to similarly
titled measures used by other companies due to the use by other companies of
different financial statement components in calculating EBITDA.
(7) Capital expenditures include assets acquired through capital lease financing
and other debt.
(8) The as adjusted figure includes $5.3 million which the Company has agreed to
pay to certain Minority Interestholders in connection with the exercise of
their Roll-Up Rights.
12
<PAGE>
RISK FACTORS
An investment in the Class A Common Stock offered hereby is subject to a
number of risks. Prospective investors should carefully consider the following
factors as well as the more detailed descriptions cross-referenced to the body
of this Prospectus and the other matters described in this Prospectus before
purchasing shares of Class A Common Stock.
SHORT OPERATING HISTORY; ENTRANCE INTO NEWLY OPENING MARKETS; MARGINS
The Company acquired its principal operations in the United States in 1995,
in France, Germany and the Netherlands in 1996 and in Italy and a minority
interest in its Portuguese operations in 1997, and commenced start-up operations
in the United Kingdom, Sweden and Finland in 1996, and Denmark and Australia in
1997. Therefore, the Company has limited experience in operating these
businesses. The businesses which now constitute the Company's principal
operations commenced operations at various dates ranging from 1990 through 1997,
and, therefore, have limited operating histories. In addition, the Company has
recently made investments in Venezuela, Austria and Japan and the Company plans
to acquire or start-up operations in markets where it currently does not have
operations. Furthermore, in many of its existing and future markets, the Company
plans to offer services that have been provided in the past only by PTTs, as
well as newly developed services. Accordingly, the Company may face difficulties
in establishing or expanding such businesses, including difficulties in hiring
personnel that have experience in providing such telecommunications services in
such markets. See '--Risks Associated with Anticipated Growth and Acquisitions.'
The Company's prospects must, therefore, be considered in light of the risks,
expenses, problems and delays inherent in establishing a new business in an
evolving industry.
As a new entrant in its markets, the Company may need to grant substantial
discounts in order to attract a significant customer base. The Company has and
will continue to provide services to carrier customers at discounted prices,
resulting in lower gross margins than margins related to sales to other
customers. In addition, the Local Operators may incur significant costs
developing their network infrastructures (including the purchase of minimum
investment units ('MIUs') and indefeasible rights of use ('IRUs'), switches and
leased capacity) as their business grows. The fixed costs and expenses incurred
under these circumstances may result in low or negative operating margins. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview.'
HISTORICAL AND FUTURE NET OPERATING LOSSES AND NEGATIVE EBITDA; NEED FOR
ADDITIONAL CAPITAL;
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company will need to continue to enhance and expand its operations and
meet the increasing demands for service quality, availability of value added
services and competitive pricing in order to establish and maintain a
competitive position in its existing markets and the additional markets it
enters. The Company has incurred, and during the next several years expects to
continue to incur, significant and increasing operating and net losses, negative
EBITDA and negative cash flow from operating activities due to the start-up
nature of the Company's business and the Company's need to expand its
operations, develop RSL-NET and build its customer base and marketing
operations. Even after receipt of the net proceeds of the Offerings, the Company
may need to raise substantial additional capital in the future to fund its
acquisitions, strategic alliances, start-up operations, capital expenditures and
anticipated substantial operating losses. The net proceeds from the Offerings
and the net proceeds from the Debt Offering, together with borrowings under the
Company's $7.5 million revolving credit facility with The Chase Manhattan Bank
(the 'Revolving Credit Facility') and vendor financing, are expected to fund the
Company's planned expansion of its existing operations and operating losses for
15 to 20 months. The foregoing is a forward-looking statement and, therefore,
there can be no assurance in this regard. If the Company's plans or assumptions
change or prove to be inaccurate, if the Company consummates acquisitions in
addition to those currently contemplated, if the Company experiences
unanticipated costs or competitive pressures or if the net proceeds from the
Offerings and the Debt Offering, together with the proceeds of the Revolving
Credit Facility and such vendor financing otherwise prove to be insufficient,
the Company may be required to seek additional capital. The
13
<PAGE>
Company may seek to raise such additional capital from public or private equity
or debt sources. There can be no assurance that the Company will be able to
raise such capital on satisfactory terms or at all. If the Company decides to
raise additional funds through the incurrence of debt, the Company may become
subject to additional or more restrictive financial covenants. If the Company is
unable to obtain such additional capital or is unable to obtain such additional
capital on acceptable terms, the Company may be required to reduce the scope of
its presently anticipated expansion, which could materially adversely affect the
Company's business, results of operations and financial condition and its
ability to compete.
The Company has a significant level of indebtedness. As of June 30, 1997,
the Company had consolidated indebtedness of $312.9 million and shareholders'
equity of $18.7 million. The Indenture limits, but does not prohibit, the
incurrence of additional indebtedness by the Company. The Company expects to
incur substantial amounts of additional indebtedness in the future. On a pro
forma basis, after giving effect to the Company's acquisition of Sprint
Corporation's international voice operations in France and Germany in May 1996
(the 'Sprint Acquisitions'), the Company's acquisition of interests in ITG in
1996 (the 'ITG 1996 Acquisition'), the Company's acquisition of 75% of RSL
Netherlands in October 1996 (the 'RSL Netherlands Acquisition') and the issuance
of the Notes in the Debt Offering for a full year, the Company would have had
interest expense, negative EBITDA, operating losses and net losses of
approximately $38.3 million, $23.5 million, $33.6 million and $68.3 million,
respectively, for the year ended December 31, 1996. The Company expects to incur
substantial and increasing interest expense, negative EBITDA, negative cash flow
from operations, deficiencies of earnings to fixed charges, operating losses and
net losses for future periods.
In 1996, after giving effect to the Sprint Acquisitions, the ITG 1996
Acquisition and the RSL Netherlands Acquisition, the Company made capital
expenditures of approximately $26.2 million. In 1997, the Company expects to
make capital expenditures of approximately $30 million. The Company has also
experienced a consistently increasing working capital deficit. The Company's
interest expense may exceed its EBITDA and cash flow from operations. If the
Company's EBITDA is insufficient to meet its future debt service obligations and
fund its operating losses, the Company will face substantial liquidity problems.
If the Company is unable to generate sufficient EBITDA or cash flow from
operations, or otherwise obtain funds necessary to make required payments, or if
the Company otherwise fails to comply with the material terms of its
indebtedness, it would be in default thereunder, which would permit the holders
of such indebtedness to accelerate the maturity thereof. The ability of the
Company to meet its obligations is dependent upon the future performance of the
Company, which is subject to prevailing economic conditions (in each market,
country and region in which the Company operates, as well as globally) and to
financial, business and other factors, including factors beyond the Company's
control.
The Company's indebtedness could have important consequences to holders of
the Class A Common Stock, including the following: (i) the debt service
requirements of any additional indebtedness could make it more difficult for the
Company to make payments on its existing debt; (ii) the Company's level of
indebtedness could limit the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes; (iii) a substantial portion of the Company's
future cash flow from operations, if any, will be dedicated to the payment of
principal and interest on the Notes, its other indebtedness and other
obligations and will not be available for the Company's business; (iv) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to changes in, its business; (v) the Company is more highly leveraged
than certain of its competitors, which may place it at a competitive
disadvantage; and (vi) the Company's high degree of indebtedness could make it
more vulnerable in the event of a downturn in its business. See 'Selected
Consolidated Financial Data' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
RISKS ASSOCIATED WITH ANTICIPATED GROWTH AND ACQUISITIONS
The Company has experienced rapid growth and intends to continue to grow
through further expansion of its existing operations, through acquisitions,
joint ventures, strategic alliances and through the establishment of new
operations. The Company constantly evaluates acquisition and joint venture
14
<PAGE>
opportunities. The Company's ability to manage its anticipated future growth
will depend on its ability to evaluate new markets and investment vehicles,
monitor operations, control costs, maintain effective quality controls, obtain
satisfactory and cost-effective lease rights from, and interconnection
agreements with, competitors that own transmission lines (in many cases
intra-national transmission lines may be available from only one dominant
competitor) and significantly expand the Company's internal management,
technical and accounting systems. The Company's growth will also depend on its
ability to purchase successfully MIUs and IRUs, which ability may be adversely
affected by, among other factors, competition to purchase such rights and
regulatory restrictions on ownership. The Company's rapid growth has placed, and
its planned future growth will continue to place, a significant and increasing
strain on the Company's financial, management and operational resources,
including the identification of acquisition targets and joint venture partners,
the negotiation of acquisition and joint venture agreements and the maintenance
of satisfactory relations, including, when necessary, the resolution of disputes
with its joint venture partners and minority investors in acquired entities. In
addition, acquisitions and the establishment of new operations will entail
considerable expenses in advance of anticipated revenues and may cause
substantial fluctuations in the Company's operating results.
The Company may, as a result of legal restrictions or other reasons,
acquire a minority interest in strategic targets, in which case the Company
would lack control over the target company's operations and strategies. There
can be no assurance that such lack of control will not interfere with the
Company's growth and integration of its operations.
The Company may also acquire interests in operations for strategic reasons,
despite the fact that such operations have operational or managerial problems.
In such cases, there can be no assurance that such operational or managerial
problems will not cause significant problems or consume substantial resources of
the Company.
The Company's planned new businesses will need to be integrated with its
existing operations. For acquired businesses, this will entail, among other
things, integration of switching, transmission, technical, sales, marketing,
billing, accounting, quality control, management, personnel, payroll, regulatory
compliance and other systems and operating hardware and software, some or all of
which may be incompatible. For example, the Company's U.S. operations only
recently began to utilize RSL-NET. Furthermore, employees and customers of
acquired businesses generally experience turnover at higher rates during and
after the acquisition. In countries where the Company expands by establishing a
new business, it must, among other things, recruit, hire and train personnel,
establish offices, obtain regulatory authorization, lease transmission lines
from, and obtain interconnection agreements with, competitors that own
intra-national transmission lines, and install hardware and software. See
'--Competition.' In addition, since the Company operates businesses in several
countries and intends to expand into additional countries and regions, including
Europe, Asia, the Pacific Rim and Latin America, the Company must manage the
problems associated with integrating a culturally and linguistically diverse
workforce. The Company has limited experience dealing with these problems.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The international telecommunications industry is changing rapidly due to,
among other things, deregulation, privatization of PTTs, technological
improvements, expansion of telecommunications infrastructure and the
globalization of the world's economies and free trade. There can be no assurance
that one or more of these factors will not vary unpredictably, which could have
a material adverse effect on the Company. There can also be no assurance, even
if these factors turn out as anticipated, that the Company will be able to
implement its strategy or that its strategy will be successful in this rapidly
evolving market. Furthermore, there can be no assurance that the Company will be
able to compete effectively or adjust its contemplated plan of development to
meet changing market conditions.
Much of the Company's planned growth is predicated upon the deregulation of
telecommunications markets. There can be no assurance that such deregulation
will occur when or as anticipated, if at all, or that the Company will be able
to grow in the manner or at the rates currently contemplated.
15
<PAGE>
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increased satellite and fiber optic cable transmission capacity for services
similar to those provided by the Company, including utilization of the Internet
for international voice and data communications. The Company cannot predict
which of the many possible future product and service offerings will be
important to establish and maintain a competitive position or what expenditures
will be required to develop and provide such products and services. The
Company's profitability will depend, in part, on its ability to anticipate and
adapt to rapid technological changes occurring in the telecommunications
industry and on its ability to offer, on a timely basis, services that meet
evolving industry standards and customer preferences. There can be no assurance
that the Company will be able to adapt to such technological changes or offer
such services on a timely basis or establish or maintain a competitive position.
As a result of existing excess international transmission capacity, the
marginal cost of carrying an additional international call is often very low for
carriers that own MIUs or IRUs. Industry observers have predicted that these low
marginal costs may result in significant pricing pressures and that, within a
few years after the end of this century, there may be no charges based on the
distance a call is carried. Certain of the Company's competitors have introduced
calling plans that provide for flat rates on calls within the U.S. and Canada,
regardless of time of day or distance of the call. If this type of pricing were
to become prevalent, it may have a material adverse effect on the Company's
prospects and its ability to make payments on its indebtedness. See
'--Dependence on Other Carriers.'
INABILITY TO PREDICT TRAFFIC VOLUME
The Company may enter into long-term agreements for leased capacity in
anticipation of traffic volumes which do not reach expected levels and,
therefore, be obligated to pay for transmission capacity without adequate
corresponding revenues. Conversely, the Company may underestimate its need for
leased capacity and, therefore, be required to obtain transmission capacity
through more expensive means. The Company's U.S. operations have, in the past,
both overestimated and underestimated their need for leased capacity and,
therefore, have been forced to obtain capacity for overflow traffic at a higher
cost and have also leased capacity which was under-utilized and, in some
instances, led to under-utilization charges. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.' If the Company is
unable to accurately project its needs for leased capacity in the future, such
inability may have a material adverse effect on the Company's business and
profitability.
DEPENDENCE ON OTHER CARRIERS
The Company does not own any intra-national telecommunications lines for
any country in which it provides services and does not intend to construct or
acquire any of its own intra-national transmission facilities. Consequently, the
Company must continue to rely on providers of intra-national transmission
facilities. All of the telephone calls made by the Company's customers are and
will continue to be connected, at least in part, through transmission lines that
the Company leases. In all of the jurisdictions in which the Company conducts
business (other than the U.S. and the United Kingdom) or plans to conduct
business, the only current provider of significant intra-national transmission
facilities is the PTT. Accordingly, prior to full deregulation, there may be
only one source of intra-national transmission lines in these countries and the
Company may be required to lease transmission capacity at artificially high
rates from a provider that occupies a monopoly or near monopoly position. In
fact, Deutsche Telekom AG ('Deutsche Telekom'), the German PTT, earlier this
year raised the rates charged to the Company and other carriers with respect to
intra-national transmissions and there can be no assurance that other PTTs will
not also do so. Such rates may be too high to allow the Company to generate
gross profit on intra-national calls or international calls routed to a Company
switch by means of such intra-national lines. In addition, PTTs will not
necessarily be required by law to allow the Company to lease transmission lines
upon which the Company depends. To the extent that applicable law requires PTTs
to lease transmission lines to the Company, delays may nevertheless be
encountered with respect to the commencement of operations and extensive delays
can be expected with respect to the negotiation
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of leases and interconnection agreements. See '--Government Regulatory
Restrictions.' In addition, ongoing disputes can be expected with respect to
pricing terms and billing.
Many of the international telephone calls made by the Company's customers
are and will continue to be transported through transmission lines that the
Company leases. The lessors of such facilities are competitors of the Company,
including American Telephone & Telegraph, Inc. ('AT&T'), MCI Communications
Corporation ('MCI'), Teleglobe Canada, Inc. ('Teleglobe'), British
Telecommunications PLC ('British Telecom'), France Telecom S.A. ('France
Telecom'), Deutsche Telekom and Mercury Communications PLC ('Mercury'). The
Company generally leases lines on a short-term basis. These include leases on a
per-minute basis (some with minimum volume commitments) and, where the Company
anticipates higher volumes of traffic, leases of transmission capacity for
point-to-point circuits on a monthly or longer-term fixed cost basis. The
negotiation of lease agreements involves estimates regarding future supply and
demand for transmission capacity as well as estimates of the calling patterns
and traffic levels of the Company's existing and future customers. When there
has been excess transmission capacity, as was the case for many years in the
United States, lease rates have declined and short term leases have been
advantageous. Recently, capacity has been somewhat constrained in the United
States and the decline in lease rates has slowed. As a result, longer term
leases may become more attractive. Should the Company fail to meet its minimum
volume commitments pursuant to long-term leases, it will be obligated to pay
'under-utilization' charges. See '--Inability to Predict Traffic Volume.' For
these reasons, the Company would suffer competitive disadvantages if it entered
into leases with inappropriate durations or leases based on per-minute charges
for high volume routes (or leases with fixed monthly rates for low volume
routes), or if it failed to meet its minimum volume requirements. The Company is
also vulnerable to service interruptions and poor transmission quality from
leased lines. The deterioration or termination of the Company's relationships
with one or more of its carrier vendors could have a material adverse effect
upon the Company's business, financial condition and results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
Sophisticated information systems are vital to the Company's growth and its
ability to monitor costs, bill and receive payments from customers, reduce
credit exposure, effect least cost routing and achieve operating efficiencies.
The Company currently operates separate network management information systems
for its U.S. and European operations. The Company intends to integrate and
operate the information services for all of its Local Operators from a central
location. A failure of any of the Company's current systems, the failure of the
Company to implement or integrate new systems without difficulty, if at all, the
failure of any new systems or the failure to upgrade systems as necessary could
have a material adverse effect on the Company, its financial condition and the
results of operations.
COMPETITION
The provision of telecommunications services is and will continue to be
extremely competitive. Prices for long distance calls have decreased
substantially over the last few years in most of the markets in which the
Company does business and prices are expected to decline substantially over the
next several years in all of the markets where the Company does business or
expects to do business. In addition, all of the Company's markets and expected
future markets have deregulated or are in the process of deregulating telephone
services. Customers in most of these markets are not familiar with obtaining
services from competitors to the PTTs and may be reluctant to use new providers,
such as the Company. In particular, the Company's target customers, small and
medium-sized businesses, may be reluctant to entrust their telecommunications
needs to new and unproven operators or may switch to other service providers as
a result of price competition. The Company has experienced high levels of
customer attrition in certain acquired businesses in the United States, France
and Germany and expects to continue to experience high levels of customer
attrition as a result of the highly competitive nature of most of its markets.
The Company's success will depend upon the Company's ability to compete
with a variety of other telecommunications providers in each of its markets,
including (i) the PTTs, (ii) alliances such as
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AT&T's alliance with Unisource (itself an alliance currently among PTT Telecom
Netherlands, Telia AB and Swiss Telecom PTT) and 'Uniworld' and the
corresponding alliance with WorldPartners, MCI's alliance (and proposed
consolidation) with British Telecom and Telefonica de Espana, S.A., known as
'Concert,' and Sprint Corporation's ('Sprint') alliance with Deutsche Telekom
and France Telecom, known as 'Global One,' (iii) companies offering resold
international telecommunications services, (iv) companies such as WorldCom, Inc.
('WorldCom') offering local exchange service in conjunction with domestic long
distance and international long distance services and (v) other companies with
business plans similar to that of the Company. The Company expects that
competition will increase in the future as the deregulation of
telecommunications markets worldwide accelerates. Many of the Company's
competitors have significantly greater financial, management and operational
resources and more experience than the Company. If any of the Company's
competitors were to devote additional resources to the provision of
international long distance voice telecommunication services to the Company's
target customer base of small and medium-sized businesses, there could be an
adverse effect on the Company's business. In addition, certain of the Company's
competitors may target discounts in one market to gain an advantage in another
market or with a particular customer. The Company may be unable to compete with
such discounts on an economically feasible basis.
Each of the Company's Local Operators are expected to separately compete
within their respective countries. There can be no assurance that any of the
Local Operators will be able to do so effectively and the success of the
Company's strategy in any one market is not necessarily indicative of its
ability to succeed in any other market.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
The Company attempts to price its services at a discount to the prices charged
by the PTT or major carriers in each of its markets. The Company has no control
over the prices set by its competitors and some of the Company's larger
competitors may be able to use their substantial financial resources to cause
severe price competition in the countries in which the Company operates. There
can be no assurance that severe price competition will not occur. Any price
competition could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, certain of the
Company's competitors will provide potential customers with a broader range of
services than the Company currently offers or can offer due to regulatory
restrictions. See 'Business--Industry Overview' and '--European Operations.'
In addition to these competitive factors, recent and pending deregulation
in each of the Company's markets may encourage new entrants. For example, as a
result of both legislation recently enacted in the United States and regulatory
initiatives taken by the FCC, regional Bell operating companies ('RBOCs') may
provide international telecommunications services, are allowed to offer domestic
long distance service through an affiliate outside their service areas as
'non-dominant' carriers and are allowed to provide long distance service within
their service areas, provided certain competition related conditions are met.
AT&T, MCI and other long distance carriers are allowed to enter the local
telephone services market, and any entity, including cable television companies
and utilities, may enter the United States domestic long distance
telecommunications market. In addition, the FCC had, on several occasions since
1984, approved or required price reductions by AT&T because it was a 'dominant'
carrier. However, the FCC reclassified AT&T as a 'non-dominant' carrier for
domestic purposes in October 1995 and for international purposes in May 1996.
These FCC actions substantially reduced the regulatory constraints on AT&T. As
the Company expands its geographic coverage, it will encounter additional
regional competitors and increased competition. Moreover, the Company believes
that competition in non-U.S. markets will increase and begin to resemble the
competitive landscape in the United States.
The PTTs generally have certain competitive advantages that the Company and
its other competitors do not have, due to such PTTs' control over the
intra-national transmission lines and connection to it, their ability to delay
access to lines and the reluctance of some regulators to adopt policies and
grant regulatory approvals that will result in increased competition for the
local PTT. If the PTT in any jurisdiction uses its competitive advantages to
their fullest extent, the Local Operator in such jurisdiction would be adversely
affected.
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GOVERNMENT REGULATORY RESTRICTIONS
National and local laws and regulations differ significantly among the
countries in which the Company currently operates and plans to operate. The
interpretation and enforcement of such laws and regulations vary and could limit
the Company's ability to provide certain telecommunications services, including
Internet telephony services. Furthermore, there can be no assurance that changes
in current or future laws or regulations or future judicial intervention in the
United States or in any other country would not have a material adverse effect
on the Company or that FCC or other regulatory investigation or intervention
would not have a material adverse effect on the Company. In addition, the
Company's strategy is based in large part upon the expected deregulation of the
EU markets based on European Commission directives. Such deregulation of the EU
markets has already experienced substantial delays. Accordingly, there can be no
assurance that the EU will proceed with the expected deregulation in accordance
with its current schedule, if at all, or that the trend towards deregulation
will not be stopped or reversed. In addition, even if the EU does act to
deregulate its telecommunications markets on the current schedule, the national
governments of EU member states must pass legislation to deregulate the markets
within their countries. The national governments may not necessarily pass such
legislation in the form required, if at all, or may pass such legislation only
after a significant delay. Even if a national legislature enacts appropriate
regulations within the time frame established by the EU, there may be
significant resistance to the implementation of such legislation from PTTs,
regulators, trade unions and other sources. For example, in the United Kingdom,
Mercury took legal action against the Post Office Engineering Union because the
union refused to connect Mercury's customers. In France, the telecommunications
union has stated its objection to the current move towards deregulation. These
and other potential obstacles to deregulation would have a material adverse
effect on the Company's operations by preventing the Company from expanding its
operations as currently anticipated.
In addition, the telecommunications services provided by the Company in the
United Kingdom are subject to and affected by regulations introduced by the
Office of Telecommunications ('Oftel'). Oftel has imposed mandatory rate
reductions on British Telecom in the past and is expected to continue to do so
for the foreseeable future. This will have the effect of reducing the prices the
Company can charge its U.K. customers.
Also, the Internet telephony services provided by the Company through Delta
Three may be subject to and affected by regulations introduced by the
authorities in each country where Delta Three has or will have operations. The
regulation of Delta Three's activities may have a material adverse effect on
Delta Three's financial condition and results of operations.
The Company is currently authorized or otherwise allowed to provide
intrastate, interexchange service in 33 states and the District of Columbia in
the United States and relies on third party carriers to originate traffic in all
other states, although the Company is applying for authority to originate
traffic in all other states. The Company believes its use of a third party
carrier in such other states is permissible, but any adverse action taken
against the Company by a state authority due to such activity could have a
material adverse effect on the Company, its financial condition and its results
of operations. RSL Italy is currently in the process of filing information with
the Ministry for Communications, which is required to offer the international
long distance services currently provided by RSL Italy. The failure to make such
filing could have a material adverse effect on the ability of the Company to
offer international long distance services in Italy.
RISK OF LOSS, OR DIMINUTION OF VALUE, OF OPERATING AGREEMENTS
Although the Company's U.S. operation has operating agreements which enable
the Company to connect with 17 foreign carriers, the Company presently only
utilizes six such agreements. These agreements are with carriers in the
Dominican Republic, the United Kingdom, Denmark, the Netherlands, Finland and
Norway. In order to utilize the remaining operating agreements, the Company
would have to make an investment in transmission facilities to each of these
countries, which the Company is unlikely to do unless and until it originates
sufficient calling volume to such countries to justify an investment. The
Company's failure to utilize these operating agreements may result in these
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foreign carriers terminating such agreements in order to secure more profitable
agreements with carriers other than the Company and may limit the Company's
ability to secure operating agreements with additional foreign carriers. The
loss of the Company's operating agreements could have a material adverse effect
on its business, and the failure to enter into additional operating agreements
or other favorable arrangements in the future could limit the Company's ability
to increase its revenues on a positive gross margin basis. There can be no
assurance that the Company will be able to enter into additional operating and
other interconnection agreements or other favorable arrangements in the future.
In addition, the Company's operating agreements may become less valuable to
the Company. As increasing numbers of international carriers emerge, operating
agreements may become more available. Moreover, as telecommunications markets
deregulate, particularly in Europe, an increasing proportion of international
traffic is being carried outside of the traditional operating agreement/
settlement rate system.
DEPENDENCE ON CARRIER CUSTOMERS
The Company provides telecommunication services to carrier customers
principally in the United States. Revenues derived from the provision of such
services accounted for 42% of the Company's revenues for the six months ended
June 30, 1997. Accordingly, the loss of revenue from carrier customers could
have a material adverse effect upon the Company's business, financial condition
and results of operations. Carrier customers are extremely price sensitive,
generate very low margin business and frequently choose to move their business
based solely on small price changes. In addition, certain of the Company's
carrier customers are unprofitable or are only marginally profitable, resulting
in a higher risk of delinquency or non-payment than in the case of more
creditworthy customers. In February 1996, the Company terminated service to a
carrier customer that accounted for 11% of ITG's 1995 U.S. revenues for failure
to pay for past services. As a result, although the Company is attempting to
recover the amounts owed by such customer, the Company booked a $4.9 million
write-off for bad debt on its 1995 financial statements. While the Company
instituted revised credit criteria to enable the Company to reduce its exposure
to the higher risks associated with carrier customers, no assurance can be given
that such criteria and methods will afford adequate protection against such
risks.
RISKS RELATED TO HOLDING COMPANY STRUCTURE
The Company is a holding company and its only material assets, other than
existing cash and the net proceeds of the Offerings, consist of the stock of its
subsidiaries. The Company intends to loan or contribute a substantial majority
of the net proceeds of the Offerings to its subsidiaries. The Company relies on
dividends, loan repayments and other intercompany cash flows from its
subsidiaries to generate the funds necessary to meet its debt service
obligations. The payment of dividends and the repayment of loans and advances by
the Company to its subsidiaries are subject to statutory, taxation and other
restrictions, are dependent upon the earnings of such subsidiaries and are
subject to various business considerations. In addition, dividends and other
payments to the Company from the subsidiaries, in certain jurisdictions, may
have adverse tax consequences to the subsidiaries or the Company, and the
subsidiaries' ability to declare and pay dividends or make other payments to the
Company are, in certain circumstances, subject to restrictions contained in
their respective organizational documents or loan agreements. As of June 30,
1997, the total outstanding indebtedness of the Company's subsidiaries not
eliminated in the Company's consolidated financial statements was approximately
$312.9 million. Moreover, claims of creditors of the Company's subsidiaries,
including tax authorities and trade creditors, will generally have a priority
claim to the assets of such subsidiaries over the claims of the Company. In
addition, certain subsidiaries have outstanding minority equity owners who will
have a pro rata claim with the Company to any dividends or other distributions
by subsidiaries. See 'Description of Certain Indebtedness' and 'Shares Eligible
for Future Sale.'
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DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent, in part, upon its key management.
In particular, the Company is highly dependent upon certain of its personnel,
including Ronald S. Lauder, Chairman of the Board of the Company and its largest
and controlling shareholder, and Itzhak Fisher, the President and Chief
Executive Officer of the Company. The loss of services of Mr. Lauder, Mr. Fisher
or any of the other members of the Company's senior management team could have a
materially adverse effect on the Company. The degree of Mr. Lauder's involvement
in the activities of the Company varies from time to time based on the needs of
the Company. Mr. Lauder's involvement with the Company, in addition to his
activities as Chairman of its Board of Directors and Executive Committee,
includes identifying potential local strategic partners, capital allocation,
corporate governance, setting compensation policy and recruiting top management.
However, he is not an employee of the Company and he spends a majority of his
business time on other matters. While Mr. Fisher has an employment agreement
with the Company, the Company does not have employment agreements with many of
the other members of its senior management team.
The Company believes its future success will depend in large part upon its
ability to attract, retain and motivate highly skilled employees. Such employees
are in great demand and are often subject to offers for competitive employment.
There can be no assurance that the Company can retain its key managerial
employees or that it can attract, integrate or retain such employees in the
future.
DEPENDENCE ON EQUIPMENT SUPPLIER
The Company purchases most of its switches from Ericsson, which has granted
the Company volume discounts and also provides lease financing for, and
maintenance of, this equipment. Although switches of comparable quality may be
obtained from several alternative suppliers, the failure of the Company to
acquire compatible switches from an alternative source, or the failure to
acquire additional switches (regardless of the vendor) on a timely basis or on a
similar price basis, could result in delays, operational problems or increased
expenses, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
CONTROLLING SHAREHOLDERS; NEGATIVE EFFECTS OF ANTI-TAKEOVER PROVISIONS
Upon completion of the Offerings, certain of the executive officers and
directors of the Company and members of their immediate families will control,
in the aggregate, approximately 97.8% of the voting power and approximately
82.3% of the outstanding capital stock of the Company, respectively, and
approximately 97.4% and 80.2%, respectively, if the U.S. and International
Underwriters' over-allotment options are exercised in full. As a result, the
existing shareholders will be able to control the election of all of the
directors and the results of other shareholder votes. Ronald S. Lauder, Chairman
of the Company, will beneficially own, in the aggregate, approximately 70.8% of
the voting power and approximately 56.9% of the outstanding capital stock of the
Company, respectively, and approximately 55.4% and 70.5%, respectively, if the
U.S. and International Underwriters' over-allotment options are exercised in
full. As a result, Mr. Lauder will have majority control of the Company, the
ability to approve certain fundamental corporate transactions and to elect all
members of the Company's Board of Directors. The exercise of the voting power by
Mr. Lauder and such other persons may present conflicts of interest between them
and the other owners of the Company's capital shares. See 'Principal
Shareholders.'
The concentration of ownership in the Company and Mr. Lauder's intention to
maintain a controlling interest in the Company may have the effect of delaying,
deferring or preventing a change of control of the Company, a transaction which
might otherwise be beneficial to shareholders. In addition, the Company's
Memorandum of Association and Bye-Laws contain provisions that could delay,
defer or prevent a change in control without the approval of the incumbent Board
of Directors. Such a provision could impede the ability of the shareholders to
replace management even if factors warrant such a change. See 'Principal
Shareholders' and 'Description of Capital Stock--Anti-Takeover Protections.'
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BERMUDA CORPORATE LAW
The Company is a Bermuda corporation and, accordingly, is governed by The
Companies Act 1981 of Bermuda. The Companies Act 1981 of Bermuda differs in
certain aspects from laws generally applicable to United States corporations and
shareholders, including with respect to the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders suits,
indemnification of directors and inspection of corporate records. See
'Description of Capital Stock--Certain Provisions of Bermuda Law.'
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no public market for the shares of Class A Common Stock
prior to the Offerings, and there is no assurance that a significant public
market for the Class A Common Stock will develop or be sustained after the
Offerings. The initial public offering price of the Class A Common Stock will be
determined by negotiations among the Company and the representatives of the U.S.
Underwriters and the International Underwriters. See 'Underwriting.' The market
price of the Class A Common Stock may be extremely volatile. Factors such as
adverse regulatory changes, acquisitions by the Company, significant
announcements by the Company and its competitors, quarterly fluctuations in the
Company's operating results and general conditions in the telecommunications
market may have a significant impact on the market price of the Class A Common
Stock. In addition, in recent years the stock market has experienced extreme
price and volume fluctuations. These fluctuations have had a substantial effect
on the market prices for many high technology and telecommunications companies,
often unrelated to the operating performance of the specific companies.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after the Offerings could adversely affect prevailing market prices.
Upon completion of the Offerings, 39,430,047 shares of Common Stock will be
outstanding (40,510,047 shares if the Underwriters' over-allotment options are
exercised in full). Of such shares, the 7,200,000 shares (8,280,000 shares if
the Underwriters' over-allotment options are exercised in full) of Class A
Common Stock offered by the Company in the Offerings will be freely tradeable
without restriction or further registration. In addition, beginning 180 days
after the date of this Prospectus, following the expiration of certain lock-up
agreements between the Underwriters, the Company's executive officers and
directors and certain other shareholders of the Company, 32,230,047 additional
outstanding shares of Class A Common Stock (assuming the conversion of Class B
Common Stock into Class A Common Stock on a one-for-one basis (including the
shares of Class B Common Stock to be issued upon the conversion of the Preferred
Stock)) will be tradeable subject to the provisions of Rule 144 promulgated
under the Securities Act of 1933, other than the holding period requirements
thereunder. Additionally, 1,192,455 shares of Class A Common Stock issuable upon
conversion of the Warrants will be registered for sale within 180 days after the
closing of the Offerings, 27,653,059 shares of Class A Common Stock are expected
to be entitled to demand registration rights which are exercisable, with certain
restrictions, starting 180 days after the closing of the Offerings and
33,520,786 (including shares which would also be subject to demand rights)
shares of Class A Common Stock would be entitled to piggyback registration
rights. See 'Description of Capital Stock' and 'Shares Eligible for Future
Sale.'
The Company is in the process of adopting stock option plans which would
provide for the grant of options to acquire up to 2,750,000 shares of Class A
Common Stock, and options to acquire up to 2,792,888 shares of Class A Common
Stock are outstanding under the Company's existing option plan. The Company
intends to register all or a portion of the shares underlying all such options
(the 'Option Shares') for resale in the public market. Options with respect to
1,333,327 of the Option Shares are currently exercisable. Approximately 307,884
shares of Class A Common Stock are issuable upon the exercise of the Roll-Up
Rights (the 'Roll-Up Shares') and certain holders of such rights have certain
piggyback registration rights with respect to their Roll-Up Shares. See
'Management--Executive Compensation,' 'Principal Shareholders' and 'Shares
Eligible for Future Sale.'
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DILUTION
Purchasers of the Class A Common Stock offered hereby will suffer immediate
dilution of $19.73 per share (assuming a public offering price of $20.50 per
share), and present shareholders will receive a substantial increase in the net
tangible book value per share of the Class A Common Stock. See 'Dilution.'
ABSENCE OF DIVIDENDS
The Company has never paid dividends on any class of the Common Stock and
does not anticipate paying any such dividends in the foreseeable future. In
addition, the Company's debt facilities and the Indenture contain restrictions
on the Company's ability to declare and pay dividends on each class of the
Common Stock. See 'Description of Indebtedness' and 'Dividend Policy.'
DEVALUATION AND CURRENCY RISKS
An increasing portion of the Company's revenues and expenses will be
denominated in non-U.S. currencies, although a disproportionate portion of the
Company's expenses, including interest and principal on the Notes, will be
denominated in U.S. dollars. In addition, the Company, in the future, may
acquire interests in entities that operate in countries where the expatriation
or conversion of currency is restricted. The Company currently does not hedge
against foreign currency exchange translation risks but may in the future
commence such hedging against specific foreign currency transaction risks.
Because of the number of currencies involved, the Company's constantly changing
currency exposure and the fact that all foreign currencies do not fluctuate in
the same manner against the United States dollar, the Company cannot quantify
the effect of exchange rate fluctuations on its future financial condition or
results of operations.
FOREIGN PERSONAL HOLDING COMPANY AND PASSIVE FOREIGN INVESTMENT COMPANY RULES
The Company will seek to manage its affairs and the affairs of its
subsidiaries so that neither the Company nor any of its foreign corporate
subsidiaries would be classified as a passive foreign investment company
('PFIC') or, once such a subsidiary is profitable, as a foreign personal holding
company ('FPHC') under the U.S. Internal Revenue Code of 1986, as amended. If
the Company or any such subsidiary were an FPHC, the undistributed foreign
personal holding company income (generally, the taxable income, with certain
adjustments), if any, of the Company or of its foreign corporate subsidiaries
would be included in the income of a U.S. shareholder of the Company as a
dividend on a pro rata basis. If the Company were a PFIC, then each U.S. holder
of Class A Common Stock would, upon certain distributions by the Company, or
upon disposition of the Class A Common Stock at a gain, be liable to pay tax at
the then prevailing rates on ordinary income plus an interest charge, generally
as if the distribution or gain had been recognized ratably over the U.S.
shareholder's holding period (for PFIC purposes) for the Class A Common Stock,
or if a 'qualified electing fund' election were made by a U.S. holder of Class A
Common Stock, a pro rata share of the Company's ordinary earnings and net
capital gain would be required to be included in such U.S. shareholder's income
each year. Also, effective for years beginning after 1997, a U.S. shareholder
may be able to make a mark-to-market election whereby annual increases and
decreases in share value are included as ordinary income or deducted from
ordinary income by marking-to-market the value of the shares at the close of
each year. While the Company intends to manage its affairs and the affairs of
its corporate subsidiaries so as to avoid PFIC status or, once profitable, FPHC
status, there can be no assurance that the Company would be successful in this
endeavor. See 'Certain United States Federal Income Tax Considerations.'
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USE OF PROCEEDS
The proceeds to be received by the Company from the sale of the 7,200,000
shares of Class A Common Stock in the Offerings (net of underwriting discounts
and estimated offering expenses) are estimated to be approximately $137.0
million ($157.7 million if the Underwriters' over-allotment options are
exercised in full) assuming a public offering price of $20.50 per share.
The Company intends to use the net proceeds from the Offerings for (i)
strategic merger and acquisition activities, including certain potential
acquisitions which the Company currently is pursuing, although there can be no
assurance that any such acquisition can be completed, (ii) the purchase of
additional interests in international cable systems and additional transmission
and switching equipment, (iii) the purchase of minority interests in its
subsidiaries and (iv) working capital purposes relating to the expansion of the
Company's operations. Depending on the size and timing of any acquisitions, the
Company may also determine to use a portion of such proceeds to reduce its
outstanding debt, including prepayment of a portion of the principal amount of
the Notes. Pending such uses, the net proceeds to the Company from the Offerings
will be placed in interest-bearing bank accounts or invested in United States
government securities or other interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has never paid dividends on any class of Common Stock and does
not anticipate paying any dividends on the Class A Common Stock or any other
class of Common Stock in the foreseeable future. Certain of the Company's credit
facilities and the Indenture contain restrictions on the Company's ability to
declare and pay dividends on the Common Stock. See 'Description of Certain
Indebtedness.' The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors. Any determination as to the
payment of dividends in the future will depend upon results of operations,
capital requirements, restrictions in loan agreements, if any, and any such
other factors as the Board of Directors may deem relevant.
24
<PAGE>
DILUTION
As of June 30, 1997, the net tangible book value of the Common Stock was
$(102.9) million, or $(2.78) per share after giving effect to the
Recapitalization. Net tangible book value per share represents the amount of the
Company's tangible net worth (total tangible assets less total liabilities)
divided by the total number of shares of Common Stock outstanding. The following
table demonstrates the increase in the net tangible book value per share to the
Company's existing shareholders and the dilution to the new investors if the
7,200,000 shares of Class A Common Stock offered by the Company in the Offerings
had been sold at June 30, 1997, assuming an initial public offering price of
$20.50 per share.
<TABLE>
<S> <C> <C>
Initial public offering price per share........... $ 20.50
Net tangible book value per share before the
Offerings(1)................................. $ (2.78)
Increase per share attributable to the
Offerings.................................... 3.55
---------
Net tangible book value per share after the
Offerings(1).................................... .77
---------
Dilution of net tangible book value per share to
new investors................................... $ 19.73
---------
---------
</TABLE>
- ------------------
(1) Includes (i) 2,792,888 shares of Class A Common Stock issuable upon exercise
of outstanding stock options (including 1,333,327 shares issuable upon the
exercise of currently exercisable options) and stock options expected to be
issued in connection with the exercise of certain Roll-Up Rights, (ii)
1,652,355 shares of Class A Common Stock issuable upon the exercise of the
Warrants and the Lauder Warrants (which is comprised of 459,900 shares of
Class A Common Stock issuable in connection with the Lauder Warrants and
1,192,455 issuable on exercise of the Warrants) and (iii) 307,884 shares of
Class A Common Stock expected to be issued to the Minority Interestholders
upon the exercise of their Roll-Up Rights.
The following table summarizes, as of June 30, 1997, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Class A Common Stock and Class B Common Stock to be
purchased from the Company in the Offerings, the total consideration paid
therefor and the average price per share paid by the existing shareholders and
the new investors (assuming an initial public offering price of $20.50 per
share).
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.... 36,983,127 83.70% $ 97,787,000 39.85% $ 2.64
New investors............ 7,200,000 16.30 147,600,000 60.15 20.50
---------- ------- ------------ -------
Total.................... 44,183,127 100.00 $245,387,000 100.00
---------- ------- ------------ -------
---------- ------- ------------ -------
</TABLE>
- ------------------
(1) Includes (i) 2,792,888 shares of Class A Common Stock issuable upon exercise
of outstanding stock options (including 1,333,327 shares issuable upon the
exercise of currently exercisable options) and stock options expected to be
issued in connection with the exercise of certain Roll-Up Rights, (ii)
1,652,355 shares of Class A Common Stock issuable upon the exercise of the
Warrants and the Lauder Warrants (which is comprised of 459,900 shares of
Class A Common Stock issuable in connection with the Lauder Warrants and
1,192,455 issuable on exercise of the Warrants) and (iii) 307,884 shares of
Class A Common Stock expected to be issued to the Minority Interestholders
upon the exercise of their Roll-Up Rights.
25
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents,
marketable securities, restricted marketable securities and capitalization of
the Company as of June 30, 1997 on an actual basis and as adjusted, giving
effect to the sale of 7,200,000 shares of Class A Common Stock offered by the
Company at an assumed public offering price of $20.50 per share and the
application of the estimated net proceeds from the Offerings as described in
'Use of Proceeds.' The table should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto and the other information
included elsewhere in this Prospectus. See 'Use of Proceeds' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
--------------------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
--------------------------
<S> <C> <C>
Cash and cash equivalents(1)...................... $ 81,301 $ 205,386
----------- -----------
----------- -----------
Marketable securities............................. $ 50,797 $ 50,797
----------- -----------
----------- -----------
Restricted marketable securities(2)............... $ 84,728 $ 84,728
----------- -----------
----------- -----------
Short-term debt and current portion of long-term
debt and current portion of capital lease
obligations..................................... $ 9,055 $ 2,006
Long-term debt and capital lease obligations:
Capital leases.................................. 15,922 15,922
12 1/4% Senior Notes due 2006 (net of
unamortized discount of $3.7 million)......... 296,300 296,300
Other long-term debt............................ 5,866 --
----------- -----------
Total long-term debt, short-term debt and
capital lease obligations(3)................ 327,143 314,228
----------- -----------
Shareholders' equity:
Common Stock, $.01 par value ($.00457 par value
as adjusted);
20,000,000 shares authorized and 200,000,000
outstanding as adjusted; 665,340 shares of
Class A Common Stock outstanding and 8,657,094
shares outstanding as adjusted(4)............. 7 40
4,807,711 shares of Class B Common Stock
outstanding and 30,772,953 shares
outstanding as adjusted..................... 48 141
Preferred Stock, $.01 par value; 20,000,000
shares authorized and 30,000,000 authorized as
adjusted; 9,243,866 shares outstanding and no
shares outstanding as adjusted................ 93 --
Warrants--Common Stock.......................... 5,544 5,544
Additional paid-in capital...................... 97,639 234,606
Accumulated deficit............................. (84,917) (84,917)
Foreign currency translation adjustment......... 622 622
Deferred financing costs........................ (386) (386)
----------- -----------
Total shareholders' equity.................... 18,650 155,650
----------- -----------
Total capitalization.......................... $ 345,793 $ 469,878
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) The as adjusted figure includes $5.3 million which the Company has agreed to
pay to certain Minority Interestholders in connection with the exercise of
their Roll-Up Rights.
(2) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
Notes. See 'Description of Certain Indebtedness--Description of the Notes.'
(3) As of June 30, 1997, the Company had $73.3 million of available (undrawn)
borrowing capacity under its current bank and vendor facilities. Immediately
following the Offerings, the Company expects to have $38.3 million of
available borrowing capacity under such facilities as a result of the
termination of a $35.0 million loan facility upon the closing of the
Offerings.
(4) Does not include (i) 2,792,888 shares of Class A Common Stock issuable upon
exercise of outstanding stock options (including 1,333,327 shares issuable
upon the exercise of currently exercisable options) and stock options
expected to be issued in connection with the exercise of certain Roll-Up
Rights, (ii) 2,750,000 shares of Class A Common Stock be reserved for
issuance pursuant to future option grants under the Company's proposed stock
option and compensation plans, (iii) 1,652,355 shares of Class A Common
Stock issuable on the exercise of the Warrants and the Lauder Warrants, (iv)
307,884 shares of Class A Common Stock which are expected to be issued to
the Minority Interestholders upon the exercise of their Roll-Up Rights or
(v) 30,772,953 shares of Class A Common Stock issuable upon the conversion
of the shares of Class B Common Stock (which includes Class B Common Stock
to be issued upon the conversion of the Preferred Stock). See 'Certain
Relationship and Related Transactions' and 'Shares Eligible for Future
Sale.'
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial data for each of the
years in the three year period ended December 31, 1996 and for the six months
ended June 30, 1996 and 1997. The selected consolidated financial data presented
below with respect to the years ended December 31, 1996 and 1995 and the six
months ended June 30, 1996 and 1997 have been derived from the Consolidated
Financial Statements appearing elsewhere in this Prospectus. The Consolidated
Financial Statements for the three year period ended December 31, 1996 have been
audited by Deloitte & Touche LLP, independent auditors. In the opinion of
management, the unaudited Consolidated Financial Statements have been prepared
on the same basis as the audited Consolidated Financial Statements and include
all adjustments, which consist only of normal recurring adjustments, necessary
for a fair presentation of the financial position and the results of operations
for these periods. Operating results for the six months ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the full
year. The information as of and for the year ended December 31, 1994 has been
derived from the financial statements of the Company's predecessor entity, ITG,
appearing elsewhere in this Prospectus, which financial statements have been
audited by Deloitte & Touche LLP, independent auditors as stated in their
reports appearing herein. The information set forth below is qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements and the notes thereto and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------- ENDED JUNE 30,
PREDECESSOR ---------------------
1994 1995(1) 1996 1996 1997
----------- -------- -------- --------- --------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................... $ 4,702 $ 18,617 $113,257 $ 39,764 $109,361
Cost of services........................... (4,923) (17,510) (98,461) (35,657) (96,631)
----------- -------- -------- --------- --------
Gross profit (loss)........................ (221) 1,107 14,796 4,107 12,730
Selling, general and administrative
expenses................................. (2,395) (9,639) (38,893) (13,656) (35,271)
Depreciation and amortization.............. (240) (849) (6,655) (2,175) (8,947)
----------- -------- -------- --------- --------
Loss from operations....................... (2,856) (9,381) (30,752) (11,724) (31,488)
Interest income............................ -- 173 3,976 80 7,224
Interest expense........................... (225) (194) (11,359) (635) (18,860)
Other income (expense)..................... -- -- (288) -- 6,883 (2)
Foreign currency transaction gain (loss)... -- -- 758 -- (268)
Minority interest.......................... -- -- (180) -- (229)
Income taxes............................... -- -- (395) -- (439)
----------- -------- -------- --------- --------
Net loss................................... $(3,081) $ (9,402) $(38,240) $ (12,279) $(37,177)
----------- -------- -------- --------- --------
----------- -------- -------- --------- --------
Loss per share(3)(4)....................... $(15.41) $ (3.65) $ (11.24) $ (4.19) $ (7.43)
Weighted average number of shares of Common
Stock outstanding(4)..................... 200 2,576 3,401 2,928 5,003
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, SIX MONTHS
----------------------------------- ENDED JUNE 30,
PREDECESSOR ---------------------
1994 1995 1996 1996 1997
----------- -------- -------- --------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(5).................................. $(2,616) $ (8,532) $(23,807) $ (9,549) $(16,155)
Capital expenditures(6).................... 1,126 6,074 23,880 4,887 13,609
Cash (used in) provided by operating
activities............................... (1,987) 3,554 (10,475) (8,177) (46,828)
Cash (used in) provided by investing
activities............................... (478) (16,537) (225,000) (15,408) 27,461
Cash (used in) provided by financing
activities............................... 2,888 18,143 335,031 24,308 (2,620)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------- AS OF JUNE 30,
PREDECESSOR --------------------
1994 1995 1996 1996 1997
----------- -------- -------------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 452 $ 5,163 $104,068 $ 5,886 $ 81,301
Restricted marketable securities........... -- -- 104,370 -- 84,728
Total assets............................... 3,682 53,072 427,969 77,711 436,200
Short-term debt and current portion of
capital lease obligations................ 2,645 5,506 6,974 30,871 9,055
Long-term debt and capital lease
obligations.............................. 1,404 6,648 314,425 5,687 318,088
Shareholders' (deficiency) equity.......... (3,651) 5,705 20,843 (6,574) 18,650
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in ITG in
September 1995, the Company began to consolidate ITG's operations. From
March 1995 (the date of the Company's initial investment) to September 1995,
the Company accounted for its investment in ITG using the equity method of
accounting.
(2) Other income includes the reversal of certain liabilities accrued in
connection with the Company's obligations under an agreement that required
the Company to meet a carrier vendor's minimum usage requirements, which
agreement was entered into by a subsidiary of the Company prior to the
Company's acquisition of such subsidiary. During May 1997, the Company
renegotiated the contract with this carrier vendor resulting in the
elimination of approximately $7.0 million of previously accrued charges.
(3) Loss per share is calculated by dividing the loss attributable to Common
Stock by the weighted average number of shares of Common Stock outstanding.
Outstanding stock options, exchange rights and Warrants are not included in
the loss per common share calculation as their effect is anti-dilutive.
(4) Loss per share and the weighted average number of shares outstanding do not
give effect to the Recapitalization.
(5) EBITDA consists of loss before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure commonly used in
the telecommunications industry. It is presented to enhance an understanding
of the Company's operating results and is not intended to represent cash
flow or results of operations in accordance with U.S. GAAP for the periods
indicated. The Company's use of EBITDA may not be comparable to similarly
titled measures used by other companies due to use by other companies of
different financial statement components in calculating EBITDA.
(6) Capital expenditures include assets acquired through capital lease financing
and other debt.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. The following contains statements which constitute
forward-looking statements regarding the intent, belief or current expectations
of the Company or its officers with respect to, among other things, the
Company's financing plans, trends affecting the Company's financial condition or
results of operations, the impact of competition, the start-up of certain
operations and acquisition opportunities. The Company's actual future results
could differ materially from those discussed herein. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors. Information contained in this Prospectus, including, without
limitation, information contained in this section of this Prospectus and
information under 'Risk Factors' and 'Business,' identifies important factors
that could cause such differences.
OVERVIEW
GENERAL
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of international and domestic telephone services to
both carrier and commercial (including business and residential) accounts. These
services include international long distance calling to over 200 countries and
calling card, private line and value-added telecommunications services. The
Company focuses on providing international long distance voice services to small
and medium-sized businesses in key markets. The Company currently has revenue
generating operations in the United States, the United Kingdom, France, Germany,
Sweden, Finland, the Netherlands, Denmark and Australia. The Company is in the
process of commencing start-up operations through its investments in
majority-owned entities in Italy, Austria, Venezuela and Japan, and through its
30% investment in a Portuguese telecommunications company. In 1995,
approximately 62% of all international long distance telecommunications minutes
originated in these markets. The Company plans to expand its operations and
network into additional key markets which account for a significant portion of
the world's remaining international traffic. The Company's consolidated revenues
for the year ended December 31, 1996 were $113.3 million and for the six months
ended June 30, 1997 were $109.4 million.
THE UNITED STATES. The Company's initial operations were established in
the United States through the acquisition of interests in ITG in March 1995 and
Cyberlink in September 1995. ITG and Cyberlink had growing businesses in New
York and California, respectively, each with an established customer base and
sales channels, but both had operational problems which prevented these entities
from realizing their profit potential. These problems included costly
transmission capacity arrangements, vendor disputes and inadequate credit and
pricing policies. Each of ITG and Cyberlink was also unable to obtain funding
for working capital which limited their ability to purchase transmission
capacity on a cost-efficient basis which, coupled with the foregoing problems,
limited their operating performance.
Following the ITG 1996 Acquisition, which brought the Company's ownership
in ITG to 87%, the Company obtained full operational control and took further
steps to streamline and improve operations, including finance, network
provisioning, pricing and selling functions. During the first quarter of 1997,
the Company completed the consolidation of its U.S. operations into one entity,
RSL USA.
The Company has implemented solutions designed to improve RSL USA's
operations. For example, the Company added key members to its management and
purchased and developed additional management software systems which provide
current traffic provisioning and an enhanced ability to predict future traffic
volume. The Company also successfully negotiated and continues to negotiate rate
reductions and more appropriate transmission capacity arrangements based on the
Company's current and anticipated capacity requirements. In addition, the
Company's U.S. operations began to utilize the Company's own facilities in the
second quarter of 1997. The Company anticipates that expanded utilization of its
own facilities (as such component of RSL-NET continues to grow) will result in
more cost-efficient methods of transport for its U.S. business. The Company also
improved
29
<PAGE>
vendor relations by paying bills on a more timely basis and has implemented
stricter financial controls, including ongoing customer credit reviews and
managerial procedures to reduce credit exposure and settled certain disputes and
claims with certain of its vendors.
Although the Company's U.S. gross margin decreased slightly for the six
month period ended June 30, 1997 as compared to the six month period ended June
30, 1996 due to the rapid expansion of its operations, the Company expects that
its gross margin will improve as a result of the operational efficiencies
implemented to date and to be derived from continued growth, the continued
development of RSL-NET and the resulting economies of scale. See 'Risk
Factors--Short Operating History; Entrance into Newly Opening Markets; Margins',
'--Inability to Predict Traffic Volume' and '--Risks Associated with Rapidly
Changing Industry.'
The Company has recorded approximately $91.0 million of goodwill in
connection with its U.S. acquisitions (including ITG and Cyberlink). Goodwill
represents the excess of cost over the fair value of the net assets of acquired
entities. The Company's component cost and purchase price allocation for U.S.
acquisitions are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND
PURCHASE PRICE ALLOCATION
-------------------------
($ IN MILLIONS)
<S> <C>
ASSETS ACQUIRED:
Cash and cash equivalents.......................... $ 7.4
Accounts receivable................................ 8.9
Telecommunications equipment....................... 4.5
Deposits and others................................ 2.0
Intangible assets--goodwill........................ 91.0
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 54.1
Long-term debt..................................... 4.7
EQUITY:
Acquisition of minority interest................... 22.4
Increase to shareholders' equity................... 32.6
</TABLE>
EUROPE. RSL COM Europe, Ltd. ('RSL Europe') is a wholly-owned subsidiary
of the Company. RSL Europe was formed in March 1995 to implement the Company's
pan-European strategy. In November 1995, RSL Europe acquired a 51% interest in
Cyberlink Communications Europe Limited ('Cyberlink Europe') which, through its
wholly-owned subsidiaries, RSL COM Finland OY ('RSL Finland') and RSL COM Sweden
AB ('RSL Sweden'), commenced operations in May 1996. In May 1996, the Company
acquired Sprint's international long distance voice businesses in France and
Germany. In October 1996, RSL Europe acquired a 75% interest in the operations
of RSL Netherlands, an international reseller which had been operating in the
Netherlands since October 1995. A start-up wholly-owned subsidiary of RSL
Netherlands commenced operations in Denmark in May 1997. In April 1997, RSL
Europe acquired a 30.4% interest in Maxitel Servicos e Gestao de
Telecomunicacoes S.A. ('Maxitel'), a Portuguese international telecommunications
carrier. In August 1997, RSL Europe acquired an 85% interest in the operations
of RSL Italy, an international telecommunications reseller that had been
operating in Italy since 1995. In August 1997, RSL Europe also acquired a 50%
interest in RSL Austria, an Austrian international telecommunications reseller,
which has just begun operations, and is expected to have a 90% interest in RSL
Austria in September 1997 upon completion of certain corporate formalities.
Most EU member states are in the initial stages of deregulation.
Deregulation in these countries may occur either because the member state
decides to open up its own market (e.g., the United Kingdom, Sweden and Finland)
or because it is directed to do so by the European Commission ('EC') through one
or more directives issued thereby. In the latter case, such an EC directive
would be
30
<PAGE>
addressed to the national legislative body of each member state, calling for
such legislative body to implement such directive through the passage of
national legislation.
Although it is not expected that interconnect will be available and
implemented in most EU countries by January 1, 1998 (as called for by an EC
directive), the current regulatory scheme in Europe nevertheless provides an
opportunity for the Company to provide a range of services immediately in many
countries, while putting in place adequate infrastructure to capitalize on final
deregulation if and when it occurs on or after January 1, 1998. The Company can
provide value-added services before 1998 and, in certain EU countries beginning
in 1998 but prior to interconnection, the Company can provide dial-in access,
coupled, when possible, with autodialers or the programming of customers' phone
systems to dial access codes, to route traffic over the public switched
telephone network ('PSTN') to the Company's switches. See '--International Long
Distance Mechanics.'
The Company's first European acquisition occurred in November 1995. The
Company has recorded an aggregate of approximately $23.5 million of goodwill in
connection with its European acquisitions. Goodwill represents the excess of
cost over the fair value of the net assets of acquired entities. The Company's
component cost and purchase price allocation for its European acquisitions are:
<TABLE>
<CAPTION>
COMPONENT COST AND
PURCHASE PRICE ALLOCATION
-------------------------
($ IN MILLIONS)
<S> <C>
ASSETS ACQUIRED:
Cash............................................... $ 2.3
Accounts receivable................................ 0.8
Telecommunications equipment....................... 2.2
Deposits and others................................ 0.3
Intangible assets--goodwill........................ 23.5
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 5.5
Lease commitments.................................. 2.4
</TABLE>
REVENUES
The Company provides both domestic and international long distance services
and derives its revenues principally from the provision of international long
distance voice telecommunication services. Revenues are derived from the number
of minutes of use (or fractions thereof) billed by the Company ('revenue
minutes') and are recorded upon completion of calls. In addition, the Company
derives revenues from prepaid calling cards. These revenues are recognized at
the time of usage or upon expiration of the card. The Company maintains local
market pricing structures for its services and generally prices its services at
a discount to the prices charged by the local PTTs and major carriers. The
Company has experienced, and expects to continue to experience, declining
revenue per minute in all of its markets as a result of increasing competition
in telecommunications, which it expects will be offset by increased minute
volumes and decreased operating costs per minute. See 'Risk Factors--Risks
Associated With Rapidly Changing Industry' and '--Competition.'
31
<PAGE>
U.S. OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED
REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 4,702 $18,461 $ 85,843 $35,411 $69,888
Percentage of consolidated revenues............ 100.0% 99.2% 75.8% 89.1% 63.9%
Cost of services............................... (4,923) (17,367) (76,892) (32,042) (63,762)
------- ------- -------- ------- -------
Gross profit (loss)............................ (221) 1,094 8,951 3,369 6,126
Selling, general and administrative expenses... (2,395) (7,444) (17,606) (7,893) (10,146)
Depreciation and amortization.................. (240) (619) (3,047) (1,248) (2,565)
------- ------- -------- ------- -------
Loss from operations........................... $(2,856) $(6,969) $(11,702) $(5,772) $(6,585)
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
Prior to 1997, the Company's revenues had been primarily derived from its
operations within the United States. The Company's U.S. revenues result
primarily from the sale of long distance voice services on a wholesale basis to
other carriers, on a retail basis to commercial customers and on a bulk discount
basis to distributors of prepaid calling cards. The Company has experienced, and
expects to continue to experience, significant month to month changes in
revenues generated by its carrier customers. The Company believes such carrier
customers will react to temporary price fluctuations and spot market
availability that will impact the Company's carrier revenues. The Company has
shifted its marketing focus in the United States to small and medium-sized
businesses and has restructured its pricing of wholesale services to other
carriers. The Company derives increasing revenues from its small and
medium-sized business channels, as it reduces its reliance on wholesale carrier
revenues. See 'Risk Factors--Dependence on Carrier Customers' and '--Overview.'
EUROPEAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PERCENTAGE OF
CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C>
Revenues....................................... $ 156 $ 27,414 $ 4,353 $ 32,286
Percentage of consolidated revenues............ 0.8% 24.2% 10.9% 29.5%
Cost of services............................... (143) (21,569) (3,615) (26,252)
------- -------- ------- --------
Gross profit................................... 13 5,845 738 6,034
Selling, general and administrative expenses... (539) (16,619) (4,390) (20,067)
Depreciation and amortization.................. (12) (1,906) (380) (2,405)
------- -------- ------- --------
Loss from operations........................... $ (538) $(12,680) $(4,032) $(16,438)
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
The Company commenced European operations with the introduction of
operations in the United Kingdom, Finland and Sweden in the second quarter of
1996. In addition, the Company acquired operations in France and Germany during
the second quarter of 1996 and acquired operations in the Netherlands in the
fourth quarter of 1996. During the six months ended June 30, 1997, the Company
commenced operations in Denmark. In the third quarter of 1997, the Company
commenced start-up operations in Italy, Austria and, through its 30% investment
in Maxitel, in Portugal. Each of the countries in which the Company operates has
experienced different levels of deregulation, resulting in various levels of
competition and differing ranges of services which the Company is permitted to
offer. The Company also believes that as it pursues its strategic growth
strategy it will continue to encounter various degrees of start-up time.
Substantially all revenues from the Company's European operations are
derived from commercial sales to end-users, which often generate a higher gross
profit than wholesale sales to carriers. Sales are targeted at small and
medium-sized corporate customers, as well as to niche consumer markets
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(including selected ethnic communities). To reduce its credit risk, the Company
primarily offers prepaid products to its targeted consumer markets.
EFFECT OF DEREGULATION ON EUROPEAN REVENUES. The Company operates or will
soon operate in various countries in Europe, each of which is in a different
state of deregulation. In certain of these countries, current regulatory
restrictions limit the Company's ability to offer a broader array of products
and services and limit the availability of those services to customers.
Accordingly, the Company anticipates that deregulation will have a favorable
impact on revenues because (i) customers will be able to access the Company's
services more easily and (ii) the Company will have the ability to provide a
broader array of products and services. It is anticipated that most European
countries will deregulate various aspects of the telecommunications industry
beginning in 1998. The Company believes that, with established operations in
nine European countries by the end of 1997, it will be well positioned to
benefit from the anticipated deregulation of European markets. However, there
can be no assurance regarding the timing or extent of deregulation in any
particular country. See 'Risk Factors--Risks Associated with Rapidly Changing
Industry,' '--Government Regulatory Restrictions,' and 'Business--European
Operations--Regulatory Environment.'
OTHER OPERATIONS
During April 1997, the Company acquired a customer base of approximately
1,700 customers from Pacific Star Communications Limited, an Australian-based
switchless reseller, and has since generated revenues of approximately $7.2
million through its Australian operations. The Company also acquired operations
in Venezuela in May 1997 as a result of the Latin American joint venture with
the Cisneros Group. To date, the Company's start-up operations in Venezuela have
not generated revenues.
In addition, during the second quarter of 1997, the Company incorporated
RSL COM Japan K.K. ('RSL Japan') and recruited a Managing Director to oversee
its operations in Japan. To date, the Company's Japanese operations also have
not generated revenues. The Company anticipates generating revenues from its
operations in Japan during 1998.
The other countries in which the Company operates or will soon operate also
have experienced different levels of deregulation. As a result, the level of
competition in each country varies. The Company believes that as it pursues its
strategic growth strategy, the commencement of new operations will entail
varying degrees of time and cost.
COST OF SERVICES
The Company's cost of services is comprised of costs associated with
gaining local access and the transport and termination of calls over RSL-NET.
The majority of the Company's cost of services are variable, including local
access charges and transmission capacity leased on a per-minute of use basis.
The Company expects that an increasing amount of its total operating costs will
be fixed in the future, as the volume of the Company's calls carried over its
IRUs, MIUs and point-to-point fixed cost leases increases. The depreciation
expense with respect to the Company's MIUs and IRUs is not accounted for in cost
of services. In addition, the Company intends to lower its variable cost of
termination as a percentage of revenues by carrying traffic pursuant to more of
its existing operating agreements and by negotiating additional operating
agreements on strategic routes. The Company has directly linked certain of its
Local Operators in Europe and the United States utilizing lines leased on a
fixed cost point to point basis and MIUs and IRUs. To the extent traffic can be
transported between two Local Operators over MIUs or IRUs, there is almost no
marginal cost to the Company with respect to the international portion of a call
other than the fixed lease payment or the capital expenditure incurred in
connection with the purchase of the MIUs or IRUs. The Company's cost of
transport and termination will decrease to the extent that it is able to bypass
the settlement rates associated with the transport of international traffic. By
integrating its operations in this manner, the Company expects to continue to
improve its gross margins. For a discussion of important factors that adversely
affect the Company's gross margins, see 'Risk Factors--Short Operating History;
Entrance into Newly Opening Markets; Margins,' '--Inability to Predict Traffic
Volume' and '--Dependence on Carrier Customers,' '--Overview' and 'Business--
Network Strategy.' However, the Company does not intend to purchase or construct
its own intra-
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national transmission facilities in any of its markets. Accordingly, variable
costs will continue to be a majority of the Company's cost of services for the
foreseeable future.
The Company's cost of services is affected by the volume of traffic
relative to its owned facilities and facilities leased on a point-to-point fixed
cost basis and capacity leased on a per minute basis with volume discounts. To
the extent that volume exceeds capacity on leased facilities that have been
arranged for in advance, the Company is forced to acquire capacity from
alternative carriers on a spot rate per-minute ('overflow') basis at a higher
cost. Acquiring capacity on an overflow basis has a negative impact on margins,
but enables the Company to maintain uninterrupted service to its customers. See
'Risk Factors--Short Operating History; Entrance into Newly Opening Markets;
Margins,' '--Inability to Predict Traffic Volume.'
EFFECT OF DEREGULATION ON EUROPEAN COST OF SERVICES
The Company's current cost structure varies from country to country as a
result of the different level of regulatory policies in place in each country.
In general, the Company's cost structure is lower in countries that have been
fully deregulated than in those which are partially deregulated. In countries
that are not fully deregulated, the Company's access to the local exchange
network is subject to more expensive means (i.e., leased lines or dial-in
access). This results in higher costs to the Company for carrying international
traffic originating within a country and terminating in another country. In
addition, local regulations in many countries restrict the Company from
purchasing capacity on international cable and fiber systems. The Company must
instead either enter into long-term lease agreements for international capacity
at a high fixed cost or purchase per-minute of use termination rates from the
dominant carrier. Deregulation in countries in which the Company operates is
expected to permit the Company to (i) interconnect its switches with the local
exchange network and (ii) purchase its own international facilities. The Company
believes that as a result of deregulation, its cost structure will improve.
Deregulation is also expected to permit the Company to terminate international
inbound traffic in a country which will result in an improved cost structure for
the Company as a whole. However, the foregoing is a forward looking statement
and there can be no assurance that deregulation will proceed as expected or
lower the Company's cost of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses consist of costs
incurred to support the continued expansion of RSL-NET, the introduction of new
services and the provision of ongoing customer service. These costs are
principally comprised of costs associated with employee compensation, occupancy,
insurance, professional fees, sales and marketing (including sales commissions)
and bad debt expenses. In addition, as the Company commences operations in
different countries, it incurs significant start up costs, particularly for
hiring, training and retention of personnel, leasing of office space and
advertising. In addition, the Company's selling, general and administrative
expense includes the settlement of various claims and disputes relating to
pre-acquisition periods.
The Company has grown and intends to continue to grow by establishing
operations in countries that are in the process of being deregulated and that
originate and terminate large volumes of international traffic or offer other
strategic benefits. Each of the Company's operations is in a different stage of
development. The early stages of development of a new operation involve
substantial start-up costs in advance of revenues. Upon the commencement of such
operations, the Company generally incurs additional fixed costs to facilitate
growth. The Company expects that during periods of significant expansion,
selling, general and administrative expenses will increase materially.
Accordingly, the Company's consolidated results of operations will vary
depending on the timing and speed of the Company's expansion strategy and,
during a period of rapid expansion, will not necessarily reflect the performance
of the more established Local Operators.
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FOREIGN EXCHANGE
The Company is exposed to fluctuations in foreign currencies relative to
the U.S. dollar, as its revenues, costs, assets and liabilities are, for the
most part, denominated in local currencies. The results of operations of the
Company's subsidiaries, as reported in U.S. dollars, may be significantly
affected by fluctuations in the value of the local currencies in which the
Company transacts business.
The Company incurs settlement costs when it exchanges traffic via operating
agreements with foreign correspondents. These costs currently represent a small
portion of total costs; however, as the Company's international operations
increase, it expects that these costs will become a more significant portion of
its cost of services. Such costs are settled by utilizing a net settlement
process with the Company's foreign correspondents comprised of special drawing
rights ('SDRs'). SDRs are the established method of settlement among
international telecommunications carriers. The SDRs are valued based upon a
basket of foreign currencies and the Company believes that this mitigates, to
some extent, its foreign currency exposure. As the Company establishes
operations in countries the currencies of which are not represented in SDRs, the
Company will consider the implementation of hedging policies, as appropriate.
The Company has monitored and will continue to monitor its currency
exposure. See 'Risk Factors--Devaluation and Currency Risks.'
ACQUISITION ACCOUNTING
Since its formation in 1994, the Company has expanded its revenues,
customer base and network through internal growth and acquisitions. All of its
acquisitions were negotiated on an arm's length basis with unaffiliated third
parties. The Company accounted for all of its acquisitions of controlling
interests using the purchase method of accounting and, accordingly, the
respective purchase prices have been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at their dates of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, which is being amortized
over a 15-year period. For periods prior to April 1, 1996, the Company had
included 100% of the losses of its loss generating subsidiaries in its results
of operations because the book value of the minority interests in these
subsidiaries has been reduced to below zero. The Company records minority
interest for its minority partners' ownership interest in RSL Netherlands. The
Company's non-U.S. subsidiaries denominate revenues, costs, assets and
liabilities for the most part in local currencies. All of the subsidiaries,
however, report their financial results in U.S. dollars pursuant to U.S. GAAP.
See '--Currency.'
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUES. Revenues increased to $109.4 million for the six months ended
June 30, 1997 compared to $39.8 million for the six months ended June 30, 1996,
an increase of 175%. This increase is due primarily to an increase in the
Company's U.S. revenues to $69.9 million for the six months ended June 30, 1997
from $35.4 million for the six months ended June 30, 1996 and the Company's
European revenues which increased to $32.3 million for the six months ended June
30, 1997 from $4.4 million for the six months ended June 30, 1996. The Company
generated revenues in the United States, in seven European countries and in
Australia during the second quarter of 1997. The Company had revenue producing
operations in only the United States and five European countries in the first
half of 1996. The increase in U.S. revenues was primarily due to both increased
traffic volume from existing customers and significant increases in the
Company's U.S. commercial customer base. Revenues from the Company's European
operations increased as a result of the generation of revenues by its start-up
operations in the United Kingdom, Sweden and Finland and the operations it
acquired in Germany, France and the Netherlands.
COST OF SERVICES. Cost of services increased to $96.6 million for the six
months ended June 30, 1997 from $35.7 million for the six months ended June 30,
1996, an increase of 171%. This increase is primarily due to increased traffic
and increased rates paid to the Company's carrier vendors. As a percentage of
revenues, cost of services decreased to 88.4% for the six months ended June 30,
1997
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from 89.7% for the six months ended June 30, 1996. The decrease in cost of
services as a percentage of revenues is primarily attributable to the Company's
growing European revenues which represented 29.5% of the Company's total
revenues for the six months ended June 30, 1997 as compared to 10.9% of the
Company's total revenues for the same period in 1996 and, to a lesser extent, to
a decrease in overflow traffic. In addition, European operations generated
higher gross margins (18.7% for the six months ended June 30, 1997) as compared
to the Company's U.S. operations (8.8% for the six months ended June 30, 1997).
The Company is currently seeking to purchase additional capacity on routes on
which it has experienced, or anticipates experiencing, overflow traffic, in
order to further reduce costs. In addition, the Company's prices to customers
utilizing these routes are often adjusted to take into account an increased
expectation of overflow traffic.
GROSS MARGINS. The Company's consolidated gross margins increased to 11.6%
for the six months ended June 30, 1997 from 10.3% for the six months ended June
30, 1996. Gross margins in the United States decreased to 8.8% from 9.5% for the
six months ended June 30, 1997 as compared to the same period in 1996, while
gross margins in the Company's European operations increased to 18.7% for the
six months ended June 30, 1997 from 17.0% for the six months ended June 30,
1996. Historically, the Company's U.S. gross margins were adversely affected
because of pre-existing deficiencies in operational procedures in businesses
acquired by the Company and more recently by its rapid expansion of its U.S.
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the six months ended June 30, 1997 increased by
$21.6 million, or 158%, to $35.3 million from $13.7 million for the six months
ended June 30, 1996. This increase is primarily attributable to the Company's
investment in sales personnel and marketing expense in order to generate
increased revenue. As a percent of U.S. revenues, the Company's U.S. selling,
general and administrative expense decreased to 14.5% for six months ended June
30, 1997 from 22.3% in the comparable period last year. The Company's European
operations generated $20.1 million or 56.9% of the Company's consolidated
selling, general and administrative expense, although such operations accounted
for 29.5% of the Company's total revenues due to a greater proportion of
start-up costs in Europe. Selling, general and administrative expense as a
percentage of revenues will continue to increase as a result of start-up costs
attributable to new local operations.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 311% to $8.9 million for the six months ended June 30, 1997
from $2.2 million for the six months ended June 30, 1996. For the six month
periods ended June 30, 1997 and 1996, amortization of goodwill amounted to $3.4
million and $1.1 million, respectively. This increase is primarily attributable
to the increased amortization of goodwill recorded as a result of acquisitions.
Depreciation and amortization expense is expected to increase in the future as
the Company acquires additional businesses and assets.
INTEREST INCOME. Interest income increased to $7.2 million for the six
months ended June 30, 1997 from $80,000 for the six months ended June 30, 1996,
primarily as a result of interest earned on the remaining net proceeds of the
Debt Offering.
INTEREST EXPENSE. Interest expense increased to $18.9 million for the six
months ended June 30, 1997 from $635,000 for the six months ended June 30, 1996,
an increase of approximately $18.2 million, as a result of interest related to
the Notes.
CURRENCY FLUCTUATIONS. During the six months ended June 30, 1997, the U.S.
dollar experienced a significant increase in value relative to most European
currencies. The translation of the Company's European results of operations was
adversely affected by changes in exchange rates.
NET LOSS. Net loss increased to $35.9 million for the six months ended
June 30, 1997, as compared to a net loss of $12.3 million for the six months
ended June 30, 1996, due to the factors described above.
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YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. Revenues increased to $113.3 million for the year ended December
31, 1996 from $18.6 million for the year ended December 31, 1995, an increase of
509%. This increase is due primarily to the full year of U.S. operations that is
consolidated in the 1996 results of operations compared to only three months of
the Company's U.S. operations consolidated in the historical statement of
operations for 1995. The Company experienced an increase in commercial customers
at each of the Company's operations. The Company's Swedish, Finnish and U.K.
operations began generating revenues in May 1996 and contributed approximately
$7.8 million to 1996 revenues. The Company purchased Sprint's international
voice operations in France and Germany in May 1996. These operations contributed
approximately $13.1 million to 1996 revenues. The Company's European operations
generated minimal revenues in 1995. For the year ended December 31, 1996,
approximately 24% of the Company's revenues were generated from the Company's
European operations. The Company expects European operations to increase as a
percentage of its total consolidated revenues as the Company proceeds with its
expansion of its operations in geographic areas outside the U.S. The foregoing
is a forward-looking statement and there can be no assurance in this regard.
Factors which could affect such statement include (i) changes to or the
Company's inability to effect its growth strategy, (ii) regulatory actions or
inactions which adversely affect the Company's existing operations or ability to
expand outside of the U.S. and (iii) changes in the competitive and economic
environments in each of the Company's existing and new markets.
In connection with the Company's shift in marketing focus to small and
medium-sized businesses, the Company determined in December 1995 that certain
carrier customers provided the Company with margins below its targeted levels
for margin contribution. Accordingly, the Company established new pricing
structures and terminated service to the low or zero margin customers which did
not agree to the new pricing structures. In addition, the Company terminated
service in February 1996 to its largest wholesale customer because of such
customer's inability to pay for past services. This customer represented
approximately 11% of ITG's revenues in 1995. The Company has commenced legal
proceedings to recover amounts owed to the Company by such customer. The Company
has also instituted stricter credit criteria to reduce its bad debt exposure.
To compensate for the loss of such revenues, the Company accelerated its
U.S. sales efforts to small and medium-sized businesses during 1996, resulting
in increased sales to this segment.
COST OF SERVICES. Cost of services increased to $98.5 million for the year
ended December 31, 1996 from $17.5 million for the year ended December 31, 1995,
an increase of 463%. This increase is due primarily to the full year of U.S.
operations that is consolidated in the 1996 results of operations compared to
only three months of the Company's U.S. operations consolidated in the
historical statement of operations for 1995. As a percentage of revenues, cost
of services decreased to 86.9% for the year ended December 31, 1996 from 94.1%
for the year ended December 31, 1995. The decrease in cost of services as a
percentage of revenues is primarily attributable to the Company's growing
European revenues which generate greater gross margins (21.3% in 1996) than the
Company's U.S. operations (10.4% in 1996) and, to a lesser extent, to a decrease
in overflow traffic and increased utilization of the Company's operating
agreements. The Company is currently seeking to purchase additional capacity on
routes on which it has experienced, or anticipates experiencing, overflow
traffic. In addition, the Company's prices to customers utilizing these routes
are often adjusted to take into account an increased expectation of overflow
traffic.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the year ended December 31, 1996 increased to $38.9
million from $9.6 million for the year ended December 31, 1995. This increase is
primarily attributable to the Company's investment in sales personnel and
marketing expense in order to generate increased revenue. Costs for start-up and
expansion of the Company's U.K., Dutch, Finnish and Swedish Local Operators
represented 30.1% and 5.6% of the Company's total selling, general and
administrative expense for the years ended December 31, 1996 and 1995,
respectively, although they only accounted for 9.9% and less than 1.0% of the
Company's total revenues for the same periods. Selling, general and
administrative expense as a percentage of revenues will vary from period to
period as a result of new Local Operators' start-up
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costs. For existing Local Operators however, such costs are not expected to
increase in proportion to revenues.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 689% to $6.7 million for the year ended December 31, 1996 from
$849,000 for the year ended December 31, 1995. This increase is primarily
attributable to the increased amortization of goodwill recorded as a result of
acquisitions. For the years ended December 31, 1996 and 1995, amortization of
goodwill amounted to approximately $2.9 million and $500,000, respectively.
Depreciation and amortization expense is expected to increase in the future as
the Company acquires additional businesses and assets. The Company depreciates
its switches over a five- to seven-year life, office equipment is depreciated
over their estimated useful lives which range from three to seven years and its
investments in MIUs and IRUs are depreciated over a 15-year life. Goodwill is
amortized over 15 years.
INTEREST INCOME. Interest income increased to $4.0 million for the year
ended December 31, 1996 from $173,000 for the year ended December 31, 1995,
primarily as a result of interest earned on the net proceeds from the Debt
Offering.
INTEREST EXPENSE. Interest expense increased to $11.4 million for the year
ended December 31, 1996 from $194,000 for the year ended December 31, 1995, an
increase of approximately $11.2 million, as a result of interest related to the
Notes ($9.2 million) and borrowings under the Revolving Credit Facility
($748,000) and the remaining amounts due to interest related to capital leases.
Interest expense will increase substantially in future periods due to the
interest payments on the Notes.
PERIODS PRIOR TO JANUARY 1, 1995
The Company had no operations in 1994 other than insignificant salary
expense. The Company's predecessor, ITG, had less than $2.8 million and $4.7
million of revenue and a net loss of $250,000 and $3.1 million for the years
ended December 31, 1993 and 1994, respectively. In 1995, the Company had
virtually no operations other than its initial investments in its U.S.
operations and an investment in Cyberlink Europe, which had no material
operations. The majority of the Company's investments (in terms of acquisition
value) were made at the end of the third quarter of 1996. Therefore, a
comparison of historical results for 1995 compared to 1994 would not be
meaningful. Accordingly, the discussion set forth above focuses on the
historical information for the six month periods ended June 30, 1996 and 1997
and the years ended December 31, 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses, due in large
part to the start-up and development of the Company's operations and RSL-NET.
The Company expects that such losses will increase as the Company implements its
growth strategy. Historically, the Company has funded its operating losses and
capital expenditures through capital contributions, borrowings and a portion of
the net proceeds of the Debt Offering.
Cash used in operating activities for the six months ended June 30, 1997
totaled $46.8 million compared with $8.2 million for the same period in 1996.
Capital expenditures for the six months ended June 30, 1997 were $13.6 million
compared with $4.9 million for the comparable period in 1996. Funds expended for
acquisitions were $5.4 million during the six months ended June 30, 1997 and
$10.6 million for the six months ended June 30, 1996. Cash provided by operating
activities for the year ended December 31, 1995 and cash used in operating
activities for the year ended December 31, 1996 equaled $3.6 million and $10.5
million, respectively. Capital expenditures for the year ended December 31, 1995
and the year ended December 31, 1996 were $6.1 million and $23.9 million,
respectively. Funds expended for acquisitions during the year ended December 31,
1995 and the year ended December 31, 1996 were $15.4 million and $38.6 million,
respectively. During 1996, the Company funded such operating losses, capital
expenditures and acquisitions with borrowings of $44.5 million and a portion of
the net proceeds of the Debt Offering. During the six month period ended June
30, 1997, the Company funded such operating losses, capital expenditures and
acquisitions with a portion of the net proceeds of the Debt Offering. At June
30, 1997, the Company had $95.8 million of working capital as compared to a
$46.1 million of working capital deficiency at June 30, 1996.
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Capital expenditures for the year ended 1996 and the six month period ended
June 30, 1997 were $23.9 million and $13.6 million, respectively. These capital
expenditures are principally for switches and related telecommunications
equipment. The Company is contractually committed to the purchase of three
international gateway and two domestic switches. This commitment amounts to
approximately $8.0 million, all of which is being financed under the Company's
existing $50.0 million facility provided by Ericsson.
The Company had 'other income' in the amount of approximately $7.0 million
as a result of the Company's successful amendments to certain transmission
capacity agreements.
The Company's indebtedness was approximately $312.9 million at June 30,
1997, of which $305.9 million represents long-term debt and $7.0 million
represents short-term debt.
On October 3, 1996, in the Debt Offering, the Company and the Note Issuer
issued 300,000 units, each unit consisting of one Note and one Warrant. The
units were sold for an aggregate purchase price of $300.0 million.
The Notes, which are guaranteed by the Company, are redeemable, at the Note
Issuer's option, subsequent to November 15, 2001, initially at 106.1250% of
their principal amount, declining to 103.0625% of their principal amount for the
calendar year subsequent to November 15, 2002, and at 100% of the principal
amount subsequent to November 15, 2003. In addition, at any time on or before
November 15, 1999, the Company may redeem up to $90.0 million of the original
aggregate principal amount of the Notes with the net proceeds of a sale of
common equity at a redemption price equal to 112.25% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption, provided that at least $210.0 million of aggregate principal amount
of Notes remains outstanding immediately after such redemption. See 'Use of
Proceeds.'
The Indenture contains certain restrictive covenants which impose
limitations on the Company and certain of its subsidiaries ability to, among
other things: (i) incur additional indebtedness, (ii) pay dividends or make
certain other distributions, (iii) issue capital stock of certain subsidiaries,
(iv) guarantee debt, (v) enter into transactions with shareholders and
affiliates, (vi) create liens, (vii) enter into sale-leaseback transactions, and
(viii) sell assets.
In connection with the issuance of the Notes, the Company was required to
purchase and maintain restricted marketable securities, which are held by the
trustee under the Indenture, in order to secure the payment of the first six
scheduled interest payments on the Notes. The market value of such restricted
marketable securities was approximately $84.7 million at June 30, 1997. On May
15, 1997, the Company made its first required semi-annual interest payment in
the amount of approximately $22.7 million. The funds required for the interest
payment were released from the restricted securities portfolio.
The Company has a $7.5 million Revolving Credit Facility and a $35.0
million subordinated Shareholder Standby Facility (as defined below). There were
no amounts outstanding under these facilities at June 30, 1997 and, as of the
date of this Prospectus. The Revolving Credit Facility is payable on April 1,
1998 and accrues interest, at the Company's option, at (i) the lender's prime
rate per annum or (ii) LIBOR plus 1% per annum. Ronald S. Lauder, the Company's
Chairman and largest and controlling shareholder, has provided a guarantee in
connection with the Company's borrowings under the Revolving Credit Facility. In
September 1996, the Company borrowed $35.0 million from Mr. Lauder (the
'Subordinated Shareholder Loan'). In connection with the subsequent prepayment
of the Subordinated Shareholder Loan, Mr. Lauder agreed to provide (or arrange
for a bank to provide) the Company with up to $35.0 million of subordinated debt
(the 'Shareholder Standby Facility'). The Shareholder Standby Facility
terminates upon the closing of the Offerings. See 'Management--Compensation
Committee Interlocks and Insider Participation' and 'Description of Certain
Indebtedness.'
Ericsson has also provided to the Company a $50.0 million vendor financing
facility to fund the purchase of additional switching and related
telecommunications capital equipment. At June 30, 1997, approximately $30.2
million was available under this facility. Borrowings from Ericsson accrue
interest at a rate of LIBOR plus either 5.25% or 4.5% depending on the equipment
purchased. See 'Description of Certain Indebtedness.'
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In connection with the September 1996 purchase of additional shares of
ITG's common stock, the Company issued secured notes totaling approximately $9.3
million. Such notes and interest are secured by the common stock acquired, are
payable in three semiannual installments, and bear interest at the rate of 6%.
The Company would prepay such indebtedness in connection with its proposed
purchase of the remaining ITG shares held by ITG's minority stockholders.
The Company believes that the net proceeds of the Offerings and the
remaining net proceeds of the Debt Offering, together with the available
borrowings under the Revolving Credit Facility, vendor financing and short-term
lines of credit and overdraft facilities from local banks, are expected to fund
the Company's planned expansion of its existing operations and operating losses
for 15 to 20 months; however, this is a forward-looking statement and there can
be no assurance in this regard. If the Company's plans or assumptions change, if
its assumptions prove to be inaccurate, if the Company consummates acquisitions
in addition to those currently contemplated, if the Company experiences
unanticipated costs or competitive pressures or if the net proceeds from the
Offerings together with the remaining proceeds of the Debt Offering and the
proceeds from the Revolving Credit Facility and the Company's vendor financing
otherwise prove to be insufficient, the Company may be required to seek
additional capital sooner than currently anticipated. See 'Risk
Factors--Historical and Future Operating Losses and Negative EBITDA; Need for
Additional Capital; Substantial Indebtedness; Ability to Service Indebtedness.'
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128 'Earnings per
Share'. This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and does not believe it
to be significant.
In June 1997, the FASB issued SFAS No. 130 'Reporting Comprehensive
Income.' This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and has found the
majority of required disclosures to be not applicable and the remainder to be
not significant.
In June 1997, the FASB issued SFAS No. 131 'Disclosure about Segments of an
Enterprise and Related Information.' SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company has not yet determined what additional disclosures may be
required in connection with adopting SFAS No. 131.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
SEASONALITY
The Company's European operations experience seasonality during July and
August, December and January, and, to a lesser extent, March, as these months
are traditional holiday months in most European countries and many European
businesses, which are the Company's principal European customers, are closed
during portions of these months.
40
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BUSINESS
COMPANY OVERVIEW
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of international and domestic telephone services to
both carrier and commercial (including business and residential) accounts. These
services include international long distance calling to over 200 countries and
calling card, private line and value-added telecommunications services. The
Company focuses on providing international long distance voice services to small
and medium-sized businesses in key markets. The Company currently has revenue
generating operations in the United States, the United Kingdom, France, Germany,
Sweden, Finland, the Netherlands, Denmark and Australia. The Company is in the
process of commencing start-up operations through its investments in
majority-owned entities in Italy, Austria, Venezuela and Japan, and through its
30% investment in a Portuguese telecommunications company. In 1995,
approximately 62% of all international long distance telecommunications minutes
originated in these markets. The Company plans to expand its operations and
network into additional key markets which account for a significant portion of
the world's remaining international traffic.
The Company was formed by Ronald S. Lauder and Itzhak Fisher in 1994 to
capitalize on the opportunities created by the growth, deregulation, and
profitability of the international long distance market. The Company has grown
rapidly through acquisitions, strategic investments and joint ventures, as well
as through the start-up of its own operations in key markets. The Company began
its operations in the United States in order to establish a presence in the
largest and one of the most deregulated telecommunications markets in the world,
and has since expanded its presence to key European countries in anticipation of
continued telecommunication deregulation in the EU. In order to pursue
opportunities in Latin America, the Company recently formed a joint venture with
entities controlled by the Cisneros Group. The Company intends to continue to
expand rapidly by establishing or acquiring operations in additional countries
as they deregulate, including countries in Asia.
COMPANY STRUCTURE
The Company was incorporated under the laws of Bermuda in March 1996. The
Company is the successor in interest to RSL Communications Inc., a British
Virgin Islands corporation ('RSL BVI'), which was amalgamated into the Company
in July 1996. RSL BVI is the successor in interest to RSL Communications, Inc.,
a Delaware corporation ('RSL Delaware'), which was merged into RSL BVI in April
1995. RSL Delaware and RSL BVI were incorporated in July 1994 and April 1995,
respectively.
UNITED STATES. The Company operates in the United States through ITG, an
international carrier which operates through its 100% owned subsidiary, RSL USA.
The Company owns 92% of ITG, has entered into definitive agreements to acquire
an additional 2.3% from one minority shareholder and is in the process of
negotiating definitive agreements to acquire the remaining interests from the
other minority shareholders. Such transactions are expected to close on or prior
to the closing date of the Offerings. RSL USA in turn owns 100% of Cyberlink.
See 'Certain Relationships and Relations Transactions.'
EUROPE. RSL Europe is a United Kingdom limited liability company and a
wholly-owned subsidiary of the Company, which was formed in March 1995 to
implement the Company's pan-European strategy. RSL Europe also serves as the
Company's Local Operator in the United Kingdom. In addition, RSL Europe owns RSL
Sweden and RSL Finland.
In May 1996, the Company acquired the international long distance voice
businesses of Sprint in France and Germany through its indirectly wholly-owned
subsidiaries RSL COM France S.A., a French corporation ('RSL France'), and RSL
COM Deutschland GmbH, a German limited liability company ('RSL Germany').
In October 1996, RSL Europe acquired a 75% interest in the operations of
RSL Netherlands, an international reseller which had been operating in the
Netherlands since October 1995. The Company has recently entered into an
agreement to acquire the remaining interest in RSL Netherlands, which is
41
<PAGE>
expected to close upon completion of the Offerings. RSL Netherlands in turn owns
100% of RSL Denmark A/S, the name of which is intended to be changed to 'RSL COM
Danmark A/S' (which is the name and service mark under which such entity
currently conducts business in Denmark) ('RSL Denmark'). RSL Denmark commenced
operations in Denmark in May 1997.
In April 1997, RSL Europe acquired a 30.4% interest in Maxitel, a
Portuguese international telecommunications carrier. RSL Europe and the other
two principal shareholders of Maxitel entered into a shareholders' agreement
pursuant to which, among other things, (i) certain major decisions by the Board
of Directors of Maxitel can only be approved with the consent of RSL Europe and
(ii) RSL Europe has the right to designate two directors to the Board of
Directors of Maxitel.
In August 1997, RSL Europe acquired an 85% interest in the operations of
RSL Italy, an international telecommunications reseller that had been operating
in Italy since 1995.
In August 1997, the Company acquired 50% of RSL Austria, an Austrian
international telecommunications reseller. Upon completion of the requisite
corporate formalities, which is expected to occur in September 1997, the Company
will own 90% of RSL Austria. The Company anticipates that RSL Austria will
commence offering services by January 1998.
OTHER REGIONS
The Company will conduct its operations in Latin America through RSL Latin
America. RSL Latin America is a joint venture which is 51% owned by the Company
and 49% owned by the Cisneros Group of Companies. RSL Latin America recently
acquired a 49% interest in Sprintel, a Venezuelan operation, and will acquire
the remaining 51% of Sprintel upon receipt of the required approval from
appropriate regulatory authorities. To date, the Company has not generated
revenues in Latin America. The Company expects to commence generating revenues
in Latin America in early 1998.
In Asia, the Company carries on its operations through its wholly-owned
subsidiary, RSL COM Asia, Ltd. ('RSL Asia'). In October 1996, the Company
established RSL COM Australia Pty Ltd. ('RSL Australia') to carry on its
Australian operations. In March 1997, the Company also incorporated RSL Japan, a
wholly-owned subsidiary of RSL Asia, to initiate the Company's operations in
Japan. To date, the Company has not generated revenues in Japan. The Company
expects to commence generating revenues in Japan in early 1998.
INDUSTRY OVERVIEW
International telecommunications involves the transmission of voice and
data from the domestic telephone network of one country to that of another.
According to industry sources, international long distance switched
telecommunications traffic worldwide increased from 28 billion minutes in 1989
to 60.3 billion minutes in 1995 and is projected to reach between approximately
99 and 151 billion minutes by the year 2000. The market for these services is
highly concentrated in more developed countries, with Europe and the United
States accounting for approximately 44% and 27%, respectively, of the industry's
1995 total worldwide minutes of use.
International telecommunications is currently recognized as one of the
fastest growing and most profitable segments of the long distance
telecommunications industry, having experienced a compounded growth in total
minutes of 13.4% per annum from 1989 to 1995. The industry has been undergoing
rapid change due to the continued deregulation of the telecommunications market,
the construction of additional infrastructure and the introduction of new
technologies, which has resulted in increased competition and demand for
telecommunications services worldwide. Forecasts by the International
Telecommunications Union (the 'ITU'), a worldwide telecommunications
organization under the auspices of the United Nations, and Analysys Ltd., a
telecommunications industry consulting group, project this trend to continue
with an annual growth rate between approximately 10% and 17% through the year
2000.
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The size of each market in which the Company currently operates or is in
the process of commencing operations is set forth below.
<TABLE>
<CAPTION>
COUNTRY'S COUNTRY'S PERCENTAGE
1995 MARKET OF 1995 GLOBAL
COUNTRY OF SIZE IN INTERNATIONAL
OPERATION MINUTES(1) TRAFFIC
- ------------------- ----------- --------------------
<S> <C> <C>
USA................ 16,057 26.6
Germany............ 5,244 8.7
UK................. 4,015 6.7
France............. 2,805 4.7
Italy.............. 1,908 3.2
Japan.............. 1,638 2.7
The Netherlands.... 1,459 2.4
Australia.......... 1,024 1.7
Austria............ 901 1.5
Sweden............. 900 1.5
Denmark............ 533 .9
Finland............ 315 .5
Portugal........... 284 .5
Venezuela.......... 129 .2
----------- --------
37,212 61.7%
</TABLE>
- ------------------
(1) All data, with the exception of U.S. outbound traffic, were taken from
Telegeography 1996/1997, which is published by Telegeography, Inc. and the
International Telecommunications Union. U.S. data were derived from FCC Rule
Section 43.61 filings which are publicly available.
The increasing pace of deregulation in telecommunications is evidenced by
the recent World Trade Organization's Group on Basic Telecommunications
Agreement (the 'GBT Agreement'). The GBT Agreement, signed by 69 countries,
calls for relaxed restrictions on foreign ownership and a commitment to
deregulate telecommunications and allow competition. Of the 69 signatories to
the GBT Agreement, 65 have agreed to adopt certain regulatory principles which
call for deregulation of telecommunications markets and the initiation of
competition based on the following actions: (i) pro-competitive regulation; (ii)
creation of favorable interconnect terms, (iii) standard licensing criteria,
(iv) establishment of an independent regulator, and (v) non-discriminatory
allocation of scarce resources (e.g., rights of way, frequencies, telephone
numbers). Each signatory nation has accepted these principles to varying degrees
and has set a different timetable for the enactment of such principles, although
there can be no assurance of such enactment. A rulemaking proceeding to consider
implementation of provisions of the GBT Agreement in the United States is
currently pending before the FCC.
Deregulation has coincided with technological innovation in the telephone
industry. New technologies include fiber optic cable and improvements in
computer software, digital compression and processing technology. Fiber optic
cable, which has widely replaced traditional wire lines, has dramatically
increased the capacity, speed and flexibility of telephone lines. In addition,
recent developments in software and hardware enable the transmission of voice
over the Internet through the use of special access servers, although the
quality of the call is not yet comparable to the quality of calls made over
traditional cable lines. In part as a result of these technological innovations,
lack of capacity is a less significant barrier to entry for new international
telephone companies and the transmission costs per minute of an international
call have decreased substantially.
Deregulation and privatization of telecommunications services and the onset
of competition have also resulted in (i) the broadening of service offerings,
including advanced and enhanced services (such as global voicemail, faxmail and
electronic mail, itemized and multicurrency billing and the ability to allow
customers to pay for long distance calls made from any telephone using a single
account (e.g., calling cards)) and (ii) lower end-user prices. These factors
have contributed to an increase in the
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volume of both inbound and outbound call traffic. Despite falling prices, the
overall market for international long distance traffic has been growing and the
decline in prices generally has been more than offset by an increase in
telecommunications usage.
PROJECTED GROWTH OF INTERNATIONAL LONG DISTANCE VOICE TRAFFIC
[CHART]
Billions of Outgoing Minutes
____________________________
| |
| Compound Annual |
| Growth Rate |
| 16.6% of Minutes of Use* |
|____________________________|
Europe USA & Canada Asia/Pacific Rim Other Total
------ ------------ ---------------- ----- -----
1996 29.4 23.7 12.2 15.8 81.1
1997 33.2 27.9 14.8 18.6 94.5
1998 37.7 32.8 17.8 21.9 110.2
1999 42.9 38.5 21.6 25.8 128.8
2000 48.8 45.4 26.2 30.5 150.9
- ------------------
Source: Analysys Ltd.
* Prices have declined and are expected to continue to decline. Accordingly,
growth in revenues is expected to be substantially less than growth in
minutes. The data presented above constitutes a forward-looking statement.
Important factors that could cause actual minutes of use to differ materially
from the forward-looking data above are noted herein. See 'Risk Factors--Risks
Associated with Rapidly Changing Industry' and '--Government Regulatory
Restrictions.'
U.S. INTERNATIONAL LONG DISTANCE MARKET
The U.S. international long distance switched telecommunications market
accounted for approximately 27% of global international long distance call
originations in 1995 based on minutes of use. The industry is large and growing,
with revenues for U.S.-originated international long distance telephone services
rising from approximately $6.9 billion (6.8 billion minutes) in 1989 to
approximately $14.2 billion (16.1 billion minutes) in 1995. The growth of the
U.S.-originated international long distance market was initially attributable to
deregulation and the decrease in prices which accompanied the onset of
competition. Deregulation and the resulting competition also led to improvement
in service offerings and customer service. More recently, in addition to further
U.S. deregulation, the growth of the U.S.-
44
<PAGE>
originated international long distance market has been attributable to (i) the
continued deregulation of other telecommunications markets throughout the world,
(ii) the privatization of PTTs, (iii) increased capacity, improved quality and
lower operating costs attributable to technological improvements, (iv) the
expansion of telecommunications infrastructure and (v) the globalization of the
world's economies and free trade.
The profitability of the traditional U.S.-originated international long
distance market is principally driven by the difference between settlement rates
(i.e., the rates paid to other carriers to terminate an international call) and
billed revenues. Increased competition arising from deregulation and
privatization and pressure arising from increased global trade have brought
about reductions in settlement rates and end-user prices, reducing termination
costs for United States based carriers. Based on FCC data for the period 1989
through 1995, per minute settlement payments by United States based carriers to
foreign PTTs fell 33%, from $.70 per minute to $.47 per minute. However, over
this same period, per minute international billed revenues fell only 14%, from
$1.02 in 1989 to $.88 in 1995. As a result, gross profit per outbound
international minute (before local access charges) grew from $.32 in 1989 to
$.41 in 1995, a 25% increase. The FCC has recently issued benchmark levels for
settlement rates, of between $.15 and $.23 per minute, in an effort to reduce
the settlement rates charged and paid by U.S. carriers. Such benchmark rates are
substantially lower than the current settlement rates. The FCC has encouraged
carriers to use alternative measures to terminate international traffic other
than through operating agreements and the international settlement process. The
Company believes that as settlement rates and costs for leased capacity continue
to decline, international long distance will continue to provide high revenue
and gross profit per minute, although there can be no assurance in this regard.
Although the Company focuses on the international telecommunications
market, it also provides domestic long distance services to many of its
customers. According to the FCC, the U.S. domestic long distance market grew in
total minutes at an annual compound rate of approximately 7.6% from 1989 to 1995
while the U.S.-originated international long distance market grew in total
minutes at an annual compound rate of approximately 15.4% during the same
period. Although the domestic market is much larger, the profit per minute of
use for international traffic has generally been higher than for domestic
traffic. See '--U.S. Operations.'
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The European international long distance market is the largest in the
world, accounting for approximately 26 billion minutes or approximately 44% of
worldwide minute originations in 1995 based on minutes. Of the total minutes,
72.4% were generated from calls between European nations and 7.2% were
terminated in the United States.
The European PTTs have historically had monopolies on providing telephone
services, making the cost of international telephone calls from Europe much
higher than similar calls from the United States. In addition, the Company
believes that many PTTs have used profits from international traffic to
subsidize domestic calling. Customers in many European markets are not able to
obtain a number of value-added features taken for granted in the United States,
such as itemized billing, touch tone dialing, voice mail and other enhanced
services. Deregulation, together with significant advances in technology that
have decreased the cost of providing services and allowed the provision of more
sophisticated value-added features, have made it possible for other telephone
companies to compete with the PTTs in providing international voice
telecommunications services.
A 1990 EC directive (the '1990 Directive') required each EU member state to
liberalize by 1992 all telephony services offered over its PSTN, with the
exception of basic 'voice telephony' and specified other services. The effect of
the 1990 Directive was that value-added services and the delivery of voice
telephony to closed user groups (i.e., to a specified group of people) were
liberalized to the extent that they do not come within the 1990 Directive's
definition of basic 'voice telephony.' Different interpretations as to whether a
service should be regarded as a value-added service or as a basic 'voice
telephony' service, and as to what constitutes a closed user group, have led to
variations among the EU member states as to what services may be delivered and
the manner in which they can be provided. In addition, certain EU member states
are late in enacting the relevant legislation
45
<PAGE>
implementing the 1990 Directive, which has created further regulatory
uncertainty. Under a 1996 EC directive (the 'Full Competition Directive'), voice
telephony services should be liberalized by January 1, 1998 in most of the EU
member states. As a condition to the FCC granting approval for the Global One
joint venture, the regulatory authorities of France and Germany agreed to enact
legislation to liberalize their respective markets by January 1998. However, it
is unlikely that the non-liberalized EU markets, including most European markets
in which the Company operates, will meet the January 1, 1998 requirement of the
Full Competition Directive and there can be no assurance regarding the timing or
extent of liberalization in any particular country or the EU in general. See
'--European Operations' for a more detailed discussion of the Full Competition
Directive and related regulatory matters.
In response to these European regulatory changes, a number of different
competitors, including the Company, are emerging to compete with the European
PTTs. At one end of the scale, the large U.S. telecommunications service
providers and European PTTs have begun to form 'mega-carrier' alliances to
compete in offering value-added services and the resale of calling services
across Europe. At the other end of the scale, a number of competitors have
emerged that primarily provide long distance 'call back' telephone service.
Other companies are developing networks in Europe to service specific markets.
The Company believes, along with many industry observers, that the
deregulation currently underway in many countries in continental Europe will
lead to market developments similar to those that occurred in the United States
and the United Kingdom upon deregulation of long distance telecommunications
services. Such deregulation in the United States and the United Kingdom has
resulted in an increase in call traffic and the emergence of multiple new
telecommunications services providers of varying sizes. In addition, significant
reductions in prices, particularly for domestic long distance calls, as well as
improvement in both the services offered and the level of overall responsiveness
to customers, have occurred. Although pricing has become competitive in both
countries, pricing levels continue to permit services to be profitably provided.
There can be no assurance, however, that this will continue to be the case.
LATIN AMERICAN INTERNATIONAL LONG DISTANCE MARKET
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. Certain
countries have competitive local and/or long distance sectors, most notably
Chile, which has competitive operators in all sectors. Colombia is scheduled to
license three international service providers in addition to its PTT by the end
of 1997, although the Colombian deregulation process is currently being reviewed
under Colombian law and, therefore, such schedule may be modified. In addition,
various Latin American countries have completely or partially privatized their
national carriers, including Argentina, Chile, Mexico, Peru and Venezuela.
Venezuela has also legalized value-added services and has targeted January 1,
2000 as the date for full deregulation. Brazil has adopted a constitutional
amendment requiring the privatization of its PTT, the establishment of an
independent regulator and the opening of the telecommunications market to
competition. In Mexico, the former PTT has been privatized, its exclusive long
distance concession expired in August 1996 and it has been obligated to
interconnect with the networks of competitors since January 1997. Competition in
Mexico has been initiated and an independent regulator has been established.
Three countries in the region, Chile, Mexico and the Dominican Republic, have
already opened their long distance telecommunications markets to competition.
OTHER MARKETS
Deregulation is spreading throughout many of the major markets in Asia and
the Pacific Rim. A significant number of countries in these regions are
signatories of the GBT Agreement and have committed to open their markets to
competition. Australia, the Philippines, New Zealand and Japan have already
opened their markets to full competition and Hong Kong, Indonesia, Japan, South
Korea and Malaysia have legalized the provision of value added services. Hong
Kong has also recently licensed three new carriers to provide local service and
Singapore will be licensing two new operators in 1998.
46
<PAGE>
Despite the growth and deregulatory trends in the global telecommunications
market, the pace of change and emergence of competition in many countries,
particularly in parts of Africa, remains slow, with domestic and international
traffic still dominated by the government-controlled PTTs. The Company believes
that international carriers, such as itself, which have already established, or
are in negotiations to establish, operating agreements with the PTTs in many
such countries will be well-positioned to capture the benefits of increasing
traffic flows as the telecommunications infrastructure in these countries is
expanded.
The Company believes that the trend towards deregulation creates numerous
opportunities for international carriers such as itself to increase their access
to developing telecommunications markets and to increase their market share for
calls both into and out of these emerging markets. The Company believes that
many of the emerging carriers in developing countries, as well as certain
recently privatized PTTs, are likely to seek alliances, partnerships or joint
ventures with other international carriers to expand their global networks, and
that the size of many of the markets may lead them to seek alliances with
carriers like the Company as opposed to the mega-carriers, such as Uniworld,
Concert and Global One. Although there is a general trend towards deregulation
worldwide, there can be no assurance regarding the timing or the nature of
deregulation, whether any deregulation will occur at all or whether any trend
towards deregulation will not be reversed in any particular country.
INTERNATIONAL LONG DISTANCE MECHANICS
A long distance telephone call generally consists of three segments
origination, transport and termination.
[CHART]
- --------------------- ----------------------------- ---------------------
| ORIGINATION | | TRANSPORT | | TERMINATION |
- --------------------- ----------------------------- ---------------------
Satellite Connection
/\
Originating Country / \ Terminating Country
/ \
Private Line / \ Private Line
|--------------------| / \ |--------------------|
| | / \ | |
- ------------ ----------------- / \ ----------------- ------------
| Calling | | International |/ Half Circuit \| International | | Called |
| Customer | | Switch |----------------| Switch | | Customer |
- ------------ ----------------- ----------------- ------------
| | | |
| | | |
|------( PSTN )------| |------( PSTN )------|
Cable Connection
o Resale/Lease
o MIU/IRU
A typical international long distance call originates on a local exchange
network or private line and is carried to the international gateway switch of a
long distance carrier. The call is then transported along a fiber optic cable or
a satellite connection to an international gateway switch in the terminating
country and finally to another local exchange network or private line where the
call is terminated. A domestic long distance call is similar to an international
long distance call, but typically involves only one long distance carrier, which
transports the call on fiber, microwave radio or via a satellite connection
within the country of origination and termination. Generally, only a small
number of carriers are licensed by a foreign country for international long
distance and, in many countries, only the PTT is licensed to provide
international long distance service. Although the Company is licensed or
otherwise permitted (or
47
<PAGE>
not prohibited) to operate as an international long distance carrier in most of
its current markets, the range of services that may be offered pending further
deregulation is, in certain countries, limited to value-added services and
closed-user group services. See '--European Operations'. Any carrier that
desires to transport switched calls to or from a particular country must, in
addition to obtaining a license or other permission (if required), enter into
operating agreements or other arrangements with the PTT or another international
carrier in that country or lease capacity from a carrier that already has such
arrangements.
ORIGINATION
The Company can originate calls in all countries where it currently has
revenue-generating operations and route them to its local switch through a
dedicated telephone line between the customer and the Company's switch (commonly
known as 'direct access'). In addition, depending on local regulations, the
Company can originate calls by using the PSTN. In the United States, all
licensed long distance carriers are provided with 'equal access' which allows
such carriers to directly interconnect with the PSTN on the same basis. As a
result of equal access, all long distance calls from a customer are routed
directly to the Company's local switch without requiring the customer to dial
any special access numbers. This is accomplished by the local telephone company
in the customer's territory programming its network to direct all of the
Company's customers' long distance calls to the selected switch. Outside the
United States, certain restrictions require the Company to utilize one of the
following methods to originate a call via the PSTN.
PREFIX DIALING. Prefix dialing allows a customer to access the Company's
switch via the PSTN by dialing a multiple digit access code (the 'prefix')
assigned to the Company prior to dialing the destination telephone number.
Prefix dialing requires direct interconnection with the operator of the PSTN,
typically the PTT or another major carrier, in order to allow the PSTN to
recognize the prefix and direct the call to the Company's switch. In order to
make the use of prefix dialing service transparent to the customer, the Company
can either program the customer's telephone system or install an auto-dialer
device to automatically dial the prefix on behalf of the customer when
appropriate. The auto-dialer device is purchased, installed and maintained by
the Company.
In Europe, prefix dialing is currently provided only by the Company's
operations in the United Kingdom, Sweden and Finland because prefix dialing
service requires interconnection with the PSTN, which is not currently permitted
or implemented in the remainder of Europe. Prefix dialing is scheduled to be
provided in the remainder of the EU after January 1, 1998, when deregulation is
required under the Full Competition Directive, but such schedule is unlikely to
be met, for the most part, until the second half of 1998, at the earliest. See
'Risk Factors--Government Regulatory Restrictions.' Prefix dialing requires the
Company to incur a substantial up-front fixed fee that is payable to the PTT or
other operator of the PSTN for interconnection. The Company is then charged a
variable local access charge to route each call to the Company's switch. Despite
such fees, for customers generating relatively low volumes of calls or in remote
locations, prefix dialing is a more cost-effective form of call origination than
through a direct access line.
DIRECT ACCESS. Direct access allows a customer to connect its phone system
directly to the Company's switch utilizing a dedicated phone line. Dedicated
phone lines are leased on a monthly or longer-term fixed cost basis from the PTT
or other local exchange carrier. This method of origination is only
cost-effective for those customers which generate substantial volumes of
international traffic, given the fixed cost of leasing a dedicated line.
DIAL-IN. In countries where interconnection with the PTT or other operator
of the PSTN is currently not available, the Company can provide dial-in services
to closed user groups by allowing the customer to directly call the Company's
switch via the PSTN by dialing a pre-assigned telephone number (local or
toll-free), followed by a pin-code (which allows the switch to recognize the
customer) and the destination telephone number. The mechanics of this service
are substantially similar to calling card services currently provided by the
Company and other carriers in the United States. What constitutes a closed user
group has been the subject of a fair degree of interpretation among EU member
states, but is generally interpreted as meaning that the customer can only call
a limited predetermined group of destinations. As with prefix dialing, the
Company can make this service more
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<PAGE>
transparent to the customer by programming the customer's telephone system or
installing an auto-dialer, subject to local regulation. Given the greater number
of digits required to be dialed by the customer, however, a slight delay in
placing a call cannot be avoided by this service. Dial-in service involves a
variable local access charge to route the call to the Company's switch.
TRANSPORT
The transport of telephone calls is accomplished via land-based cables or
undersea cables, which are usually fiber optic, or by microwave radios or
satellites. A carrier can obtain half circuits on cable systems through MIUs,
IRUs or leases. In instances where a carrier has not purchased interests in a
cable prior to the time when the cable was placed in service, the carrier is
only permitted to acquire capacity on the cable through the purchase, by way of
a lump sum payment, of an IRU. The fundamental difference between an IRU holder
and an owner of MIUs is that the IRU holder is not entitled to participate in
management decisions relating to the cable system. Between two countries, a
carrier from each country owns a 'half-circuit' of a cable, essentially dividing
the ownership of the cable into two equal components. In the event that the
Company commences utilizing its remaining operating agreements, it will have to
either invest in additional IRUs or MIUs, or acquire satellite capacity, to
enable it to connect to a carrier in such countries. Additionally, any carrier
may generally lease circuits on a cable from another carrier with an MIU or IRU.
Satellite circuits are also obtained on a leased basis.
Traditionally, international long distance traffic is exchanged under
bilateral operating agreements between international carriers which own MIUs or
IRUs on the same fiber optic cable system in two countries or through leased
satellite capacity. Operating agreements provide for the termination of traffic
in, and return of traffic to, the carriers' respective countries at negotiated
accounting rates. Operating agreements typically provide that carriers will
return to their correspondents a percentage of the minutes received from such
correspondents ('return traffic'). In the United States, this percentage is set
by the FCC to be the relative ratio of U.S. inbound traffic to U.S. outbound
traffic to each country. In addition, operating agreements provide for network
coordination and accounting and settlement procedures between the carriers.
Accounting rates are reciprocal between each party to an operating
agreement. For example, if a foreign carrier charges a U.S. carrier $0.30 per
minute to terminate a call in the foreign country, the U.S. carrier would charge
the foreign carrier the same $0.30 per minute to terminate a call in the United
States. All U.S. carriers face a single accounting rate for each country unless
otherwise permitted by the FCC.
The term 'settlement' rates arises because carriers pay each other for
traffic exchanged utilizing the accounting rate structure on a net basis
determined by the difference between inbound and outbound traffic between them.
Settlement rates differ between countries. For example, a U.S. carrier may have
a settlement rate of $.30 to terminate a call in one country and $.35 in another
country while a U.K. carrier may have settlement rates of $.45 and $.40 to
terminate calls in the same countries. By linking its Local Operators over owned
and leased facilities, the Company bypasses this traditional settlement process
and lowers its cost of transporting its international traffic.
The FCC has established a policy that effectively prohibits foreign
carriers from discriminating among U.S. carriers (the 'International Settlements
Policy'). The International Settlements Policy requires: (1) the equal division
of accounting rates; (2) non-discriminatory treatment of U.S. carriers; and (3)
proportionate return of inbound traffic. In December 1996, the FCC modified its
rules to allow alternative payment arrangements that deviate from the
International Settlements Policy between any U.S. carrier and any foreign
correspondent in a country that satisfies the FCC's effective competitive
opportunities test. The FCC also stated that it would allow alternative
settlement arrangements between a U.S. carrier and a foreign correspondent in a
country that does not satisfy the effective competitive opportunities test, if
the U.S. carrier can demonstrate that deviation from the International
Settlements Policy will promote market-oriented pricing and competition while
precluding abuse of market power by the foreign correspondent.
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Recently, the FCC adopted new lower benchmark rates that U.S. carriers must
pay to foreign carriers in order to settle calls originating from the U.S. The
benchmark rates were adopted to remedy a growing U.S. settlement deficit, which
results from the imbalance between outbound and inbound call volume which is
estimated to be approximately 70% higher than the actual cost of terminating
international calls. Three benchmarks were established to fit the income level
of foreign countries, with a low of $0.15 per minute for high income countries
and a high of $0.23 per minute for low income countries. Implementation periods,
ranging from one year for high income nations to five years for nations with
less than one telephone line for every 100 inhabitants, were also enacted. The
FCC also determined that a grant of authorization to provide international
facilities-based switched service from the United States to an affiliated market
would be conditioned on the carrier's foreign affiliate offering U.S.
international carriers a settlement rate at or below the relevant benchmark. If,
after the carrier has commenced service to an affiliated market, the FCC learns
that the carrier's service offering has distorted market performance, the FCC
will take enforcement action. The new benchmarks are intended to promote a
competitive environment in which rates will more closely reflect costs;
officials also hope that the FCC's order will encourage multilateral
negotiations and lead to an international agreement to reduce costs further.
A carrier which does not have an operating agreement with a carrier in a
particular country is able to provide international service to that country by
leasing capacity from a carrier which does. Until recently, in many foreign
countries there was only one operating agreement in place between that country's
PTT and a foreign based international carrier as a result of monopolies held by
such PTTs. For example, in the United States, before the deregulation of
telecommunications services, AT&T was the only carrier that had operating
agreements with foreign carriers. However, after deregulation, MCI and Sprint,
over a period of years, each negotiated its own operating agreements with
foreign carriers. Since then, a limited number of other U.S.-based companies,
including the Company, have been able to secure operating agreements with
foreign carriers. Operating agreements are expected to become increasingly
available as international markets deregulate and new carriers that are seeking
business partners emerge in countries previously subject to a PTT monopoly or
other limited competition market. See 'Risk Factors--Risks Associated with
Rapidly Changing Industry' and '--Risk of Loss, or Diminution of Value of
Operating Agreements.'
For an international long distance company without operating agreements or
its own international network, the profitability of originating international
traffic is a function of, among other things, the difference between its billing
rates and the rates it must pay another carrier to transport and terminate such
traffic.
For a company with operating agreements that provide for return traffic,
the profitability of originating international traffic will be a function of,
among other things, the volume of its originating traffic and its billing rates,
as well as the relative volume of its originating and return traffic minutes.
Under the settlement process, a carrier which originates more traffic than it
receives, will, on a net basis, make payments to the corresponding carrier,
while a carrier which receives more traffic than it originates will receive
payments from the corresponding carrier. If the incoming and outgoing flows of
traffic are equal in the number of minutes transmitted, there is no net
settlement payment to either carrier. Therefore, in addition to all of the other
factors that can influence the profitability of a long distance carrier, the
profitability of an international carrier is dependent on its relative flows of
incoming and outgoing traffic.
Return traffic can be more profitable than outgoing traffic when there is a
significant disparity in the cost of terminating traffic between the two
countries that are party to an operating agreement. This is particularly true
for a U.S. carrier because the actual cost for a U.S. carrier to terminate a
call in the United States generally is less expensive than the settlement cost
under an operating agreement with any foreign carrier and return traffic does
not involve any origination costs. The receipt of more profitable return traffic
reduces the aggregate cost to a carrier to transport traffic pursuant to an
operating agreement, and carriers with significant levels of return traffic can
price their international transport and termination services at a discount to
the settlement cost and recover the discount on the return traffic.
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TERMINATION
The termination of an international call occurs after the call has been
transported to an international carrier in the destination country. The
international carrier then transports the call to a local exchange network where
it is then terminated. In many countries, only the PTT is licensed to provide
international long distance service and local exchange services.
COMPANY STRATEGY
The Company's strategic objective is to create a low-cost facilities-based
global network that provides high quality international telecommunications
services to small and medium-sized businesses in key markets. The key elements
of the Company's strategy to achieve this objective are as follows.
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
generated an estimated $55 billion in revenue and 60 billion minutes in 1995
with minutes of use projected to grow at a rate of between approximately 10% and
approximately 17% per annum through the year 2000. The Company currently has
significantly less than a 1% share of this market. Although prices are expected
to decline, resulting in substantially slower growth in revenues, the
international long distance switched telecommunications market is currently
recognized as one of the fastest growing and most profitable segments of the
long distance industry. The Company provides a broad array of international and
domestic services but focuses on providing services to end-users which generate
significant calling traffic between countries to capitalize on (i) the continued
growth of international traffic and (ii) the margin opportunity created by the
high end-user rates currently maintained by PTTs and other dominant carriers. If
any of the factors contributing to the growth of traffic or the pricing scheme
by the PTTs and other major carriers should cease to apply, growth and
profitability in the international market and the Company's prospects would be
negatively impacted. The United States market, one of the most deregulated and
competitive markets in the world, illustrates the greater profitability of
international traffic versus domestic traffic in the current market and
regulatory environment. Based on FCC statistics and other available information,
the Company estimates that industry-wide gross profit (before access charges) in
1995 for U.S.-originated traffic averaged $.41 per minute of international use,
compared to $.08 per minute of domestic use, although the actual gross profit
per minute of use may vary significantly depending on the destination, route and
time of day of a particular call. From 1989 to 1995, per minute settlement
payments by United States based carriers to foreign PTTs fell approximately 33%
from $.70 to $.47. However, over this same period, per minute international
billed revenues fell only about 14%, from $1.02 in 1989 to $.88 in 1995.
Therefore, gross profit per international minute (before local access charges)
grew from $.32 in 1989 to $.41 in 1994, a 25% increase. Despite declining costs,
dominant carriers and PTTs have maintained high end-user rates for international
long distance services, allowing them to provide domestic services at lower
rates. The Company believes that as settlement rates and costs for leased
capacity continue to decline, international long distance should continue to
provide high revenue and gross profit per minute, although increased competition
may, to a certain extent, moderate such revenues and gross profits. See
'--Industry Overview.'
ESTABLISH OPERATIONS IN KEY MARKETS
The Company establishes operations in markets that (i) originate or
terminate significant levels of international traffic and (ii) are, or are in
the process of being, deregulated. The Company has structured its Local
Operators to be managed independently and expects its Local Operators to be
separately profitable, while benefiting from centralized strategic, financial
and network support provided by the Company. The Local Operators are each
developed to be stand-alone operations shaped by local market conditions and
preferences. The Company currently provides each Local Operator with centralized
business development, financial, and marketing support and has commenced a plan
of operation to provide billing and RSL-NET management. See '--Headquarter
Operations.' The Company currently operates or is in the process of commencing
operations in 14 markets that, in the aggregate, accounted for approximately 62%
of all international long distance telecommunications
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minutes in 1995. By expanding its operations into additional key markets, in
which significant volumes of international traffic are originated and terminated
and which are in the process of deregulation, the Company seeks to rapidly
establish a broad market coverage. The Company currently plans to initiate
operations in five to 10 additional countries over the next two years which,
together with the markets in which the Company currently operates, accounted for
approximately 72% of the 1995 worldwide international long distance minutes of
use.
The Company enters additional countries primarily by acquiring a
controlling interest in existing companies that are either operating in or are
in the process of establishing operations in the international
telecommunications industry in that country or by means of a start-up operation
which the Company funds and manages on its own or together with a local
strategic partner. In the case of an acquisition, the Company seeks to acquire
an international carrier which matches the criteria set forth below. In the case
of the establishment of new operations, the Company identifies an experienced
and professional management team to develop the new operation. In the formation
of a joint venture, the Company identifies a local strategic partner with a good
reputation and knowledge of the local marketplace.
ENTER MARKETS EARLY
The Company seeks to enter new markets ahead of full deregulation in an
attempt to gain competitive advantages over carriers which attempt to enter a
market after deregulation is complete. These advantages include (i) the
development of multiple sales channels and the establishment of a customer base
prior to widespread competition, (ii) the early acquisition of scarce
experienced technical and marketing personnel and distribution channels and
(iii) the achievement of name recognition as one of the early competitors to the
incumbent PTTs. The Company employs multiple marketing and distribution
channels, including direct sales forces, telemarketing organizations, agents and
resellers, while also forming marketing alliances with other service providers,
such as Internet service providers and mobile service providers.
The Company believes that its early entry into deregulating markets will
provide it with an advantage in obtaining licenses as they become available over
carriers which attempt to enter the market after deregulation is complete. The
securing of necessary licenses, which is limited in some circumstances to a
small number of entrants into the deregulating market, is essential to the
Company's strategy and the Company will endeavor to enter into arrangements with
a licensee to gain access to such market if the Company cannot secure
successfully the license.
In countries that are in the process of deregulating, competition is often
restricted to a limited number of specific services. In such cases the Company
employs a two-stage market penetration strategy whereby initially the Company
takes advantage of current market conditions and, within the context of its
established strategy and service offerings, provides the fullest range of
services permissible under local regulation. The Company thereby gains an early
toehold in the market, affording it the opportunity to become a recognized
international carrier and to begin to build its own marketing channels and
customer base prior to the opening of markets to broader competition.
Subsequently, as deregulation permits, the Company expands its service offerings
thereby giving the Company the opportunity to increase the amount of business it
does with its existing customers and to increase its market penetration by
building on its name recognition, marketing channels and expanded service
offerings to attract additional customers. However, there can be no assurance
regarding the timing or extent of deregulation in any particular country. See
'Risk Factors--Government Regulatory Restrictions.'
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 in international
telephone calls per month. The Company believes that this segment offers
significant market opportunities because it has traditionally been underserved
by the major global telecommunications carriers and the PTTs, which offer their
lowest rates and best services primarily to higher volume multinational business
customers. The Company
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believes that in most markets, small and medium-sized businesses account for a
significant percentage of international calling traffic and will continue to do
so in the future.
Small and medium-sized businesses account for the majority of all
businesses. For example, the EU estimates that there are 15 million small and
medium-sized businesses in the EU and that the businesses that employ fewer than
100 workers in the aggregate account for more than one half of all EU employment
and almost half of all business revenue. In addition, Europe's small to
medium-sized businesses are projected to produce total telecommunications
revenues larger than those of the major multinational business sector. For the
six-month period ended June 30, 1997, approximately 42% of the Company's
revenues were derived from sales to other carriers, 41% were derived from
commercial customers, including small and medium-sized businesses, and 18% were
derived from calling card customers.
DEVELOP A COST COMPETITIVE GLOBAL NETWORK
Most of the Local Operators maintain network switching facilities to
establish POPs to provide international voice and other telecommunications
services in their markets. The Company presently has an international gateway or
domestic switch located in each of New York, Los Angeles, London, Paris,
Frankfurt, Rotterdam, Amsterdam, Stockholm, Helsinki, Sydney, Melbourne,
Brisbane, Lisbon and Caracas. The Company intends to link its current and future
switches via owned international facilities or leased capacity to form an
integrated network for international telecommunications. By integrating its
current and future POPs into RSL-NET, the Company believes that it will be able
to originate, transport and terminate traffic utilizing its own network, thereby
bypassing the high costs associated with the transport of the international
portion of a call through a third party carrier. This is expected to enable the
Company to reduce significantly its operating costs for calls that originate and
terminate in markets in which the Company has Local Operators, as well as its
overall operating costs. See '--Network' and '--Network Strategy.'
The Company uses state-of-the-art technology in its switching facilities.
The Ericsson switches used by the Company allow the Company to interconnect its
switches to existing PTT and carrier networks around the world and to develop
new services and upgrade network software on an efficient basis.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. The Company is continuously reviewing acquisition
opportunities and seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier, experience with additional or emerging telecommunications products and
technologies and/or experienced management. The Company intends to pursue
acquisitions which it believes will expand or enhance its current operations by
providing the Company with the opportunity to enter additional key markets or to
strengthen its operations in an existing market. The Company also seeks to enter
into joint ventures and strategic alliances which the Company believes will
enhance its ability to grow its business. For example, the Company has recently
entered into a joint venture with the Cisneros Group and a strategic alliance
with Ericsson.
The Company believes that many of the emerging carriers in developing
countries, as well as certain recently privatized PTTs, are likely to seek
alliances, partnerships or joint ventures to compete more effectively in their
local markets and abroad. The Company actively seeks out opportunities for
alliances with such carriers to expand the scope of its network and improve its
competitive abilities. The Company believes that it is uniquely positioned as an
attractive alternative strategic partner for such carriers as opposed to the
mega-carriers such as Uniworld, Concert and Global One.
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LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has retained a number of experienced management personnel in
the telecommunications industry, many of whom have had significant experience
with incumbent providers, as well as early competitors in deregulating markets.
As a result, the Company believes that it is well positioned to manage the rapid
growth of its customer base and network infrastructure.
MANAGE NETWORK INVESTMENTS
The Company seeks to manage the investment of capital within its network on
an incremental basis in order to maximize the efficiency of its capital
expenditures program. In general, the Company transmits traffic by leasing
capacity on a variable cost per minute basis until it believes that a direct
investment in facilities or a fixed cost lease arrangement between countries or
on a particular route is warranted. When the cost of owning facilities is
justified relative to leasing facilities, and the Company invests in such
facilities, the Company generally experiences higher gross margins and lower
overall transmission costs. See 'Risk Factors--Short Operating History; Entrance
Into Newly Opening Markets; Margins' and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview.'
NETWORK
The Company generally utilizes a single switch technology platform for its
international gateway switches comprised of state-of-the-art Ericsson AXE-10
switches. The Company believes that a single switch platform allows the Company
to develop new services and upgrade network software on a more efficient basis
when compared to other global carriers which may employ multiple switch
technologies. The Company is also pursuing alternative transmission technologies
such as the Internet in order to minimize its operating costs. See 'Prospectus
Summary--Recent Developments--Acquisition of Delta Three' and '--Internet
Telephony Operation.'
OWNED FACILITIES
The Company's owned facilities include switches and interests in
international fiber optic cable systems. The Company's eight international
gateway switches are located in New York, Los Angeles, London, Stockholm, Paris,
Frankfurt, Helsinki and Sydney. In addition, the Company operates eight domestic
switches in Rotterdam, Amsterdam, New York, London, Melbourne, Brisbane, Lisbon
and Caracas, although the Company's Australian switches cannot be used until
they are interconnected with the Australian PSTN. The Company's existing
international gateway switches conform to international signaling and
transmission standards provided for in CCITT recommendations and allow the
Company to interconnect its network to existing PTT and carrier networks around
the world while maintaining quality and dependable services. The Company's
switch and related equipment purchases have been financed by Ericsson and the
Company believes it has developed a favorable working relationship with Ericsson
which will enable the Company to benefit from financing from Ericsson for future
purchases from Ericsson, although there can be no assurance that this will be
the case. See 'Risk Factors--Dependence on Equipment Supplier.' The Company's
switching facilities are easily expandable to accommodate growth.
The Company also owns capacity on certain international digital fiber optic
cable systems. The Company's United States operations currently own IRUs on
three undersea fiber optic cable systems, which are CANUS-1, CANTAT-3 and PTAT-1
and owns MIUs on four undersea fiber optic cable systems, which are Antillas I,
Odin, Rioja and the TAT-12/TAT-13 systems. The Company also is currently in
negotiations to purchase IRUs for its United States operations on the Columbus
II, TPC-5, America's One, T-C and Eurafrica Systems and on APCN, Ariane-2,
Aphrodite, JASAURUS and NPC undersea fiber optic cable systems and on the CMC
and MCC terrestrial fiber optic cables and GEMINI undersea fiber optic cable
systems. The Company's Swedish operation owns IRUs on the CANTAT-3 and MIUs on
the KATTEGAT-1 transoceanic cables. The Company purchased for its United Kingdom
operations IRUs on the UK-NL 14 and the Company's United Kingdom operations owns
PTAT-1 undersea fiber optic cable systems and plans to purchase MIUs on the FLAG
and GEMINI systems.
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The Company's Australian operation plans to purchase IRUs on the APCN, JASAURUS
and NPC undersea fiber optic cable systems and on the CMC and MCC terrestrial
fiber optic cables.
OPERATING AGREEMENTS
The Company's operating agreements provide the Company with the ability to
transmit traffic directly to foreign carriers over jointly-owned facilities
rather than utilizing leased capacity. The Company's U.S. operations currently
hold 15 operating agreements (one of which allows the Company to transmit
traffic into three countries), which provide potential direct access to
Australia, Azerbaijan, Bolivia, Chile, Denmark, the Dominican Republic, Finland,
Japan, Jordan, the Netherlands, New Zealand, Norway, Russia, Sweden,
Switzerland, Suriname and the United Kingdom. The Company currently only
transmits and terminates traffic pursuant to operating agreements in the
Dominican Republic, the United Kingdom, Denmark, the Netherlands, Finland and
Norway. See '--U.S. Operations--U.S. Network Architecture.' The Company believes
that these agreements constitute significant assets and that the Company is one
of only a limited number of carriers within the United States that has been able
to secure a significant number of operating agreements with non-U.S. carriers.
The Company's Swedish operation currently utilizes two operating agreements
which enable it to exchange traffic with Denmark and Norway. Operating
agreements lower the cost of transmitting traffic by allowing the Company to
utilize its MIUs and IRUs to correspond directly with its foreign carriers,
thereby eliminating the cost of transmitting a call through leased capacity. In
addition, if the Company can develop sufficient traffic into another country, it
can potentially develop an additional source of revenue through return traffic
or other settlement arrangements with the PTT or other carriers in that country.
See 'Risk Factors--Risk of Loss, or Diminution of Value, of Operating
Agreements.'
LEASED CAPACITY
For all routes where the Company does not own facilities or utilize
operating agreements, the Company utilizes leased capacity. In addition, the
Company has arrangements with local carriers in each country in which it
originates traffic to transmit domestic calls from its end-users to its switch.
The Company does not own or intend to own intra-national transmission facilities
networks due to the general availability of such facilities for lease and the
high cost associated with the development and operation of a transmission line
infrastructure. Leased capacity is typically obtained on a per minute basis or a
point-to-point fixed cost basis. The Company utilizes leased satellite
facilities for traffic to and from those countries where digital undersea fiber
optic cables are not available or cost-effective. Leased satellite facilities
are also used for redundancy when digital undersea cable service is temporarily
interrupted. See 'Risk Factors--Dependence on Other Carriers.'
NETWORK MANAGEMENT SYSTEMS
The Company generally utilizes redundant, highly automated state-of-the-art
telecommunications equipment in its network and can, in cases of component or
facility failure, use the network management facilities to redirect calls to
another carrier's facilities. Back-up power systems and automatic traffic
re-routing enable the Company to provide a high level of reliability to its
customers. Computerized automatic network monitoring equipment allows fast and
accurate analysis and resolution of service problems. The Company maintains
separate network management facilities for its U.S. and European operations
which maintain separate least cost routing systems. U.S. network management is
operated from the Company's facilities in New York and Los Angeles. European
network management for the United Kingdom, Sweden and Finland is operated
centrally from the Company's switching center in London. The Company expects
that France and Germany will be monitored from this facility by the fourth
quarter of 1997. See 'Risk Factors--Risks Associated with Rapidly Changing
Industry,' '--Dependence on Effective Information Systems' and '--Dependence on
Equipment Supplier.'
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NETWORK STRATEGY
The Company has switches in most of the countries in which it operates. The
Company has connected its current switches and expects to connect its future
switches by investing in IRUs and MIUs or fixed point to point leases, subject
to local regulatory conditions. In countries in which the Company currently
operates without a switch and in each new market the Company enters, the Company
intends to install its own switching facilities which will then be integrated
into RSL-NET to improve the Company's overall cost structure. The Company
transmits traffic from its Local Operators on capacity leased on a variable cost
per minute basis until it believes an investment in owned facilities or fixed
cost lease arrangements between countries or on a particular route is warranted.
To the extent traffic can be transported between two Local Operators over MIUs
and IRUs or lines leased on a fixed cost point-to-point basis, there is almost
no marginal cost to the Company. In such cases, the Company will be able to
bypass the traditional settlement process for the transport and termination of
international traffic. The settlement rates for international correspondence are
based on negotiated rates which are, according to the FCC, up to 70% higher than
the actual cost. The Company expects that it will realize significant cost
savings by routing an increasing portion of its international traffic over its
owned and leased facilities as opposed to corresponding via operating
agreements, in particular, once the markets in which the Company operates
deregulate sufficiently to allow interconnect. See '--Management's Discussion
and Analysis of Financial Condition and Results of Operation--Effect of
Deregulation on Cost of Services.' In addition, each of the Local Operators
maintains an independent cost structure for all other traffic. By directly
linking its operations, the Company will be better able to implement a least
cost routing system. See '--International Long Distance Mechanics,' 'Risk
Factors--Short Operating History; Entrance into Newly Opening Markets; Margins,'
'--Inability to Predict Traffic Volume' and '--Dependence on Other Carriers.'
For calls to countries where the Company does not have a Local Operator,
the Company seeks to establish and utilize an operating agreement with a local
carrier. While this method generates higher costs than transporting calls
between the Local Operators, it has the potential to generate higher margin
return minutes. The Company has not generated significant return minutes to
date. In addition, by strategically establishing its Local Operators and
obtaining operating agreements, the Company will seek to arbitrage the
differential in settlement rates between countries.
Origination and termination of traffic is accomplished through transmission
capacity leased on a per minute basis, except where the Company provides private
line service. As the Company's operations in a given country grow, the Company
generally will install additional POPs and lease transmission capacity (on a
point-to-point fixed cost basis) to connect the new POP to its international
gateway switch. This will enable the Company to reduce its dependence on
relatively high cost-per-minute leases by reducing the distance calls will
travel over capacity leased on that basis.
PRODUCTS AND SERVICES
The Company offers a variety of long distance products and services to its
customers, as well as certain value-added services. Although the Company focuses
on providing international service, it also provides domestic long distance
services, where permitted under relevant regulations, to accommodate customer
demands.
The Company provides the services described below to the extent permitted
by local regulation in each of its markets. See 'Risk Factors--Government
Regulatory Restrictions' and '--Industry Overview,' '--International Long
Distance Mechanics,' '--U.S. Operations' and '--European Operations.'
LONG DISTANCE SERVICES
The Company provides domestic and international long distance service to
its customers. Currently, the Company provides domestic services in the United
States, the United Kingdom, Sweden, Finland and Australia. In the United States,
the Company is certified and tariffed or otherwise authorized to originate
intrastate, interexchange calls from 33 states and the District of Columbia and
can terminate calls throughout the United States.
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PRIVATE LINE SERVICE
The Company can provide dedicated point-to-point connections to businesses
requiring dedicated private telephone lines for high volumes of voice and data
between the customer's offices in all countries where the Company has revenue
generating operations.
CALLING CARDS
The Company's calling cards are either prepaid cards or post paid cards
(for which calls are billed in arrears). The Company's calling cards provide
international call access to or between all countries that have direct dial
service with the United States. Prepaid calling cards are similar products to
other calling cards, but differ in marketing focus as well as the method of
payment. A customer purchases a prepaid card that entitles the customer to make
phone calls on the card up to some limit. The Company also offers prepaid
calling cards that are rechargeable. In all cases, the card number is
proprietary to the customer and is secured by means of a personal identification
number. The Company currently offers these products only in the United States,
the United Kingdom, the Netherlands, Denmark and Venezuela. The Company plans to
offer these products in the rest of its existing European operations through
PrimeCall Europe during 1998 and throughout its global operations in subsequent
years, to the extent permitted under the laws and regulations of each market.
VALUE-ADDED SERVICES
The Company currently offers facsimile services in all of its operations,
toll-free dialing in the United States, the United Kingdom and Sweden and
Internet access in Sweden and, in the future, intends to offer most of these
services in all markets where it is allowed to do so. The Company also intends
to introduce the following services: (i) voice mail, (ii) video-teleconferencing
and (iii) international directory assistance. In addition, with the acquisition
of a majority interest in Delta Three, the Company can offer international long
distance voice service to niche markets utilizing the Internet at discounts to
standard international calls.
INTERNATIONAL TERMINATION AND TRANSIT
International termination on a wholesale basis involves the sale of long
distance services to another long distance company that resells the services to
its customers. Selling bulk capacity to other carriers generates traffic
sufficient to allow the Company to obtain volume discounts when it leases
capacity on a per-minute basis and allows it to generate revenues from otherwise
unused capacity on its MIUs, IRUs and point-to-point leases. See 'Risk
Factors--Dependence On Carrier Customers.' Transit traffic originates and
terminates outside of a particular country, but is transported through that
country on a carrier's network to take advantage of lower costs.
MARKETING AND SALES
The Company markets its services on a retail basis to business customers
and residential customers and on a wholesale basis to other carriers and
resellers. The Company markets its products and services utilizing its direct
sales forces, networks of independent agents and distributors and telemarketing
organizations. The Company's services are currently marketed independently by
the Local Operators. The Company is in the process of developing a universal
brand name to provide uniformity of image and brand and to create worldwide name
recognition for the Company.
CUSTOMERS
SMALL AND MEDIUM-SIZED BUSINESSES. The Company's target customers are
small and medium-sized businesses with significant international telephone usage
(i.e., generally in excess of $500 in international phone calls per month). The
Company has focused on industries which traditionally have significant volumes
of international traffic. The Company believes that small and medium-sized
businesses have generally been underserved by the major global
telecommunications carriers and the PTTs, which have focused on offering their
lowest rates and best services primarily to higher volume multinational business
customers. The Company offers these companies significantly
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discounted international calling rates as compared to the standard rates charged
by the major carriers and PTTs.
Small and medium-sized businesses account for the majority of all
businesses and the Company believes that in most markets they account for a
significant percentage of the international long distance traffic originated in
those markets. For example, the EU estimates that in 1996 there were 15 million
small and medium-sized businesses in the EU and that businesses that employ
fewer than 100 workers accounted for more than one half of all EU employment in
1996, almost half of all business revenue and about $30 billion per year in
total telecommunications revenue. Consistent with that, it is estimated that in
the United Kingdom, companies employing fewer than 250 people spend about $6
billion to $7 billion per year on telecommunications services as compared to
about $8 billion to $9 billion per year for businesses employing in excess of
250 people and only $3 billion per year for the multinationals.
CARRIERS. The Company offers international termination and transit traffic
services to other carriers, including resellers, on a wholesale basis, as a
'carriers' carrier.' The Company's carrier customers as a group currently
provide the Company with a relatively stable customer base and thereby assist
the Company in projecting potential utilization of its network facilities. In
addition, the significant levels of traffic volume generated by such carrier
customers enable the Company to obtain large usage discounts based on volume
commitments. The Company believes that revenues from its carrier customers will
continue to represent a significant portion of the Company's overall revenues in
the future. See 'Risk Factors--Inability to Predict Traffic Volume' and
'--Dependence on Carrier Customers.'
RESIDENTIAL CUSTOMERS. The Company targets customers with high
international calling patterns. The Company intends to capitalize on global
immigration patterns to target ethnic communities, primarily for its prepaid
calling cards.
LARGE CORPORATIONS. The Company services a number of large corporations
through its French and German operations (acquired as part of the Sprint
Acquisitions) and the Company intends to continue to target large corporations
on those routes where the Company's cost structure allows it to compete
effectively. See '--European Operations--French Operations.'
SALES CHANNELS
The Company markets its services through a variety of channels, including
sales by the Company's own direct sales force, indirect sales through
independent agents, sales through distributors and telemarketing sales by
outside organizations, depending, in part, on local business practices and
business environment. Residential customers are targeted in neighborhoods with
large immigrant populations, utilizing resource materials and third party market
research companies, among other things, as resources for this information.
Carriers typically approach the Company directly to inquire about the Company's
transit and termination rates.
DIRECT SALES. Most Local Operators maintains their own direct sales force.
Generally, sales representatives are compensated on a commission basis. The
Company intends to expand its direct sales force as it expands existing
operations and commences additional operations.
INDEPENDENT AGENTS. The Company also markets its services through an
indirect sales force comprised of independent agents. These agents include,
among others, companies which have a sales force or individuals marketing
related services such as telephone systems, copiers, fax machines or other
office equipment to the Company's targeted customer segments. The Company's
indirect sales force will be an increasingly important sales channel to access
the local market.
DISTRIBUTORS. The Company has relationships with a small number of
distributors in the United States as well as the Netherlands for the sale of
prepaid cards and will seek such arrangements in its other markets.
TELEMARKETING SALES. The Company's European operations use the services of
independent telemarketing sales organizations in certain of their markets.
Telemarketing sales are targeted to cover small to medium-sized business and
niche residential customers. Commercial customers are offered long distance
services while residential customers are offered long distance services and a
blend of prepaid and similar products.
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CUSTOMER MANAGEMENT
The Company strives to provide competitive pricing, high quality services
and superior customer service and believes that these factors are important to
its ability to compete effectively. The Company works closely with its customers
to develop competitively priced telecommunications and value-added services
(such as customized billing) that are tailored to their needs. The Company has
invested significant resources in developing information systems to allow it to
provide accurate and timely responses to customer inquiries. In addition, each
of the Local Operators has customer service and engineering personnel available
to address service and technical problems as they arise.
HEADQUARTERS OPERATIONS
The Company directs the operations of its subsidiaries, including the
management of the growth of current operations, the expansion of operations into
new markets, the formation of potential joint ventures and strategic alliances
and the execution of acquisitions. Identification of key markets, determination
of the vehicles through which, as well as the manner in which, the Company will
enter such markets and oversight of the implementation of these plans is also
done at the Company level. The Company is continuously reviewing and considering
investment and acquisition opportunities. The Company intends to pursue
acquisitions which it believes will expand or enhance its current operations.
All such acquisitions will be identified, negotiated and consummated at the
Company level, generally working together with local and regional management in
cases where the acquisitions supplement existing operations. In addition, the
Company seeks alliances with carriers to expand the scope of the Company's
network and improve its competitive profile.
The Company currently provides centralized financial services for all of
the Local Operators, including financial planning and analysis, cost control and
network management. The Company attempts to coordinate the acquisition of
additional transmission capacity (either leased or purchased) with the growth of
traffic volumes of each Local Operator. The Company assists in securing
financing and discounts for these expenditures as well as other capital
expenditures through its arrangements with particular vendors. The Company also
maintains global treasury functions, including the management of cash flows
between the Local Operators for the transmission of traffic between them, as
well as the allocation of working capital.
The Company will eventually link all of its switching facilities to a
central billing system administered at the Company level. The Company will
provide the billing information to Local Operators which will then invoice the
customers directly. The invoice will be branded with the Company's name and will
be payable to a Company account in the Local Operator's country.
The Company manages the expansion of RSL-NET, including the acquisition of
additional capacity for existing operations and the integration of developing
and new Local Operators into RSL-NET. The Company will coordinate the routing of
traffic on RSL-NET to effect routing on a least cost basis. Least cost routing
involves the programming of the Company's switches to transport international
calls over the route which is most likely to produce the lowest cost to the
Company without compromising on call quality. The Company consolidates the least
cost routing information of each of its Local Operators to allow them to take
advantage of each others' cost structure.
The Company is in the process of coordinating the marketing activities of
the Local Operators and defining its own unique approach to branding and
marketing its services on a global basis. In addition, the Company intends to
direct the service offerings of the Local Operators to enable the Company to
provide services to a single customer in more than one country. The Company
intends to then provide the customer with a single bill and designate a primary
customer service representative to address the customer's overall needs.
U.S. OPERATIONS
OVERVIEW
The United States is the largest single market in terms of international
long distance call terminations and originations. The top seven destinations for
U.S.-originated calls in 1995 were Canada, Mexico, the United Kingdom, Germany,
Japan, France and the Dominican Republic. The
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Company initiated its U.S. operations in March 1995 with its initial investment
in ITG and has grown the business significantly since then. The Company operates
in the United States as a full service international long distance carrier with
multiple '214' licenses issued under the Communications Act, which permit it to
provide international telecommunications services. The Company currently has
offices located in the New York, Los Angeles and Miami metropolitan areas. The
Company is planning to open additional offices in several large metropolitan
areas by the end of 1998.
The Company primarily operates in the United States through RSL USA. The
Company's operations in the United States have shown considerable growth.
Revenues for the Company's U.S. operations on a consolidated basis were
approximately $18.5 million for the year ended December 31, 1995, $85.8 million
for the year ended December 31, 1996 and $69.9 million for the six months ended
June 30, 1997. International traffic carried by RSL USA has experienced
substantial growth from 3.6 million minutes in December 1995 to 14.6 million
minutes in December 1996. The Company's U.S. operations have grown from a total
of 24 employees in December 1994 to 151 employees in June 1997.
During 1996, the Company initiated a program focused on enhancing
profitability, revenues and the quality of services to its customers. The
Company shifted the marketing focus of its U.S. operations from wholesale
'carrier's carrier' business to higher margin services targeted at end-user
customers in an effort to increase operating margins. In connection with this
effort, the Company determined that the rates offered to certain customers
provided the Company with inadequate margins. Accordingly, the Company increased
rates to these customers and, as a result, these customers either accepted the
rate increases or terminated their arrangements with the Company, thus reducing
the Company's exposure to low or negative margin business. Beginning in the
fourth quarter of 1996, the Company began restructuring its U.S. operations and
recorded a charge of $750,000 in connection with such restructuring.
Operational, managerial and technical functions were consolidated under a single
organization. The Company has hired experienced management, implemented new
managerial and financial controls, and introduced a new marketing focus and
plan. Although these activities, in conjunction with the Company's investment in
MIUs, IRUs and switches, receipt of multiple international operating agreements
and increased focus on customer service, have resulted in rapid growth of the
business, gross margins for the U.S. operations were slightly down for the six
month period ended June 30, 1997 compared to the six month period ended June 30,
1996 due to the rapid expansion of the Company's operations. See 'Risk
Factors--Short Operating History; Entrance into Newly Opening Markets; Margins'
and 'Dependence on Other Carriers' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
SERVICES AND CUSTOMERS
The Company offers its customers in the United States international and
domestic long distance, private line, calling card and value added services.
Since the first quarter of 1996, the Company has been refocusing its U.S.
operations from providing international long distance services to other carriers
to providing international and domestic long distance services to small and
medium-sized businesses as well as certain residential markets. As of June 30,
1997, the Company had 67 carrier customers, approximately 5,000 business
customers and approximately 21,000 residential customers.
In addition, through RSL COM PrimeCall, Inc. ('RSL PrimeCall'), the Company
specializes in the provision of prepaid calling cards for niche ethnic markets
and for promotional use by large corporate subscribers in entertainment, retail,
banking and other industries.
MARKETING AND SALES
The Company markets its services and products in the United States through
a variety of channels, including direct sales, indirect sales through
independent agents and distributors. As of June 30, 1997, the Company's U.S.
operations employed 21 sales and marketing employees and had relationships with
approximately 390 master agents with an underlying network in excess of 2,000
independent agents and six distributors. In addition, the Company employs a
retail and wholesale sales force dedicated to the sale of promotional post and
prepaid card products. The Company intends to expand its direct sales force as a
part of its growth strategy by adding sales personnel to its New York City, Los
Angeles and Miami metropolitan area sales offices and by opening additional
sales offices in several
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other large metropolitan areas by the end of 1998. The Company believes that,
due to the existence of a competitive marketplace in the United States for over
a decade, it can hire capable, experienced sales representatives and managers
and that use of a direct sales force is the most efficient means for it to grow
its business.
U.S. NETWORK ARCHITECTURE
The Company operates two international gateway switches in the United
States, an Ericsson AXE-10 located in New York and a Northern Telecom DMS
250/300 located in Los Angeles. The Company plans to replace the Northern
Telecom switch with an Ericsson AXE-10 by the end of the first quarter of 1998.
The Company's New York international gateway switch and Los Angeles
international gateway switch conform to CCITT recommendations and are directly
connected to each other via leased lines on a fixed cost, point-to-point basis.
The Company also operates a domestic switch and a prepaid card platform in each
of New York and Los Angeles. The Company is developing a plan for installation
of additional switches in strategic sites throughout the United States, which
may include a third international gateway switch in Florida. Traffic to Asia and
the Pacific Rim is generally routed via the Company's Los Angeles international
gateway switch and traffic to Europe, Africa and Latin America is generally
routed via the Company's New York international gateway switch.
The Company currently has investments in IRUs in three undersea fiber optic
cable systems which are CANUS-1, CANTAT-3, and PTAT-1 and owns MIUs on four
undersea fiber optic cable systems, which are Antillas I Odin, Rioja and the
TAT-12/TAT-13 systems. The Company also is currently involved in negotiations to
purchase IRUs for its United States operations on the Columbus II, TPC-5,
America's One, T-C and Eurafrica systems and on the APCN, Ariane-2, Aphrodite
and GEMINI undersea fiber optic cable systems.
The Company currently is a party to 15 operating agreements (one of which
allows the Company to transmit traffic into three countries), which provide
potential direct access from the U.S. to Australia, Azerbaijan, Bolivia, Chile,
Denmark, the Dominican Republic, Finland, Japan, Jordan, New Zealand, the
Netherlands, Norway, Russia, Sweden, Switzerland, Suriname and the United
Kingdom. The Company believes that it is one of only a limited number of
carriers within the United States that has been able to secure a significant
number of operating agreements with carriers outside the United States. The
Company currently only transmits and terminates traffic pursuant to the
operating agreements in the Dominican Republic, the United Kingdom, Denmark,
Finland, Netherlands and Norway. The Company transmits call traffic bound for
all other destinations through leased capacity. The remaining operating inactive
agreements are inactive because the Company has not yet invested in
international transmission capacity for those routes, in certain cases because
call volume on such routes does not warrant such an investment. By activating
these operating agreements as well as any additional operating agreements it may
obtain, the Company believes it will be able to significantly lower its costs of
terminating international traffic. The Company's failure to begin transmitting
traffic pursuant to any such operating agreement could lead to the termination
of the agreement. See 'Risk Factors--Risk of Loss, or Diminution of Value, of
Operating Agreements.'
The Company also operates the network management control facilities from
which the Company administers and monitors the Company's switches and facilities
and provides customer service, 24-hour network monitoring, trouble reporting and
response procedures, service implementation and billing assistance. The Company
designates a specific customer service representative for each commercial
customer to oversee the installation and maintenance of the phone equipment, the
start-up of service and problem resolution.
INFORMATION SYSTEMS AND BILLING
The Company owns and operates an Electronic Data Systems ('EDS') IXPlus
System that runs on an IBM A5/400 hardware platform. The Company expects that
the EDS system will be utilized in the U.S. to: (i) provide sophisticated
billing information that can be tailored to meet a specific customer's
requirements, (ii) provide high quality customer service, (iii) detect and
reduce fraud, (iv) integrate efficiently additions to its customer base and (v)
provide real time traffic and call detail management. The EDS IXPlus System is
operated and maintained by the Company in its Los Angeles office. The
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Company has also implemented a customer care and trouble management system, as
well as developed a state of the art information system that produces, among
other things, profitability margin analysis, routing statistics and overall
traffic trends by country, customer, vendor and switch. In addition, the Company
has installed a Wide Area Network linking all of its offices in the U.S.
enabling the use of its systems within the organization. The Company's
information systems are important to its operations as they allow the Company to
assess and determine quickly customer billing and collection problems,
production by and compensation or commissions owed to agents, sales
representatives and distributors, proper pricing for the Company's services and
other matters which are important to the operation of the Company. See 'Risk
Factors--Dependence on Effective Information Systems.'
COMPETITION
The Company competes with AT&T, MCI, Sprint, WorldCom and other United
States-based and foreign carriers, many of which have considerably greater
financial and other resources than the Company. Certain of the larger United
States based carriers have entered into joint ventures with foreign carriers to
provide international services. In addition, certain foreign carriers have
entered into joint ventures with other foreign carriers to provide international
services and have begun to compete or invest in the United States market,
creating greater competitive pressures on the Company. The Company believes that
its services are competitive in terms of price and quality with the service
offerings of its U.S. competitors.
REGULATORY ENVIRONMENT
The Company's United States operations are subject to extensive federal and
state regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or international regulators or third parties will not raise material
issues with regard to the Company's compliance or noncompliance with applicable
regulations or that regulatory activities will not have a material adverse
effect on the Company.
FEDERAL. The FCC currently regulates the Company as a non-dominant carrier
with respect to both its domestic and international long distance services.
Generally, the FCC has chosen not to exercise its statutory power to closely
regulate the charges, practices or classifications of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulation
requirements on the Company, to change its regulatory classification, to impose
monetary forfeiture and to revoke its authority. In the current regulatory
atmosphere, the Company believes that the FCC is unlikely to do so with respect
to the Company's domestic service offerings. With respect to the Company's
international services, however, it is possible that the FCC could classify the
Company as dominant for the provision of services on specific international
routes on the basis of the Company's foreign ownership and affiliations or a
determination that the Company had the ability to discriminate against U.S.
competitors. Recently, for example, the FCC classified Sprint as a dominant
carrier for the provision of U.S. international services on the U.S.-France and
U.S.-Germany routes in connection with investments in Sprint by France Telecom
and Deutsche Telekom.
Among domestic carriers, local exchange carriers ('LECs') are currently
classified as dominant carriers with respect to the local exchange services they
provide, and no interstate, interexchange carriers, including RBOCs which are
permitted to offer long distance service outside their service areas, are
classified as dominant. Until recently, AT&T was classified as a dominant
carrier, but AT&T successfully petitioned the FCC for non-dominant status in the
domestic interstate, interexchange and international markets. Therefore, certain
pricing restrictions that once applied to AT&T have been eliminated, likely
making AT&T's prices more competitive than the Company's. Nonetheless, the FCC
placed certain conditions on AT&T's reclassification to promote the development
of vigorous competition in the international services marketplace.
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The Company has the authority to provide domestic, interstate
telecommunications services. The Company has also been granted authority by the
FCC to provide switched international telecommunications services through the
resale of switched services of United States facilities based carriers, to
generally resell international private lines not connected to the PSTN or which
are connected to the PSTN in Canada, New Zealand, Sweden or the United Kingdom,
and to provide international telecommunication services by acquiring circuits on
various undersea cables or leasing satellite facilities. The FCC reserves the
right to condition, modify or revoke such domestic and international authority
for violations of the Communications Act or the FCC's regulations, rules or
policies promulgated thereunder. Although the Company believes the probability
to be remote, a rescission by the FCC of the Company's domestic or international
authority or a refusal by the FCC to grant additional international authority
would have a material adverse effect on the Company.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. The Company must file tariffs containing detailed actual
rate schedules. In reliance on the FCC's past relaxed tariff filing requirements
for non-dominant domestic carriers, the Company and most of its competitors did
not maintain detailed rate schedules for domestic offerings in their tariffs, as
the FCC's rules currently require. Until the two year statute of limitations
expires, the Company could be held liable for damages for its past failure to
file tariffs containing actual rate schedules. The Company believes that such an
outcome is remote and would not have a material adverse effect on its financial
condition or results of operations. The Company has always been required to
include detailed rate schedules in its international tariffs.
In February 1996, the Telecommunications Act of 1996 was signed into law.
Under the Telecommunications Act, the RBOCs will be permitted to provide long
distance services in competition with the Company. The law includes safeguards
against anti-competitive conduct which could result from a RBOC having access to
all customers on its existing network as well as its ability to cross-subsidize
its services and discriminate in its favor against its competitors.
Except with respect to transit agreements, authorizations held under
Section 214 of the Communications Act (such as those held by the Company) for
international services are limited to providing services or using facilities
between the United States and countries specified in the authorizations. The
Company holds all necessary Section 214 authorizations for conducting its
present business but may need additional authority in the future. Additionally,
carriers may not lease private lines between the United States and an
international point for the purpose of offering switched services unless the FCC
has first determined that the foreign country affords resale opportunities to
United States carriers equivalent to those available under United States law.
The FCC has made such a determination with respect to New Zealand, Canada,
Sweden and the United Kingdom and the Company is authorized to resell
international private lines to these points for the provision of basic services
interconnected to the PSTN.
The FCC has promulgated certain rules governing the offering of
international switched telecommunications. Such calls typically involve a
bilateral, correspondent relationship between a carrier in the United States and
a carrier in the foreign country. Until recently, the United States was one of a
few countries to allow multiple carriers to handle international calls; almost
all foreign countries authorized only a single carrier, often a state-owned
monopoly, to provide telecommunication services. In light of the disparate
bargaining positions of the United States carriers, the FCC imposed certain
requirements to try to minimize the opportunities that dominant foreign
telecommunications providers would have to favor one United States carrier over
another. These policies include provisions of the International Settlement
Policy, which requires the equal division of accounting rates, non-
discriminatory treatment of U.S. carriers, and that return minutes from a
foreign carrier must be proportional to the traffic that the United States
carrier terminates to a foreign carrier. In December 1996, the FCC modified its
rules to allow payment arrangements that deviate from the International
Settlements Policy between any U.S. carrier and any foreign correspondent in a
country that satisfies the FCC's effective competitive opportunities test. The
FCC also stated that it would allow alternative settlement arrangements between
a U.S. carrier and a foreign correspondent in a country that does not satisfy
the effective opportunities test if the U.S. carrier can demonstrate that
deviation from the International Settlement Policy will promote market-oriented
pricing and competition, while precluding
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abuse of market power by the foreign correspondent. The Company has numerous
agreements with foreign carriers providing for the handling of switched calls.
Recently, the FCC adopted lower benchmarks for settlement rates that U.S.
carriers must pay to foreign carriers in order to settle calls originating from
the U.S. The benchmark rates were adopted to remedy a growing U.S. settlement
deficit, which results from the imbalance outbound and inbound call volume which
is estimated to be approximately 70% higher than the actual cost of terminating
international calls. Three benchmarks were established to fit the income level
of foreign countries, with a low of $0.15 per minute for high income countries
and a high of $0.23 per minute for low income countries. Implementation periods,
ranging from one year for high income nations to five years for nations with
less than one telephone line for every 100 inhabitants, were also enacted. The
FCC also determined that it would condition any carrier's authorization to
provide international facilities-based switched service from the United States
to an affiliated market on the carrier's foreign affiliate offering U.S.
international carriers a settlement rate at or below the relevant benchmark. If,
after the carrier has commenced service to an affiliated market, the FCC learns
that the carrier's service offering has distorted market performance, the FCC
will take enforcement action. The new benchmarks are intended to promote a
competitive environment in which rates will more closely reflect costs;
officials also hope that the FCC's order will encourage multilateral
negotiations and lead to an international agreement to reduce costs further.
Additionally, the FCC enforces certain requirements which derive from the
regulations of the ITU. These regulations may further circumscribe the
correspondent relationships described above. In addition to settlement rates,
these regulations govern certain aspects of transit arrangements, wherein the
originating carrier may contract with an interim carrier in a second country to
terminate service in a third country. The Company has transit agreements with
foreign carriers. Such agreements may allow the Company to pay less than the
full accounting rate it would have to pay if it had a direct operating agreement
with the terminating country. However, the Company is unaware of any instance in
which a terminating country has objected with respect to any of the Company's
traffic. If a terminating country objects in the future to such transit
arrangements, the Company may be required to secure alternative arrangements.
STATE. The intrastate, long distance telecommunications operations of the
Company are also subject to various state laws, regulations, rules and policies.
Currently, the Company is certified and tariffed or otherwise authorized to
provide intrastate, interexchange service in 33 states and the District of
Columbia and uses a third party carrier to originate calls in states where it
needs, but does not have, authorization to provide services. Ultimately, the
Company intends to apply for authorization in substantially all of the states
that require certification or registration. See 'Risk Factors--Government
Regulatory Restrictions.'
The vast majority of states require carriers to apply for certification to
provide telecommunications services before commencing intrastate service and to
file and maintain detailed tariffs listing the rates for intrastate service.
Many states also impose various reporting requirements and require prior
approval for all transfers of control of certified carriers, assignments of
carrier assets, carrier stock offerings and the incurrence by carriers of
certain debt obligations. In some states, regulatory approval may be required
for acquisitions of telecommunications operations. In the past, the Company has
sought and successfully obtained such approval for its acquisitions.
EUROPEAN OPERATIONS--GENERAL
OVERVIEW
RSL Europe is a wholly-owned subsidiary of the Company. RSL Europe was
formed in March 1995 to implement the Company's pan-European strategy. In
November 1995, RSL Europe acquired a 51% interest of Cyberlink Europe, which,
through its wholly-owned subsidiaries, RSL Finland and RSL Sweden, commenced
operations in May 1996. During the period from August 1996 through March 1997,
RSL Europe acquired the remaining 49% interest in Cyberlink Europe. In May 1996,
the Company acquired the international long distance voice businesses of Sprint
in France and Germany. In October 1996, RSL Europe acquired a 75% interest in
the operations of RSL Netherlands, an
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international reseller which had been operating in the Netherlands since October
1995. The Company has entered into an agreement to acquire the remaining
interest in RSL Netherlands and expects to close such transaction on the closing
date of the Offerings. RSL Denmark, a start-up subsidiary of RSL Netherlands,
commenced operations in Denmark in May 1997.
In April 1997, RSL Europe entered into an agreement with Gerard van Leest,
the founder, general manager and minority shareholder of RSL Netherlands, and
the First Worldwide Network Management & Consultant N.V. ('FWN'), a corporation
wholly-owned by Mr. van Leest, pursuant to which RSL Europe and FWN are to
jointly develop, market and distribute a prepaid calling card product targeted
at select customers throughout Europe.
In April 1997, RSL Europe acquired a 30.4% interest in Maxitel, a
Portuguese international telecommunications carrier. RSL Europe and the other
two principal shareholders of Maxitel entered into a shareholders' agreement,
pursuant to which, among other things, (i) certain major decisions by the Board
of Directors of Maxitel can only be approved with the consent of RSL Europe and
(ii) RSL Europe has the right to designate two directors to the Board of
Directors of Maxitel.
In August 1997, RSL Europe acquired an 85% interest in the operations of
RSL Italy, an international telecommunications reseller that had been operating
in Italy since 1995.
In August 1997, the Company acquired 50% of RSL Austria, an Austrian
international telecommunications reseller which will begin operations by January
1998. Upon completion of the requisite corporate formalities, which is expected
to occur in September 1997, the Company will own 90% of RSL Austria.
As of June 30, 1997, the Company had 311 employees in Europe.
INFORMATION SERVICES, SYSTEMS AND BILLING
RSL Europe has developed its own proprietary information and billing system
employing a Hewlett Packard 9000 UNIX server and a Sybase, Inc. ('Sybase')
developed customized software package (collectively, the 'System'). The System
provides for billing, customer service, management information, financial
reporting and related functions. The Company has invested significant resources
into the development of the System and the Company's management worked closely
with Sybase to develop software which reflects the experiences of the Company's
management in the telecommunications industry. The System has been designed to
be easily integrated into the operations of each of its current, planned and
future European Local Operators and may ultimately be used as the centralized
information system for the Company. The System currently provides centralized
billing, customer service, and information systems to the Company's United
Kingdom, Sweden and Finland operations, with France and Germany expected to be
brought online by the end of 1997. The Company believes that the System is a key
asset of the Company and an important advantage in the management of its growth.
The System provides for sophisticated, automatic, itemized billing that can
be tailored to meet each customer's specific requirements, including customized
tariffs and discount schemes. The Company expects that the System will also
facilitate integration and central oversight of its European operations through
automated data entry by its Local Operators and through easily generated
financial status, sales information, performance and sales commission reports.
REGULATORY ENVIRONMENT
Most EU member states are in the initial stages of deregulation.
Deregulation in these countries may occur either because the member state
decides to open up its own market (e.g., the United Kingdom, Sweden and Finland)
or because it is directed to do so by the European Commission ('EC') through one
or more directives issued thereby. In the latter case, such an EC directive
would be addressed to the national legislative body of each member state,
calling for such legislative body to implement such directive through the
passage of national legislation.
Since most European countries currently restrict competition to a limited
number of specific services, the Company has developed a two stage market
penetration strategy to capitalize on the current and future opportunities in
Europe. The first step is to take advantage of current market
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conditions and, within the parameters of the Company's established service
offerings, to provide the fullest range of services permissible under local
regulation. The Company thereby seeks to become a recognized international
carrier in the targeted countries as its operations grow. The second step, as
deregulation permits, is to build on its name recognition, marketing channels
and existing customer base in the market to expand its service offerings to both
existing and new customers. By the time that the telecommunications markets
throughout Europe are open to broader competition, the Company intends to have
established Local Operators in all major European telecommunications markets.
However, there can be no assurance regarding the timing or extent of
deregulation in any particular country. See 'Risk Factors--Government Regulatory
Restrictions.'
The EC issued in 1997 an interconnect directive (the 'Interconnect
Directive'), which is expected to be implemented in 1998 and is expected to
require the incumbent PTTs to interconnect to other carriers using CCITT C-7
signaling standards. Such connection will provide 'Calling Line Identity'
('CLI'), also known as ANI or PIC, which will allow the Company's customers to
access more easily the Company's local switch (e.g., through prefix dialing
instead of dial-in access) and will remove the local access fee levied in
addition to the Company's charge for the call. After interconnection, rates
charged by the PTT for the PSTN portion of the call are expected to be incurred
by carriers at wholesale rates and it is expected that carriers will be allowed
to compete against the PTT in the domestic long distance market, as well as the
international market. However, the implementation of this or any EC directive by
member states is subject to substantial delay. See 'Risk Factors--Government
Regulatory Restrictions.'
Member states have limited flexibility to interpret EC directives. If the
EC determines that a member state's legislation implementing an EC directive
does not adequately do so, the EC tests such interpretation through legal
proceedings in a court of law. This process is time consuming. Accordingly,
while a date has been set for the liberalization of voice telephony services
within the EU, the actual date on which liberalization actually occurs could be
months or years later. See 'Risk Factors--Government Regulatory Restrictions.'
There also may be practical considerations in implementing a directive
which could result in a delay of its implementation, as there are considerable
doubts as to the preparedness of many EC countries for a wide-ranging change.
For example, the negotiation of interconnection agreements can take a
significant amount of time. Even after such agreements are negotiated and
implemented, substantial ongoing disputes with the incumbent PTTs regarding
prices and billing are to be expected.
In an attempt to speed up the market entry of new operators despite the
obstacles referred to above, the Full Competition Directive allowed alternative
entities to the PTTs (typically utility and cable television companies) to
supply infrastructure, beginning July 1, 1996. This permits the Company to
purchase cable capacity from companies other than the local PTTs as such
companies build transmission facilities. To date, however, there has not been
substantial construction of such facilities by competitors to the PTTs in EU
countries, although several member states have enacted national legislation to
adopt the Full Competition Directive.
Although it is not expected that interconnect will be available and
implemented in most countries of interest by January 1, 1998, the current
regulatory scheme in Europe nevertheless provides an opportunity for the Company
to provide a range of services immediately in many countries, while putting in
place adequate infrastructure to capitalize on final deregulation when it occurs
on or after January 1, 1998. The Company can provide value-added services before
1998 and, in certain EC countries beginning in 1998 but prior to
interconnection, the Company can provide dial-in access, coupled, when possible,
with autodialers or the programming of customers' phone systems to dial access
codes, to route traffic over the PSTN to the Company's switches. See
'--International Long Distance Mechanics.'
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U.K. OPERATIONS
OVERVIEW
The United Kingdom originated approximately four billion minutes of
international traffic in 1995. The Company's UK operations began generating
revenues in May 1996 and generated $6.3 million in revenues for the year ended
December 31, 1996, its first year of operations, and $11.3 million for the six
months ended June 30, 1997.
SERVICES AND CUSTOMERS
The Company offers its customers in the United Kingdom international and
domestic long distance services. Customers access these services by direct
access, prefix dialing and dial-in. Direct access services are provided by
connecting customers to the Company's London switches by means of lines leased
from British Telecom or Mercury. Prefix dialing services are provided by means
of access to the Company's London switches by way of the PSTN using the
Company's access codes. As of June 30, 1997, the Company's customer base in the
United Kingdom consisted of 12 carriers and in excess of 2,700 commercial
customers and 11,000 pre-paid account customers. The Company's current
commercial customers include multinationals, large national companies, as well
as small and medium-sized businesses.
MARKETING AND SALES
The Company markets its services in the United Kingdom through a variety of
channels, including direct sales, indirect sales through independent agents and
telemarketing sales. The Company has three professionals dedicated to marketing.
As of June 30, 1997, RSL Europe employed 13 full-time and 23 part-time sales
employees in the United Kingdom dedicated to commercial and residential
customers. RSL Europe intends to expand its direct sales force as a part of its
growth strategy by adding sales representatives to its London office as well as
establishing additional sales offices in the United Kingdom. The Company relies
heavily on its network of approximately 42 agents to sell its long distance
calling services in the United Kingdom. The Company believes that several of the
agents have existing relationships with businesses in the Company's target
market which better position them to identify and sell services to prospective
customers. The Company has acquired one of these agents and is negotiating to
acquire a second, with the strategic aim of providing the Company with local
presence in certain regions of the U.K.
U.K. NETWORK ARCHITECTURE
RSL UK operates two Ericsson switches, one an international gateway switch,
the other a domestic switch, located in London. Prior to December 1996, the
Company was prohibited from owning interests in fiber optic cable coming in or
out of the United Kingdom. As a result, the Company had been transmitting call
traffic bound for destinations outside of the United Kingdom through leased
capacity provided by British Telecom and Mercury. The Company has since
purchased IRUs on the UK-NL14 and PTAT-1 undersea fiber optic cable systems and
continues to utilize leased capacity for all other international destinations.
The Company is currently in negotiations to purchase IRUs on the CMC and MCC
terrestrial fiber optic cables. The Company is currently in negotiations to
purchase MIUs on the FLAG and GEMINI systems and additional MIUs and IRUs as
warranted.
COMPETITION
The Company's principal competitors in the United Kingdom are British
Telecom, the dominant supplier of telecommunications services in the United
Kingdom, and Mercury. The Company also faces competition from emerging licensed
public telephone operators (who are constructing their own facilities-based
networks) such as Energis, and from resellers including ACC Corporation,
WorldCom, Esprit and Global One. The Company believes its services are
competitive, in terms of price and quality, with the service offerings of its UK
competitors.
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REGULATORY ENVIRONMENT
The Company was awarded an International Facilities Based
Telecommunications License (an 'IFBTL') in the United Kingdom in December 1996.
An IFBTL entitles the Company to acquire IRUs and MIUs on international
satellite and cable systems, resell international private lines, as well as
interconnect with, and lease capacity at, wholesale rates from British Telecom
and Mercury. In addition, the Company holds an International Simple Resale
('ISR') license in the United Kingdom. An ISR license allows the Company to
resell international private lines, as well as interconnect with, and lease
capacity at wholesale rates from, British Telecom and Mercury.
GERMAN OPERATIONS
OVERVIEW
Germany originated 5.2 billion minutes of international traffic in 1995.
RSL Germany was formed in April 1996 for the purpose of acquiring Sprint's
international voice business in Germany. Sprint was required to divest itself of
its German and French international voice businesses pursuant to the terms of
the Global One joint venture agreement.
Sprint commenced its German voice business in 1993. Revenues for such
operation for the years ended December 31, 1996 and 1995 were $8.6 million and
$6.4 million, respectively, and $5.1 million and $4.0 million for the six months
ended June 30, 1997 and 1996, respectively. The Company's German operations
generated pro forma revenues of $11.7 million for the year ended December 31,
1996 and actual revenues of $5.1 million for the six months ended June 30, 1997.
SERVICES AND CUSTOMERS
National and international long distance services are offered by the
Company to members of closed user groups. International long distance services
are further offered to customers that are not members of closed user groups
utilizing direct access over leased lines from Deutsche Telekom. As of June 30,
1997 the Company's customer base in Germany consisted of one reseller in Austria
that provides international traffic from Austria to Germany and other countries,
two German resellers, one of which is the largest service provider of mobile
phone service and approximately 175 commercial customers. The Company's current
customer base primarily consists of large national or multinational corporations
and a larger number of small and medium-sized business customers. See
'--Products and Services.'
MARKETING AND SALES
As of August 1997, the Company employed 26 sales and marketing employees in
Germany. RSL Germany is expanding its direct sales force as a part of its growth
strategy by adding sales representatives. The Company continues to develop a
network of independent sales agents to sell its services in Germany.
GERMAN NETWORK ARCHITECTURE
RSL Germany currently operates a Wyatts MRX 2000 domestic switch in its
offices in Frankfurt, and recently installed an Ericsson AXE 10 international
gateway switch, which has been operational since August 1, 1997. The Company
also plans to install POPs in additional German cities to lower its cost of
providing services in these cities. International transmissions facilities are
leased from Deutsche Telekom. The Company has interconnect agreements with
Teleglobe International Inc. for termination of its international traffic, and
with TelDaFax GmbH for termination of domestic traffic. The Company is
integrating these services into its own systems and is making such other
arrangements as are necessary to ensure these services are provided to the
Company.
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COMPETITION
In Germany, the Company competes with facilities-based carriers and
resellers. The Company's principal competitor in Germany is Deutsche Telekom,
the dominant supplier of telecommunications services in Germany. The Company
also faces competition from emerging public telephone operators (who are
constructing their own facilities-based networks) such as Arcor (Mannesmann and
DBKom), O.telo (RWE and VEBA) and VIAG Interkom (VIAG and British Telecom), from
resellers including Worldcom and Viatel and call-back providers such as Tele
Passport. Assuming deregulation in 1998, it is expected that alternative
networks currently under construction will become available to route and
terminate voice traffic. The Company believes its services are competitive, in
terms of price and quality, with the service offerings of its German
competitors.
REGULATORY ENVIRONMENT
The German Parliament passed the German Telecommunications Act 1996 (the
'German Act'), which became effective August 1, 1996, in order to liberalize the
German telecommunications market. Until January 1998, 'voice telephony' as
defined in the German Act in accordance with the 1990 Directive may only be
provided by Deutsche Telekom. 'Voice telephony' as defined in the German Act
does not, however, include the delivery of voice telephony to 'closed user
groups'. International direct dialing services offered to customers utilizing
direct access over leased lines also do not come within the German Act's
definition of 'voice telephony '.
Under the German Act, licenses for the offering of voice telephony services
are issued to an applicant unless (i) such applicant fails to meet certain good
standing requirements, (ii) such applicant lacks the competence to run a
telecommunications business or (iii) the offering of telecommunications services
by such applicant would be regarded as a danger to public safety. Under the
German Act, Deutsche Telekom is required to permit competitors to be
interconnected to its network. RSL Germany has applied for a Germany-wide, class
4 license (public switched telephony services) with the Federal Ministry of
Posts and Telecommunications.
DUTCH OPERATIONS
OVERVIEW
The Netherlands originated 1.5 billion minutes of international traffic in
1995. The Company operates in the Netherlands through RSL Netherlands. RSL
Netherlands is an international carrier with switches installed in Rotterdam and
Amsterdam.
RSL Netherlands initiated operations in October 1995 and generated
approximately $7.9 million in revenues for the year ended December 31, 1996, its
first full year of operations, a gross margin of approximately 47%, and a pretax
profit of approximately $2.0 million. Revenues for the six month period ended
June 30, 1997 were approximately $8.1 million.
SERVICES AND CUSTOMERS
The Company offers its customers in the Netherlands international long
distance services utilizing direct access, prefix dialing and dial-in access,
and prepaid calling cards (which represented approximately 54% of RSL
Netherlands' total revenues for the six months ended June 30, 1997). As of June
30, 1997, the Company's customer base in the Netherlands consisted of
approximately 1,440 commercial customers.
MARKETING AND SALES
The Company markets its services in the Netherlands through a variety of
channels, including through six direct sales representatives, and indirect sales
through independent agents and an outside telemarketing company. The Company
believes that many of the agents have existing relationships with businesses in
the Company's target market which better position them to identify and sell
services to
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prospective customers. The Company sells its prepaid calling card through seven
independent distributors.
NETHERLANDS NETWORK ARCHITECTURE
In the Netherlands, the Company operates two Nortel Meridian switches,
directly linked by leased capacity, from its offices in Rotterdam and Amsterdam.
RSL Netherlands is linked directly to the Company's London gateway by leased
facilities and resells the services of British Telecom and Global One on all
routes where it is economical to do so.
COMPETITION
The Company's principal competitor in the Netherlands is PTT Telecom
Netherlands, the dominant supplier of telecommunications services in the
Netherlands. The Company also faces competition from emerging licensed public
telephone operators (who are constructing their own facilities-based networks)
such as WorldCom, and from mega-carriers including Concert and Global One. The
Company believes its services are competitive, in terms of price and quality,
with the service offerings of its competitors in the Netherlands.
REGULATORY ENVIRONMENT
As of July 1, 1997, restrictions on voice telephony services over cable
infrastructure were liberalized, in effect bringing about full liberalization of
the telecommunications market in the Netherlands.
Under the current licensing regime, two new licensees other than the Dutch
PTT may operate nationwide fixed telecommunications networks: Telfort, a joint
venture between British Telecom and the Dutch Railway Company, and Enertel, a
consortium of Dutch electricity companies and a large Dutch cable television
company. Furthermore, hundreds of licenses to operate regional fixed networks
have been granted mainly to electricity and cable television companies.
Nevertheless, neither the use of leased lines capacity and other leased
facilities, nor the services provided by the Company, requires a license.
A new telecommunications act is expected to take effect by the end of the
first quarter of 1998. The new act is expected to consolidate the full
liberalization of the Dutch telecommunications market and introduce a new
licensing regime. Although the details of that new regime are not yet certain,
the Company expects it will be required to obtain a registration from the new
Regulatory Authority in order to provide its current services. Such a
registration is, however, mainly a formality, and is not intended to restrict
access to the market. Notably, the new telecommunications act may require an
individual license for the provision of voice telephony services between the
Netherlands and non-EU countries. The Company, however, does not believe such a
license will be required for the services it provides in the Netherlands,
although there can be no assurance in this regard.
FRENCH OPERATIONS
OVERVIEW
France originated 2.8 billion minutes of international traffic in 1995. RSL
France was formed in April 1996 for the purpose of acquiring Sprint's
international voice business in France. Sprint was required to divest itself of
its French and German international voice businesses under the terms of the
Global One joint venture agreement.
Sprint commenced its international voice business in France in 1994.
Revenues for such operation for the years ended December 31, 1996 and 1995 were
$11.1 million and $8.0 million, respectively, and $3.9 million and $5.3 million
for the six months ended June 30, 1997 and 1996, respectively. This decline in
the Company's revenues for the six month period ended June 30, 1997 is due
primarily to customer attrition from the customer base of Sprint France
(consisting solely of large national and
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multinational customers acquired in the Sprint Acquisitions), as well as the
deterioration in the Dollar-Franc exchange rate.
SERVICES AND CUSTOMERS
The Company offers its customers in France international long distance
services utilizing direct access over leased lines and restricted dial-in for
customers in closed-user groups. Direct access is provided via a leased line
connection between the customer's phone system and the Company's switch in
Paris. Following deregulation, the Company plans to offer long distance
services, which are presently restricted to closed user groups, with prefix
dialing and value-added services. As of June 30, 1997, the Company's French
customer base consisted of three carrier customers and 48 direct access and
approximately 134 dial-in access commercial customers. The Company's customers
in France include small and medium-sized businesses, a government agency with
heavy international calling patterns, as well as certain large national and
multinational businesses that were part of Sprint France's customer base and
which remain customers of the purchased business.
MARKETING AND SALES
The Company markets its services through a variety of channels, including
direct sales and indirect sales through independent agents. As of June 30, 1997,
the Company's French operations employed 19 sales representatives and had
relationships with 15 independent agents. The Company intends to expand its
direct sales force and agent network as a part of its growth strategy.
FRENCH NETWORK ARCHITECTURE
RSL France operates an Ericsson AXE-10 international gateway switch in its
offices in Paris. RSL France also operates two POPs, one located in Paris and
another located in Nice-Sophia Antipolis. In addition the Company intends to
install additional POPs in major business centers outside Paris to lower its
cost of providing services in these areas. French regulations currently do not
allow the Company to purchase its own international transmission facilities and
it is uncertain when or if the law will be changed. As a result, international
transmission facilities are leased from France Telecom. The Company connected
its French operations to RSL-NET in December 1996.
COMPETITION
The Company's principal competitor in France is France Telecom, the
dominant supplier of telecommunications services in France, and its
International Colisee program which offers discount long distance services to
the largest commercial customers. The Company also faces competition from
emerging licensed public telephone operators (who are constructing fiber
networks in major metropolitan areas) such as AT&T, Bouygues and CEGETEL and
from resellers including Esprit and Viatel, Inc. ('Viatel'). Upon deregulation,
alternative networks currently under construction are expected to become
available to route and terminate traffic domestically. The Company believes its
services are competitive, in terms of price and quality, with the service
offerings of its French market competitors.
REGULATORY ENVIRONMENT
The services currently provided by the Company in France do not require a
license. In accordance with the Telecommunications Laws passed in July 1996, the
liberalization process is regulated by a new government authority, the French
Telecommunications Authority ('Autorite de regulation des Telecommunications'),
which was established in January 1997. The telecommunications market in France
is scheduled to be liberalized on January 1, 1998 along with the markets of most
other EU member states. In accordance with the standard terms and conditions and
price lists for interconnection with France Telecom duly approved by the French
Telecommunications Authority on April 9, 1997, new operators would be able to
interconnect with France Telecom's PSTN starting on January 1, 1998. The Company
has applied for a license which will permit it to provide international long
distance services utilizing direct access or dial-in access in those areas where
the Company establishes POPs. In the areas where the Company has not established
POPs, the Company may not have the opportunity to participate in the lower
interconnection prices. If this license is granted, the French government is
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expected to require the Company to commit approximately $10 million in capital
expenditures for infrastructure over the next three to five years, which is in
excess of amounts the Company believes it will spend in its other European
operations. See 'Risk Factors--Government Regulatory Restrictions.'
SWEDISH OPERATIONS
OVERVIEW
Sweden originated 900 million minutes of international traffic in 1995. The
Company operates in Sweden through RSL Sweden, in which the Company acquired a
majority interest in November 1995. RSL Sweden is licensed as an international
carrier in Sweden, which permits it to transmit long distance services
nationally and internationally. The Company's Swedish operations began operating
and generating revenues in May 1996 and generated approximately $895,000 for the
year ended December 31, 1996, its first full year of operations, and $1.8
million for the six months ended June 30, 1997.
SERVICES AND CUSTOMERS
The Company offers long distance and value added services to its customers
in Sweden. Customers access the Company's switch utilizing prefix dialing and
direct access. As of June 30, 1997, the Company's customer base in Sweden
consisted of 1,011 commercial customers and 3,519 residential customers as well
as an agreement to terminate international traffic for a mobile service provider
in Sweden.
MARKETING AND SALES
The Company's Swedish operation markets its services through a variety of
channels, including direct sales, indirect sales through independent agents and
telemarketing sales. As of June 30, 1997, the Company employed five full-time
sales and marketing employees in Sweden, although the Company intends to expand
its direct sales force as a part of its growth strategy. The Company primarily
relies on its network of approximately 20 independent sales agents to sell its
long distance calling services in Sweden. In addition, the Company sells its
services through a chain of 12 independent telecommunications stores with
locations throughout Sweden, as well as through a large association comprised of
individuals and businesses. The Company believes that many of its agents have
existing relationships with businesses in the Company's target market which
better position them to identify, and sell services to, prospective customers.
SWEDISH NETWORK ARCHITECTURE
In Sweden, the Company operates an Ericsson AXE-10 international gateway
switch from its offices outside of Stockholm. RSL Sweden is connected to RSL-NET
by leased facilities. RSL Sweden utilizes its IRUs on the CANTAT-3 transoceanic
cable and resells services from WorldCom and Telia (the former monopoly PTT in
Sweden). RSL Sweden also owns MIUs on the KATTEGAT-1 transoceanic cable system.
RSL Sweden currently has operating agreements with carriers in Denmark and
Norway, as well as direct connections to the Company's operations in the United
Kingdom, United States and Finland.
COMPETITION
The Company's principal competitor in Sweden is Telia, the dominant
supplier of telecommunications services in Sweden. The Company also faces
competition from emerging licensed public telephone operators (which are
constructing their own fiber networks) such as Tele 2 and WorldCom, and from
resellers including Telenordia, Telecom Finland and Tele 8. Upon the completion
of the construction of the new fiber networks, the Company will have alternative
means of routing and terminating calls. The Company believes its services are
competitive, in terms of price and quality, with the service offerings of its
Swedish competitors.
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REGULATORY ENVIRONMENT
All types of telecommunications services were liberalized in Sweden in
1993. Through RSL Sweden, the Company holds an unrestricted license to provide
national and international telephony in the Swedish market. As a licensed
carrier, the Company may buy IRUs or lease fixed capacity from other providers,
or utilize the former PTT network to originate and terminate its traffic. The
Company's services are accessed primarily by prefix dialing. It is generally
believed that the Swedish Parliament will amend the Swedish Telecom Act to
facilitate equal access for all carriers after 1998.
FINNISH OPERATIONS
OVERVIEW
Finland originated 315 million minutes of international traffic in 1995 and
is an important market because it serves as a gateway to Russia. The Company
operates in Finland through RSL Finland, in which the Company acquired a
majority interest in November 1995. RSL Finland is a fully licensed
international long distance carrier in Finland. The Company's Finnish operations
began operating and generating revenues in May 1996 and generated approximately
$598,000 in revenues for the year ended December 31, 1996, its first full year
of operations, and $1.2 million for the six months ended June 30, 1997.
SERVICES AND CUSTOMERS
The Company offers its customers in Finland international and domestic long
distance services utilizing direct access, prefix dialing and dial-in access. As
of June 30, 1997, the Company's customer base in Finland consisted of
approximately 1,895 commercial customers and 950 residential customers.
MARKETING AND SALES
The Company markets its services in Finland through a variety of channels,
including direct sales and indirect sales through independent agents. As of June
30, 1997, the Company employed nine sales and marketing employees in Finland.
The Company relies heavily on its network of approximately 20 independent sales
agents to sell its long distance calling services in Finland. The Company
believes that many of the agents have existing relationships with businesses in
the Company's target market which better position them to identify and sell
services to prospective customers.
FINNISH NETWORK ARCHITECTURE
In Finland, the Company operates an Ericsson AXE-10 international gateway
switch in its offices in Helsinki. RSL Finland primarily utilizes RSL Europe's
network for international termination. International termination is also
achieved by RSL Finland through connections to Telecom Finland's and other
carriers' international circuits.
COMPETITION
The Company's principal competitor in Finland is Telecom Finland, the
dominant supplier of telecommunications services in Finland. The Company also
faces competition from emerging licensed public telephone operators (who are
constructing their own facilities-based networks) such as Global One, Finnet and
Telivo, a subsidiary of Telia, and from resellers including Tele 1. The Company
believes its services are competitive, in terms of price and quality, with the
service offerings of its Finnish competitors.
REGULATORY ENVIRONMENT
There are two classes of operators in Finland, (i) network operators, which
have their own network of domestic transmission lines, and (ii) service
operators, which cannot own domestic transmission lines or IRUs, but can have
their own switching facilities. RSL Finland was granted a license to provide
services as a network operator in March 1997.
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In August 1997, the New Telecommunications Market Law was enacted, which
removes the last restrictions applicable to telecommunications and enforces
competition. As a result, network operators are obligated to rent full network
capacity, including local loops to other operators. In addition, the New
Telecommunications Market Law provides that companies will only need to hold a
license in order to provide services as a mobile phone network operator.
DANISH OPERATIONS
Denmark originated 533 million minutes of international traffic in 1995.
The Company operates in Denmark through RSL Denmark, a wholly owned subsidiary
of RSL Netherlands, which initiated its operations in April 1997 and began
generating revenues in May 1997.
SERVICES AND CUSTOMERS
RSL Denmark currently offers its customers prefix dialing. The services are
offered to commercial customers as a subscription service and to private
customers by prepaid cards.
MARKETING AND SALES
The services are distributed through direct sales by the Company and
through a third party marketing company. The Company's interconnect prefix,
which was recently installed, provides the customers with the option of using
the Company's direct line, without requiring a physical connection.
DANISH NETWORK ARCHITECTURE
All traffic is transmitted through leased lines terminating at RSL
Netherlands' domestic switches located in Rotterdam and Amsterdam. The Company
routes all calls through Tele Danmark's network via the interconnect agreement
between the Company and Tele Danmark.
COMPETITION
The Company's principal competitor in Denmark is Tele Danmark, the dominant
PTT supplier of telecommunications services in Denmark. The Company also faces
competition from various other carriers, primarily Telia (the Swedish PTT), the
smaller Netcom Services and Global One, which are all connected to Tele
Danmark's fixed line network via interconnect agreements.
Tele Danmark offers full scale telephony in all areas. Telia offers both
long distance services through prefix dialing and other related services such as
call center solutions and data services.
REGULATORY ENVIRONMENT
All telecommunications services in Denmark were liberalized in 1996.
Currently, the Company may, through RSL Denmark, provide national and
international telephony in the Danish market, except mobile telephony which
requires a license. The Company currently can only either buy or lease fixed
lines from the PTT operator, Tele Danmark, which has an effective (but not
legal) monopoly on the ownership and construction of fixed lines. It is
expected, however, that pending regulation will limit Tele Danmark's market
control, although there can be no assurance in this regard.
PORTUGUESE OPERATIONS
Portugal originated 284 million minutes of international traffic in 1995.
The Company operates in Portugal through its 30.4% investment in Maxitel, which
the Company acquired in April 1997.
Maxitel commenced operations in the international voice and data business
in December 1994. Revenues for the year ended December 31, 1996 were $492,000 as
compared to $253,000 for the year ended December 31, 1995 and were $225,000 and
$58,000 for the six months ended June 30, 1997 and 1996, respectively.
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SERVICES AND CUSTOMERS
Maxitel offers international and long distance voice services to closed
user groups of companies utilizing autodialers and direct access. In addition,
Maxitel offers store and forward fax services. The target market for the Company
is small to medium-sized business. At June 30, 1997, Maxitel had 154 commercial
customers and subscriptions from an additional 100 customers.
MARKETING AND SALES
Maxitel markets its services through a direct sales force and is developing
an indirect sales force through independent agents. It is using its existing fax
customer base to sell voice telephony services. As of June 30, 1997, Maxitel
employed three sales representatives.
PORTUGUESE NETWORK ARCHITECTURE
Maxitel operates an Ericsson domestic switch in its offices in Lisbon,
which is in the process of being upgraded to an Ericsson AXE-10 international
gateway switch. In addition, the Company is in the process of installing an
Ericsson domestic switch in Oporto. The upgraded switch and the new switch are
expected to be operational by the end of the third quarter of 1997.
Additionally, Maxitel leases satellite transmission capacity on Orion, Hispasat
and Intelsat.
COMPETITION
Maxitel's primary competitor is Portugal Telecom, the dominant supplier of
telecommunications services in Portugal. The Company also competes with the
local Portuguese affiliates of global carriers such as Global One, and with
resellers in the Portuguese market.
REGULATORY ENVIRONMENT
Fixed voice telephony services, except mobile, were subject to a monopoly
until March 1997. A second GSM mobile operator has been licensed since 1992 and
a request for applications for a third license was issued by the government in
July 1997. Under the terms of the current legislation it is possible for
companies other than the PTT to offer both national and international voice
services to closed user groups. Interconnection to the Portugal Telecom PSTN is
permitted for such services. Portugal Telecom is expected to be fully privatized
by the end of 1997. Full market liberalization is now expected to occur by
January 1, 2000, but there can be no assurance in this regard.
ITALIAN OPERATIONS
OVERVIEW
Italy originated 1.9 billion minutes of international traffic in 1995. The
Company operates in Italy through RSL Italy (DECADE Communications S.r.l.) in
which it acquired an 85% interest in August 1997. RSL Italy, under its former
ownership, commenced operations in 1995 and generated approximately $400,000 in
revenues for the year ended December 31, 1996 and approximately $300,000 for the
six months ended June 30, 1997.
SERVICES AND CUSTOMERS
RSL Italy offers its customers in Italy international long distance
services utilizing dial-in access via autodialers. RSL Italy is in the process
of filing a declaration with the Ministry for Communications which is required
to offer the international long distance service that it currently offers. RSL
Italy will begin selling domestic long distance service to its customers in
Italy upon obtaining the additional appropriate regulatory approvals necessary
to provide such national service. RSL Italy's current customer base consists of
125 small and medium-sized businesses.
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MARKETING AND SALES
RSL Italy markets its services through a direct sales force and is
developing an indirect sales force of independent agents. As of August, 1997,
RSL Italy had two agents in an office in Milan and three agents in an office in
Rome.
ITALIAN NETWORK ARCHITECTURE
RSL Italy currently operates as a switchless reseller, purchasing wholesale
facilities from other Italian carriers. RSL Italy plans to install an
international gateway switch in Milan and a POP in Rome by the end of the first
quarter of 1998. At such time the Company will link RSL Italy with RSL-NET.
COMPETITION
RSL Italy's primary competitor is Telecom Italia S.p.A. ('Telecom Italia'),
the dominant supplier of telecommunications services in Italy. The Company also
competes with the local Italian affiliates of global carriers such as BT and
Global One. In addition, the Company competes with resellers in the Italian
market such as Infostrada and Skipper.
REGULATORY ENVIRONMENT
Currently, 'voice telephony' may only be provided by Telecom Italia. The
international voice services presently offered by RSL Italy do not fall within
the definition of 'voice telephony' as construed by Italian authorities. Under
the current regime, in order to render certain liberalized services, RSL Italy
is required to file a declaration with, or obtain an ad hoc authorization from,
the Italian Ministry for Communications. Whether RSL needs the declaration or
the authorization depends on the type of links to the PSTN actually used to
render the services. In fact, for liberalized services offered through switched
links to the PSTN, the declaration is required, whereas only an authorization is
needed for services offered through dedicated links. As of September 2, 1997,
RSL Italy had not filed a declaration or application for an ad hoc authorization
to offer the services that it currently offers or for those that it plans to
offer, but it intends to do so in the near future.
In July 1997, the Italian Parliament passed Law No. 249/97 for the creation
of the National Regulatory Authority ('NRA') in the telecommunications field.
The NRA is not established yet. However, when the NRA is actually established
and operative, it will assume most of the regulatory and supervisory functions
currently carried out by the Italian Ministry for Communications. The NRA will
ensure the application of EU liberalization principles in Italy.
In August 1997, the Italian Government approved the text of a decree that
will implement a number of EC directives (including the Full Competition
Directive and the Interconnect Directive) aimed at creating a fully competitive
environment also with respect to 'voice telephony.' The decree has not been
published on the Italian Official Gazette as yet. If and when effective, the
decree should gradually assure 'full competition' starting from January 1, 1998.
AUSTRIAN OPERATIONS
OVERVIEW
Austria originated 901 million minutes of international traffic in 1995.
The Company will operate in Austria through RSL Austria in which it currently
holds a 50% interest. Upon completion of the requisite corporate formalities,
which is expected to occur in September 1997, the Company will own 90% of RSL
Austria.
SERVICES AND CUSTOMERS
RSL Austria intends to offer international voice services utilizing
autodialers and direct access beginning in the fourth quarter of 1997. RSL
Austria's targeted customers are small to medium-sized businesses.
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MARKETING AND SALES
RSL Austria intends to market its services through both a direct and
indirect sales force as well as independent agents.
AUSTRIAN NETWORK ARCHITECTURE
RSL Austria anticipates that it will begin offering services by January
1998 as a switchless reseller. The Company has placed an order for an Ericsson
AXE-10 international gateway switch which it anticipates will be installed by
the end of the first quarter of 1998.
COMPETITION
RSL Austria's primary competitor will be Post und Telecom Austria (the
'PTA'), the dominant supplier of telecommunications services in Austria. The
Company will compete with the local Austrian affiliates of global carriers such
as the BT and Global One. In addition, the Company expects to compete with
resellers in the Austrian market.
REGULATORY ENVIRONMENT
The telecommunications monopoly has remained largely intact and the PTA has
a legal monopoly on voice telephony, telex and telegram services. New
telecommunications legislation, however, was passed in July 1997 which will
permit interconnection with the PTA's PSTN beginning on January 1, 1998,
allowing competition in voice telephony services. Telecommunications services
will be subject to licenses granted by an Austrian regulatory authority to
applicants with sufficient technical and economic facilities. The Company
intends to apply for such a license at such time.
AUSTRALIAN OPERATIONS
OVERVIEW
Australia originated 1.0 billion minutes of international traffic in 1995.
The Company operates in Australia through RSL COM Australia Pty. Ltd. ('RSL
Australia'), a wholly-owned subsidiary of RSL COM Asia Ltd. The Company began
generating revenues in Australia in April 1997. From April 1, 1997 through June
30, 1997, RSL Australia generated $7.2 million of revenues.
SERVICES AND CUSTOMERS
In April 1997, the Company entered into an agreement with Pacific Star
Communications Limited ('Pac Star'), an Australian based switchless reseller,
pursuant to which the Company acquired substantially all of the commercial
customer contracts of Pac Star. As a result of such transaction, the Company's
customer base in Australia currently consists of approximately 1,450 commercial
customers. The Company offers these customers local services and domestic and
international long distance services.
MARKETING AND SALES
The Company plans to market its services in Australia through a variety of
channels, including direct sales and indirect sales through independent agents.
The Company's current revenues are generated from the customer base acquired
from Pac Star.
AUSTRALIAN NETWORK STRUCTURE
The Company has installed an Ericsson AXE-10 international gateway switch
in its offices in Sydney and two domestic switches in Melbourne and Brisbane
which are directly linked to each other. These switches are expected to be
operational in the fourth quarter of 1997. The Company plans to purchase for its
Australian operation IRUs on the APCN, JASAURUS and NPC undersea fiber optic
cable systems and on the CMC and MCC terrestrial fiber optic cables.
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COMPETITION
The Company's principal competitors in Australia are the two licensed
general carriers Telstra Corporation Limited (the former PTT) and Optus
Communications Pty. Limited. Each of these competitors provide a bundle of
services including mobile, local, and domestic and international long distance.
In addition the Company faces competition from switch-based and switchless
resellers such as Spectrum Network Systems Limited, Axicorp Pty. Limited, Call
Australia Pty. Limited and AAPT Pty. Limited.
REGULATORY ENVIRONMENT
RSL Australia has been enrolled with the Australian Telecommunications
Authority ('Austel') under the provisions of the International Service Providers
Class License as a provider of services with double-ended interconnection. The
Telecommunications Act 1991 allows enrollment as a provider of services with
double-ended interconnection, provided that Austel is satisfied that the
services to be offered are in the public interest. Double-ended interconnection
allows the Company to interconnect with the Australian PSTN, to resell general
carrier services, and to transmit international calls over owned international
transmission facilities. Customers are able to access the Company's network from
the PSTN utilizing a four digit prefix code issued by Austel and via 'equal
access' pursuant to the Telstra Interconnect Agreement. International long
distance services may be provided by the use of satellite based facilities or
international cable capacity. Full deregulation of the Australian
telecommunications market occurred in July 1997 with the repeal of the
Telecommunications Act 1991 and the introduction of the Telecommunications Act
1997. RSL Australia has been granted full international carrier status under the
new act. However, there have been delays in implementing the new act and,
therefore, the Company has continued to operate as it has under the old act
pursuant to the transitional provisions of the new act.
LATIN AMERICAN OPERATIONS--GENERAL
RSL Latin America was formed in May 1997 as a joint venture pursuant to a
shareholders' agreement (the 'Joint Venture Agreement'), between the Company and
Coral Gates Investments Ltd., a British Virgin Islands corporation ('Coral
Gates'), which is an affiliate of Inversiones Divtel, D.T., C.A. ('Divtel'), a
Venezuelan corporation, and a member of the Cisneros Group. RSL Latin America is
51% owned by RSL and 49% owned by the Cisneros Group. To date, RSL Latin America
has not generated revenues.
RSL Latin America's primary purpose is to develop, through local operating
companies formed in conjunction with local partners, a pan-Latin American
network and operations spanning Mexico, Central and South America and the
Caribbean.
Concurrently with the execution of the Joint Venture Agreement with the
Cisneros Group, RSL Latin America acquired 49% of Sprintel, from Divtel and
Megatel Telecomunicaciones, C.A. ('Megatel'). Divtel will transfer its remaining
51% interest in Sprintel to RSL Latin America upon the receipt of approval from
the appropriate regulatory authorities for the transfer of control of Sprintel
to RSL Latin America. Sprintel has terminated its agreements with each of Sprint
and Global One to distribute each of their products in Venezuela and has begun
to provide calling cards and enhanced fax services for RSL Latin America.
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. Certain
countries have competitive local and/or long distance sectors, most notably
Chile, which has competitive operators in all sectors. In addition, various
Latin American countries have completely or partially privatized their national
carriers, including Argentina, Brazil, Chile, Mexico, Peru and Venezuela.
Since most Latin American countries currently restrict competition to a
limited number of specific services, the Company has developed a two stage
market penetration strategy to capitalize on the current and future
opportunities in Latin America. The first step is to take advantage of current
market conditions and, within the parameters of the Company's product line, to
provide the fullest range of services permissible under the local regulation.
The Company seeks to build a customer base within its
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target segments prior to full market liberalization, and when the market opens
to competition, the Company will have an established base in its target areas.
VENEZUELAN OPERATIONS
OVERVIEW
Venezuela originated 129 million minutes of international traffic in 1995.
The Company operates in Venezuela through Sprintel and provides value-added
telecommunications services for RSL Latin America. Sprintel was organized in
1992.
SERVICES AND CUSTOMERS
Sprintel offers its customers in Venezuela international long distance
voice services utilizing dedicated access along with prepaid and postpaid cards.
Sprintel has not yet developed a significant customer base.
MARKETING AND SALES
Sprintel markets its services through a direct sales force, telemarketing
and use of distributors to market its prepaid product. As of June 30, 1997,
Sprintel employed four sales representatives.
VENEZUELAN NETWORK ARCHITECTURE
Sprintel currently operates an Ericsson MD 110 switch directly linked via a
Panamsat-1 satellite circuit to the Company's New York international gateway
switch.
COMPETITION
Sprintel's primary competitor is CANTV, the dominant supplier of
telecommunications services in Venezuela. Sprintel also competes with local
Venezuelan affiliates of global carriers such as British Telecom, Global One,
Cable & Wireless, regional competitors such as Telefonica de Espana, Impsat,
Texcom S.A. and Charter Communications, and callback operators.
REGULATORY ENVIRONMENT
The Venezuelan telecommunications market is regulated by the Ministry of
Transportation and Telecommunications, by means of the National
Telecommunications Commission ('Conatel'). CANTV holds an exclusive monopoly on
the provision of local, domestic and international switched fixed telephone
services within Venezuela until October 2000. However, certain value-added
services are open to competition with a concession. Sprintel currently holds
Concessions for Value Added and Data Services which allow it to provide
international voice services via dedicated access provided on a private network.
Sprintel is not required to obtain a concession to provide prepaid and post paid
card services.
ASIA AND PACIFIC RIM OPERATIONS
RSL Asia is a wholly-owned subsidiary of the Company, based in Hong Kong.
RSL Asia was formed to expand the Company's operations into the Asian/Pacific
Rim market and, in March 1997, the Company incorporated RSL Japan to initiate
the Company's operations in Japan. RSL Asia intends to capitalize on the trend
toward deregulation within the region to establish operations in key countries.
The Company has hired a Regional Manager to oversee and develop RSL Japan's
operations. RSL Japan has also applied for a Type II value added network
provider license and will be able to provide services following approval of such
application. The Company plans to install an Ericsson AXE-10 international
gateway switch in its offices in Tokyo.
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INTERNET TELEPHONY OPERATION--GENERAL
In July 1997, the Company acquired a 51% interest in Delta Three, a
telecommunications provider utilizing the Internet and networks based on
Internet protocols to provide telecommunications services and to transmit voice
communications. Concurrently with the execution of the acquisition agreement,
the Company and Delta Three entered into a services agreement, pursuant to
which, among other things, Delta Three will provide the Company with discounted
Internet telephony services and the Company will provide Delta Three with
termination services at preferred rates and the co-location of Delta Three's
servers with the Company's facilities.
The Internet is an interconnected global computer network of tens of
thousands of packet-switched networks using Internet protocols. Technology
trends over the past decade have removed the distinction between voice and data
segments. Traditionally, voice conversations have been routed on analog lines.
Today, voice conversations are routinely converted into digital signals and sent
together with other data over high-speed lines. In order to satisfy the high
demand for low-cost communication, software and hardware developers began to
develop technologies capable of allowing the Internet to be utilized for voice
communications.
Several companies, including Delta Three, now offer services that provide
real-time voice conversations over the Internet ('Internet Telephony'). These
services work by the use of an Internet gateway server ('Internet Gateway'),
which provides a connection between the PSTN and the Internet and converts
analog voice signals into digital signals. These signals are in turn compressed
and split into packets which are sent over the Internet like any other packets
and reassembled by a second Internet Gateway as audio output at the receiving
end. The packets are converted back into analog format and transferred to the
PSTN and then to the telephone number dialed.
Most Internet Telephony software today requires both users to use computers
that are connected to the Internet at the time of the call, but services
provided by Delta Three allows both parties to use their ordinary telephones.
Current Internet Telephony does not provide comparable sound quality to
traditional long distance service. The quality of Internet Telephony, however,
has increased over the past few years, and the Company expects such quality to
continue to improve, although there can be no assurance in this regard.
DELTA THREE OPERATIONS
OVERVIEW
Delta Three began operations in May 1996 and began offering commercial
voice over the Internet telecommunications services in January 1997. Delta Three
currently offers commercial service between 10 countries and it plans to extend
the service to several additional countries within the next two years.
SERVICE AND CUSTOMERS
Delta Three utilizes the Internet, traditionally a device for data
communications, as a transmission medium for ordinary telephone calls. The
service offered by Delta Three enables customers to place long distance and
international phone calls while using a standard telephone, without an
additional equipment. Delta Three offers these calls at a significant discount
to standard international calls.
Delta Three operates as a wholesale carrier for international long distance
resellers on a point-to-point basis and as a retail carrier, servicing its own
network and marketing the use of its network to consumers in designated areas.
MARKETING AND SALES
Delta Three's strategy is initially to utilize wholesale contracts to
increase the volume on its network and then to add retail and corporate clients
onto the network, which it will market under its name. Delta Three focuses on
supplying its services to high-margin international niches. Delta Three also
offers the Company the ability to purchase minutes wholesale at preferred rates.
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DELTA THREE NETWORK
The Delta Three network consists of 10 Internet Gateways, located within
key metropolitan areas in target countries. A Delta Three customer dials an
access number where a Delta Three system prompts the customer for an access code
and the desired phone number. The system then opens a connection with a remote
Internet Gateway and instructs the Internet Gateway to place a local call to the
telephone the customer has dialed. Once the local call is transmitted, the
Internet Gateway converts the call into a form which can be routed over the
Internet and transfers the call to a second Internet Gateway. The Internet
Gateway may be connected by (i) the Internet accessed through an Internet
service provider, (ii) capacity leased on a private Intranet and (iii) leased
private lines. By routing calls in such a manner, Delta Three is able to avoid
the high costs associated with the settlement process.
REGULATORY ENVIRONMENT
While regulation still plays a significant role in traditional
telecommunications markets, the Internet is largely unregulated, permitting
business opportunities to flourish and to rapidly follow technological
developments. To date, the FCC has never directly exercised regulatory
jurisdiction over Internet-based services. The rapid development of the
Internet, however, raises the question of whether the language of the
Communications Act of 1934, as amended by the Telecommunications Act of 1996, or
existing FCC regulations, covers particular services offered over the Internet.
The FCC and most foreign regulators have not yet attempted to regulate the
companies that provide the software and hardware for Internet Telephony, the
access providers that transmit their data, or the service providers, as common
carriers or telecommunications services providers. Therefore, the existing
systems of access charges and international accounting rates, to which
traditional long distance carriers are subject, are not imposed on providers of
Internet Telephony services. As a result, such providers may offer calls at a
significant discount to standard international calls. There can be no assurance,
however, that the FCC and foreign regulators will not regulate Internet
Telephony or Internet service providers in the future.
The level of regulation of Internet Telephony differs significantly in
other countries and, in many countries, Internet Telephony is not regulated any
differently than other Internet service. In some countries Internet Telephony is
illegal. There can be no assurance that regulation of Internet Telephony will
not increase around the world.
EMPLOYEES
At August 1997, the Company employed approximately 475 people, including
officers, administrative and salaried selling personnel. The Company considers
its relationship with its employees to be good.
PROPERTIES
The Company's principal office is at Clarendon House, Church Street,
Hamilton, Bermuda.
The Company maintains executive offices at 767 Fifth Avenue, New York, New
York, where the Company occupies 2,589 square feet under a lease which expires
on January 31, 2002, although the Company has the option to terminate such lease
beginning in February 1998. The lease provides for annual lease payments of
$110,000.
The Company also maintains a 3,040 square foot office at 60 Hudson Street,
New York, New York which houses the Company's international gateway and domestic
switches located in New York. The lease extends until September 30, 1997 and
provides for annual lease payments of $262,000.
The Company has entered into a lease to maintain a 14,000 square foot
office at 430 Park Avenue, New York, New York for RSL USA's Eastern United
States offices. The lease extends until June 29, 2001 and provides for annual
lease payments of $375,000.
The Company maintains an office at Churchill House, 142-146 Old Street,
London, England which is used as the location for the London international
gateway switch and the London domestic switch.
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The lease extends until October 1, 2005 and provides for annual lease payments
of $83,000 until March 1998 and may be increased thereafter.
In addition, the Company maintains offices with respect to its other
foreign operations, the aggregate annual lease payments for which equal
approximately $2.1 million.
The Company, through its direct and indirect subsidiaries, also leases
additional office spaces for its operations.
LEGAL PROCEEDINGS
AT&T recently filed with the FCC an opposition to the Company's requests
for modification of the International Settlement Policy to implement the
Company's accounting rates for international long distance service between the
United States and each of Denmark, the Dominican Republic, Finland, Norway and
the United Kingdom. AT&T has alleged, inter alia, that the requests violate the
principles underlying the International Settlement Policy and the FCC's
non-discrimination policy. The Company does not believe that the FCC's
resolution of this matter reasonably can be expected to have a material adverse
effect on its business or results of operations.
The Company also is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company is not presently a
party to any such litigation that the Company believes could reasonably be
expected to have a material adverse effect on its business or results of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning directors and executive officers of the
Company and certain of its subsidiaries is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Ronald S. Lauder................................ 53 Director and Chairman of the Board
Itzhak Fisher................................... 41 Director, President and Chief Executive Officer
Andrew Gaspar................................... 49 Director and Vice Chairman of the Board
Jacob Z. Schuster............................... 48 Director, Executive Vice President, Chief
Financial Officer, Assistant Secretary and
Treasurer
Richard E. Williams............................. 45 President and Chief Executive Officer of RSL
Europe
Paul G. Black................................... 40 President of RSL USA
Adrian Coote.................................... 43 Managing Director of RSL Australia
Karen van de Vrande............................. 47 Vice President of Marketing
Nir Tarlovsky................................... 31 Vice President of Business Development
Nesim N. Bildirici.............................. 30 Vice President of Mergers and Acquisitions
Mark J. Hirschhorn.............................. 33 Vice President--Finance, Global Controller and
Assistant Secretary
Roland T. Mallcott.............................. 50 Vice President of Engineering
Andrew C. Shields............................... 41 Vice President of International Carrier
Relations
Avery S. Fischer................................ 30 Legal Counsel
Tucker Hall..................................... 41 Secretary
Gustavo A. Cisneros............................. 52 Director
Leonard A. Lauder............................... 64 Director
Eugene Sekulow.................................. 66 Director
Nicolas G. Trollope............................. 50 Director
Fred H. Langhammer.............................. 52 Nominee for Director
</TABLE>
All directors hold office, subject to death, removal or resignation, until
the next annual meeting of shareholders and thereafter until their successors
have been elected and qualified. Officers of the Company serve at the pleasure
of their respective Boards of Directors, subject to any written arrangements
with the Company. See '--Employment Arrangements.' Set forth below is certain
information with respect to the directors, executive officers and other senior
management of the Company.
Ronald S. Lauder co-founded the Company, has served as its Chairman since
1994 and is its largest and controlling shareholder. He is also a founder and
has served as the non-executive Chairman of the Board of Central European Media
Enterprises Ltd. ('CME'), an owner and operator of commercial television
stations and networks in Central and Eastern Europe since 1994. Mr. Lauder is a
principal shareholder of The Estee Lauder Companies Inc. ('Estee Lauder') and
has served as Chairman of Estee Lauder International, Inc. and Chairman of
Clinique Laboratories, Inc. since returning to the private sector from
government service in 1987. From 1983 to 1986, Mr. Lauder served as Deputy
Assistant Secretary of Defense for European and NATO affairs. From 1986 to 1987,
Mr. Lauder served as U.S. Ambassador to Austria. Mr. Lauder is a director of
Estee Lauder. He is
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Chairman of the Board of Trustees of the Museum of Modern Art, and Treasurer of
the World Jewish Congress.
Itzhak Fisher, a co-founder of the Company, has been a director, President
and Chief Executive Officer of the Company since its inception in 1994. Mr.
Fisher is also the President and Chief Executive Officer of ITG, the Chief
Executive Officer of RSL USA and the Chairman of RSL Europe. From 1992 to 1994,
Mr. Fisher served as General Manager of Clalcom Inc., the telecommunications
subsidiary of Clal (Israel), Ltd., Israel's largest investment corporation
('Clal'). Prior to joining Clalcom, from 1990 to 1992, Mr. Fisher served as the
Special Consultant to the President of Bezeq the Israel Telecomunication Corp.
Ltd., Israel's national telecommunications company. From 1990 to 1991, Mr.
Fisher was a consultant to Mobil Oil Corporation, in the telecommunications
field. In 1989, Mr. Fisher co-founded Medic Media, Inc., a company engaged in
the business of renting telephone and television systems in hospitals throughout
Israel, and was a director and its President and Chief Executive Officer through
1991. Mr. Fisher remains a director of Medic Media.
Andrew Gaspar has served as a director and Vice Chairman of the Board of
the Company since its inception in 1994. Mr. Gaspar has been (through a limited
liability company) the managing member of Lauder Gaspar Ventures LLC ('LGV')
since its inception in September 1996 and has been President of the corporate
general partner of R.S. Lauder, Gaspar & Co., L.P. ('RSLAG') since 1991. Both
RSLAG and LGV are venture capital companies. Mr. Gaspar has also been a director
of CME since June 1994. From 1982 until 1991, Mr. Gaspar was a partner of
Warburg, Pincus & Co., a venture capital firm, in which Mr. Gaspar specialized
in start-up ventures in the telecommunications industry. From 1973 until 1981,
Mr. Gaspar served in various executive capacities at RCA Global Communications,
Inc. and its affiliates. Mr. Gaspar is Chairman of Auto Info Inc., a financial
services company. Mr. Gaspar played a significant role in developing the initial
concept for the Company's global network and guided its initial strategy,
formation and financings.
Jacob Z. Schuster has been a director, Secretary or Assistant Secretary,
Treasurer and Executive Vice President of the Company since 1994 and has been
Chief Financial Officer of the Company since February 1997. From 1986 to 1992,
Mr. Schuster was a General Partner and the Treasurer of Goldman, Sachs & Co.
('Goldman Sachs'). Mr. Schuster has been President and Treasurer of RSL
Management Corporation since November 1995 and Executive Vice President of RSL
Investments Corporation since March 1994. Mr. Schuster joined Goldman Sachs in
1980, served as Treasurer of the firm from 1985 until his retirement from the
firm in 1992 and was made a General Partner in 1986. In 1993, Mr. Schuster
served as a consultant to Goldman Sachs.
Richard E. Williams has served as President and Chief Executive Officer of
RSL Europe since August 1995. From 1992 through 1994, Mr. Williams served as a
director of IDB WorldCom, with responsibility for sales and marketing. From 1990
to 1992, Mr. Williams served as Managing Director and Vice President of
Operations (Europe, Africa and Middle East) of WICAT Systems, a computer systems
company. From 1968 to 1990, Mr. Williams served in various technical, research,
sales, and management capacities at British Telecom, most recently serving as a
General Manager from 1988 to 1990.
Paul G. Black has been the President of RSL USA since March 1997. Mr. Black
joined the Company as President and Chief Executive Officer of Cyberlink in
October 1996. From 1995 to 1996, Mr. Black served as Vice President,
International Business Development of Pacific Gateway Exchange, Inc. From 1993
through 1995, Mr. Black was President and Chief Operating Officer of
SERSA/GEOCOMM, a provider of dedicated international communications services.
From 1990 to 1993, Mr. Black was Manager, Western Region for GTE Spacenet (now
known as GTE Telecom).
Adrian Coote has been Managing Director of RSL Australia since October
1996. From May 1993 to October 1996, Mr. Coote served as Director of Engineering
and Operations of Vodafone Pty. Limited, an Australian mobile carrier,
responsible for the design, implementation and operation of its mobile network
and subscriber administration systems. From 1987 to 1993, Mr. Coote was General
Manager, Sales of British Telecom Australasia responsible for introducing and
managing its private switching
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systems and global data networks. Prior to joining British Telecom Australasia,
Mr. Coote served in various capacities at Philips Telecommunications Systems.
Karen van de Vrande has been Vice President of Marketing of the Company
since March 1996. From March 1993 to February 1996, Ms. van de Vrande served as
Managing Director of AT&T's Consumer Communications Services for Europe, the
Middle East and Africa. From 1990 to 1993, Ms. van de Vrande served as Managing
Director of AT&T's Israeli operations. She served in various marketing and sales
capacities at AT&T from 1981 to 1990.
Nir Tarlovsky has been Vice President of Business Development of the
Company since April 1995 and served as a director of the Company from April 1,
1995 until March 1997. Mr. Tarlovsky is also Vice President of ITG. From 1992 to
March 1995, Mr. Tarlovsky served as Senior Economist of Clal, where he was
responsible for oversight of the operations and budgets of 150 of Clal
subsidiaries. While at Clal, he was also responsible for the development of new
international telecommunications ventures. Prior to 1992, Mr. Tarlovsky served
as an officer in the Israeli Army, where he was responsible for management and
financial oversight of international research and development projects.
Nesim N. Bildirici has been Vice President of Mergers and Acquisitions of
the Company since 1995 and served as a director of the Company from April 1995
until March 1997. From August 15, 1993 to December 31, 1996, Mr. Bildirici was
employed by both RSLAG and the Company. Mr. Bildirici is also a Managing
Director of RSLAG. Prior to joining RSLAG, Mr. Bildirici was an investment
banker at Morgan Stanley & Co. Incorporated from 1989 to 1991. From 1991 to
1993, Mr. Bildirici was a graduate student at Harvard Business School, where he
received his MBA.
Mark J. Hirschhorn has been Vice President-Finance of the Company since
August 1997 and has been Global Controller of the Company since January 1996.
Mr. Hirschhorn has also served as the Assistant Secretary of the Company since
September 1996. From October 1987 to December 1995, Mr. Hirschhorn was employed
at Deloitte & Touche LLP, most recently as a Senior Manager specializing in
emerging business and multinational consumer product companies.
Roland T. Mallcott has been Vice President of Engineering of the Company
since February 1997. From December 1995 until January 1997, Mr. Mallcott served
as Director of Joint Ventures of Concert, through British Telecom and MCI, in
Canada, Mexico and Germany. From January 1992 to December 1995, Mr. Mallcott
served as Director of Engineering and Operations for British Telecom (US)
responsible for building and managing the British Telecom and Concert global
data and voice networks. Prior to 1992, Mr. Mallcott served in various network
engineering capacities for British Telecom.
Andrew C. Shields has been Vice President of International Carrier
Relations since August 1997. From October 1993 until August 1997, Mr. Shields
served as Vice President of International Business Development of LCI
International, with responsibility for international business development and
international carrier relations. From June 1991 until October 1993, Mr. Shields
served as Director of Global Alliances for Northern Telecom responsible for
international infrastructure expansion. Mr. Shields also served as Northern
Telecom's Director of International Marketing from June 1989 until June 1991.
From 1984 to 1989, Mr. Shields served as Senior Manager, International Relations
for MCI International responsible for negotiating bilateral direct operating
agreements with international carriers. Mr. Shields also served, in various
capacities at MCI International, MCI Telecommunications, and ITT World
Communications from 1979 to 1984.
Avery S. Fischer has served as Legal Counsel of the Company since January
1997. From 1994 to 1997, Mr. Fischer was an associate with the law firm of
Rosenman & Colin LLP, New York, New York, with a practice concentrating in
mergers and acquisitions, securities and general corporate counseling. From 1993
to 1994, Mr. Fischer was an associate with the law firm of Shea & Gould, New
York, New York, with a practice concentrating in commercial and securities
litigation. From 1990 to 1993, Mr. Fischer was a student at Brooklyn Law School,
where he received his Juris Doctor.
Tucker Hall, Secretary of the Company since March 1997, has been a manager
of Codan Services Limited, Hamilton, Bermuda, a corporate service company, since
1989.
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Gustavo A. Cisneros has been a director of the Company since March 1997.
Mr. Cisneros, together with other members of his family, owns a controlling
interest in Venevision as well as interests in a wide variety of other business
enterprises. For more than five years, Mr. Cisneros has been a direct or
indirect beneficial owner of interests in and a director of certain of the
companies that own or are engaged in a number of diverse commercial enterprises
principally in Venezuela, the United States, Brazil, Chile and Mexico. Mr.
Cisneros is also the Chairman of the Board of Directors of Pueblo Xtra
International, Inc. and a Director of Univision Communications Inc.
Leonard A. Lauder has been a director of the Company since March 1997. Mr.
Lauder is a principal shareholder and has served as Chief Executive Officer of
Estee Lauder since 1982 and as President of Estee Lauder from 1972 until 1995.
He became Chairman of the Board of Directors of Estee Lauder in 1995. He has
been a director of Estee Lauder since 1958. Mr. Lauder formally joined Estee
Lauder in 1958 after serving as an officer in the United States Navy. He is
Chairman of the Board of Trustees of the Whitney Museum of American Art, a
Charter Trustee of the University of Pennsylvania and a Trustee of The Aspen
Institute. He also served as a member of the White House Advisory Committee on
Trade Policy and Negotiations under President Reagan.
Eugene Sekulow has been a director of the Company since September 1995.
Until his retirement in December 1993, Mr. Sekulow served as Executive Vice
President-International of NYNEX Corporation, having served as President of
NYNEX International Company from 1986 to 1991. Prior to joining NYNEX
International Company, Mr. Sekulow had served as President of RCA International,
Ltd. since 1973. Mr. Sekulow previously served as a member of the United States
State Department Advisory Committee on International Communications and
Information Policy and on the State Department Task Force on Telecommunications
in Eastern Europe.
Nicolas G. Trollope, a director of the Company since July 1996, has been a
partner with the law firm of Conyers, Dill & Pearman, Hamilton, Bermuda, since
1991.
Fred H. Langhammer, a nominee for director of the Company, has been
President of Estee Lauder since 1995, and Chief Operating Officer of Estee
Lauder since 1985, and was Executive Vice President of Estee Lauder from 1985
until 1995. Mr. Langhammer joined Estee Lauder in 1975 as President of its
operations in Japan. In 1982, he was appointed Managing Director of Estee
Lauder's operations in Germany. Prior to joining Estee Lauder, Mr. Langhammer
was General Manager of Dodwell (Japan), a global trading company. He is a member
of the Board of Directors of the Cosmetics, Toiletries and Fragrance
Association, an industry group, and serves on the Board of the American
Institute for Contemporary German Studies at Johns Hopkins University.
Other than Ronald S. Lauder and Leonard A. Lauder, who are brothers, no
family relationship exists between any director or executive officer of the
Company.
COMMITTEES OF THE BOARD
The Company's Board of Directors (the 'Board of Directors') has an
Executive Committee (the 'Executive Committee'), a Compensation Committee (the
'Compensation Committee') and, after the completion of the Offerings, will
establish an Audit Committee (the 'Audit Committee').
EXECUTIVE COMMITTEE
The Executive Committee is composed of Ronald S. Lauder, Andrew Gaspar,
Itzhak Fisher, Jacob Schuster and Eugene Sekulow. A majority of the members of
the Executive Committee must approve any action taken by the Executive
Committee. During the period between meetings of the Board of Directors, the
Executive Committee has all powers and authority of the Board of Directors to
manage the Company's business, except that the Executive Committee, acting
alone, cannot (i) amend the Company's Memorandum of Association or Bye-laws
(which also require shareholder approval); (ii) adopt an agreement of merger or
consolidation or approve the sale, lease or exchange of all or substantially all
of the Company's property and assets; or (iii) approve or recommend to the
Company's shareholders a dissolution of the Company.
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COMPENSATION COMMITTEE
The Compensation Committee currently is composed of Ronald S. Lauder,
Andrew Gaspar and Itzhak Fisher. The Board of Directors intends to change the
composition of the Compensation Committee subsequent to the Offerings, so that
the Compensation Committee will be composed solely of 'non-employee directors'
within the meaning of Rule 16b-3(b)(1) promulgated under the U.S. Securities
Exchange Act of 1934, as amended and 'outside directors' within the meaning of
Section 162(m)(4)(C)(i) of the U.S. Internal Revenue Code of 1986, as amended.
The Compensation Committee is responsible for determining executive compensation
policies and guidelines and for administering the Company's stock option and
compensation plans.
AUDIT COMMITTEE
Within 90 days after completion of the Offerings, the Board of Directors
will establish an Audit Committee. The Audit Committee will be comprised solely
of independent directors and will be charged with (i) recommending the
engagement of independent accountants to audit the Company's financial
statements, (ii) discussing the scope and results of the audit with the
independent accountants, (iii) reviewing the functions of the Company's
management and independent accountants pertaining to the Company's financial
statements and (iv) performing such other related duties and functions as are
deemed appropriate by the Audit Committee and the Board of Directors.
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COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation awarded
to, earned by, or paid to (i) the Company's Chief Executive Officer, (ii) its
five most highly compensated executive officers, other than the Chief Executive
Officer, whose total annual salary and bonus exceed $100,000 and who were
serving as executive officers at the end of the Company's last fiscal year and
(iii) Charles M. Piluso, a former executive officer of the Company (together,
the 'Named Executive Officers'), for services rendered in all capacities to the
Company for the year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------- ---------------
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION $ $ #
- ----------------------------------------------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Itzhak Fisher
President and Chief Executive Officer................................ 350,000 150,000 0
Nir Tarlovsky
Vice President of Business Development............................... 178,000 75,000 0
Richard E. Williams (1)
President and Chief Executive Officer of RSL Europe.................. 172,000 50,000 0
Nesim N. Bildirici (2)
Vice President of Mergers and Acquisitions........................... 165,000 75,000 0
Charles M. Piluso (3)
Chairman of ITG...................................................... 230,000 0 0
Mark Hirschhorn
Vice President--Finance.............................................. 140,000 50,000 93,294
Karen van de Vrande
Vice President of Marketing.......................................... 120,000 50,000 131,400
</TABLE>
- ------------------
(1) Mr. Williams' salary has been converted to U.S. dollars for the purposes of
this table based upon the average exchange rate of British pounds to U.S.
dollars for the periods covered.
(2) Mr. Bildirici is employed by the Company but, during 1996, was employed by
both the Company and RSLAG. For purposes of this Prospectus, he is treated as an
employee of the Company only for the relevant periods. See '--Fiscal Year-End
Option Values,' '--Compensation Committee Interlocks and Participation.'
(3) Mr. Piluso, the former President of ITG and RSL USA, has not, since November
1996, served as an executive officer of the Company.
No other annual compensation, restricted stock awards, stock appreciation
rights or long-term incentive plan payouts or other compensation (all as defined
in the regulations of the Securities and Exchange Commission (the 'Commission'))
were awarded to, earned by or paid to the Named Executive Officers during 1996.
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STOCK OPTION AND COMPENSATION PLANS
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
In April 1995, the Board of Directors of the Company authorized, and the
shareholders of the Company approved, the 1995 Stock Option Plan (as amended and
restated, the '1995 Plan'). Under the 1995 Plan, the Company's Compensation
Committee is authorized to grant options (after giving effect to the
Recapitalization) for up to 2,847,000 shares of the Company's Class A Common
Stock. As of September 4, 1997, the Company had granted options to purchase
2,792,888 shares of the Company's Class A Common Stock under the 1995 Plan. In
general, options granted under the 1995 Stock Option Plan terminate on the tenth
anniversary of the date of grant. The 1995 Plan was developed to provide
incentives to employees of the Company and to attract new employees and non-
employee directors. The Company will not grant further options under the 1995
Plan.
1997 STOCK INCENTIVE PLAN
Prior to the consummation of the Offerings, the Board of Directors intends
to adopt, and the shareholders of the Company are expected to approve, the 1997
Stock Incentive Plan (the '1997 Plan'). All future grants of options following
the consummation of the Offerings will be under the 1997 Plan. Options will be
granted under the 1997 Plan for the purposes of attracting and motivating key
employees of the Company.
The 1997 Plan will be administered by the Compensation Committee and will
provide for the grant of (i) incentive and non-incentive stock options to
purchase Class A Common Stock; (ii) stock appreciation rights ('SARs'), which
may be granted in tandem with stock options, in addition to stock options, or
freestanding; (iii) restricted stock and restricted units; (iv) incentive stock
and incentive units; (v) deferred stock units; and (vi) stock in lieu of cash
(hereinafter referred to as 'Awards'). The maximum number of shares of Common
Stock which shall be available for Awards granted under the 1997 Plan during its
term shall be 2,100,000. The maximum number of shares for which options or stock
appreciation rights may be granted to any one participant in a calendar year is
500,000. At the consummation of the Offerings, the Company expects to grant to
Itzhak Fisher pursuant to his new employment agreements options to acquire
Common Stock under the 1997 Plan representing 1% of the common shares of the
Company, on a fully-diluted basis. See '--Employment Agreements'.
STOCK OPTIONS. Under the 1997 Plan, the exercise price of the options
generally will initially equal the fair market value of the Class A Common Stock
on the date of grant and will be increased on the first day of each calendar
quarter by an amount, compounded annually, based on the yield to maturity of
United States Treasury Securities with a maturity approximately equal to the
term of such options. The exercise price will not be less than fair market value
on the date of grant.
The options will generally have a term of seven years and will generally
become exercisable in three equal annual installments commencing on the first
anniversary of the date of grant.
The Compensation Committee may provide that a participant who delivers
shares of Class A Common Stock to exercise an option when the market value of
the Class A Common Stock exceeds the exercise price of the option will be
automatically granted new options for the number of shares delivered to exercise
the option ('reload options'). Reload options will be subject to the same terms
and conditions as the related option except that the exercise price is the fair
market value on the date the reload option is granted and such reload options
will not be exercisable for six months.
STOCK APPRECIATION RIGHTS. The 1997 Plan authorizes the Compensation
Committee to grant SARs in tandem with a stock option, in addition to a stock
option, or freestanding and unrelated to a stock option. SARs entitle the
participant to receive the excess of the fair market value of a stated number of
shares of Class A Common Stock on the date of exercise over the base price of
the SAR. The base price may not be less than 100% of the fair market value of
the Class A Common Stock on the date the SAR is granted. The Compensation
Committee will determine when an SAR is exercisable, the method of exercise, and
whether settlement of the SAR is to be made in cash, shares of Class A Common
Stock or a combination of the foregoing.
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<PAGE>
RESTRICTED STOCK AND RESTRICED UNITS. The 1997 Plan authorizes the
Compensation Committee to grant Awards in the form of restricted stock and
restricted units. For purposes of the 1997 Plan, restricted stock is an Award of
Class A Common Stock and a restricted unit is a contractual right to receive
Class A Common Stock (or cash based on the fair market value of Class A Common
Stock). Such awards will be subject to such terms and conditions, if any, as the
Compensation Committee deems appropriate. Unless otherwise determined by the
Compensation Committee, participants shall be entitled to receive either
currently or at a future date, dividends or other distributions paid with
respect to restricted stock and, if and to the extent determined by the
Compensation Committee, either to be credited with or receive currently an
amount equal to dividends paid with respect to the corresponding number of
shares covered by restricted units. Restricted stock and restricted units become
vested and nonforfeitable and the restricted period shall lapse upon the third
anniversary of the date of grant unless the Compensation Committee determines
otherwise. If a participant's employment terminates because of death,
disability, early retirement (with the Compensation Committee's consent) or
normal retirement, during the period in which the transfer of shares is
restricted, the restricted stock or restricted units become vested and
nonforfeitable as to that percentage of the shares based upon the days worked as
a percentage of total days in the restricted period. Unless nonforfeitable on
the date of termination or otherwise determined by the Compensation Committee, a
restricted stock or restricted unit award is forfeited on termination.
INCENTIVE STOCK AND INCENTIVE UNITS. The 1997 Plan allows for the grant of
Awards in the form of incentive stock and incentive units. For purposes of the
1997 Plan, incentive stock is an Award of Class A Common Stock and an incentive
unit is a contractual right to receive Class A Common Stock. Such awards will be
contingent upon the attainment, in whole or in part, of certain performance
objectives over a period to be determined by the Compensation Committee. With
regard to a particular performance period, the Compensation Committee shall have
the discretion, subject to the 1997 Plan's terms, to determine the terms and
conditions of such Awards, including the performance objectives to be achieved
during such period and the determination of whether and to what degree such
objectives have been attained. Unless otherwise determined by the Compensation
Committee, participants shall be entitled to receive, either currently or at a
future date, all dividends and other distributions paid with respect to the
incentive stock and, if and to the extent determined by the Compensation
Committee, either to be credited with or receive currently an amount equal to
dividends paid with respect to the corresponding number of shares covered by the
incentive units. If a participant's employment terminates because of death,
disability, early retirement (with the Committee's consent) or normal retirement
during the measurement period, an Award of incentive stock or incentive units
shall become vested and nonforfeitable as to that percentage of the award that
would have been earned based on the attainment of performance objectives for the
days worked as a percentage of total days in the performance period. Unless
nonforfeitable on the date of termination, any incentive stock or incentive unit
award is forfeited on termination.
DEFERRED STOCK. An Award of deferred stock confers upon a participant the
right to receive shares of Class A Common Stock at the end of a specified
deferral period. On such date or dates established by the Compensation Committee
and subject to such terms and conditions as the Compensation Committee shall
determine, a participant may be permitted to defer receipt of all or a portion
of his annual compensation and/or annual incentive bonus ('Deferred Annual
Amount') and receive the equivalent amount in elective stock units based on the
fair market value of the Class A Common Stock on the date of grant. To the
extent determined by the Compensation Committee, a participant may also receive
supplemental stock units for a percentage of the Deferred Annual Amount. If the
participant elects to receive any portion of a bonus in Class A Common Stock in
lieu of cash as allowed by the 1997 Plan, the Compensation Committee may grant
an Award of deferred stock as free standing stock units, in such number and on
such terms as the Compensation Committee may determine. Deferred stock units
carry no voting rights until the shares have been issued. The Compensation
Committee shall determine whether any dividend equivalents attributable to
deferred units are paid currently or credited to the participant's account and
deemed reinvested in deferred stock units. Deferred stock units and dividend
equivalents with respect thereto are fully vested at all times. Unless the
Compensation Committee provides otherwise, supplemental stock units and dividend
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equivalents with respect thereto will become fully vested on the third
anniversay of the date the corresponding deferred amount would have been paid
and free standing stock units and dividend equivalents with respect thereto will
become fully vested on the third anniversary of the corresponding Class A Common
Stock in lieu of cash Award. Free standing units may be forfeited if the
corresponding Class A Common Stock is not held for a specified holding period.
STOCK IN LIEU OF CASH. The 1997 Plan authorizes the Compensation Committee
to grant Awards of Class A Common Stock to executive officers in lieu of all or
a portion of an award otherwise payable in cash pursuant to any bonus or
incentive compensation plan of the Company, based on the fair market value of
the Class A Common Stock.
1997 PERFORMANCE INCENTIVE COMPENSATION PLAN
Prior to the consummation of the Offerings, the Board of Directors intends
to adopt, and the shareholders of the Company are expected to approve, the 1997
Performance Incentive Compensation Plan (the '1997 Performance Plan'). The 1997
Performance Plan will be administered by the Compensation Committee. Awards
under the 1997 Performance Plan may be made to key employees recommended by the
Chief Executive Officer, selected by the Compensation Committee and approved by
the Board of Directors, including officers of the Company and its subsidiaries.
Directors who are not also employees of the Company or any of its subsidiaries
will not be eligible for awards under the 1997 Performance Plan. The 1997
Performance Plan will be effective for 1997 and each of calendar years 1998,
1999 and 2000, unless extended or earlier terminated by the Board of Directors.
With respect to calendar year 1997, a cash bonus pool of $2,675,000 will be
established if the Company achieves certain specified performance targets for
1997 to be established after the adoption of such Plan. In the event that all of
these performance targets are achieved, $650,000 will be awarded to the
Company's Chief Executive Officer, Mr. Itzhak Fisher and the remainder will be
awarded to key employees of the Company and its subsidiaries based upon the
recommendation of the Company's Chief Executive Officer and approved by the
Compensation Committee and the Board of Directors, with no individual receiving
more than $650,000. Any such award will be payable promptly following the
completion of the audit of the Company's 1997 financial statements.
Bonuses will be payable under the 1997 Performance Plan for a year if the
Company meets any one or more of the performance criteria for such year selected
by the Compensation Committee from among the following: (i) amount of or
increase in consolidated EBITDA; (ii) revenues; (iii) earnings per share; (iv)
net income; (v) gross profit margin; (vi) maximum capital expenditures; (vii)
return on equity; (viii) return on total capital; and/or (ix) completion of the
Offerings (applicable to 1997 only).
With respect to calendar years 1998 and thereafter, bonus amounts shall be
determined as follows: if 100% of such pre-established target or targets are
achieved, participants will generally be eligible to receive a bonus equal to
their base salary for such year. If 120% of such target is achieved, the bonus
potentially payable to participants will generally equal twice their base salary
for such year and, if 80% of such target is achieved, 25% of such base salary.
In the case of the Company's Chief Executive Officer, the amount of such
potential bonus will be 150% of base salary if 100% of the target is achieved,
250% of base salary if 120% of the target is achieved and 25% of such base
salary if 80% of the target is achieved. To the extent the Company's results
exceed 80% of the target but are less than 120% of the target, the amount of the
bonus payable to participants will be adjusted proportionately based on where
such results fall within the ranges set forth above. Any such bonus will consist
of two components. Fifty percent of the amount determined pursuant to the
formula described above will be payable if the applicable target is achieved. Up
to an additional 50% of such amount will be payable in the discretion of the
Compensation Committee. In addition, the 1997 Performance Plan will permit the
Compensation Committee to grant discretionary bonuses to participants,
notwithstanding that a bonus would not otherwise be payable under such Plan, to
recognize extraordinary individual performance.
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<PAGE>
Under the 1997 Performance Plan, the Company will have the right to pay up
to 50% of a participant's bonus in Class A Common Stock (based on the fair
market value of such Common Stock at the time of payment). In addition, the 1997
Performance Plan will permit a participant to elect, in a time and manner
acceptable to the Compensation Committee, to receive all or a portion of his
bonus in Class A Common Stock. The maximum bonus that may be paid to any
individual under the Plan with respect to any year may not exceed $2,000,000. No
more than 400,000 shares of Class A Common Stock may be issued under the 1997
Performance Plan.
Because the 1997 Performance Plan will be in existence before the
completion of the Offerings, the $1,000,000 deductibility limit of Section
162(m) of the Code generally will not apply to payments under the 1997
Performance Plan until the first meeting of the Company's shareholders at which
directors will be elected after the close of the third calendar year following
the calendar year in which the Offerings occur. The Board of Directors or the
Compensation Committee may at any time amend, suspend, discontinue or terminate
the 1997 Performance Plan; provided, however, that no such action shall be
effective without approval by the shareholders of the Company to the extent
necessary to continue to qualify the amounts payable as deductible under Section
162(m) of the Code.
SPECIAL OPTIONS
The Company intends to award options for the purchase of shares of Class A
Common Stock with an aggregate fair market value on the date of grant of up to
$100,000 to employees and other persons who have been instrumental in the
Company's development. Such options will be awarded by the Compensation
Committee at the recommendation of the Company's Chief Executive Officer.
OTHER PLANS
The Company is in the process of developing both short and long-term
programs for the employees of its subsidiaries which will be designed to reward
for outstanding performance, retain key employees, and align employees'
interests with those of the Company's shareholders. The Company's goals are also
to make its employee compensation packages competitive and to provide employees
with the opportunity to share in the long-term equity appreciation of the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of stock
options to purchase shares of Class A Common Stock pursuant to the 1995 Plan
granted to the Named Executive Officers during the year ended December 31, 1996.
No stock appreciation rights have been granted by the Company.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS GRANTED
TO EMPLOYEES IN
FISCAL YEAR
OPTIONS ----------------- EXERCISE
GRANTED INDIVIDUAL PRICE EXPIRATION GRANT DATE
NAME # GRANTS $/SH DATE PRESENT VALUE $(1)
- ------------------------------------------ ------- ----------------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Itzhak Fisher............................. 0 -- -- -- --
Nir Tarlovsky............................. 0 -- -- -- --
Richard E. Williams....................... 0 -- -- -- --
Charles M. Piluso......................... 0 -- -- -- --
Mark Hirschhorn........................... 93,294 33.6% 1.60 1/01/06 25,000
Nesim N. Bildirici........................ 0 -- -- -- --
Karen van de Vrande....................... 131,400 46.3% 1.60 4/01/06 35,000
</TABLE>
- ------------------
(1) The grant date present value has been calculated as of the grant date (which
dates were January 1, 1996 and April 1, 1996 for Mark Hirschhorn and Karen
van de Vrande, respectively) in accordance with the Black-Scholes model.
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FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the value at
December 31, 1996 of unexercised stock options held by the Named Executive
Officers. No stock appreciation rights have been granted by the Company and no
stock options were exercised during the fiscal year ended December 31, 1996 by
the Named Executive Officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS
NUMBER OF UNEXERCISED IN-THE-MONEY AT FISCAL YEAR-
OPTIONS AT FISCAL YEAR-END END (1)
--------------------------- ----------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME # $
- ------------------------------------------------------ --------------------------- ----------------------------
<S> <C> <C>
Itzhak Fisher......................................... 0/0 0/0
Nir Tarlovsky (2)..................................... 88,851/787,149 1,078,742/9,556,858
Richard E. Williams................................... 0/0 0/0
Charles M. Piluso..................................... 0/0 0/0
Mark Hirschhorn....................................... 0/93,294 0/983,634
Nesim N. Bildirici (3)................................ 88,851/458,649 1,078,742/5,568,508
Karen van de Vrande................................... 0/131,400 0/1,385,900
</TABLE>
- ------------------
(1) Fair market value of securities underlying the options at fiscal year-end
minus the exercise price of the options. Fair market value was determined by
the last prior sale of the Company's equity securities by the Company in
October 1996.
(2) Mr. Tarlovsky's options to acquire Class A Common Stock vest such that he
will not be able to exercise options to acquire more than 2% of the
outstanding capital stock as of the date on which his current employment
agreement expires.
(3) Mr. Bildirici is employed by the Company, but during 1996, was employed by
both the Company and RSLAG. For purposes of this Prospectus, he is treated
as an employee of the Company only for the relevant periods. See
'--Compensation Committee Interlocks and Participation.'
COMPENSATION OF DIRECTORS
The Company believes that the interests of its non-employee directors
should be aligned with the interests of the Company's shareholders. To this end,
the Company intends to require such directors to make 'meaningful' investments
in the Class A Common Stock (based on each director's financial means) and to
compensate such directors for their services to the Company principally through
the grant of stock options and stock awards.
With respect to the ownership of Class A Common Stock, at the time the
Offerings are closed, Mr. Langhammer will have the right to purchase up to
$250,000 of Class A Common Stock, and Mr. Sekulow will have the right to
purchase up to $100,000 of Class A Common Stock, in each case valued at the
initial public offering price of the Class A Common Stock. Future directors will
be required, prior to joining the Board, to purchase at the then fair market
value a meaningful number of shares of Class A Common Stock based on each such
director's financial means.
1997 DIRECTORS COMPENSATION PLAN
Prior to the consummation of the Offerings, the Company's Board of
Directors intends to adopt, and the current shareholders of the Company are
expected to approve, the 1997 Directors Compensation Plan (the 'Directors
Plan'). Under the Directors Plan, on the closing date of the Offerings and on
the first business day following each annual meeting of the Company's
shareholders during the 10-year term of the Directors Plan, each non-employee
Director (including for these purposes, the Chairman and Vice Chairman of the
Board of Directors) (a 'Non-Employee Director'), will be granted options to
acquire a number of shares of Class A Common Stock with an aggregate fair market
value on the date of grant equal to $50,000 ($150,000 and $75,000 in the case of
Ronald S. Lauder and Andrew Gaspar, respectively, in their respective capacities
as Chairman and Vice Chairman of the Board of Directors). Each such option will
have a 10-year term. The exercise price of the options initially will equal the
fair market value of the Class A Common Stock on the date of grant and will be
increased on the first day of
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each calendar quarter by an amount, compounded annually, based on the yield to
maturity of United States Treasury Securities having a maturity approximately
equal to the term of such options.
The options will become exercisable in five equal annual installments
commencing on the first anniversary of the date of grant. The maximum number of
shares that may be issued under the Directors Plan will be 250,000.
The Directors Plan will also provide that, unless a Non-Employee Director
elects to defer receipt of such shares, he will receive, at or about the time of
the annual meeting of shareholders of the Company in each of 1998 through 2007,
for each full year of service as a Non-Employee Director (measured from one
annual meeting to the next), a number of shares of Class A Common Stock with a
fair market value equal to $30,000 (an 'Annual Share Award'). Pro rata awards
will generally be made for partial years of service greater than six months. Any
shares of Class A Common Stock granted to Non-Employee Directors as
compensation, while not restricted, are expected to be held by such persons
until they are no longer serving as a director, although there is no requirement
or assurance that they will do so.
On or before December 31 of any calendar year prior to December 31, 2007, a
Non-Employee Director may elect to defer receipt of all or any part of the value
of any Annual Share Award (the 'Share Value') payable in respect of the calendar
year following the year in which such election is made. The Share Value deferred
will be deemed invested in a stock account and will be deemed to be invested in
a number of notional shares of Class A Common Stock based on the fair market
value of the Class A Common Stock. Dividends (if any) will be deemed reinvested
in additional Units on the related dividend payment date. In the event of any
change in the Class A Common Stock by reason of any recapitalization,
reorganization, merger, consolidation, stock split or any similar change
affecting the Class A Common Stock (other than a stock dividend), the Board will
make an appropriate adjustment in the number of Units credited to the stock
account.
Each Non-Employee Director will elect whether (i) the aggregate amounts
credited to his account will be distributed wholly in cash, in the greatest
number of whole shares of Class A Common Stock or a combination of cash and
whole shares (with any fractional interest payable in cash), (ii) such
distribution will commence immediately following the date he ceases to be a
director or on the first business day of any calendar year following the
calendar year in which he ceases to be a director and (iii) such distribution
will be in one lump-sum payment or in such number of annual installments (not to
exceed 10) as he may designate. Each Non-Employee Director also may elect to
receive a distribution of all or any portion of the amounts credited to his
account as of a date which is at least one full year after the date of such
election. Any Non-Employee Director who elects to receive such a distribution
will cease to be eligible to make any additional deferrals for the two
immediately following calendar years.
KEY MAN LIFE INSURANCE
The Company maintains $5.0 million key man life insurance policies on the
lives of each of Itzhak Fisher and Richard E. Williams. The Company is the sole
beneficiary of such policies.
EMPLOYMENT ARRANGEMENTS
Each of the Company and ITG are parties to Employment Agreements, dated as
of September 15, 1995, with Itzhak Fisher, the President and Chief Executive
Officer of the Company and the President and Vice Chairman of ITG, the initial
terms of which are scheduled to expire on December 31, 1998. These agreements
will be replaced by the agreements described below upon the closing of the
Offerings. If the Closing of the Offerings does not occur, the terms of the
existing agreements will be automatically extended for successive one-year
periods unless they are terminated (i) by either party by September 30, 1997 or
September 30 of any subsequent year, (ii) for cause pursuant to a majority vote
of the Company's and ITG's Board of Directors, respectively, or (iii) or by Mr.
Fisher for good reason upon 30 days' notice. The existing employment agreements
provide that Mr. Fisher's aggregate initial base salary is $350,000 per annum,
which amount may be increased at the sole discretion of the respective Board of
Directors of each of the Company and ITG. The existing agreements contain non-
compete covenants having a term of one year following the termination of the
agreements and a confidentiality covenant. The existing agreement with the
Company relates to services to be provided by
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Mr. Fisher solely outside of the United States, while the existing agreement
with ITG relates to services to be provided by Mr. Fisher solely within the
United States.
On September 2, 1997, each of the Company and ITG entered into new
employment agreements to replace the existing employment agreements with Itzhak
Fisher, which will commence on the date of the closing of the Offerings and
terminate on December 31, 2002. The employment agreements will provide that Mr.
Fisher will serve as President and Chief Executive Officer of the Company and
will specify certain of his other duties and reporting responsibilities. The
Company will use its best efforts to ensure that Mr. Fisher continues to serve
as a director and member of the Executive Committee of the Company and ITG will
use its best efforts to ensure that Mr. Fisher continues to serve as a director
of ITG. Under the employment agreements, Mr. Fisher will be entitled to receive,
in the aggregate, a base salary of $400,000, increased by not less than $50,000
on each January 1, commencing January 1, 1999, plus an additional amount based
on the increase in the consumer price index in the New York metropolitan area.
In no event will Mr. Fisher's base salary, in the aggregate, be less than
$50,000 more than the aggregate base salary of any other executive officer of
the Company. The employment agreements will also provide that Mr. Fisher will be
a participant in the 1997 Performance Plan, and that Mr. Fisher will receive
additional bonuses of $1,500,000 and $1,000,000 if the total return to the
Company's shareholders from the closing of the Offerings to December 31, 2000
and December 31, 2007, respectively, exceeds the return to shareholders of peer
companies for the same periods. If Mr. Fisher's employment is terminated for any
reason other than by the Company for Cause (as defined) or by Mr. Fisher without
Good Reason (as defined, including in the event of a change in control), Mr.
Fisher will be entitled to a pro-rated bonus if the total return objective is
achieved through the date of such termination. The employment agreements will
provide that Mr. Fisher will be awarded options under the 1997 Plan at the time
of the Company's initial public offering to acquire shares of Class A Common
Stock representing 1% of the Common Stock on a fully-diluted basis. 40% of such
options will be exercisable on December 31, 2000, an additional 30% on December
31, 2001, and an additional 30% on December 31, 2001, except that all such
options will become exercisable in the event that Mr. Fisher's employment is
terminated by the Company without Cause or Mr. Fisher terminates his employment
for Good Reason or by reason of his death or Disability (as defined). The
employment agreement will also contain noncompetition provisions applicable
during the term of the employment agreement and for one-year thereafter. In the
event that Mr. Fisher's employment is terminated by the Company without Cause,
or by Mr. Fisher for Good Reason, the employment agreements will provide that
Mr. Fisher will be entitled to receive benefits and his salary (in addition to
any vested benefits and previously earned but unpaid salary) for the balance of
the term of the employment agreement or for at least 12 months, whichever is
longer, plus an amount equal to his bonus under the 1997 Performance Plan for
the immediately preceding year. In the event of Mr. Fisher's death or
Disability, he (or his representative or estate or beneficiary) will be paid, in
addition to any previously earned but unpaid salary and vested benefits, 12
months salary (reduced, in the case of disability, by any disability benefits he
receives). If Mr. Fisher's employment is terminated for any other reason, he
will be entitled to receive any previously earned but unpaid salary and any
vested benefits.
The Company and ITG have also entered into Employment Agreements, dated as
of April 1, 1995, with Nir Tarlovsky, the Vice President of Business Development
of the Company and a Vice President of ITG, the terms of which expire on March
31, 1998. Mr. Tarlovsky's employment agreements provide that his aggregate
initial base salary will be $150,000 per annum, which amount may be increased at
the sole discretion of the respective Board of Directors of each of the Company
and ITG. Pursuant to the agreement with the Company, the Company granted to Mr.
Tarlovsky options under its 1995 Plan to acquire up to 876,000 shares of the
Class A Common Stock. Mr. Tarlovsky's options to acquire shares of Class A
Common Stock vest in an amount no greater than 2% of the outstanding shares of
capital stock as of the date on which his current employment agreement expires.
The agreements contain non-compete covenants having a term of one year following
the termination of the agreements and a confidentiality covenant. The agreement
with the Company relates to services to be provided by Mr. Tarlovsky solely
outside of the United States, while the agreement with ITG relates to services
to be provided by Mr. Tarlovsky solely within the United States.
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RSL Europe has entered into an employment agreement, dated as of August 5,
1995, with Richard E. Williams, the Chief Executive Officer of RSL Europe, the
term of which expires in August 1998. The employment agreement provides that Mr.
Williams' base salary shall be pounds 100,000 (approximately $160,000) per
annum, which amount may be increased at the sole discretion of RSL Europe's
Board of Directors. Pursuant to the agreement, RSL Europe granted to Mr.
Williams the option to purchase shares of capital stock of RSL Europe equal to
up to 2% of the outstanding capital stock of RSL Europe (the 'RSL Europe Option
Rights'). The Company expects to enter into an agreement pursuant to which the
Company, in consideration for his waiver of the RSL Europe Option Rights, will
grant to Mr. Williams options to purchase 350,400 shares of the Company's Class
A Common Stock, which options will be exercisable upon the earlier of the
closing date of the Offerings or October 15, 1997, at an exercise price per
share of $.00457. In addition, Mr. Williams is, under circumstances more fully
described in the agreement, entitled to receive certain annual bonus payments.
The agreement contains a non-compete covenant having a term of nine months
following the termination of the agreement and a confidentiality covenant.
The Company has also entered into, or is in the process of entering into,
employment agreements with other executive officers of the Company and the
country managers of its Local Operators in the United States, the United
Kingdom, France, Sweden, Finland, Australia, Italy, Japan and the Netherlands.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee for the fiscal year ended
December 31, 1996 were Ronald S. Lauder, Andrew Gaspar and Itzhak Fisher. Since
1994, Mr. Fisher has served as the President and Chief Executive Officer of the
Company.
RSL Management Corporation ('RSL Management'), which is wholly-owned by
Ronald S. Lauder, the Chairman of the Board of the Company and its largest and
controlling shareholder, leases an aggregate of 2,670 square feet of office
space to the Company at an annual rent of $180,000 per annum. In addition, RSL
Management provides payroll and benefits services to the Company for an annual
fee of $6,000. During 1996, Jacob Z. Schuster, Chief Financial Officer,
Executive Vice President, Treasurer and a director of the Company, was the
President and Treasurer of RSL Management. Mr. Schuster received compensation in
1996 only for his services to RSL Management (and such compensation was paid by
RSL Management). As of August 1, 1997, Mr. Schuster became a full time employee
of the Company and is being compensated by the Company.
In September 1996, the Company borrowed $35.0 million from Ronald S.
Lauder, the Chairman of the Board of the Company and its largest and controlling
shareholder, bearing interest at the rate of 11% per annum (the 'Subordinated
Shareholder Loan'). The Company repaid the Subordinated Shareholder Loan with
the proceeds of the Shareholder Equity Investment (described below).
The Company used the proceeds of the Subordinated Shareholder Loan to repay
$35.0 million of the amounts outstanding under the Revolving Credit Facility and
reduced the outstanding commitment amount under the Revolving Credit Facility to
$15.0 million. The Revolving Credit Facility is personally guaranteed by Ronald
S. Lauder, the Chairman of the Board of the Company and the its largest and
controlling shareholder, shareholder of the Company.
Prior to the closing of the Debt Offering, Ronald S. Lauder, Leonard A.
Lauder, a director of the Company and Ronald S. Lauder's brother, and LGV, an
investment vehicle the principal investors of which are Ronald S. Lauder and
Leonard A. Lauder and the managing member (through a wholly-owned company) of
which is Andrew Gaspar, a director of the Company, purchased an aggregate of
4,117,521 shares of Class B Common Stock (approximately 11.6% of the outstanding
common shares of the Company on a fully diluted basis) for $50.0 million (the
'Shareholder Equity Investment'). LGV purchased one-half of such shares and
Ronald S. Lauder and Leonard A. Lauder each purchased one-quarter of such
shares. The Company has applied the proceeds of the Shareholder Equity
Investment to the repayment in full of the Subordinated Shareholder Loan,
together with accrued interest.
In addition, Ronald S. Lauder will, upon the request of the Company,
provide (or arrange for a bank to provide) the Company with the Shareholder
Standby Facility. If this facility is provided by a bank,
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<PAGE>
Mr. Lauder will personally guarantee the Company's obligations under the
facility up to $35.0 million. Under the terms of the Indenture, the Company may
borrow, repay, and reborrow any amounts under the Shareholder Standby Facility
at any time or from time to time. As of the date of this Prospectus, the
Shareholder Standby Facility has not been utilized. The Shareholder Standby
Facility will expire upon the closing of the Offerings.
As consideration for the Shareholders Standby Facility and Mr. Lauder's
continuing guarantee of the Revolving Credit Facility, Mr. Lauder received, in
the aggregate, warrants to purchase 459,900 shares of Class B Common Stock, of
the Company. The exercise price, exercise period and other terms of the Lauder
Warrants are substantially the same as the terms of the Warrants, other than
with respect to the class of stock which will be issued upon their exercise. The
Warrants and the Lauder Warrants become exercisable beginning on October 3,
1997.
During 1996, Nesim N. Bildirici, the Vice President of Mergers and
Acquisitions of the Company, was an employee of both the Company and RSLAG, a
venture capital company of which Ronald S. Lauder, the Company's Chairman and
its largest and controlling shareholder, and Leonard A. Lauder are the principal
investors. Andrew Gaspar, the Company's Vice Chairman, is the president of
RSLAG's corporate general partner. In the past, Mr. Bildirici's salary was paid
by RSLAG and the Company reimbursed RSLAG for the services Mr. Bildirici
provided to the Company. In 1996, the Company reimbursed RSLAG approximately
$130,000 for Mr. Bildirici's services. Mr. Bildirici currently dedicates
substantially all of his business time to the business of the Company and, as of
January 1, 1997, became a full-time employee of the Company. Mr. Bildirici is
treated as an employee of the Company only for purposes of this Prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a consulting agreement as of September 1, 1995
with Eugene Sekulow, a director of the Company. The consulting agreement expired
August 31, 1997. The consulting agreement provided that Mr. Sekulow receive a
$24,000 annual fee, as well as an annual grant of options to purchase 21,900
shares of the Company's Class A Common Stock, for services rendered as a
consultant to the Company.
The Company intends to avoid entering into agreements and arrangements
(such as consulting agreements) with its non-employee directors or their
affiliates which, directly or indirectly, would result in compensation being
received by such directors.
The law firm of Conyers, Dill & Pearman, of which Nicolas Trollope is a
partner, was engaged as the Company's counsel in Bermuda for the fiscal year
ended December 31, 1996 and will continue to be so engaged for the fiscal year
ending December 31, 1997.
For additional disclosure with respect to certain transactions between the
Company and certain of its directors, see 'Management Compensation--Committee
Interlocks and Insider Participation.'
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Class A Common Stock, the Class B Common Stock and
the Preferred Stock as of September 1, 1997 by (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of either the
Class A Common Stock, Class B Common Stock or Preferred Stock, (ii) each
director and nominee for director of the Company and each Named Executive
Officer who owns shares of any class of the Company's capital stock and (iii)
the directors and executive officers as a group. Except as otherwise noted
below, each of the shareholders identified in the table has sole voting and
investment power over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF CLASS A
COMMON STOCK+ BENEFICIAL OWNERSHIP
----------------------------------- OF CLASS B
PERCENT COMMON STOCK+ PREFERRED STOCK (1)
--------------------- -------------------- --------------------
NAME AND ADDRESS NUMBER PRIOR TO AFTER NUMBER NUMBER
OF BENEFICIAL OWNER OF SHARES OFFERINGS OFFERINGS OF SHARES PERCENT OF SHARES PERCENT
- ----------------------------------- --------- --------- --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald S. Lauder (2)(3)(4)(5)...... -- -- -- 4,602,387 41.9% 18,107,529 89.4%
Andrew Gaspar (2)(3)(4)(6)......... -- -- -- 2,983,226 28.3 15,703,267 77.6
R.S. Lauder, Gaspar & Co., L.P.
(2)(4)........................... -- -- -- 924,464 8.8 15,703,267 77.6
Itzhak Fisher (2)(7)............... -- -- -- 4,408,862 41.9 534,281 2.6
Leonard A. Lauder (2)(3)(4)(8)..... -- -- -- 4,012,607 29.3 -- --
Lauder Gaspar Ventures LLC
(2)(3)........................... -- -- -- 2,058,759 19.6 -- --
Jacob Z. Schuster (2)(9)........... -- -- -- 919,296 8.7 801,421 4.0
Charles M. Piluso (10)............. 1,457,094 100% 16.8% -- -- --
Nir Tarlovsky (2).................. 509,580(11) 25.9 5.9 28,862(12) * 534,281(12) 2.6
Nesim N. Bildirici (2)............. 202,561(13) 12.2 1.1 -- -- 266,554 1.3
Karen van de Vrande (14)........... 43,800 2.9 * -- -- -- --
Mark J. Hirschhorn (2)(15)......... 31,098 2.1 * -- -- -- --
Eugene Sekulow (16)(17)............ 43,800 2.9 * -- -- -- --
All directors, nominees for
director and executive officers
as a group (13 persons).......... 2,287,933 100.0% 10,988,787 100.0% 20,244,066 100.0%
<CAPTION>
POST OFFERINGS
--------------------------
NAME AND ADDRESS % VOTING % OWNERSHIP OF
OF BENEFICIAL OWNER POWER COMMON STOCK
- ----------------------------------- ---------- --------------
<S> <C> <C>
Ronald S. Lauder (2)(3)(4)(5)...... 70.8% 56.9%
Andrew Gaspar (2)(3)(4)(6)......... 59.1 47.4
R.S. Lauder, Gaspar & Co., L.P.
(2)(4)........................... 52.6 42.2
Itzhak Fisher (2)(7)............... 15.6 12.5
Leonard A. Lauder (2)(3)(4)(8)..... 12.7 10.2
Lauder Gaspar Ventures LLC
(2)(3)........................... 6.5 5.2
Jacob Z. Schuster (2)(9)........... 5.4 4.4
Charles M. Piluso (10)............. * 3.7
Nir Tarlovsky (2).................. 1.8 2.7
Nesim N. Bildirici (2)............. * 1.2
Karen van de Vrande (14)........... * *
Mark J. Hirschhorn (2)(15)......... * *
Eugene Sekulow (16)(17)............ * *
All directors, nominees for
director and executive officers
as a group (13 persons).......... 97.8% 82.3%
</TABLE>
- ------------------
+ Does not include 31,232,853 shares of Class A Common Stock issuable upon
conversion of shares of Class B Common Stock (including 20,244,066 shares of
Class B Common Stock issuable upon conversion of the Preferred Stock). Shares
of Class B Common Stock are convertible at any time into shares of Class A
Common Stock for no additional consideration on a share-for-share basis, and
shares of Preferred Stock are convertible at any time into shares of Class B
Common Stock for no additional consideration on a share-for-share basis.
+ Does not include shares of Class B Common Stock issuable upon conversion of
shares of Preferred Stock.
* Less than 1%.
(1) Shares of Preferred Stock are convertible at any time into shares of Class
B Common Stock and are mandatorily convertible into such shares immediately
upon the closing of the Offerings.
(2) The business address of each of the indicated holders of the Company's
securities is 767 Fifth Avenue, New York, New York 10153.
(3) Andrew Gaspar (through a limited liability company) is the managing member
of LGV, Ronald S. Lauder and Leonard A. Lauder are both members with
substantial ownership interests in LGV, and as such each may be deemed to
beneficially own all of the shares of Class B Common Stock owned by LGV.
Such shares, however, are only included once in the computations of shares
beneficially owned by directors, nominees for director and executive
officers of the group. The managing member of LGV has executed an
irrevocable proxy in favor of Ronald S. Lauder to vote his allocable
interest. Ronald S. Lauder, Leonard A. Lauder and Andrew Gaspar each
disclaim beneficial ownership of some of such shares.
(4) Andrew Gaspar is president of the corporate general partner of RSLAG, and
Ronald S. Lauder is directly and indirectly the owner of a majority of the
limited partnership interests in RSLAG, and, as such, may be deemed to
beneficially own all of the shares of Class B Common Stock and Preferred
Stock owned by RSLAG. Such shares, however, are only included once in the
computations of shares beneficially owned by directors, nominees for
director and executive officers of the group. In addition, Leonard A.
Lauder owns limited partnership interests in RSLAG. The general partner of
RSLAG has executed an irrevocable proxy in favor of Ronald S. Lauder to
vote his partnership interests. Ronald S. Lauder, Leonard A. Lauder and
Andrew Gaspar each disclaim beneficial ownership of some of such shares.
(5) Includes 2,983,226 shares of Class B Common Stock owned by RSLAG and LGV
(see notes 3 and 4), 1,159,261 shares of Class B Common Stock owned
directly by Ronald S. Lauder, 459,900 shares of Class B Common Stock
issuable upon exercise of the Lauder Warrants, 15,703,268 shares of
Preferred Stock owned by RSLAG (see note 4) and 2,404,261 shares of
Preferred Stock owned directly by Ronald S. Lauder.
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
(6) Includes 15,703,268 shares of Preferred Stock owned by RSLAG (see note 4)
and an aggregate of 2,404,261 shares of Class B Common Stock owned by RSLAG
and LGV (see notes 3 and 4).
(7) Such shares are owned by Fisher Investment Partners, L.P., a Delaware
limited partnership, of which Itzhak Fisher is the sole general partner and
the Fisher 1997 Family Trust is the sole limited partner. Mr. Fisher
disclaims beneficial ownership of such shares.
(8) Includes 2,983,226 shares of Class B Common Stock owned by RSLAG and LGV
(see notes 3 and 4), 1,029,381 shares of Class B Common Stock owned
directly by Leonard A. Lauder and 15,703,267 shares of Preferred Stock
owned by RSLAG (see note 4).
(9) Such shares are owned by Schuster Family Partners I, L.P., a New York
limited partnership, of which Jacob Z. Schuster is the sole general partner
and the limited partners of which are certain of Mr. Schuster's children.
Mr. Schuster disclaims beneficial ownership of such shares.
(10) Mr. Piluso's home address is 495 Manhasset Woods Rd., Manhasset, NY 11030.
(11) Consists of 509,580 shares of Class A Common Stock issuable upon exercise
of an equal number of presently exercisable options granted to Mr.
Tarlovsky under the Company's 1995 Plan.
(12) Such shares are owned by Tarlovsky Investment Partners, L.P., a Delaware
limited partnership of which Nir Tarlovsky is the sole general partner and
the Tarlovsky 1997 Family Trust is the sole limited partner. Mr. Tarlovsky
disclaims beneficial ownership of such shares.
(13) Consists of 202,561 shares of Class A Common Stock issuable upon exercise
of an equal number of presently exercisable options granted to Mr.
Bildirici under the Company's 1995 Plan.
(14) Consists of 43,800 shares of Class A Common Stock issuable upon exercise of
an equal number of presently exercisable options granted to Ms. van de
Vrande under the Company's 1995 Plan.
(15) Consists of 31,098 shares of Class A Common Stock issuable upon exercise of
an equal number of presently exercisable options granted to Mr. Hirschhorn
under the Company's 1995 Plan.
(16) The business address of Mr. Sekulow is Westchester Financial Center, 50
Main Street, 10th Floor, White Plains, New York 10606.
(17) Consists of 43,800 shares of Class A Common Stock issuable upon the
exercise of an equal number of presently exercisable options granted to Mr.
Sekulow under the Company's 1995 Plan.
Itzhak Fisher, an officer and director of the Company, and Nir Tarlovsky,
an officer of the Company, on behalf of each of their family trusts, and Nesim
Bildirici, an officer of the Company, are negotiating a transaction pursuant to
which they would sell (i) to Ronald S. Lauder and Leonard A. Lauder, each of
whom is a director of the Company, equally, in the aggregate, shares of Class B
Common Stock (following conversion of shares of their Preferred Stock into Class
B Common Stock) equal to up to 1.84% of the fully-diluted outstanding shares of
Class A Common Stock prior to the Offerings for an aggregate purchase price of
approximately $14.4 million and (ii) to Fred H. Langhammer, a nominee for
director of the Company, shares of Class A Common Stock (following conversion of
shares of their Preferred Stock into Class B Common Stock and conversion of
shares of their Class B Common Stock into Class A Common Stock), at an aggregate
purchase price not to exceed $250,000. The terms of such transaction have not
been finalized and definitive agreements between the parties have not yet been
executed. If terms are eventually agreed upon, and definitive documentation is
executed there can still be no assurance that such transaction will be
consummated.
Charles Piluso is negotiating a transaction pursuant to which he would sell
to Coral Gates, a company beneficially owned by Gustavo Cisneros, a director of
the Company, and his brother, Ricardo Cisneros, from his shareholdings shares of
Class A Common Stock equal to 4% of the fully-diluted outstanding shares of
Class A Common Stock prior to the Offering. Mr. Piluso's remaining shares of
Class A Common Stock would be purchased by Ronald S. Lauder. The aggregate
purchase price for all of Mr. Piluso's shares of Class A Common Stock would be
approximately $30 million.
EMPLOYEE AND AFFILIATE EQUITY INVESTMENTS
In order to align the interests of employees with those of the Company's
shareholders and to reward them and other persons who have been instrumental in
the establishment and development of the Company, the Company has reserved up to
360,000 of shares to be sold in the Offerings for sale to such persons. Senior
executives will be entitled to purchase up to $25,000 of Class A Common Stock
and other employees and 'friends' of the Company will be entitled to purchase up
to $5,000 of Class A Common Stock, in each case at the initial public offering
price. In addition, the non-executive employees and other friends of the Company
will be eligible for one-time bonus plan grants of no more than $500 of Class A
Common Stock based on the initial public offering price.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is qualified
in its entirety by reference to the provisions of the Company's Memorandum of
Association and Bye-Laws, copies of which have been filed with the Commission.
The Company is authorized to issue 20,000,000 shares of Common Stock, which
may be issued as shares of Class A Common Stock, Class B Common Stock or Class C
common shares. The Company is also authorized to issue 20,000,000 shares of
Preferred Stock. The Company has in the past used and intends in the future to
use shares of its capital stock to pay for acquisitions.
Prior to the consummation of the Offerings, the Company will revise its
capital structure, in part to (i) effect a 2.19-for-one stock split, (ii)
increase the number of authorized shares of its Class A Common Stock and Class B
Common Stock to an aggregate 200,000,000, (iii) increase the number of
authorized shares of its Preferred Stock to 30,000,000 and (iv) eliminate the
Company's Class C Common Stock.
CLASS A COMMON STOCK
As of the date of this Prospectus, 1,459,094 shares of Class A Common Stock
had been issued. The holders of the Class A Common Stock are entitled to one
vote per share and are entitled to vote as a single class together with the
holders of the Class B Common Stock and the Preferred Stock on all matters
subject to shareholder approval, except that the holders of the Class A Common
Stock will vote as a separate class on any matter requiring class voting by The
Companies Act 1981 of Bermuda. The holders of the outstanding shares of Class A
Common Stock are entitled to receive dividends as and when declared by the Board
of Directors, pari passu with the holders of the Class B Common Stock, out of
funds legally available therefor after the payment of any dividends declared but
unpaid on any shares of Preferred Stock then outstanding. The holders of the
Class A Common Stock have no preemptive or cumulative voting rights and no
rights to convert their shares of Class A Common Stock into any other
securities. On liquidation, dissolution or winding up of the Company, the
holders of Class A Common Stock are entitled to receive, pari passu with the
holders of Class B Common Stock, pro rata the net assets of the Company
remaining after preferential distribution to holders of Preferred Stock and the
payment of all creditors and liquidation preferences, if any.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Class A Common Stock
will be American Stock Transfer & Trust Company.
CLASS B COMMON STOCK
As of the date of this Prospectus, there were seven holders of Class B
Common Stock and 10,528,887 shares of Class B Common Stock were issued and
outstanding. The holders of the Class B Common Stock are entitled to 10 votes
per share and are entitled to vote as a single class together with the holders
of the Class A Common Stock and the Preferred Stock on all matters subject to
shareholder approval, except that the holders of the Class B Common Stock vote
as a separate class on any matter requiring class voting by The Companies Act
1981 of Bermuda. The holders of the outstanding shares of Class B Common Stock
are entitled to receive dividends as and when declared by the Board of
Directors, pari passu with the holders of Class A Common Stock, out of funds
legally available therefor. The holders of the Class B Common Stock can convert
their shares of Class B Common Stock on a share-for-share basis into Class A
Common Stock. Shares of Class B Common Stock may be transferred only to other
original holders of Class B Common Stock or to members of the family of the
original holder by gift, devise or otherwise through laws of inheritance,
descent, distribution or to a trust established by the holder for the holder's
family members, to corporations the majority of beneficial owners of which are
or will be owned by the holders of Class B Common Stock and from corporations or
partnerships which are the holders of Class B Common Stock, to their
shareholders or partners, as the case may be (each a 'Permitted Transferee').
Any other transfer of Class B Common Stock is void, although the Class B Common
Stock may be converted at any time into Class A Common Stock on a one to one
basis and then sold, subject to the conditions and restrictions of Rule 144.
On liquidation or winding up of the Company, the holders of the Class B
Common Stock are entitled to share ratably, pari passu with the holders of Class
A Common Stock, the assets remaining after
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payment of all debts and other liabilities and after distribution in full of the
preferential amounts to be distributed to the holders of Preferred Stock.
PREFERRED STOCK
As of the date of this Prospectus, 20,244,066 shares of Preferred Stock
were outstanding and there were six holders of record of Preferred Stock.
Dividends accrue on the Preferred Stock on a cumulative basis at a rate of 8% of
the liquidation preference amount per share per annum. Cumulative dividends are
not payable and are to be deemed cancelled and waived upon conversion of the
shares of Preferred Stock.
Each holder of Preferred Stock is entitled to the number of votes per share
equal to the number of votes to which the shares of Class B Common Stock into
which each share of Preferred Stock is convertible would be entitled. Holders of
the Preferred Stock vote together with the holders of Class A Common Stock and
Class B Common Stock as a single class on all matters subject to shareholder
approval, except that the holders of the Preferred Stock vote as a separate
class on any matter requiring class voting by the Companies Act 1981 of Bermuda.
In the event of the liquidation, dissolution or winding up of the Company,
holders of Preferred Stock are entitled to receive $456.62 per share (to the
extent a share is paid up) plus an amount per share equal to the accrued and
unpaid dividends thereon. Subject to Board approval, the liquidation preference
on the Preferred Stock will be reduced to $.457 per share. Each share of
Preferred Stock is convertible into one share of Class B Common Stock at the
option of the holder, and each share of Preferred Stock will be automatically
converted into one share of Class B Common Stock on a one-for-one basis upon the
closing of the Offerings.
WARRANTS
SHAREHOLDER WARRANTS
As consideration for the Shareholders Standby Facility and Mr. Lauder's
continuing guarantee of the Revolving Credit Facility, Mr. Lauder received, in
the aggregate, warrants to purchase 459,900 shares of Class B Common Stock, of
the Company. The exercise price, exercise period and other terms of the Lauder
Warrants are substantially the same as the terms of the Warrants, other than
with respect to the class of stock which will be issued upon their exercise. The
Warrants and the Lauder Warrants become exercisable beginning on October 3,
1997.
WARRANTS ISSUED IN DEBT OFFERING
The Company issued an aggregate of 300,000 Warrants to the purchasers of
the units in the Debt Offering. The Warrants were issued pursuant to a Warrant
Agreement (the 'Warrant Agreement'), between the Company and The Chase Manhattan
Bank, as the warrant agent (the 'Warrant Agent').
Each Warrant is evidenced by a certificate which entitles the holder
thereof to purchase 3.975 shares of Class A Common Stock from the Company at an
exercise price of $.00457 per share, subject to adjustment as provided in the
Warrant Agreement. The Warrants may be exercised at any time beginning on
October 3, 1997 and ending prior to the close of business on October 3, 2007.
Warrants that are not exercised by such date will expire.
The aggregate number of shares of Class A Common Stock issuable upon
exercise of the Warrants is equal to approximately 2.7% of the outstanding
shares of Class A Common Stock, on a fully diluted basis, as of the date of this
Prospectus, giving effect to the number of shares of Class A Common Stock
anticipated to be sold in the Offerings.
CERTAIN TERMS
The Warrant Agreement contains provisions (to which there are certain
exceptions) adjusting the exercise price and the number of shares of Class A
Common Stock or other securities issuable upon exercise of a Warrant in the
event of (i) a division, consolidation or reclassification of the shares of
Class A Common Stock, (ii) the issuance of rights, options, warrants or
convertible or exchangeable securities to all holders of shares of Class A
Common Stock entitling such holders to subscribe for or purchase shares of Class
A Common Stock at a price per share which is lower than the then current value
per share of Class A Common Stock, subject to certain exceptions, (iii) the
issuance of shares of
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Class A Common Stock at a price per share that is lower than the then current
value of such shares, except for issuances in connection with an acquisition,
merger or similar transaction with a third party, (iv) certain distributions to
all holders of shares of Class A Common Stock of evidences of indebtedness or
assets and (v) in the discretion of the Company's Board of Directors, in certain
other circumstances.
In addition, the Warrant Agreement contains provisions designed to protect
holders of Warrants in the event of a consolidation, merger or sale of assets.
The Warrant Agreement also provides that the shares of Class A Common Stock
exercisable upon conversion of the Warrants must be registered for sale within
180 days after an initial public offering of the Class A Common Stock and that
holders of Warrants (and shares of Class A Common Stock issued upon the exercise
of Warrants) may participate in any public offering of Class A Common Stock in
which any shareholder sells shares and in priority to all selling shareholders.
ANTI-TAKEOVER PROTECTIONS
The voting provisions of the Class A Common Stock, Class B Common Stock and
the Preferred Stock could substantially impede the ability of one or more
shareholders (acting in concert) to acquire sufficient influence over the
election of directors and other matters to effect a change in control or
management of the Company. As a result, such provision may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in such shareholder's best interest,
including attempts that might result in a premium over the market price for the
Class A Common Stock held by shareholders.
CERTAIN PROVISIONS OF BERMUDA LAW
The Company has been designated as a non-resident under the Exchange
Control Act of 1972 (the 'Control Act') by the Bermuda Monetary Authority whose
permission for the issuance of shares of Class A Common Stock has been obtained.
This designation allows the Company to engage in transactions in currencies
other than the Bermuda dollar.
The transfer of shares of Class A Common Stock between persons regarded as
resident outside Bermuda for exchange control purposes and the issuance of such
shares after the completion of the Offerings to or by such persons may be
effected without specific consent under the Control Act and regulations
thereunder. Issues and transfers of shares involving any person regarded as
resident in Bermuda for exchange control purposes require specific prior
approval under the Control Act.
Non-Bermuda owners of shares of Class A Common Stock are not restricted in
the exercise of the rights to hold or vote their shares. Because the Company has
been designated as a non-resident for Bermuda exchange control purposes there
are no restrictions on its ability to transfer funds in and out of Bermuda or to
pay dividends to United States residents who are holders of Class A Common
Stock, other than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations, partnerships or individuals. In the case of an applicant
acting in a special capacity (for example as a trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such trust.
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an 'exempted company', the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudians but,
as an exempted company, the Company may not participate in certain business
transactions including: (1) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for
terms of not more than 21 years); (2) the taking of mortgages on land in Bermuda
to secure an amount in excess of $50,000 without the consent of the Minister of
Finance of Bermuda; (3) the acquisition of securities created or issued by, or
any interest in, any local company or business, other than certain types of
Bermuda government securities or another 'exempted' company, partnership or
other corporation resident in Bermuda but incorporated abroad; or (4) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda or with the permission of, or
under a license granted by, the Minister of Finance of Bermuda.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK REVOLVING CREDIT FACILITY
On October 5, 1995, The Chase Manhattan Bank, N.A. (the 'Bank') extended a
$10 million revolving credit facility to Ronald S. Lauder, Chairman of the Board
of the Company and its largest and controlling shareholder. On June 26, 1996,
the Bank replaced the original Revolving Credit Facility, which had been
increased to $25 million, by extending a $40 million Revolving Credit Facility
directly to the Company which was increased to $50 million in August 1996.
Pursuant to the Subordinated Shareholder Loan, $35 million of this facility was
repaid and the Revolving Credit Facility was reduced to $7.5 million. The
remaining outstanding amounts under the Revolving Credit Facility were repaid
with a portion of the proceeds of the Shareholder Equity Investment. The Company
intends to maintain the Revolving Credit Facility and, accordingly, such amounts
may be subsequently reborrowed. Mr. Lauder has guaranteed the Company's
obligations under the Revolving Credit Facility. The Revolving Credit Facility
accrues interest on all amounts outstanding at the Company's option at either
(i) the Bank's publicly announced prime rate per annum or (ii) LIBOR plus 1% per
annum, with such interest rate to be determined by the Company. As of December
31, 1996, the full amount of the Revolving Credit Facility was available to the
Company. The Revolving Credit Facility is payable on demand or is otherwise due
and payable by the Company on June 30, 1998.
VENDOR FINANCING
Ericsson has provided to certain of the Company's subsidiaries an aggregate
of approximately $50 million in financing commitments to fund the purchase of
additional switches and related equipment. At June 30, 1997, approximately $30.2
million of this facility was available. Borrowings from this equipment vendor
will accrue interest at a rate of LIBOR plus either 5.25% or 4.5% depending on
the equipment purchased.
SHAREHOLDER STANDBY FACILITY
Ronald S. Lauder, Chairman of the Board of the Company and its largest and
controlling shareholder, has agreed, upon the Company's request, to provide (or
arrange for a bank to provide) the Company with the $35.0 million subordinated
Shareholder Standby Facility. If the Shareholder Standby Facility is provided by
a bank, Mr. Lauder will personally guarantee the Company's obligations under the
facility up to $35.0 million. Under the terms of the Indenture, the Company may
borrow, repay and reborrow any amounts under the Shareholder Standby Facility at
any time and from time to time. The Shareholder Standby Facility will expire
upon the closing of the Offerings.
DESCRIPTION OF THE NOTES
GENERAL
The Company and the Note Issuer (together, the 'Issuers') issued $300.0
million of 12 1/4% Senior Notes pursuant to the Indenture among the Issuers and
The Chase Manhattan Bank, as trustee (the 'Trustee'). On May 22, 1997, the
Company consummated an offer (the 'Exchange Offer') to exchange the Notes issued
in the Debt Offering for $300 million of Notes that had been registered under
the Securities Act.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $300.0 million and
will mature on October 3, 2006. Interest on the Notes accrues at 12 1/4% per
annum and is payable semiannually in arrears on May 15 and November 15 of each
year. Interest is computed on the basis of a 360-day year comprised of 12 30-day
months. At the closing of the Debt Offering, the Company used $102.8 million of
the net proceeds of the Debt Offering to purchase a portfolio of securities,
initially consisting of U.S. government securities (including any securities
substituted in respect thereof, the 'Pledged Securities'), to pledge as security
for payment of interest on the principal of the Notes. Proceeds from the Pledged
Securities may be used by the Company to make interest payments on the Notes
through November 15, 1999. The Pledged Securities are being held by the Trustee
pending disbursement. The Company is under no obligation to escrow additional
securities.
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RANKING
The Notes are unsecured senior obligations of the Issuers, rank pari passu
in right of payment with all existing and future senior obligations of the
Issuers, and rank senior in right of payment to all future subordinated
obligations of the Issuers.
REDEMPTION
The Notes are not redeemable at the Company's option prior to November 15,
2001. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the 12-month period beginning
on November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------------------------- -----------
<S> <C>
2001..................................................................................... 106.125%
2002..................................................................................... 103.0625%
2003 and thereafter...................................................................... 100.000%
</TABLE>
In addition, at any time on or before November 15, 1999, the Company may
redeem up to $90.0 million of the original aggregate principal amount of the
Notes with the net proceeds of a sale of common equity at a redemption price
equal to 112.25% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of redemption, provided that at least
$210.0 million of aggregate principal amount of Notes remains outstanding
immediately after such redemption, and such redemption occurs within 180 days of
the related sale of common equity. See 'Use of Proceeds.'
COVENANTS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, pay dividends or make certain other restricted
payments, incur certain liens to secure pari passu or subordinated indebtedness,
engage in any sale and leaseback transaction, sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company,
enter into certain transactions with affiliates, or incur indebtedness that is
subordinated in right of payment to any senior indebtedness and senior in right
of payment to the Notes. The Indenture permits, under certain circumstances, the
Company's subsidiaries to be deemed unrestricted subsidiaries and thus not
subject to the restrictions of the Indenture.
EVENTS OF DEFAULT
The Indenture contains standard events of default, including (i) defaults
in the payment of principal, premium or interest, (ii) defaults in the
compliance with covenants contained in the indenture, (iii) cross defaults on
more than $10 million of other indebtedness, (iv) failure to pay more than $10
million of judgments that have not been stayed by appeal or otherwise and (v)
the bankruptcy of the Company or certain of its subsidiaries.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 8,657,094 shares of
Class A Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). This amount does not include (i) 2,792,888 shares of
Class A Common Stock issuable upon the exercise of an equal number of options
granted by the Company's Compensation Committee to certain employees and non-
employee directors of the Company under the 1995 Plan (1,333,327 of which are
presently exercisable) and stock options expected to be issued in connection
with the exercise of certain Roll-Up Rights, (ii) 2,750,000 shares of Class A
Common Stock to be reserved for issuance pursuant to future option grants under
the Company's proposed stock option and compensation plans, (iii) 30,772,953
shares of Class A Common Stock issuable upon conversion of shares of Class B
Common Stock (which includes shares of Class B Common Stock issuable upon
conversion of the Preferred Stock); Shares of Class B Common Stock are
convertible at any time into shares of Class A Common Stock for no additional
consideration on a share-for-share basis, and shares of Preferred Stock are
convertible at any time into shares of Class B Common Stock for no additional
consideration on a share-for-share basis,
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(iv) 459,900 shares of Class A Common Stock issuable upon the conversion of the
Class B Common Stock issuable on exercise of the Lauder Warrants, (v) 1,192,445
shares of Class A Common Stock issuable upon the exercise at any time beginning
October 3, 1997 and ending prior to the close of business on October 3, 2007, of
an aggregate of 300,000 Warrants by purchasers of units in the Debt Offering,
(vi) shares of Class A Common Stock issuable upon conversion of the 459,900
shares of Class B Common Stock issuable upon the exercise of the Lauder
Warrants, and (vii) 307,884 shares of Class A Common Stock which are expected to
be issued to the Minority Interest holders upon exercise of their Roll-Up.
Rights. Of these shares, the 7,200,000 shares of Class A Common Stock sold in
the Offerings will be freely transferable and tradeable without restriction or
further registration under the Securities Act of 1933 except for any shares
purchased by any 'affiliate', as defined below, of the Company which will be
subject to the resale limitations in Rule 144 adopted under the Securities Act
of 1933. All the remaining shares of Class A Common Stock held by existing
shareholders are 'restricted' securities within the meaning of Rule 144 and may
only be sold in the public market pursuant to an effective registration
statement under the Securities Act of 1933 or pursuant to an applicable
exemption from registration, including Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have
beneficially owned shares for at least one year, including an 'affiliate', is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding number of shares of Class A
Common Stock of the Company or the average weekly trading volume in shares of
Class A Common Stock during the four calendar weeks preceding the filing of the
required notice of such sale. Sales under Rule 144 may also be subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person (or persons whose shares
are required to be aggregated) who is not deemed to have been an affiliate of
the Company during the three months preceding a sale, and who has beneficially
owned shares within the definition of 'restricted securities' under Rule 144 for
at least two years is entitled to sell such shares under Rule 144 without regard
to the volume limitation, manner of sale provisions, notice requirements or
public information requirements of Rule 144. Affiliates continue to be subject
to such limitations. As defined in Rule 144, an 'affiliate' of an issuer is a
person that directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer.
Upon completion of the Offerings, up to approximately 32,230,047 shares of
Class A Common Stock, which are beneficially held by certain existing
shareholders of the Company, may be eligible for sale under Rule 144. The
Company and certain directors, officers and shareholders will agree that,
subject to certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
the Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any securities of the Company or which are convertible into or exchangeable
for shares of Class A Common Stock offered in connection with the Offerings. See
'Underwriting.'
No prediction can be made as to the effect, if any, that future sales of
Class A Common Stock, or the availability of shares of Class A Common Stock for
future sale, will have on the market price of the Class A Common Stock
prevailing from time to time. Sales of substantial numbers of shares of Class A
Common Stock, pursuant to a registration statement, Rule 144 or otherwise, or
the perception that such sales may occur, could adversely affect the prevailing
market price of the Class A Common Stock. See 'Risk Factors--No Prior Market;
Possible Volatility of Stock Price' and '--Shares Eligible for Future Sale.'
The Company has granted to Minority Interestholders of ITG, RSL
Netherlands, RSL Austria, RSL Italy, Delta Three, RSL Latin America, and
PrimeCall Europe and officers of certain of its other subsidiaries Roll Up
Rights which allow the Minority Interestholders to exchange their shares or
interests in such entities for shares of Class A Common Stock upon the
occurrence of, and at certain times following, the Offerings. Based upon
agreements with the Minority Interestholders of RSL Austria, RSL Italy, Delta
Three, PrimeCall Europe, RSL Netherlands and RSL Latin America, the number of
shares of Class A Common Stock to be exchanged upon the exercise of a Roll-Up
Right in connection with the Offerings will be determined at the pricing of the
Offerings based on an agreed upon valuation of such Minority Interestholder's
shares or interests. If a Roll-Up Right is exercised by a Minority
Interestholder in RSL Austria, RSL Italy or Delta Three, the Company may, in its
sole discretion (and
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only under certain circumstances), choose to exchange cash for the Minority
Interestholder's shares or interests rather than the Company's Class A Common
Stock.
All of the Roll-Up Rights are currently exercisable in connection with the
Offerings, with the exception of the Roll-Up Rights held by the Minority
Interestholder of RSL Italy. The Minority Interestholders of RSL Austria, Delta
Three, RSL Latin America and PrimeCall Europe have waived their rights to
exchange their interests in the relevant subsidiaries on the occurrence of the
Offerings, but have maintained their future Roll-Up Rights. One Minority
Interestholder of ITG has agreed to waive its Roll-Up Rights and exchange its
shares of ITG for a combination of approximately 140,125 shares (based upon an
assumed initial offering price of $20.50 per share) of Class A Common Stock and
$2,179,273 cash. The Company currently is negotiating with the other Minority
Interestholders of ITG to acquire their interests in ITG for approximately $22.7
million in the aggregate. The Minority Interestholder of RSL Netherlands has
agreed to exchange his 25% interest in RSL Netherlands for a combination of
approximately 167,759 shares (based upon an assumed initial offering price of
$20.50 per share) of Class A Common Stock and $3,095,156 cash.
The Company also has or intends to enter into agreements with certain
Minority Interestholders of RSL Europe and RSL USA pursuant to which the Company
may grant to such Minority Interestholders, among other rights, options to
acquire shares of Class A Common Stock in exchange for all or some of their
interests in the relevant subsidiaries.
Additionally, the Company has granted to a number of Minority
Interestholders certain registration rights with respect to shares of Class A
Common Stock acquired by the Minority Interestholders pursuant to an exercise of
their Roll-Up Rights. If, at any time after the consummation of the Offerings
or, in the case of RSL Netherlands, ITG and PrimeCall Europe, at least 12 months
after consummation of the Offerings, the Company shall file with the Commission
a registration statement on Form S-3, which registration statement shall include
shares being sold by or for the account of shareholders of the Company, the
Company shall, at the option of Minority Interestholders who are then registered
owners of Class A Common Stock and subject to certain limitations, register all
or any portion of their Class A Common Stock concurrently with the registration
of such other securities. In addition, certain Minority Interestholders in RSL
Latin America have demand registration rights on or after the Company becomes
eligible to file a registration statement on Form S-3 under the Securities Act.
REGISTRATION RIGHTS AGREEMENT
Ronald S. Lauder, the Company's Chairman and largest and controlling
shareholder, Itzhak Fisher, President and Chief Executive Officer of the
Company, the other holders of Class B Common Stock, Coral Gates and the Company
intend to enter into a Registration Rights Agreement (the 'Registration Rights
Agreement'), pursuant to which Ronald S. Lauder will be granted three demand
registration rights exercisable at any time after 180 days after consummation of
the Offerings and Itzhak Fisher will be granted two demand registration rights
exercisable after termination of his employment with the Company, other than as
a result of a termination by the Company for Cause (as defined) or a termination
by Itzhak Fisher without Good Reason (as defined) (a 'Qualified Severance
Event'). Ronald S. Lauder and Itzhak Fisher, such holders of Class B shares,
Coral Gates, and such additional holders of Class A Common Stock as Mr. Lauder
and Mr. Fisher may jointly designate to the Company will have an unlimited
number of piggyback registration rights that will allow such holders to include
their shares of Class A Common Stock in any registration statement filed by the
Company, subject to certain limitations. Prior to the occurrence of a Qualified
Severance Event, Itzhak Fisher may not register any shares pursuant to his
piggyback registration rights if, after giving effect to the sale of such
shares, Mr. Fisher and his family members and certain entities controlled by
family members ('Family Members') would hold less than 70% of the shares of
Class A Common Stock held as of the closing date of the Offerings. Ronald S.
Lauder, Itzhak Fisher, and the other holders of Class B Common Stock, may assign
their rights under the Registration Rights Agreement to their respective Family
Members and entities controlled by Family Members, Coral Gates and Messrs.
Cisneros may assign their rights to entities owned by Messrs. Cisneros, and all
such holders may assign their rights to lenders to whom shares of Class A Common
Stock may be pledged.
The Company will pay all expenses (other than legal expenses, underwriting
discounts and commissions of the selling stockholders and taxes payable by the
selling stockholders) in connection with any registration pursuant to the
exercise of demand registration rights and piggyback registration rights. The
Company will also agree to indemnify such persons against certain liabilities,
including liabilities arising under the Securities Act.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Rosenman & Colin LLP, U.S. counsel to the Company, the
following correctly describes certain material U.S. federal income tax
consequences to the Company and its subsidiaries and to the ownership and
disposition of Class A Common Stock by an initial U.S. and non-U.S. shareholder.
For purposes of this discussion, the term 'U.S. shareholder' includes (i) a U.S.
citizen or resident, (ii) a U.S. corporation or other U.S. entity taxable as a
corporation, (iii) a trust if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust, and (iv) an estate that is subject to U.S. federal income tax on its
income regardless of its source. A 'non-U.S. shareholder' is any shareholder
other than a U.S. shareholder. The discussion is based upon provisions of the
U.S. Internal Revenue Code of 1986, as amended (the 'Code'), its legislative
history, judicial authority, current administrative rulings and practice, and
existing and proposed Treasury Regulations, all as in effect and existing on the
date hereof. Legislative, judicial or administrative changes or interpretations
may be forthcoming that could alter or modify the conclusions set forth below,
possibly on a retroactive basis, which could adversely affect a holder of Class
A Common Stock. This discussion assumes that such Class A Common Stock will be
held as capital assets (as defined in Section 1221 of the Code) by the holders
thereof.
The following discussion generally does not address the tax consequences to
a person who holds (or will hold), directly or indirectly, shares in the Company
giving the holder the right to exercise 10% or more of the total voting power of
the Company's outstanding stock (a '10% Shareholder'). 10% Shareholders are
advised to consult their own tax advisors regarding the tax considerations
incident to an investment in the Class A Common Stock. In addition, this
discussion does not purport to deal with all aspects of U.S. federal income
taxation that might be relevant to particular holders in light of their personal
investment circumstances or status, nor does it discuss the U.S. federal income
tax consequences to certain types of holders that may be subject to special
rules under the U.S. federal income tax laws, such as financial institutions,
insurance companies, dealers in securities or foreign currency, tax-exempt
organizations, foreign corporations or nonresident alien individuals or persons
whose functional currency is not the U.S. dollar. Moreover, the effect of any
applicable state, local or foreign or other tax laws is not discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH PURCHASER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
In general, the Company and its foreign (non-U.S.) subsidiaries will be
subject to U.S. federal income tax only to the extent they have income which has
its source in the United States or is effectively connected with a U.S. trade or
business. Except with respect to interest on pledged securities, it is
anticipated that the Company and its foreign subsidiaries will derive
substantially all of their income from foreign sources and that none of their
income will be effectively connected with a U.S. trade or business. As a result,
the Company and its foreign subsidiaries should not be subject to material U.S.
federal income tax. On the other hand, the domestic (U.S.) subsidiaries of the
Company will be subject to U.S. federal income tax on their worldwide income
regardless of its source (subject to reduction by allowable foreign tax
credits), and distributions by such U.S. subsidiaries to the Company or its
foreign subsidiaries generally will be subject to U.S. withholding taxes.
TAXATION OF U.S. SHAREHOLDERS
A U.S. shareholder receiving a distribution on Class A Common Stock
generally will be required to include such distribution in gross income as a
taxable dividend to the extent such distribution is paid from the current or
accumulated earnings and profits of the Company as determined under U.S. federal
income tax principles. Distributions in excess of the earnings and profits of
the Company generally will
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first be treated, for U.S. federal income tax purposes, as a nontaxable return
of capital to the extent of the U.S. shareholder's basis in the Class A Common
Stock and then as gain from the sale or exchange of a capital asset. Dividends
received on the Class A Common Stock by U.S. corporate shareholders will not be
eligible for the corporate dividends received deduction.
A U.S. shareholder will be entitled to claim a foreign tax credit with
respect to income received from the Company only for foreign taxes (such as
withholding taxes), if any, imposed on dividends paid to such U.S. shareholder,
and not for taxes, if any, imposed on the Company or on any entity in which the
Company has made an investment. It is not anticipated, however, under current
Bermuda law that any such withholding taxes would be imposed by Bermuda on
distributions made by the Company to a U.S. shareholder. See 'Certain Bermuda
Tax Considerations.' For so long as the Company is a 'U.S.-owned foreign
corporation,' distributions with respect to the Class A Common Stock that are
taxable as dividends generally will be treated as foreign source passive income
(or, for U.S. shareholders that are 'financial service entities' as defined in
the Treasury Regulations, foreign source financial services income) or U.S.
source income for U.S. foreign tax credit purposes, in proportion to the
earnings and profits of the Company in the year of such distribution allocable
to foreign and U.S. sources, respectively. For this purpose, the Company will be
treated as a U.S.-owned foreign corporation so long as stock representing 50
percent or more of the voting power or value of the Company is owned, directly
or indirectly, by 'U.S. shareholders.'
With certain exceptions, gain or loss on the sale or exchange of the Class
A Common Stock will be treated as U.S. source capital gain or loss. Such capital
gain or loss will be long-term capital gain or loss if the U.S. shareholder has
held the Class A Common Stock for more than one year at the time of the sale or
exchange. (Recently enacted legislation reduces the tax rate of long-term
capital gain applicable to non-corporate taxpayers from the sale of capital
assets held for more than 18 months.)
Various provisions contained in the Code impose special taxes in certain
circumstances on U.S. or foreign corporations and their stockholders. The
following is a summary of certain provisions which could have an adverse impact
on the Company and the U.S. shareholders.
PERSONAL HOLDING COMPANIES
A corporation that is a personal holding company ('PHC') is subject to a
39.6% tax on its undistributed personal holding company income (generally, U.S.
taxable income with certain adjustments, reduced by distributions to
shareholders). A corporation that is neither a foreign personal holding company
nor a passive foreign investment company, discussed below, generally is a PHC if
(i) more than 50% of the stock of which measured by value is owned, directly or
indirectly, by five or fewer individuals (without regard to their citizenship or
residence) and (ii) it receives 60% or more of gross income, as specifically
adjusted, form certain passive sources. For purposes of this gross income test,
a foreign corporation generally only includes taxable income derived from U.S.
sources or income that is effectively connected with a U.S. trade or business.
More than 50% of the outstanding shares of the Company and each of its
corporate subsidiaries, by value, is currently owned, directly or indirectly, by
five or fewer individuals. It is expected that this will remain the case on a
going forward basis. Since it is anticipated that the Company will derive
substantially all of its U.S. source gross income from interest on its pledged
securities, which the Company believes may constitute undistributed personal
holding company income for PHC purposes, the Company may be subject to PHC tax
with respect to a taxable year in which the Company is not treated as either a
foreign personal holding company or a passive foreign investment company and
during which the Company has held or continues to hold pledged securities.
However, if any of the Company's foreign corporate subsidiaries were to derive
any income from U.S. sources, less than 50% of any such income can be expected
to be from passive sources. Accordingly, the Company believes that none of such
subsidiaries will satisfy the foregoing income test and therefore none of them
will be classified as a PHC. In addition, since it is anticipated that the
Company's U.S. subsidiaries will derive most or all of their income from
non-passive sources, the Company further believes that none of such subsidiaries
will satisfy the foregoing income test and, thus, none of them will be
classified as a PHC. The Company intends to manage its affairs and the affairs
of its subsidiaries so as to attempt to avoid or
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minimize the imposition of the PHC tax, to the extent such management of its
affairs is consistent with its other business goals.
FOREIGN PERSONAL HOLDING COMPANIES
In general, if the Company or any of its foreign corporate subsidiaries
were to be classified as a FPHC the undistributed foreign personal holding
company income (generally, taxable income with certain adjustments) of the
Company or such subsidiary would be imputed to all of the U.S. shareholders who
were deemed to hold the Company's stock or the stock of such subsidiary on the
last day of its taxable year. Such income would be taxable to such persons as a
dividend, even if no cash dividend were actually paid. U.S. shareholders who
dispose of their Class A Common Stock prior to such date generally would not be
subject to U.S. federal income tax under these rules. If the Company were to
become an FPHC, U.S. shareholders who acquire Class A Common Stock from
decedents would, in certain circumstances, be denied the step-up of the income
tax basis for such Class A Common Stock to fair market value at the date of
death which would otherwise have been available and instead would have a tax
basis equal to the lower of the fair market value or the decedent's basis.
A foreign corporation will be classified as an FPHC if (i) five or fewer
individuals, who are U.S. citizens or residents, directly or indirectly, own
more than 50% of the corporation's stock (measured either by voting power or
value) (the 'stockholder test') and (ii) the corporation receives at least 60%
of its gross income (regardless of source), as specifically adjusted, from
certain passive sources (the 'income test'). After a corporation becomes an
FPHC, the income test percentage for each subsequent taxable year is reduced to
50%.
Five or fewer individuals who are U.S. citizens or residents currently own
a beneficial interest of more than 50% of the voting power of the outstanding
Class A Common Stock of the Company and its foreign corporate subsidiaries for
purposes of the FPHC rules, and the Company believes that the stockholder test
will likely be met on a going forward basis. The Company believes, however, that
neither the Company nor its foreign corporate subsidiaries, once profitable,
should be classified as a FPHC because the Company and each of the subsidiaries
should not then satisfy the foregoing income test.
While the Company currently believes that neither it nor any of its foreign
corporate subsidiaries would be classified as an FPHC once profitable, it is
possible that the Company or one or more of such subsidiaries would meet the
foregoing income test in a given taxable year and would qualify as a FPHC for
that year. If the Company concludes that it or any of its foreign corporate
subsidiaries would be classified as an FPHC for any profitable taxable year, the
Company intends to manage its affairs and the affairs of the subsidiaries so as
to attempt to avoid or minimize having income imputed to the U.S. shareholders
under these rules, to the extent such management of its affairs is consistent
with its other business goals.
PASSIVE FOREIGN INVESTMENT COMPANIES
If 75% or more of the gross income of the Company (taking into account
under an income 'look-through' rule, the Company's pro rata share of the gross
income of any company of which the Company is considered to own 25% or more of
the stock by value) in a taxable year is passive income, or if at least 50% of
the average percentage of assets of the Company (also taken into account, under
an asset 'look-through' rule, the pro rata share of the assets of any company of
which the Company is considered to own 25% or more of the stock by value) in a
taxable year produce or are held for the production of passive income, the
Company would be classified as a PFIC. Passive income for purposes of the PFIC
rules generally includes dividends, interest and other types of investment
income and would include amounts derived by reason of the investment of a
portion of the funds raised in the Offerings. If the Company were a PFIC at any
time during a U.S. shareholder's holding period, each U.S. shareholder
(regardless of the percentage of stock owned) would, upon certain distributions
by the Company and upon disposition of the Class A Common Stock at a gain, be
liable to pay tax plus an interest charge. The tax would be determined by
allocating such distribution or gain ratably to each day of the U.S.
shareholder's holding period for the Class A Common Stock. The amount allocated
to years prior to the taxable year of the distribution or disposition would be
taxed at the highest marginal rates for
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ordinary income for such years (if the Company was a PFIC during such years).
The U.S. shareholder would also be liable for interest on the amount of such
additional tax due with respect to such prior years in which the Company was a
PFIC. The amount allocated to the current taxable year and any non-PFIC years
would be taxed in the same manner as other ordinary income earned in the current
taxable year.
Under certain circumstances, if the Company were to become a PFIC,
distributions and dispositions in respect of shares in a direct or indirect
foreign corporate subsidiary of the Company may be attributed in whole or in
part to a U.S. investor, and such U.S. investor may be taxed under the PFIC
rules with respect to such distributions or dispositions.
If the Company were to become a PFIC, U.S. shareholders who acquire Class A
Common Stock from decedents could be denied the step-up of the income tax basis
for such Class A Common Stock to fair market value at the date of death which
would otherwise have been available and instead could have a tax basis equal to
the lower of the fair market value of the decedent's basis.
The above results may be eliminated (at least in part) if a U.S.
shareholder permanently elects to treat the Company as a 'qualified electing
fund' ('QEF') for U.S. federal income tax purposes. A stockholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary income of the QEF as ordinary income and a pro rata share of the net
capital gain of the QEF as long-term capital gain. If a U.S. shareholder in a
PFIC has made a QEF election in a year subsequent to the year in which such
investor acquired an interest in the PFIC, the U.S. shareholder must agree in
the year of such election to either (1) recognize gain equal to such U.S.
shareholder's unrealized appreciation in such stock or (2) assuming the Company
is a controlled foreign corporation (discussed below) include in income as a
dividend his pro rata share of the Company's earnings and profits up to the
first day of the tax year for which such election was made (in each case subject
to the tax consequences discussed above for non-QEF PFICs) so that thereafter
any additional gain on the sale of such stock in the future generally will be
characterized as capital gain and the denial of basis step-up at death and the
interest charge (as well as the other PFIC tax consequences described above)
would not continue to apply.
Effective for taxable years beginning after December 31, 1997, a U.S.
shareholder of a PFIC may, in lieu of making a QEF election, also avoid the
above results by electing to 'mark-to-market' the PFIC stock as of the close of
each taxable year so long as such stock is 'marketable'. The Company expects
that the Class A Common Stock will be 'marketable' for this purpose. Under this
election, the U.S. shareholder will include in income each year as ordinary
income, an amount equal to the excess, if any, of the fair market value of the
stock at the close of the year over such U.S. shareholders adjusted basis. If
the stock declines in value during any year, such U.S. shareholder will be
entitled to a deduction from ordinary income the excess of such U.S.
shareholder's adjusted basis over the stock's value at the close of such year
but only to the extent of net mark-to-market gains previously included in
income. Any gain or loss on the sale of the stock of the PFIC will be ordinary
income or ordinary loss (but only to the extent of the previously included net
mark-to-market gains). In the case of a U.S. shareholder who makes this
mark-to-market election for PFIC stock as to which a QEF election was not in
effect during his period of ownership, a coordination rule applies to ensure
that the shareholder does not avoid the interest charge for periods prior to
this election. An election to mark-to-market applies to the year for which the
election is made and following years unless the PFIC stock ceases to be
marketable or the Internal Revenue Service consents to the revocation of such
election.
The Company intends to manage its business and the businesses of the
subsidiaries so as to attempt to avoid PFIC status. The Company will notify U.S.
shareholders in the event that it concludes that it will be treated as a PFIC
for any taxable year to enable U.S. shareholders to consider whether to elect to
treat the Company as a QEF for U.S. federal income tax purposes or to make the
mark-to-market election. In addition, the Company will, at the request of a U.S.
shareholder who elects to have the Company treated as a QEF, comply with the
applicable information reporting requirements.
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CONTROLLED FOREIGN CORPORATIONS
If 10% Shareholders, who are also U.S. persons, own, in the aggregate,
directly or indirectly, more than 50% (measured by voting power or value) of the
shares of a foreign corporation, that foreign corporation would be a controlled
foreign corporation ('CFC'). If a foreign corporation were characterized as a
CFC, then some portion of the undistributed income of the foreign corporation
may be imputed to such 10% Shareholders, and some portion of the gains
recognized by such 10% Shareholders on the disposition of their shares in the
foreign corporation (which would otherwise qualify for capital gains treatment)
may be converted into ordinary dividend income. The Company is currently a CFC,
and it is likely that 10% Shareholders who are also U.S. persons will continue
to own (or be deemed to own) more than 50% of the voting power of the
outstanding Common Stock of the Company and, thus, that the Company will
continue to be characterized as a CFC. However, the CFC rules referred to above
only apply with respect to such 10% Shareholders. For 1997, because the Company
is a CFC, the asset test to determine whether the Company would be a PFIC is
made by comparing the relative adjusted tax bases of the Company's assets and
not the relative fair market values of such assets, making it more difficult for
the Company to manage its affairs so as to avoid PFIC status. However, for
taxable years beginning after December 31, 1997, in the case of CFC's with
publicly traded shares, the asset test to determine whether the CFC is a PFIC
will be made on the basis of the relative fair market values of such assets. The
Company expects to be publicly traded for this purpose so that this more
favorable asset test will be applicable in 1998 and later years.
TAXATION OF NON-U.S. SHAREHOLDERS
For U.S. federal income tax purposes, a non-U.S. shareholder should not be
subject to tax on distributions made with respect to, and gains realized from
the disposition of, Class A Common Stock unless such distributions and gains are
attributable to an office or fixed place of business maintained by such non-U.S.
shareholder in the U.S. A non-U.S. shareholder generally will not be subject to
U.S. federal income or withholding tax in respect of gain recognized in the
disposition of Class A Common Stock.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. SHAREHOLDERS
Under certain circumstances, a U.S. shareholder who is an individual may be
subject to backup withholding at a 31% rate on dividends received on Class A
Common Stock. This withholding generally applies only if such individual U.S.
shareholder (i) fails to furnish his or her taxpayer identification number
('TIN') to the U.S. financial institution or any other person responsible for
the payment of dividends on the Class A Common Stock, (ii) furnishes an
incorrect TIN, (iii) is notified by the U.S. Internal Revenue Service ('IRS')
that such U.S. shareholder has failed to properly report payments of interest
and dividends and the IRS has notified the Company that such U.S. shareholder is
subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty or perjury, that the TIN
provided is such U.S. shareholder's correct number and that such U.S.
shareholder is not subject to backup withholding rules.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. Federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the U.S.
shareholder's U.S. federal income tax liability, if any, provided the required
information or appropriate claim for refund is filed with the Internal Revenue
Service.
NON-U.S. SHAREHOLDERS
Currently, U.S. information reporting requirements and backup withholding
will not apply to dividends on the Class A Common Stock paid to non-U.S.
shareholders at an address outside the U.S. (provided that the payor does not
have definite knowledge that the payee is a U.S. person). As a general matter,
information reporting and backup withholding will not apply to a payment of the
proceeds of a sale effected outside the U.S. of the Class A Common Stock by a
foreign office of a foreign holder. However, information reporting requirements
(but not backup withholding) will apply to a
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payment of the proceeds of a sale effected outside the U.S. of the Class A
Common Stock through a 'U.S. Broker', unless the U.S. Broker has documentary
evidence in its records that the non-U.S. shareholder is not a U.S. person and
has no actual knowledge that such evidence is false, or the non-U.S. shareholder
otherwise establishes an exemption. For purposes of the preceding sentence, a
U.S. Broker is a broker that (i) is a U.S. person, (ii) is 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 U.S. or (iii) is a Controlled Foreign Corporation.
Payment by a broker of the proceeds of a sale of the Shares effected inside the
United States is subject to both backup withholding and information reporting
unless the non-U.S. shareholder certifies under penalties of perjury that such
non-U.S. shareholder is not a United States person and provides such non-U.S.
shareholder's name and address or the non-U.S. shareholder otherwise establishes
an exemption. Any amounts withheld under the backup withholding rules from a
payment to a non-U.S. shareholder will be allowed as a refund or a credit
against such non-U.S. shareholder's U.S. Federal income tax, provided that the
required information or appropriate claim for refund is furnished to the IRS.
The United States Treasury issued proposed regulations on April 22, 1996
(the 'Proposed Withholding Regulations') which would, if adopted, alter the
information reporting and backup withholding rules applicable to non-U.S.
shareholders. Among other things, the Proposed Withholding Regulations would
provide certain presumptions under which a non-U.S. shareholder would be subject
to backup withholding and information reporting until the Company receives
certification from such shareholder of non-U.S. status. The Proposed Withholding
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The foregoing
discussion is not intended to be a complete discussion of the provisions of the
Proposed Withholding Regulations, and prospective shareholders are urged to
consult their tax advisors with respect to the effect that the Proposed
Withholding Regulations would have if adopted.
CERTAIN BERMUDA TAX CONSIDERATIONS
In the opinion of Conyers, Dill & Pearman, the following correctly
describes a summary of certain material anticipated tax consequences of an
investment in the Class A Common Stock under current Bermuda tax laws. This
discussion does not address the tax consequences under non-Bermuda tax laws and,
accordingly, each prospective investor should consult his or her tax advisor
regarding the tax consequences of an investment in the Class A Common Stock. The
discussion is based upon laws and relevant interpretation thereof in effect as
of the date of this Prospectus, all of which are subject to change.
BERMUDA TAXATION
At the date hereof, there is no Bermuda income, corporation or profits tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by the Company or its shareholders other than those who
are ordinarily resident in Bermuda. The Company is not subject to stamp or other
similar duty on the issue, transfer or redemption of its Class A Common Stock.
The Company has obtained an assurance from the Minister of Finance of
Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the
event there is enacted in Bermuda any legislation imposing tax computed on
profits or income or computed on any capital assets, gain or appreciation or any
tax in the nature of estate duty or inheritance tax, such tax shall not be
applicable to the Company or to its operations, or to the shares or other
obligations of the Company until March 28, 2016 except insofar as such tax
applies to persons ordinarily resident in Bermuda and holding such shares or
other obligations of the Company or any real property or leasehold interests in
Bermuda owned by the Company. No reciprocal tax treaty affecting the Company
exists between Bermuda and the United States.
As an exempted company, the Company is liable to pay in Bermuda a
registration fee based upon its authorized share capital and the premium on its
issued shares at a rate not exceeding $25,000 per annum.
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LEGAL MATTERS
The validity of the Class A Common Stock offered in the Offerings will be
passed upon for the Company and the Underwriters by the Company's counsel,
Conyers, Dill & Pearman, Hamilton, Bermuda. Certain legal matters under U.S. and
New York law will be passed upon for the U.S. Underwriters and the International
Underwriters by their United States counsel, Cravath, Swaine & Moore. Statements
with respect to, or involving matters of, Bermuda law in this Prospectus under
'Service of Process of And Enforcement of Civil Liabilities', 'Certain Bermuda
Tax Considerations' and 'Description of Capital Stock--Certain Provisions of
Bermuda Law,' have been passed upon by Conyers, Dill & Pearman, Bermuda and are
stated herein on their authority.
There is no minimum amount which in the opinion of the directors of the
Company must be raised by the offer of the shares of Class A Common Stock in
order to provide for the matters referred to in Section 28 of The Companies Act
1981 of Bermuda.
EXPERTS
The Consolidated Financial Statements of RSL Communications, Ltd. as of and
for the years ended December 31, 1995 and December 31, 1996, and International
Telecommunications Group, Ltd. as of and for the year ended December 31, 1994
and as of and for the nine months ended September 30, 1995, included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The Consolidated Financial Statements of Cyberlink, Inc. as of August 31,
1995 and for the eight months then ended, included in this Prospectus, have been
audited by Brown, Leifer, Slatkin + Berns, independent auditors, as stated in
their report appearing herein.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
The Company is a Bermuda corporation. Certain of its directors and
officers, and certain of the experts named herein, are not residents of the
United States. All or a substantial portion of the assets of such persons are or
may be located outside the United States. As a result, it may not be possible
for investors to effect service of process within the United States upon such
persons or to enforce against them judgments obtained in the United States
courts. The Company has been advised by its legal counsel in Bermuda, Conyers,
Dill & Pearman, that there is doubt as to the enforcement in Bermuda, in
original actions or in actions for enforcement of judgments of United States
courts, of liabilities predicated upon U.S. Federal securities laws, although
Bermuda courts will enforce foreign judgments for liquidated amounts in civil
matters, subject to certain conditions and exceptions.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933 with respect to the shares of Class A
Common Stock being offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Class A Common Stock offered hereby, reference is
made to the Registration Statement, including the exhibits thereto, and the
financial statements and notes filed as a part thereof. Statements made in this
Prospectus concerning the contents of any contract, agreement or other document
filed with the Commission as an exhibit are not necessarily complete. With
respect to each such contract, agreement or other document filed with the
Commission as an exhibit, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C.
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20549, and at the Commission's Regional Offices at 7 World Trade Center, New
York, New York 10048 and the Northwestern Atrium Center, 500 West Madison
Street, Room 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports, proxy
statements and other information with the Commission. Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at the address and in
the manner set forth in the foregoing paragraph.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RSL COMMUNICATIONS, LTD.
Independent Auditors' Report.............................................................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995, December 31, 1996 and unaudited June 30, 1997........ F-3
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1995, December 31, 1996 and
for the unaudited Six Month Periods Ended June 30, 1996 and 1997........................................ F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 31, 1995, December 31,
1996 and for the unaudited Six Month Period Ended June 30, 1997......................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1995, December 31, 1996 and
for the unaudited Six Month Periods Ended June 30, 1996 and 1997........................................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-25
Consolidated Financial Statements for the Nine Months Ended September 30, 1995
Consolidated Statement of Operations and Accumulated Deficit for the Nine Months Ended September 30,
1995.................................................................................................... F-26
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1995......................... F-27
Notes to Consolidated Financial Statements................................................................ F-28
Independent Auditors' Report.............................................................................. F-32
Consolidated Financial Statements for the Year Ended December 31, 1994
Consolidated Statement of Operations and Accumulated Deficit for the Year Ended December 31, 1994......... F-33
Consolidated Statement of Cash Flows for the Year Ended December 31, 1994................................. F-34
Notes to Consolidated Financial Statements................................................................ F-35
CYBERLINK, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-39
Consolidated Financial Statements
Consolidated Balance Sheet as of August 31, 1995.......................................................... F-40
Consolidated Statement of Operations for the Eight Month Period Ended August 31, 1995..................... F-41
Consolidated Statement of Cash Flows for the Eight Month Period Ended August 31, 1995..................... F-42
Notes to Consolidated Financial Statements................................................................ F-43
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
RSL Communications, Ltd.
We have audited the accompanying consolidated balance sheets of RSL
Communications, Ltd., a Bermuda corporation, and its subsidiaries (together, the
'Company'), as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995. Our audits also included the consolidated
financial statement schedules listed in the Index at Item 21(b). These
consolidated financial statements and the consolidated financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such consolidated financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
MARCH 7, 1997
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 5,163 $104,068 $ 81,301
Accounts receivable............................................... 6,140 26,479 43,588
Marketable securities--available for sale......................... -- 67,828 50,797
Prepaid expenses and other current assets......................... 856 3,969 12,326
------------ ------------ -----------
Total current assets................................................ 12,159 202,344 188,012
------------ ------------ -----------
Marketable Securities--Held to maturity............................. -- 104,370 84,728
------------ ------------ -----------
Property and Equipment:
Telecommunications equipment...................................... 9,844 29,925 37,980
Furniture, fixtures and other..................................... 989 5,926 9,816
------------ ------------ -----------
10,833 35,851 47,796
Less accumulated depreciation..................................... (302) (3,513) (6,917)
------------ ------------ -----------
Property and equipment--net....................................... 10,531 32,338 40,879
------------ ------------ -----------
Goodwill--and other intangible assets net of accumulated
amortization...................................................... 29,398 87,605 121,555
------------ ------------ -----------
Deposits and Other Assets........................................... 984 1,312 1,026
------------ ------------ -----------
Total Assets........................................................ $ 53,072 $427,969 $ 436,200
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 20,788 $ 49,370 $ 62,991
Accrued expenses.................................................. 2,277 12,701 12,648
Notes payable..................................................... 5,236 6,538 7,049
Deferred revenue.................................................. 745 3,570 4,628
Other liabilities................................................. 2,712 5,236 4,968
------------ ------------ -----------
Total current liabilities........................................... 31,758 77,415 92,284
------------ ------------ -----------
Other Liabilities--noncurrent....................................... 8,962 15,286 7,178
------------ ------------ -----------
Long-term Debt--less current portion................................ 1,604 6,032 5,866
------------ ------------ -----------
Senior Notes, 12 1/4% due 2006, net................................. -- 296,000 296,300
------------ ------------ -----------
Capital Lease Obligations--less current portion..................... 5,043 12,393 15,922
------------ ------------ -----------
Total Liabilities................................................... 47,367 407,126 417,550
------------ ------------ -----------
Commitments and Contingencies
Shareholders' Equity
Common stock, Class A--par value $.01; 665,340 issued and
outstanding at June 30, 1997.................................... -- -- 7
Common stock, Class B--par value $.01; 2,927,564, 4,807,711 and
4,807,711 issued and outstanding at December 31, 1995, December
31, 1996 and June 30, 1997, respectively........................ 29 48 48
Common stock Class C--par value $.01; no shares issued............ -- -- --
Preferred stock par value $.01; 20,000,000 shares authorized,
9,243,866 shares issued and outstanding at December 31, 1995,
December 31, 1996 and June 30, 1997, respectively............... 93 93 93
Warrants--Common Stock, exercise price of $.01.................... -- 5,544 5,544
Additional paid-in capital........................................ 15,083 65,064 97,639
Accumulated deficit............................................... (9,500) (47,740) (84,917)
Foreign currency translation adjustment........................... -- (622) 622
Deferred financing costs.......................................... -- (1,544) (386)
------------ ------------ -----------
Total shareholders' equity.......................................... 5,705 20,843 18,650
------------ ------------ -----------
Total Liabilities and Shareholders' Equity.......................... $ 53,072 $427,969 $ 436,200
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................................. $ 18,617 $ 113,257 $ 39,764 $ 109,361
Cost of services...................................... 17,510 98,461 35,657 96,631
------------ ------------ ----------- -----------
Gross profit........................................ 1,107 14,796 4,107 12,730
Selling, general and administrative expenses.......... 9,639 38,893 13,656 35,271
Depreciation and amortization......................... 849 6,655 2,175 8,947
------------ ------------ ----------- -----------
Loss from operations.................................. (9,381) (30,752) (11,724) (31,488)
Interest income....................................... 173 3,976 80 7,224
Interest expense...................................... (194) (11,359) (635) (18,860)
Other (expense) income................................ -- (288) -- 6,883
Foreign currency transaction gain (loss).............. -- 758 -- (268)
Minority interest..................................... -- (180) -- (229)
Income taxes.......................................... -- (395) -- (439)
------------ ------------ ----------- -----------
Net loss.............................................. $ (9,402) $ (38,240) $ (12,279) $ (37,177)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Loss per share........................................ $ (3.65) $ (11.24) $ (4.19) $ (7.43)
Weighted average number of shares of common stock
outstanding......................................... 2,576 3,401 2,928 5,003
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B COMMON STOCK FOREIGN
COMMON STOCK COMMON STOCK PREFERRED STOCK WARRANTS ADDITIONAL CURRENCY
--------------- --------------- --------------- --------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1995... -- $-- -- $ -- -- $ -- -- $ -- $ -- $ (98)* $ --
Issuance of
Preferred Stock... -- -- -- -- 9,244 93 -- -- 13,261 -- --
Issuance of Common
Stock............. -- -- 2,928 29 -- -- -- -- 1,822 -- --
Net loss........... -- -- -- -- -- -- -- -- -- (9,402) --
--
------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
BALANCE, December
31, 1995.......... -- -- 2,928 29 9,244 93 -- -- 15,083 (9,500) --
Issuance of
warrants in
connection with
Notes Offering.... -- -- -- -- -- -- 300 4,000 -- -- --
Issuance of
warrants in
connection with
shareholder
standby facility
and revolving
credit facility... -- -- -- -- -- -- 210 1,544 -- -- --
Issuance of Common
Stock............. -- -- 1,880 19 -- -- -- -- 49,981 -- --
Foreign Currency
Translation
Adjustment........ -- -- -- -- -- -- -- -- -- -- (622)
Net loss........... -- -- -- -- -- -- -- -- -- (38,240) --
--
------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
BALANCE, December
31, 1996.......... -- -- 4,808 48 9,244 93 510 5,544 65,064 (47,740) (622)
UNAUDITED:
Issuance of Class A
Common Stock...... 665 7 -- -- -- -- -- -- 32,575 -- --
Foreign Currency
Translation
Adjustment........ -- -- -- -- -- -- -- -- -- -- 1,244
Amortization of
deferred financing
costs............. -- -- -- -- -- -- -- -- -- -- --
Net loss........... -- -- -- -- -- -- -- -- -- (37,177) --
--
------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
BALANCE
June 30, 1997
(Unaudited)....... 665 $7 4,808 $ 48 9,244 $ 93 510 $5,544 $ 97,639 $ (84,917) $ 622
--
--
------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
------ ------ ------ ------ ------ ------ ------ ---------- ----------- ----------
<CAPTION>
DEFERRED
FINANCING
COSTS TOTAL
--------- --------
<S> <C> <C>
BALANCE,
January 1, 1995... $ -- $ (98)
Issuance of
Preferred Stock... -- 13,354
Issuance of Common
Stock............. -- 1,851
Net loss........... -- (9,402)
--------- --------
BALANCE, December
31, 1995.......... -- 5,705
Issuance of
warrants in
connection with
Notes Offering.... -- 4,000
Issuance of
warrants in
connection with
shareholder
standby facility
and revolving
credit facility... (1,544) --
Issuance of Common
Stock............. -- 50,000
Foreign Currency
Translation
Adjustment........ -- (622)
Net loss........... -- (38,240)
--------- --------
BALANCE, December
31, 1996.......... (1,544) 20,843
UNAUDITED:
Issuance of Class A
Common Stock...... -- 32,582
Foreign Currency
Translation
Adjustment........ -- 1,244
Amortization of
deferred financing
costs............. 1,158 1,158
Net loss........... -- (37,177)
--------- --------
BALANCE
June 30, 1997
(Unaudited)....... $ (386) $ 18,650
--------- --------
--------- --------
</TABLE>
* Deficit at January 1, 1995 consists of pre-operating expenses.
See notes to consolidated financial statements.
F-5
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss..................................................... $ (9,402) $ (38,240) $ (12,279) $ (37,177)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of
purchase of subsidiaries and accretion of interest
receivable on restricted marketable securities........... -- (1,562) -- (3,023)
Depreciation and amortization............................ 848 6,655 2,175 8,947
Foreign currency transaction (loss) gain................. -- (788) -- 161
Loss on disposal of fixed assets......................... -- 368 -- --
Provision for losses on accounts receivable.............. 149 2,830 877 1,968
Changes in assets and liabilities:
Increase in accounts receivable.......................... (2,453) (17,034) (9,461) (17,909)
Decrease (increase) in deposits and other current
assets................................................. 366 (3,249) 91 (2,908)
Decrease (Increase) in prepaid expenses and other current
assets................................................. 297 (925) (2,094) (6,334)
Increase in accounts payable and accrued expenses........ 3,511 44,243 10,243 12,692
Increase (decrease) in deferred revenue and other current
liabilities............................................ 1,501 4,279 2,327 (3,000)
Increase (decrease) in other liabilities................. 8,737 (7,052) (56) (245)
------------ ------------ ----------- -----------
Net cash provided by (used in) operating activities............ 3,554 (10,475) (8,177) (46,828)
------------ ------------ ----------- -----------
Cash flows used in investing activities:
Acquisition of subsidiaries.................................. (15,413) (38,552) (10,616) (5,350)
Purchase of marketable securities............................ -- (82,529) -- --
Proceeds from marketable securities.......................... -- 14,701 -- 17,031
Purchase of restricted marketable securities................. -- (102,808) -- --
Proceeds from restricted marketable securities............... -- -- -- 22,665
Purchase of property and equipment........................... (1,124) (15,983) (4,792) (6,885)
Proceeds from sale of equipment.............................. -- 171 -- --
------------ ------------ ----------- -----------
Net cash (used in) provided by investing activities............ (16,537) (225,000) (15,408) 27,461
------------ ------------ ----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common and preferred stock and
Warrants................................................... 15,205 50,000 -- --
Proceeds from notes payable.................................. 3,000 -- 24,461 --
Payment of notes payable..................................... -- (3,000) -- (1,692)
Proceeds from issuance of 12 1/4% Senior Notes and Warrants.. -- 300,000 -- --
Payments of offering costs................................... -- (10,989) -- --
Proceeds from long-term debt................................. -- 44,000 -- --
Payments of long-term debt................................... -- (44,598) -- (108)
Principal payments under capital lease obligations........... (62) (382) (153) (820)
------------ ------------ ----------- -----------
Net cash provided by (used in) financing activities............ 18,143 335,031 24,308 (2,620)
------------ ------------ ----------- -----------
Increase (decrease) in cash and cash equivalents............... 5,160 99,556 723 (21,987)
Effects of foreign currency exchange rates on cash............. -- (651) -- (780)
Cash and cash equivalents at beginning of period............... 3 5,163 5,163 104,068
------------ ------------ ----------- -----------
Cash and cash equivalents at end of period..................... $ 5,163 $ 104,068 $ 5,886 $ 81,301
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest................................................... $ 31 $ 1,639 $ 634 $ 23,089
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Supplemental schedule of noncash investing and financing
activities--
Assets acquired under capital lease obligations.............. $ 4,950 $ 7,897 $ 95 $ 6,359
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Issuance of notes to acquire stock........................... $ -- $ 9,328 $ -- $ --
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Issuance of warrants for shareholder standby facility........ $ -- $ 1,544 $ -- $ --
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Issuance of Class A Common Stock............................. $ -- $ -- $ -- $ 32,582
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
1. BUSINESS DESCRIPTION
RSL Communications, Ltd. ('RSL'), a Bermuda corporation, is the successor
in interest to RSL Communications Inc., a British Virgin Islands corporation,
which is the successor in interest to RSL Communications, Inc., a Delaware
corporation. RSL, together with its direct and indirect subsidiaries are
referred to herein as the 'Company.' The Company is a multinational
telecommunications company which provides an array of international and domestic
telephone services. The Company focuses on providing international long distance
voice services to small and medium-sized businesses in key markets. The Company
currently has revenue producing operations and provides services in the United
States, the United Kingdom, France, Germany, the Netherlands, Sweden, Finland,
Australia and Denmark. In 1995, approximately 54% of the world's international
long distance telecommunications minutes originated in these markets.
In August 1997, the Board of Directors of the Company approved the issuance
of Class A common shares in an initial public offering to be filed with the
Securities and Exchange Commission on or about August 22, 1997. Concurrent with
such offering, the Board has authorized a 2.19 to 1 stock split. Upon the
closing of the offering, the Preferred Stock will be automatically converted
into Class B Common Stock.
2. ACQUISITIONS
On March 10, 1995, the Company entered into a stock purchase agreement (the
'Agreement') with International Telecommunications Group, Ltd. ('ITG') and RSL
COM U.S.A., Inc. (formerly known as International Telecommunications
Corporation) ('RSL USA'), pursuant to which the Company initially purchased from
ITG 66,667 shares of ITG's Series A convertible preferred stock (which
represented 25% of ITG's then outstanding stock, including common and preferred
shares) for $3,000,000, subject to increase, to a maximum of $4,750,000. Such
increase was predicated upon the attainment of certain financial targets and
ratios. Based on the terms of the Agreement, the adjusted purchase price of the
shares totaled $4,750,000. The Company subsequently purchased additional shares
of ITG's common stock at various times during 1995 and 1996 for a total purchase
price of cash and secured notes aggregating $12,870,000 and $26,725,000 at
December 31, 1995 and 1996, respectively and the assumption of net liabilities
resulting in recorded goodwill of $26,780,000. At December 31, 1996 and at June
30, 1997, the Company's investment in ITG was $54,204,000 and $67,647,000,
respectively, which represented in excess of 87% (at December 31, 1996) and 92%
(at June 30, 1997) of the outstanding shares of ITG.
Effective September 1, 1995, ITG's subsidiary RSL USA, purchased 51% of the
capital stock of Cyberlink, Inc. ('Cyberlink'). During the period August 1996
through December 1996, RSL USA purchased 1,023,807 shares of the capital stock
of Cyberlink for approximately $7,200,000. In addition, through March 1997, the
Company acquired the remaining outstanding shares.
The total purchase price consisted of approximately $9,485,000, and
assumption of net liabilities of $21,131,000. In connection with the purchase of
Cyberlink, the Company recorded approximately $30,616,000 of goodwill.
In November 1995, the Company, through its wholly-owned subsidiary RSL COM
Europe, Ltd. ('RSL COM Europe') completed the acquisition of 51% of Cyberlink
Communications Europe Ltd. ('Cyberlink Europe'). Cyberlink Europe is a holding
company which owned 100% of the shares of RSL COM Sweden AB, Cyberlink
International Telesystems Germany GmbH and RSL COM Finland OY. During the period
August 1996 through March 1997, RSL COM Europe purchased the remaining 49%
F-7
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
of the Cyberlink Europe shares for approximately $2,062,000. The total cash paid
was approximately $3,658,000. In connection with the purchase of Cyberlink
Europe, the Company recorded approximately $2,914,000 of goodwill in connection
with this purchase.
In May 1996, the Company acquired the net assets, principally
telecommunications equipment and facilities, constituting the international long
distance voice businesses of Sprint in France and Germany through its wholly
owned subsidiaries RSL COM France S.A., a French corporation ('RSL France'), and
RSL COM Deutschland GmbH, a German limited liability company ('RSL Germany').
Pursuant to the applicable asset purchase agreements, the Company can not
disclose the purchase price of the net assets. In connection with this
transaction, the Company recorded approximately $7,905,000 of goodwill.
In October 1996, the Company acquired 38,710 shares of Belnet Nederland
B.V. ('Belnet/RSL'), representing 75% of the outstanding stock for $10,000,000.
In connection with the purchase of Belnet/RSL, the Company recorded
approximately $8,250,000 of goodwill.
In August 1996, the Company acquired the assets and assumed certain limited
liabilities of Incom (UK) Limited ('Incom'), a United Kingdom reseller, for
$500,000 plus 3,954 non-voting shares of ITG (the 'Purchased Shares'). In
addition, 3,333 voting shares of ITG currently held by Incom were exchanged for
an equal number of non-voting shares. The Company has also entered into a
consulting agreement with an affiliate of Incom calling for payments of $10,000
per month for seven years and has paid such affiliate $280,000 for its agreement
not to compete for a period of 7 years and has agreed to make a $660,000,
seven-year loan to such affiliate, bearing interest at a rate of 7% per annum.
In connection with this acquisition, the Company recorded approximately
$3,840,000 of goodwill.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to the
assets acquired, primarily fixed assets and accounts receivable, and liabilities
assumed based on their estimated fair values at the dates of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired has been recorded as goodwill, which is amortized over fifteen years.
The December 31, 1995 consolidated statements of operations, shareholders'
equity and cash flows include the results of ITG, Cyberlink and Cyberlink Europe
from their dates of acquisition, respectively, through December 31, 1995. The
1996 consolidated statements of operations, shareholders' equity and cash flows
also include the results of RSL COM France and RSL COM Germany as of May 1996
(date of commencement of operations), Incom as of August 1996 (date of
acquisition), and Belnet/RSL from October 1996 (date of acquisition) through
December 31, 1996.
The following presents the unaudited pro forma consolidated statements of
operations of the Company for the years ended December 31, 1995 and 1996 as
though the acquisitions of ITG, Cyberlink, Cyberlink Europe, RSL COM France, RSL
COM Germany and Belnet/RSL had occurred on January 1, 1995. The acquisition of
Incom is excluded as it is not significant. The consolidated
F-8
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
statements do not necessarily represent what the Company's results of operations
would have been had such acquisitions actually occurred on such date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT LOSS PER
SHARE)
<S> <C> <C>
Revenues...................................................... $ 72,778 $ 124,236
----------------- -----------------
----------------- -----------------
Net loss...................................................... $ (38,008) $ (41,277)
----------------- -----------------
----------------- -----------------
Net loss per share............................................ $ (14.76) $ (12.14)
----------------- -----------------
----------------- -----------------
</TABLE>
In April 1997, the Company acquired a 30% interest in a company operating
in Portugal. The total cash paid was approximately $1,200,000.
In April 1997, the Company acquired substantially all of the commercial
customer contracts of an Australian based company. The Company paid
approximately $1,500,000 in cash and will amortize the contracts over a three
year period.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--As of June 30, 1997
the consolidated financial statements include the accounts of RSL
Communications, Ltd. and its majority-owned subsidiaries: its 92% owned
subsidiary ITG and its wholly-owned subsidiary, Cyberlink, Inc. and RSL COM
Europe and its 100% owned subsidiary Cyberlink Communications Europe Ltd. and
Belnet/RSL a 75% owned subsidiary of RSL COM Europe. The Company has included
100% of its subsidiaries' operating losses since the minority interests'
investments have been reduced to zero. Minority interest represents another
entity's ownership interest in Belnet/RSL, at December 31, 1996 and June 30,
1997. All material intercompany accounts and transactions have been eliminated.
All of the Company's subsidiaries' years end December 31.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for other claims. Actual results could differ from these estimates.
Foreign Currency Translation--Assets and liabilities of foreign entities
have been translated into United States dollars using the exchange rates in
effect at the balance sheet dates. Results of operations of foreign entities are
translated using the average exchange rates prevailing throughout the period.
Local currencies are considered the functional currencies of the Company's
foreign operating entities. The Company utilizes a net settlement process with
its correspondents comprised of special drawing rights ('SDRs'). SDRs are the
established method of settlements among international telecommunications
carriers. The SDRs are valued based upon the values of a basket of foreign
currencies. Translation effects are accumulated as part of the cumulative
foreign currency translation adjustment in equity which at December 31, 1995
were not significant. Gains and losses from foreign currency transactions are
included in the consolidated statements of operations for each respective
period.
Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Accounts Receivable--Accounts receivable are stated net of the allowance
for doubtful accounts of $1,600,000, $3,900,000 and $2,949,000 at December 31,
1995, December 31, 1996 and June 30, 1997, respectively. The Company recorded
bad debt expense of $149,000, $2,830,000 and $1,968,000 for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997,
respectively.
Accrued Expenses--Accrued expenses for the six months ended June 30, 1997
and for the years ended December 31, 1996 and 1995 consist primarily of accrued
interest. Accrued interest as of December 31, 1995 and 1996 and June 30, 1997
was $92,000, $9,447,000 and $4,798,000, respectively.
Marketable Securities--Marketable securities consist principally of US.
Treasury bills, commercial paper and corporate notes with a maturity date
greater than three months when purchased. Available for sale securities are
stated at market and the held to maturity securities are stated at amortized
costs. Gains and losses, both realized and unrealized, are measured using the
specific identification method. Market value is determined by the most recently
traded price of the security at the balance sheet date. Marketable securities
are defined as either available for sale or held to maturity securities under
the provisions of SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities', depending on the security.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or fair values at the date of acquisition, and in the case of
equipment under capital leases, the present value of the future minimum lease
payments, less accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the depreciable assets,
which range from five to fifteen years. Improvements are capitalized, while
repair and maintenance costs are charged to operations as incurred. Depreciation
expense was $302,000, $3,462,000 and $3,404,000 for the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997, respectively.
Goodwill and Related Amortization--Goodwill represents the excess of cost
over the fair value of the net assets of acquired entities, and is being
amortized using the straight-line method over fifteen years. The Company
periodically reviews the value of its goodwill to determine if an impairment has
occurred. The Company measures the potential impairment of recorded goodwill by
the undiscounted value of expected future cash flows in relation to its net
capital investment in the subsidiary. Based on its review, the Company does not
believe that an impairment of its goodwill has occurred.
Deferred Financing Costs--The deferred financing costs incurred in
connection with the Senior Notes are being amortized on a straight line basis
over ten years.
Deposits and Other Assets--Deposits consist principally of amounts paid to
the Company's carrier vendors.
Revenue Recognition and Deferred Revenue--The Company records revenue based
on minutes (or fractions thereof) of customer usage.
The Company records payments received in advance for prepaid calling card
services and services to be supplied under contractual agreements as deferred
revenues until such related services are provided.
Cost of Services--Cost of services is comprised primarily of transmission
costs.
Selling Expenses--Selling costs such as commissions, marketing costs, and
other customer acquisition costs are treated as period costs. Such costs are
recorded in selling, general and administrative expenses in the Company's
consolidated statement of operations.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ('SFAS') No. 109, Accounting for
Income Taxes. SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. The Company's foreign
subsidiaries file separate income tax returns in the jurisdiction of their
operations. The Company's United States subsidiaries file stand-alone United
States income tax returns.
Loss per Common Share--Loss per common share is calculated by dividing the
loss attributable to common shares by the weighted average number of shares
outstanding. Outstanding common stock options and warrants are not included in
the loss per common share calculation as their effect is anti-dilutive.
New Accounting Standards--During 1995, the Company adopted SFAS No. 121,
Impairment of Long-Lived Assets. There was no adjustment recorded as a result of
adopting this standard. The Company periodically compares the carrying value of
its long-lived assets, principally property and equipment, to undiscounted cash
flows generated by the long-lived assets. The Company's undiscounted cash flows
exceed the carrying value of its long-lived assets.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128. 'Earnings per
Share'. This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and does not believe it
to be significant.
In June 1997, the FASB issued SFAS No. 130 'Reporting Comprehensive
Income.' This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and has found the
majority of required disclosures to be not applicable and the remainder to be
not significant.
In June 1997, the FASB issued SFAS No. 131, 'Disclosure about Segments of
an Enterprise and Related Information.' SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company has not yet determined what additional disclosures may be
required in connection with adopting SFAS No. 131.
4. CONCENTRATION OF CREDIT RISK
The Company is subject to significant concentrations of credit risk which
consist principally of trade accounts receivable, cash and cash equivalents, and
marketable securities. The Company's US subsidiaries sell a significant portion
of their services to other carriers and, as a result, maintains significant
receivable balances with certain carriers. If the financial condition and
operations of these customers deteriorate below critical levels, the Company's
operating results could be adversely affected.
The Company maintains its cash with high quality credit institutions, and
its cash equivalents and marketable securities are in high quality securities.
F-11
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
5. MARKETABLE SECURITIES
A summary of the Company's available for sale marketable securities at
December 31, 1996 and June 30, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
UNAUDITED
<S> <C> <C> <C> <C>
Corporate notes........................................ $40,728 $40,678 $32,657 $32,514
Medium term notes...................................... 10,951 10,938 8,651 8,653
Commercial Paper....................................... 10,261 10,257 -- --
Federal agency notes................................... 5,888 5,884 9,489 9,497
--------- ------- --------- -------
$67,828 $67,757 $50,797 $50,664
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
The Company has recorded its available for sale marketable securities at
amortized cost as the difference between amortized cost and market value is
immaterial to the consolidated financial statements.
The carrying value of the available for sale marketable securities by
maturity date as of December 31, 1996 and June 30, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
UNAUDITED
<S> <C> <C>
Matures in one year................................................ $57,548 $47,240
Matures after one year through three years......................... 10,280 3,557
----------------- -------------
Total.............................................................. $67,828 $50,797
----------------- -------------
----------------- -------------
</TABLE>
Proceeds from the sale of available for sale marketable securities for the
year ended December 31, 1996 and the six months ended June 30, 1997 were
$14,701,000 and $2,832,000, respectively. Gross gains (losses) of $56,000 and
($1,000) were realized on these sales for the year ended December 31, 1996 and
the six months ended June 30, 1997.
Securities classified as held to maturity, which are comprised of Federal
agency notes, are stated at amortized cost. Such securities are restricted in
order to make the first six scheduled interest payments on the 12 1/4% Senior
Notes (see Note 7). The held to maturity securities at December 31, 1996 and
June 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
--------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- ---------
UNAUDITED
<S> <C> <C> <C> <C>
Matures in one year................................. $ 39,692 $ 39,738 $35,456 $35,481
Matures after one year through three years.......... 64,678 65,002 49,272 49,280
--------- -------- --------- ---------
Total............................................... $ 104,370 $104,740 $84,728 $84,761
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
6. INCOME TAXES
The Company has incurred losses since inception for both book and tax
purposes. The Company's Netherlands subsidiary recorded income tax expense of
approximately $359,000 for the six months ended June 30, 1997 and $395,000 for
the year ended December 31, 1996. As of December 31, 1996 and June 30, 1997, the
Company had net operating loss carryforwards generated primarily in the United
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
6. INCOME TAXES--(CONTINUED)
States of approximately $47,000,000 and $83,000,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 2009
through 2012 if not utilized.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as of December 31, 1995 and 1996 and June 30, 1997, as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
------------ -------- --------
UNAUDITED
<S> <C> <C> <C>
Deferred tax assets............................................ $ 6,900 $ 18,800 $ 33,200
Less valuation allowance....................................... (6,900) (18,800) (33,200)
------------ -------- --------
Net deferred tax assets........................................ $ -- $ -- $ --
------------ -------- --------
------------ -------- --------
</TABLE>
The Company's net operating losses and legal reserves generated the
deferred tax assets. At December 31, 1995, 1996 and June 30, 1997, a valuation
allowance of $6,900,000, $18,800,000 and $33,200,000, respectively, is provided
as the realization of the deferred tax benefits are not likely.
7. NOTES PAYABLE AND LONG-TERM DEBT
On October 3, 1996, RSL Communications PLC ('RSL PLC'), a wholly owned
subsidiary of RSL, issued (the 'Debt Offering') 300,000 Units, each consisting
of an aggregate of one $1,000 Senior Note (collectively, the 'Notes') due 2006
bearing interest at the rate of 12 1/4% and one warrant to purchase 1.815 Class
A common shares which expire in ten years (collectively, the 'Warrants'). The
exercise price of such Warrants is $.01.
The value ascribed to the Warrants was $4,000,000. The unamortized discount
is recorded as a reduction against the face value of the Notes, and is amortized
over the life of the Notes. Such discount was $4,000,000 and $3,700,000 at
December 31, 1996 and June 30, 1997, respectively.
The Notes, which are guaranteed by RSL, are redeemable, at RSL PLC's
option, subsequent to November 15, 2001, initially at 106.1250% of their
principal amount, declining to 103.0625% of their principal amount for the
calendar year subsequent to November 15, 2002, and at 100% of the principal
amount subsequent to November 15, 2003.
The indenture pursuant to which the Notes were issued contains certain
restrictive covenants which impose limitations on RSL and certain of its
subsidiaries ability to, among other things: (i) incur additional indebtedness,
(ii) pay dividends or make certain other distributions, (iii) issue capital
stock of certain subsidiaries, (iv) guarantee debt, (v) enter into transactions
with shareholders and affiliates, (vi) create liens, (vii) enter into
sale-leaseback transactions, and (viii) sell assets.
At December 31, 1996 and June 30, 1997, the Company is in compliance with
the above restrictive covenants.
In connection with the issuance of the Notes, the Company is required to
maintain restricted marketable securities in order to make the first six
scheduled interest payments on the Notes. Such restricted marketable securities
amounted to $104,370,000 and $84,728,000 at December 31, 1996 and June 30, 1997,
respectively.
At December 31, 1996 and June 30, 1997, the Company had a $35,000,000
shareholder standby facility with the Company's Chairman and a $7,500,000
revolving credit facility with a bank (the 'Revolving Credit Facility'),
guaranteed by the Company's Chairman, all of which was available.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
The shareholder standby facility bears interest at the rate of 11% per
annum. In connection with this facility and the Company's Chairman's personal
guarantee of the Revolving Credit Facility, the Company's Chairman received
warrants, which vest over one year, to purchase 210,000 Class B common shares of
the Company (the 'Class B Common Stock'). The Company recorded $1,544,000 as the
value of the warrants at the time of their issuance. At June 30, 1997, the
deferred financing costs recorded will continue to be amortized, over the
vesting period, through October 3, 1997. The Revolving Credit Facility bears
interest at the rate of LIBOR plus 1%.
The warrants become exercisable on October 3, 1997 at an exercise price of
$.01 per share and expire in October 2006.
In connection with the September 1996 purchase of additional shares of
ITG's common stock, the Company issued secured notes totaling approximately
$9,328,000. Such notes and interest are secured by the common stock acquired,
and are payable in annual and quarterly installments, respectively, and bear
interest at the rate of 6%.
During August 1996, the Company obtained a $50,000,000 revolving credit
facility with a bank, guaranteed by the Company's Chairman, and utilized this
facility to repay the bank for all amounts due under the previously outstanding
Revolving Loan Facility provided by the bank and guaranteed by the Company's
Chairman, which was $44,000,000 at the time of repayment. Immediately prior to
the Debt Offering, the Company repaid $35,000,000 of the $44,000,000 borrowed
under the Revolving Credit Facility with the proceeds of the Subordinated
Shareholder Loan (see Note 11) and reduced the outstanding commitment under the
Revolving Credit Facility to $7,500,000.
At June 30, 1997 RSL USA has a series of current notes payable to different
vendors in the amount of $4,234,000, which bear interest at the rates from 8% to
14.5%. At December 31, 1995 and 1996, such amounts were $565,000 and $4,282,000,
respectively.
The Company has a credit agreement which provides for up to $5,000,000 in
committed credit lines to finance its accounts receivable. Interest is payable
at 2 1/4% over the prime rate of interest (prime being 8 1/4% and 8 1/2% at
December 31, 1996 and June 30, 1997, respectively). A second credit line
provides for up to $2,000,000 in capital expenditure financing. Interest on this
line is payable at 2 1/2% over the prime rate of interest. During the six months
ended June 30, 1997, the lines of credit were reduced to $570,000 and $-0-,
respectively. The total amounts outstanding at December 31, 1995 from the above
credit lines were $1,566,000 and $470,000, respectively, and $680,000 and
$606,000, at December 31, 1996, respectively, and June 30, 1997 was $364,000.
The remaining credit line terminates on August 31, 1998. Borrowings under both
of these credit lines are collateralized by a letter of credit.
One of the Company's primary equipment vendors has provided to certain of
the Company's subsidiaries an aggregate of approximately $50 million in vendor
financing commitments to fund the purchase of additional capital equipment. At
December 31, 1996 and June 30, 1997, approximately $39.0 million and $30.2
million was available, respectively. Borrowings under this agreement are
recorded as capital lease obligations.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
Long-term debt maturities at December 31, 1996 and June 30, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
1997..................................................... $ 6,538 $ --
1998..................................................... 3,099 7,049
1999..................................................... 2,933 3,016
2000..................................................... -- 2,850
2001..................................................... -- --
2002..................................................... -- --
2003 and thereafter...................................... 300,000 300,000
----------------- -------------
Total.................................................... 312,570 312,915
Less current maturities.................................. (6,538) (7,049)
----------------- -------------
Long Term Debt and 12 1/4% Senior Notes.................. $ 306,032 $ 305,866
----------------- -------------
----------------- -------------
</TABLE>
RSL's notes payable had fair values that approximated their carrying
amounts.
Interest expense on the above notes was approximately $461,000, $10,457,000
and $18,542,000 for the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, respectively.
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1996 and June 30, 1997 consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30, 1997
1995 1996 -------------
------- ------- UNAUDITED
<S> <C> <C> <C>
Goodwill.............................................. $29,425 $79,732 $ 117,048
Deferred financing costs.............................. -- 10,988 11,296
Organization costs and others......................... 521 626 796
------- ------- -------------
29,946 91,346 129,140
Less accumulated amortization......................... (548) (3,741) (7,585)
------- ------- -------------
Intangible assets-net................................. $29,398 $87,605 $ 121,555
------- ------- -------------
------- ------- -------------
</TABLE>
Amortization expense for the years ended December 31, 1995 and 1996 and the
six months ended June 30, 1997 was $548,000, $3,193,000 and $3,844,000,
respectively.
9. SHAREHOLDERS' EQUITY
Common Stock
Pursuant to an agreement and plan of reorganization between the Company,
the Note Issuer and Charles Piluso ('Piluso'), Piluso elected to exchange his
shares in International Telecommunications Group, Ltd. ('ITG'), a subsidiary of
the Company, for shares in the Company. Accordingly, the Company issued Piluso
665,340 of the Class A Common Stock (the 'RSL Shares'), par value $0.01 per
Share, of the Company in exchange for 15,619 shares of common stock of ITG. The
RSL Shares were issued pursuant to a private placement exemption under Section
4(2) of the Securities Act of 1933, as amended, and the certificates evidencing
the RSL Shares have been legended as restricted securities.
During 1996, the Company issued 1,880,147 shares of Class B Common Stock
for cash aggregating $50,000,000. During 1995, 2,927,564 shares of Class B
Common Stock were issued for $1,851,000. The Company is authorized to issue
20,000,000 shares in aggregate of its common stock.
Preferred Stock
During 1995, the Company issued 9,243,866 shares of its preferred stock to
the holders of its Class B Common Stock for cash of $13,354,000. The preferred
stock ranks senior to the Company's common stock as to dividends and a
liquidation preference of $1.00 per share. Each share is convertible at the
holder's option into one share of Class B Common Stock. All preferred shares
will be automatically converted into the Company's Class B Common Stock in the
event of the consummation of a public offering that yields proceeds in excess of
$25,000,000. Dividends, at the rate of 8%, are cumulative. Upon conversion of
the shares of the preferred stock, the cumulative dividends are not payable and
are to be deemed cancelled and waived. The cumulative amount of such dividends
is approximately $16,000.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1996 and June 30, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1997.......................................................... $ 1,237
1998.......................................................... 2,852
1999.......................................................... 4,356
2000.......................................................... 3,692
2001.......................................................... 2,627
2002 and thereafter........................................... 3,769
---------
Total minimum lease obligations............................... 18,533
Less interest................................................. (5,704)
---------
Present value of future minimum lease obligations............. 12,829
Less current portion, included in other current liabilities... (436)
---------
Long-term lease obligations at December 31, 1996.............. $12,393
---------
---------
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30, UNAUDITED
- ------------------- ---------
<S> <C>
1998.......................................................... $ 1,913
1999.......................................................... 5,785
2000.......................................................... 6,029
2001.......................................................... 3,536
2002.......................................................... 3,168
2003 and thereafter........................................... 2,435
---------
Total minimum lease obligations............................... 22,866
Less interest................................................. (4,938)
---------
Present value of future minimum lease obligations............. 17,928
Less current portion, included in other current liabilities... (2,006)
---------
Long-term lease obligations at June 30, 1997.................. $15,922
---------
---------
</TABLE>
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
9% to 11% per annum.
Assets held under capital leases aggregated $5,326,000, $13,225,000 and
$18,578,000 at December 31, 1995 and 1996 and June 30, 1997, respectively. The
related accumulated depreciation was $82,000, $825,000 and $1,322,000,
respectively.
11. RELATED PARTY TRANSACTIONS
In September 1996, the Company borrowed $35,000,000 from Ronald S. Lauder,
the Chairman of the Board of the Company and the principal shareholder of the
Company, bearing interest at the rate of 11% per annum (the 'Subordinated
Shareholder Loan'). The Company repaid the Subordinated Shareholder Loan with
the proceeds of the Shareholder Equity Investment (described below).
The Company used the proceeds of the Subordinated Shareholder Loan to repay
$35,000,000 of the amounts outstanding under the Revolving Credit Facility
available in August 1996 (see Note 7) and
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
11. RELATED PARTY TRANSACTIONS--(CONTINUED)
reduced the outstanding commitment amount under the Revolving Credit Facility to
$15,000,000 at December 31, 1996 and $7,500,000 at June 30, 1997. The Revolving
Credit Facility is personally guaranteed by the Company's Chairman.
Prior to the closing of the Debt Offering, Ronald S. Lauder, the Company's
Chairman, Leonard A. Lauder, a director of the Company and Ronald S. Lauder's
brother, and Lauder Gaspar Venture LLC ('LGV'), an investment vehicle the
principal investors of which are Ronald S. Lauder and Leonard A. Lauder and the
managing member (through a wholly owned company) of which is Andrew Gaspar, a
director of the Company, purchased an aggregate of 1,880,147 shares of Class B
Common Stock (approximately 11.6% of the outstanding common shares of the
Company on a fully diluted basis) for $50,000,000 (the 'Shareholder Equity
Investment'). LGV purchased one-half of such shares and Ronald S. Lauder and
Leonard A. Lauder each purchased one-quarter of such shares.
In addition, Ronald S. Lauder will, upon the request of the Company,
provide (or arrange for a bank to provide) the Company with the Shareholder
Standby Facility (see Note 7). If this facility is provided by a bank, Mr.
Lauder will personally guarantee the Company's obligations under the facility up
to $35,000,000. Under the terms of the indenture which governs the Notes, the
Company may borrow, repay, and reborrow any amounts under the Shareholder
Standby Facility at any time or from time to time. However, the lender will be
obligated to make loans thereunder at the request of the Company up to
$35,000,000, without conditions and regardless of any default thereunder, until
such time as the Company has received $35,000,000 of net cash proceeds from the
issuance of common shares of the Company (the 'Common Stock'). The Shareholder
Standby Facility will expire on the earlier of December 15, 2006 or the receipt
of $35,000,000 of net cash proceeds from the issuance of Common Stock and will
provide that interest may not be paid in cash until December 15, 2001.
Nesim N. Bildirici, a director and the Vice President of Mergers and
Acquisitions of the Company, is an employee of both the Company and R.S. Lauder,
Gaspar & Co., L.P. ('RSLAG'), a venture capital company owned and controlled by
Ronald S. Lauder and Andrew Gaspar. During 1996 Mr. Bildirici's salary was paid
by RSLAG and the Company reimbursed RSLAG for the services Mr. Bildirici
provided to the Company. During the year ended December 31, 1996 and the six
months ended June 30, 1997, the Company reimbursed RSLAG approximately $130,000
and $0, respectively, for Mr. Bildirici's services. Mr. Bildirici became a full
time employee of the Company as of January 1, 1997.
RSL Management Corporation ('RSL Management'), which is wholly owned by
Ronald S. Lauder, the Chairman of the Board of the Company and the principal
shareholder of the Company, leases an aggregate of 2,670 square feet of office
space to the Company at an annual rent of $180,000 per annum. In addition, RSL
Management provides payroll and benefit services to the Company for an annual
fee of $6,000.
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning April 1998 through August 2000
unless terminated earlier by the executive or the Company, and provide for
annual salaries and bonuses based on the performance of the Company. Salary
expense for these officers was approximately $646,000, $1,419,000 and $998,000
for the years ended December 31, 1995, 1996 and the six months ended June 30,
1997, respectively. The aggregate commitment for annual future salaries at
December 31, 1996, excluding bonuses, is approximately $1,728,000, $1,051,000,
$448,000, and $67,000 for 1997, 1998, 1999 and 2000, respectively, and at June
30, 1997, excluding bonuses, is approximately $1,942,000, $1,066,000, $468,000
and $27,000 for 1998, 1999, 2000 and 2001, respectively.
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
12. DEFINED CONTRIBUTION PLAN
In 1996, the Company instituted a defined contribution plan which provides
retirement benefits for most of its domestic employees. The Company's
contributions to the defined contribution which are based on a percentage of the
employee's annual compensation subject to certain limitations, were not
significant for the year ended December 31, 1996 and the six months ended June
30, 1997.
13. STOCK INCENTIVE PLAN
In April 1995, the Company established an Incentive Stock Option Plan (the
'Plan') to reward employees, nonemployee consultants and directors for service
to the Company and to provide incentives for future service and enhancement of
shareholder value. The Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the 'Committee'). The Committee consists of
three members of the Board of Directors. The Plan provides for awards of up to
1,000,000 shares of Class B Common Stock of the Company.
The options granted in 1995 vest over a period of three years commencing on
the first anniversary of the date of grant such that the option holder may not
acquire more than 2% of the outstanding capital stock as of the date upon which
the related employment agreement expires. The options granted in 1996 vest in
one-third increments on each of the first, second and third anniversaries of the
grant date.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995
Granted................................................ 650,000 $ 0.001 $0.001
Exercised.............................................. -- -- --
Rescinded/Canceled..................................... -- -- --
--------- -------------- --------------
Outstanding at December 31, 1995......................... 650,000 0.001 0.001
Granted................................................ 129,600 3.50-5.50 3.79
Exercised.............................................. -- -- --
Rescinded/Canceled..................................... -- -- --
--------- -------------- --------------
Outstanding at December 31, 1996......................... 779,600 0.001-5.50 0.63
Granted................................................ 181,400 0.01-26.59 18.18
Exercised.............................................. -- -- --
Rescinded/Canceled..................................... -- -- --
--------- -------------- --------------
Outstanding at June 30, 1997............................. 961,000 $ 0.001-26.59 $ 3.94
--------- -------------- --------------
--------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
RESERVED FOR AVERAGE
EXERCISABLE FUTURE GRANTS EXERCISE PRICE
----------- ------------- --------------
<S> <C> <C> <C>
December 31, 1995........................................ -- 350,000 $ --
December 31, 1996........................................ 81,142 220,400 0.001
June 30, 1997............................................ 375,378 39,000 0.53
</TABLE>
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
The Company has elected to follow Accounting Principles Board Opinion No.
25, 'Accounting for Stock Issued to Employees' ('APB 25') and related
Interpretations in accounting for its employee stock options. The Company has
issued its options at fair market value at the date of grant. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
SFAS Statement No. 123, 'Accounting for Stock Based Compensation' ('SFAS
123') was issued by the FASB in 1995 and if fully adopted, changes the methods
for recognition of costs on plans similar to those of the Company. Adoption of
the recognition provisions of SFAS No. 123 is optional; however, pro forma
disclosures as if the Company adopted the cost recognition requirements under
SFAS No. 123 are presented below.
Under SFAS No. 123, for options granted, the fair value at the date of
grant was estimated using the Black-Scholes option pricing model. The fair value
was estimated using the minimum value method. Under this method, the expected
volatility of the Company's common stock is not estimated, as there is no market
for the Company's common stock in which to monitor stock price volatility.
The following weighted average assumptions were used in calculating the
fair value of the options granted in the years ended December 31, 1995, 1996 and
the six months ended June 30, 1997, respectively: risk-free interest rates of
5.85%; no dividends are expected to be declared; expected life of the options
are between 30 and 42 months, between 39 and 51 months and between 36 and 48
months, respectively; and a maximum contractual life of 10 years.
For purposes of the pro forma disclosures the estimated fair value of the
options granted is amortized to compensation expense over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT LOSS PER COMMON SHARE
AND WEIGHTED AVERAGE FAIR VALUE OF OPTIONS
GRANTED)
YEAR ENDED
DECEMBER 31,
----------------------------- SIX MONTHS
1995 1996 ENDED
----------- ------------ JUNE 30,
1997
-----------
UNAUDITED
<S> <C> <C> <C>
Net loss
As reported................................... $ (9,402) $ (38,240) $ (37,177)
Pro forma..................................... $ (9,404) $ (38,315) $ (37,177)
Net loss per common share:
As reported................................... $ (3.65) $ (11.24) $ (7.43)
Pro forma..................................... $ (3.65) $ (11.26) $ (7.43)
Weighted average fair value of options granted
during the Period............................. $ 0.0004 $ 0.58 $ 11.76
</TABLE>
F-20
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company was committed to unrelated parties for
the rental of office space under operating leases. Minimum annual lease payments
with respect to the leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1997................................................................ $ 2,117
1998................................................................ 1,852
1999................................................................ 1,642
2000................................................................ 1,489
2001................................................................ 1,427
2002 and thereafter................................................. 3,303
--------------
$ 11,830
--------------
--------------
</TABLE>
At June 30, 1997, the Company was committed to unrelated parties for the
rental of office space under operating leases. Minimum annual lease payments
with respect to the leases is as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30, UNAUDITED
- ---------------------------- --------------
<S> <C>
1998................................................................ $ 2,179
1999................................................................ 1,984
2000................................................................ 1,907
2001................................................................ 1,732
2002................................................................ 1,486
2003 and thereafter................................................. 1,290
--------------
$ 10,578
--------------
--------------
</TABLE>
Rent expense for the six months ended June 30, 1997 was $1,494,000 and for
the years ended December 31, 1995 and 1996 was $210,000 and $2,276,000,
respectively.
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1997................................................................ $ 40,500
1998................................................................ 3,000
--------------
$ 43,500
--------------
--------------
</TABLE>
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30, UNAUDITED
- ---------------------------- --------------
<S> <C>
1998................................................................ $ 9,000
1999................................................................ 6,000
2000................................................................ 6,000
2001................................................................ 6,000
2002................................................................ 6,000
2003................................................................ 2,970
--------------
$ 35,970
--------------
--------------
</TABLE>
Commitments and Contingencies--The Company is involved in various claims
that arose in the ordinary course of its acquired businesses prior to the
Company's acquisition of such businesses. The expected settlements from these
matters have been accrued and are recorded as 'Other Liabilities.' In
management's opinion, the settlement of such claims would not have a material
adverse effect on the Company's consolidated financial position or results of
its operations.
In connection with the acquisition of one of its United States
subsidiaries, the Company recorded what management believed to be its best
estimate of the unfavorable portion related to certain transmission capacity
agreements. During the six months ended June 30, 1997, the Company successfully
amended such transmission capacity agreements. The resulting settlement of
approximately $7,000,000 has been recorded as other income.
Letters of Credit--The Company has outstanding letters of credit
aggregating $550,000 and $6,100,000 at December 31, 1996 and June 30, 1997,
respectively, expiring at various dates. Such letters of credit, which were
issued as deposits to vendors or security on leased premises, are fully secured
by certificates of deposit, and are classified as current assets.
15. SIGNIFICANT CUSTOMER
For the six months ended June 30, 1997 and the year ended December 31, 1996
no customer accounted for more than 10% of the Company's revenues. For the year
ended December 31, 1995, one customer accounted for 26% of the Company's
revenues.
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
16. REVENUES BY GEOGRAPHIC AREA
The following table provides certain geographic data on the Company's
operations for the years ended December 31, 1995 and 1996 and for the six months
ended June 30, 1997 (in thousands).
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUE INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1995
US..................................................................... $ 18,460 $ (6,969) $ 37,760
Corporate and other.................................................... 157 (2,412) 15,312
-------- ------------- ------------
$ 18,617 $ (9,381) $ 53,072
-------- ------------- ------------
-------- ------------- ------------
Year ended December 31, 1996
US..................................................................... $ 85,843 $ (12,146) $ 54,509
Germany................................................................ 8,844 (2,250) 9,776
France................................................................. 7,346 (886) 10,423
UK..................................................................... 6,260 (8,256) 18,994
Netherlands............................................................ 3,471 1,087 8,606
Corporate and other.................................................... 1,493 (8,301) 325,661
-------- ------------- ------------
$113,257 $ (30,752) $427,969
-------- ------------- ------------
-------- ------------- ------------
Six Months Ended June 30, 1997 (unaudited)
US..................................................................... $ 69,889 $ (6,585) $ 79,798
Germany................................................................ 6,051 (4,781) 9,772
France................................................................. 3,850 (2,289) 9,191
UK..................................................................... 11,347 (8,555) 28,331
Netherlands............................................................ 8,060 1,189 12,095
Australia.............................................................. 7,186 (865) 11,496
Corporate and other.................................................... 2,978 (9,602) 288,076
-------- ------------- ------------
$109,361 $ (31,488) $438,759
-------- ------------- ------------
-------- ------------- ------------
</TABLE>
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1997
16. REVENUES BY GEOGRAPHIC AREA--(CONTINUED)
Intersegment and intergeographic revenue are not significant to the revenue
of any business segment or geographic location. There is no export revenue from
the United States. Corporate and other assets consist principally of cash and
cash equivalents, and goodwill.
17. SUMMARIZED FINANCIAL INFORMATION
The following presents summarized financial information of RSL
Communications PLC a company incorporated in 1996 ('RSL PLC') as of June 30,
1997. RSL PLC is a 100% wholly owned subsidiary of the Company. RSL PLC had no
independent operations other than serving solely as a foreign holding company
for the Company's U.S. and European operations. The Notes issued by RSL PLC are
fully and unconditionally guaranteed by the Company. The Company's financial
statements are, except for the Company's capitalization, corporate overhead
expenses, operations in Australia and available credit facilities, identical to
the financial statements of RSL PLC (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
UNAUDITED
<S> <C> <C>
Current Assets........................................................... $ 201,734 $183,058
Non-current Assets....................................................... 225,131 241,651
Current Liabilities...................................................... 74,949 123,513
Non-current Liabilities.................................................. 394,556 355,513
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
UNAUDITED
<S> <C> <C>
Net Revenue.............................................................. $ 113,257 $102,175
Gross Profit............................................................. 14,796 12,160
Net Loss................................................................. (34,309) (31,508)
</TABLE>
18. SUBSEQUENT EVENTS
In July 1997, the Company acquired a majority interest in Delta Three, Inc.
('Delta Three'), a telecommunications provider utilizing the Internet and
networks based on Internet Protocols to provide telecommunications services. The
Company paid $5.0 million for a 51% ownership of the Company. Delta Three
utilizes the Internet, traditionally a device for communications between
computers, as a transmission medium for ordinary telephone calls.
The Company and Delta Three also entered into a services agreement pursuant
to which, among other things, Delta Three will provide the Company with
discounted carrier telephony services and the Company will provide Delta Three
with termination services at preferred rates and the co-location of Delta
Three's servers with the Company's facilities.
In August 1997, the Company purchased 85% of Decade Communications S.r.l.
('DECADE'), an Italian telecommunications company that commenced operations in
Italy in 1995. The Company paid approximately $1.7 million for its investment in
DECADE.
The Company purchased 90% of Newtelco Telecom AG ('Newtelco') in August
1997. Newtelco is an Austrian start-up telecommunications company that intends
on becoming the Company's Austrian local operator. The Company paid
approximately $800,000 for its investment in Newtelco.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
International Telecommunications Group Ltd. And Subsidiaries
We have audited the consolidated statements of operations and accumulated
deficit and of cash flows of International Telecommunications Group Ltd. and
subsidiaries for the nine months ended September 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of International
Telecommunications Group Ltd. and subsidiaries present fairly, in all material
respects, the results of their operations and their cash flows for the nine
months ended September 30, 1995 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 14, 1997
F-25
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Revenues......................................................................................... $ 26,351,634
Cost of Services................................................................................. 24,614,337
------------
Gross Profit................................................................................... 1,737,297
Selling, General and Administrative Expenses..................................................... 6,299,188
------------
Loss from Operations............................................................................. (4,561,891)
Interest Income.................................................................................. 56,148
Interest Expense................................................................................. (345,212)
------------
Net Loss......................................................................................... (4,850,955)
Accumulated Deficit, January 1, 1995............................................................. (5,153,000)
------------
Accumulated Deficit, September 30, 1995.......................................................... $(10,003,955)
------------
------------
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................................................ $(4,850,955)
Adjustments to reconcile net loss to net cash provided by operating activities, net of effects
of purchase of subsidiaries:
Depreciation and amortization.............................................................. 379,782
Provision for losses on accounts receivable................................................ 2,881,440
Changes in operating assets and liabilities:
Increase in accounts receivables........................................................ (9,204,455)
Decrease in accounts receivables-affiliates............................................. 111,434
Increase in prepaid expenses and other current assets................................... (325,013)
Increase in deposits and other assets................................................... (398,003)
Increase in accounts payable and accrued expenses....................................... 11,849,193
Increase in other current liabilities................................................... 601,084
Increase in other liabilities........................................................... 1,355,703
Decrease in due to affiliates........................................................... (534,941)
-----------
Net cash provided by operating activities............................................. 1,865,269
-----------
Cash Flows From Investing Activities:
Acquisition of subsidiary, net of cash acquired.............................................. (1,500,000)
Purchase of marketable debt securities....................................................... (2,200,000)
Purchase of property and equipment........................................................... (446,517)
-----------
Net cash used in investing activities................................................. (4,146,517)
-----------
Cash Flows from Financing Activities:
Repayment of short-term note payable......................................................... (1,000,000)
Proceeds from issuance of common stock....................................................... 5,749,300
Proceeds from issuance of preferred stock.................................................... 3,000,000
Principal payments under capital lease obligations........................................... (100,166)
Repayment of long-term debt.................................................................. (241,080)
-----------
Net cash provided by financing activities............................................. 7,408,054
-----------
Increase in Cash.................................................................................. 5,126,806
Cash at January 1, 1995........................................................................... 451,865
Cash at September 30, 1995........................................................................ $ 5,578,671
-----------
-----------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest................................................................................... $ 185,996
-----------
-----------
Supplemental Schedule of Noncash Investing Activities-
Assets acquired under capital lease obligation............................................... $ 443,710
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995
1. BUSINESS DESCRIPTION
International Telecommunications Group Ltd. and its subsidiaries ('ITG')
operate a domestic and international communications network which provides
international and domestic long distance telephone services for businesses and
individuals in the United States and abroad.
2. ACQUISITION
Effective September 1, 1995, ITG's subsidiary International
Telecommunications Corporation ('RSL USA') (collectively, 'ITG') consummated a
stock purchase agreement with Cyberlink, Inc. ('Cyberlink') and Cyberlink's
principal stockholder.
The agreement provided for the purchase of 51% of the capital stock of
Cyberlink. The purchase price consisted of $1,500,000 paid to Cyberlink and
assumption of net liabilities of $14,131,000. In connection with the purchase of
Cyberlink, the Company recorded approximately $15,631,000 of goodwill as of
September 30, 1995.
In connection with the acquisition of Cyberlink, the 49% minority
stockholders of Cyberlink may sell their shares to RSL USA at fair market value
if RSL USA consummates an initial public offering of its securities. RSL USA can
call the 49% minority stockholders shares at any time after December 31, 1996
for a price equal to 49% of the sum of eight times Cyberlink's average monthly
revenues of the last quarter prior to exercise date plus cash minus long-term
liabilities.
The acquisition has been accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. The excess of the purchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill, which will be
amortized over fifteen years.
The accompanying consolidated statements of operations and accumulated
deficit and cash flows include the results of Cyberlink from its date of
acquisition through September 30, 1995.
The following presents the unaudited pro forma consolidated statement of
operations of the Company for the nine months ended September 30, 1995, assuming
the Company had purchased Cyberlink at January 1, 1995. The consolidated
statement does not necessarily represent what the Company's results of
operations would have been had such acquisition actually occurred on such date,
or of results to be achieved in the future:
<TABLE>
<CAPTION>
PRO FORMA FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1995
----------------------
(UNAUDITED)
<S> <C>
Revenue.................................................... $ 40,504,172
Cost of services........................................... 37,087,243
----------------------
Gross Profit............................................... 3,416,929
Selling, general and administrative expenses............... 23,555,216
----------------------
Loss from operations....................................... (20,138,287)
Interest income............................................ 56,148
Interest expense........................................... (738,496)
----------------------
Net loss................................................. $(20,820,635)
----------------------
----------------------
</TABLE>
F-28
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of International Telecommunications
Group Ltd. and its majority-owned subsidiaries. The Company has included 100% of
its subsidiaries' operating losses since the minority interests' investment has
been reduced to zero. All material intercompany accounts and transactions have
been eliminated. All of the Company's subsidiaries' fiscal years end December
31.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for litigation and other claims. Actual results could differ from these
estimates.
Revenue Recognition--The Company records revenue based on minutes (or
fractions thereof) of customer usage.
The Company records payments received in advance for prepaid calling card
services and services to be supplied under contractual agreements as deferred
revenues until such related services are provided. Deferred revenue is included
in other current liabilities.
Goodwill--Goodwill represents the excess of cost over the fair value of the
net assets of acquired entities, and is being amortized using the straight-line
method over fifteen years. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company measures the
potential impairment of recorded goodwill by the undiscounted value of expected
future cash flows in relation to its net capital investment in the subsidiary.
Based on its review, the Company does not believe that an impairment of its
goodwill has occurred.
Amortization expense for the nine months ended September 30, 1996 was
$86,838.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or fair values at the date of acquisition, and in the case of
equipment under capital leases, the present value of the future minimum lease
payments, less accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the depreciable assets,
which range from five to fifteen years. Improvements are capitalized, while
repair and maintenance costs are charged to operations as incurred. Construction
in progress represents costs incurred in connection with the building of a
switch facility center.
Deposits--Deposits consist principally of amounts paid to the Company's
providers of telephone access lines.
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ('SFAS') No. 109, Accounting for
Income Taxes. SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes.
New Accounting Standards--During 1995, the Company adopted SFAS No. 121,
Impairment of Long-Lived Assets. There was no adjustment recorded as a result of
adopting this standard. The Company periodically compares the carrying value of
its long-lived assets, principally property and equipment, to undiscounted cash
flows generated by the long-lived assets. The Company's undiscounted cash flows
exceed the carrying value of its long-lived assets.
F-29
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
4. CONCENTRATION OF CREDIT RISK
The Company is subject to significant concentrations of credit risk which
consist principally of trade accounts receivable. The Company sells a
significant portion of its services to other carriers and, as a result,
maintains significant receivable balances with certain carriers. If the
financial condition and operations of these customers deteriorate below critical
levels, the Company's operating results could be adversely affected. During
1995, one of the Company's customers, which represented approximately 18% of the
Company's sales for the nine months ended September 30, 1995, failed to meet
minimum payments schedules and, as a result, the Company terminated services to
this customer. Consequently, the customer refused to pay outstanding receivable
balances totaling approximately $4,653,000. At September 30, 1995, the Company
had written off the entire $4,653,000. The Company has commenced legal
proceedings to recover amounts owed to the Company.
The Company now performs ongoing credit evaluations of its customer's
financial condition and requires collateral in the form of deposits in certain
circumstances.
5. INCOME TAXES
No provision for income taxes has been made because the Company has
sustained cumulative losses since the commencement of its operations in 1994.
For the nine months ended September 30, 1995, the Company had net operating loss
carryforwards generated primarily in the United States of approximately
$10,000,000. The net operating loss carryforwards will expire at various dates
beginning in 2009 through 2010 if not utilized.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as follows:
<TABLE>
<S> <C>
Deferred tax assets................................................. $ 8,120,000
Less valuation allowance............................................ (8,120,000)
-----------
Net deferred tax assets........................................... $ --
-----------
-----------
</TABLE>
The Company's net operating losses and legal reserves generated the
deferred tax assets. At September 30, 1995, a valuation allowance of $8,120,000
is provided as the realization of the deferred tax benefits is not likely.
6. NOTES PAYABLE AND LONG-TERM DEBT
RSL USA has a series of notes payable to different vendors in the amount of
$1,136,712 which bear interest at rates from 8% to 14.5%, of which $874,066 is
current.
Cyberlink has a credit agreement which provides for up to $5,000,000 in
committed credit lines to finance its accounts receivable. Interest is payable
at 2 1/4% over the prime rate of interest (prime being 8.75% at September 30,
1995). A second credit line provides for up to $2,000,000 in capital expenditure
financing with interest payable at 2 1/2% over the prime rate. The total amounts
outstanding at September 30, 1995 from the above credit lines are $1,713,296 and
$0, respectively. The credit lines terminate on August 31, 1998.
Cyberlink has a long-term note payable to a vendor in the amount of
$1,000,000 which bears interest at the rate of 10%, commencing January 1, 1997.
ITG's notes payable had fair values that approximated their carrying
amounts.
Interest expense on the above notes was approximately $190,603 for the nine
months ended September 30, 1995.
F-30
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
7. EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning April 1998 through May 2000 unless
terminated earlier by the executive or the Company, and provides for an annual
base salary. Salary expense for the officers was $253,750 for the nine months
ended September 30, 1995. The aggregate commitment for annual future salaries at
September 30, 1995, excluding bonuses, was approximately $453,750 for 1996,
$454,500, $300,000, $200,000 and $116,667 for 1997, 1998, 1999 and 2000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
At September 30, 1995, the Company is committed to unrelated parties for
the purchase of certain capital assets and the rental of office space under
operating leases. Minimum annual lease payments with respect to the leases and
capital commitment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- -----------------
<S> <C>
1996................................................................. $ 849,435
1997................................................................. 808,300
1998................................................................. 546,760
1999................................................................. 366,998
2000................................................................. 305,226
2001 and thereafter.................................................. 431,612
----------
$3,308,331
----------
----------
</TABLE>
Rent expense for the nine months ended September 30, 1995 was $173,072.
The Company is committed to the rental of transmission capacity under
certain operating leases. The minimum annual lease payments with respect to
these agreements is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- -----------------
<S> <C>
1996................................................................ $20,400,000
1997................................................................ 38,000,000
1998................................................................ 7,500,000
-----------
$65,900,000
-----------
-----------
</TABLE>
The Company is currently negotiating the termination of these operating
leases.
Litigation and Other Claims--The Company is involved in various litigation
and other claims that arose in the ordinary course of its acquired businesses
prior to the Company's acquisition of such businesses. The expected settlements
from these matters have been accrued and are recorded as 'Other Liabilities.' In
management's opinion, the settlement of such litigation and claims would not
have a material adverse effect on the Company's consolidated financial position
or results of its operations.
Letters of Credit--The Company has outstanding letters of credit
aggregating approximately $76,000 at September 30, 1995, expiring at various
dates between June 1, 1996 and August 8, 1996. Such letters of credit, which
were issued as deposits to vendors or security on leased premises, are fully
secured by certificates of deposit and are classified as current assets.
9. SIGNIFICANT CUSTOMER
For the nine months ended September 30, 1995, one customer accounted for
18% of the Company's revenues.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
International Telecommunications Group Ltd. and Subsidiaries
We have audited the consolidated statements of operations and accumulated
deficit and of cash flows of International Telecommunications Group Ltd. and
subsidiaries for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of International
Telecommunications Group Ltd. and subsidiaries present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 14, 1997
F-32
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Revenues.......................................................................................... $ 4,701,886
Cost of services.................................................................................. 4,922,545
-----------
Gross loss...................................................................................... (220,659)
Selling, general and administrative expenses...................................................... 2,635,115
-----------
Loss from operations.............................................................................. (2,855,774)
Interest expense-net.............................................................................. (225,069)
-----------
Net loss.......................................................................................... (3,080,843)
Accumulated deficit, January 1, 1994.............................................................. (2,072,157)
-----------
Accumulated deficit, December 31, 1994............................................................ $(5,153,000)
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Cash flow from Operating Activities:
Net loss........................................................................................ $ (3,080,843)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.................................................................................... 239,663
Gain on the sale of equipment................................................................... (6,781)
Provision for losses on accounts receivable..................................................... 13,237
Changes in operating assets and liabilities:
Decrease in accounts receivables................................................................ 75,785
Increase in inventories......................................................................... (426,431)
Decrease in prepaid expenses and other current assets........................................... 41,271
Decrease in due from affiliates................................................................. 235,804
Increase in employee loans...................................................................... (209,596)
Increase in deposits............................................................................ (71,395)
Increase in accounts payable and accrued expenses............................................... 1,183,149
Increase in other current liabilities........................................................... 19,108
------------
Net cash used in operating activities........................................................ (1,987,029)
------------
Cash flows used in Investing Activities:
Proceeds from sale of property and equipment.................................................... 544,890
Purchase of property and equipment.............................................................. (1,022,783)
------------
Net cash used in investing activities........................................................ (477,893)
------------
Cash flows provided by Financing Activities:
Proceeds from long-term debt.................................................................... 1,454,094
Payments of long-term debt...................................................................... (686,868)
Principal payments under capital lease obligations.............................................. (440,330)
Due to affiliate................................................................................ 60,913
Proceeds from issuance of common stock.......................................................... 1,499,700
Proceeds from short-term note payable to RSL Communications, Inc................................ 1,000,000
------------
Net cash provided by financing activities....................................................... 2,887,509
------------
Increase in cash................................................................................ 422,587
Cash at January 1, 1994......................................................................... 29,278
------------
Cash at December 31, 1994....................................................................... $ 451,865
------------
------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest..................................................................................... $ 234,100
------------
------------
Supplemental Schedule of Noncash Investing Activities:
Assets acquired under capital lease obligations................................................. $ 103,230
------------
------------
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994
1. BUSINESS DESCRIPTION
International Telecommunications Group Ltd. and its subsidiaries ('ITG')
operate a domestic and international communications network which provides
international and domestic long distance telephone services for businesses and
individuals in the United States and abroad.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of International Telecommunications
Group Ltd. and its majority-owned subsidiaries. The Company has included 100
percent of its subsidiaries' operating losses since the minority interests'
investment has been reduced to zero. All material intercompany accounts and
transactions have been eliminated. All of the Company's subsidiaries' fiscal
years end December 31.
Revenue Recognition--The Company records revenue based on minutes (or
fractions thereof) of customer usage.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or in the case of equipment under capital leases, the present
value of the future minimum lease payments, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the depreciable assets, which range from five to fifteen years.
Improvements are capitalized, while repair and maintenance costs are charged to
operations as incurred.
Deposits--Deposits consist principally of amounts paid to the Company's
providers of telephone access lines.
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ('SFAS') No. 109, Accounting for
Income Taxes. SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes.
3. RELATED PARTY TRANSACTIONS
The Company engaged in certain transactions with certain companies in which
stockholders of the Company are significant shareholders. Such transactions are
in the normal course of business. For the year ended December 31, 1994, the
Company had receivables with respect to those related parties as follows:
<TABLE>
<CAPTION>
ACCOUNTS
AFFILIATES RECEIVABLES
- ---------- -----------
<S> <C>
Litco........................................................................... $ 1,649
Income UK....................................................................... 191,255
ITC America..................................................................... 18,285
Intelco Europe, Ltd............................................................. 195,909
Intelco Russia.................................................................. 295,270
Intelco Ukraine................................................................. 284,486
Interactive Telephone........................................................... 4,565
-----------
Total........................................................................... 991,419
Less provision for doubtful affiliate receivables............................... (776,417)
-----------
Due from affiliates-net......................................................... $ 215,002
-----------
-----------
</TABLE>
Due to affiliate, aggregating $60,913 at December 31, 1994, consists of a
loan from Income UK.
F-35
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994
4. INCOME TAXES
No provision for Federal, state and local income taxes has been made
because the Company has sustained cumulative losses since commencement of its
operations. For the year ended December 31, 1994, the Company had net operating
loss carryforward of approximately $4,266,000. Such net operating loss
carryforwards begin expiring in 2006.
In accordance with SFAS No.109, the Company has computed the components of
deferred income taxes as follows:
<TABLE>
<S> <C>
Deferred tax benefit...................................... $ 1,500,000
Less valuation allowance.................................. (1,500,000)
-----------
Net deferred tax benefit.................................. $ --
-----------
-----------
</TABLE>
At December 31, 1994, a valuation allowance of $1,500,000 is provided as
the realization of the deferred tax benefits are not more likely than not. The
Company's net operating losses, primarily generated the deferred tax benefits.
5. LONG-TERM DEBT
Notes payable at December 31, 1994 consists of the following:
<TABLE>
<S> <C>
Term note payable in monthly installments of $54,357 plus interest at 8.0 percent per
annum through the date of maturity, January 15, 1996................................... $ 674,728
Term note payable in monthly installments of $3,729 plus interest at 8.25 percent per
annum through the date of maturity, July 1, 1996....................................... 82,237
Term note payable in monthly installments of $4,628 plus interest at 8.25 percent per
annum through the date of maturity, September 15, 1996................................. 64,795
Term note payable in monthly installments of $43,745 plus interest at 10.0 percent per
annum through the date of maturity, June 1, 1996....................................... 1,355,703
Term note payable in monthly installments of $23,750 plus interest at 14.5 percent per
annum through date of maturity, January 12, 1997....................................... 517,575
Term note payable at 10.0 percent per annum due January 1, 1995.......................... 2,688
----------
Total.................................................................................... $2,697,726
----------
----------
</TABLE>
The scheduled repayment of long-term debt from years subsequent to December
31, 1994 is as follows:
<TABLE>
<S> <C>
1995...................................................... $ 1,580,457
1996...................................................... 805,522
1997...................................................... 311,747
-----------
2,697,726
Less current maturities................................... (1,500,457)
-----------
$ 1,197,269
-----------
-----------
</TABLE>
F-36
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994
6. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1995........................................................ $ 181,447
1996........................................................ 159,359
1997........................................................ 66,399
---------
Total minimum lease obligations............................. 407,205
Less interest............................................... (55,930)
---------
Present value of future minimum lease obligations........... 351,275
Less current portion........................................ (144,610)
---------
Long-term lease obligations at December 31, 1994............ $ 206,665
---------
---------
</TABLE>
Assets held under capital leases aggregated $276,643 (net of accumulated
depreciation of $201,679).
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
9 percent to 11 percent per annum.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Company is committed to the rental of office
space under an operating lease. Minimum annual lease payments with respect to
this lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1995......................................................... $115,927
1996......................................................... 115,927
1997......................................................... 115,927
1998......................................................... 115,927
1999......................................................... 115,927
Thereafter................................................... 173,891
--------
$753,526
--------
--------
</TABLE>
Rent expense for the year ended December 31, 1994 was $106,049.
The Company is currently in litigation with one of its vendors. The Company
has provided for an amount equal to the vendor's original invoices, prior to the
filing of this claim and has recorded such amounts in long-term debt. The
Company has not made any payments on this debt since June 1994. ITG's subsidiary
International Telecommunications Corporation ('RSL USA') outside counsel had
advised RSL USA that at this time, the extent of RSL USA's liability, if any, is
not determinable.
The Company has outstanding letters of credit aggregating $167,772 at
December 31, 1994, expiring at various dates during 1995. Such letters of
credit, which were issued as deposits to vendors or security on leased premises,
are fully secured by certificates of deposit, such certificates of deposit are
classified as long-term assets and included in the balance sheet caption
'Deposits.'
F-37
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994
8. SUBSEQUENT EVENTS
On March 10, 1995, International Telecommunications Group Ltd., sold 66,667
shares of its convertible preferred stock to RSL Communications Inc. (RSL) for
$3,000,000 subject to increase to a maximum of $4,750,000, as provided for in
the terms of the transactions. The convertible preferred stock is convertible at
RSL's option into common stock, in a one-for-one basis. Additionally, RSL has
the option of redeeming such preferred stock, at any time, through 1998 for
$4,750,000. ITG utilized $1,000,000 of the proceeds from the transaction to
repay the short-term note payable to RSL subsequent to December 31, 1994.
In conjunction with the March 10th sale of shares, ITG reorganized Intelco
Russia and Ukraine; the ITG ownership in these two entities was transferred to
the Chairman of the Company. The Company continues to do business with these two
entities. Fair market value of these two entities was nominal.
On September 1, 1995, ITG issued additional shares of common stock to RSL
for $6,000,000.
In September 1995, RSL USA purchased 51% of Cyberlink, Inc., a Delaware
Corporation, for $6,000,000. Two percent of the total purchase price is held in
escrow until certain requirements are satisfied by Cyberlink.
RSL USA has begun the installation of new telecommunication switching
facilities. In conjunction with these installations, RSL USA will enter into a
long-term capital lease agreement for approximately $6,000,000.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Cyberlink, Inc. and Subsidiaries
Woodland Hills, California
We have audited the accompanying consolidated balance sheet of Cyberlink, Inc.
and subsidiaries as of August 31, 1995, and the related consolidated statements
of operations and accumulated deficit, and cash flows for the eight months then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cyberlink, Inc. and
Subsidiaries as of August 31, 1995, and the results of its operations and cash
flows for the eight months then ended in conformity with generally accepted
accounting principles.
BROWN, LEIFER, SLATKIN + BERNS
August 30, 1996
Studio City, California
F-39
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash............................................................................................ $ 7,324
Accounts receivable, less allowance for doubtful accounts of $2,438,000......................... 2,195,483
Prepaid expenses................................................................................ 71,430
-----------
Total current assets......................................................................... 2,274,237
-----------
Property and Equipment.......................................................................... 2,558,200
-----------
Other Assets.................................................................................... 671,302
-----------
$ 5,503,739
-----------
-----------
LIABILITIES AND NET SHAREHOLDER'S DEFICIT
Current Liabilities:
Checks outstanding in excess of balance in bank................................................. $ 131,012
Advances under accounts receivable financing line............................................... 1,472,889
Current maturities of long-term debt............................................................ 1,226,168
Accounts payable................................................................................ 7,541,228
Accrued expenses and other current liabilities.................................................. 9,994,564
Advances from stockholder....................................................................... 200,000
-----------
Total current liabilities.................................................................... 20,565,861
-----------
Long-term Debt.................................................................................... 2,611,526
-----------
Commitments and Contingencies (Note 7)
Net Stockholders' Deficit:
Common stock, authorized 10,000,000 shares; issued and outstanding 1,000 shares................. 1,200
Additional paid-in capital...................................................................... 796,214
Accumulated deficit............................................................................. (18,471,062)
-----------
(17,673,648)
-----------
$ 5,503,739
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<S> <C>
Revenue.......................................................................................... $ 14,152,538
Cost Of Revenue.................................................................................. 12,472,906
------------
Gross Profit..................................................................................... 1,679,632
Operating Expenses:
Selling........................................................................................ 2,356,714
General and Administrative..................................................................... 6,117,255
------------
8,473,969
------------
Loss from Operations............................................................................. (6,794,337)
Other Expenses:
Interest....................................................................................... 405,875
Reserve for lawsuits and contingencies......................................................... 7,810,000
------------
8,215,875
------------
Loss before Provision for Income Taxes........................................................... (15,010,212)
Provision for Income Taxes....................................................................... 1,600
------------
Net Loss......................................................................................... (15,011,812)
Accumulated Deficit, beginning of Period......................................................... (3,459,250)
------------
Accumulated Deficit, end of Period............................................................... $(18,471,062)
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss....................................................................................... $(15,011,812)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization............................................................... 221,620
Provision for uncollectible accounts........................................................ 1,528,938
Increase in accounts receivable............................................................. (1,152,942)
Increase in prepaid expenses................................................................ (71,430)
Increase in accounts payable, accrued expenses, and other current liabilities............... 13,436,607
------------
Net cash used by operating activities............................................................ (1,049,019)
Cash flows from investing activities:
Capital expenditures........................................................................... (1,276,888)
Deposits paid.................................................................................. (142,764)
Advances to affiliates......................................................................... (500,000)
------------
Net cash used by investing activities............................................................ (1,919,652)
------------
Cash flows from financing activities:
Net borrowings on accounts receivable financing line........................................... 951,091
Loans from officer/stockholder................................................................. 1,600,000
Principal payments on long-term debt........................................................... (27,225)
Other borrowings............................................................................... 131,012
------------
Net cash provided by financing activities........................................................ 2,654,878
------------
Net decrease in cash............................................................................. (313,793)
Cash and cash equivalents, beginning of period................................................... 321,117
------------
Cash and cash equivalents, end of period......................................................... $ 7,324
------------
------------
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest.................................................................................... $ 293,991
------------
------------
</TABLE>
During the period, the Company incurred capital lease obligations in the amount
of $131,595.
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
1. NATURE OF OPERATIONS
Cyberlink, Inc. and its subsidiaries (the 'Company') provide domestic
common carrier service by leasing a mix of telephone services from a variety of
underlying common carriers. In addition, the Company resells international
switched and private line telecommunications services between the United States
and various international points. The Company is also authorized to resell
private line services to provide non-interconnected private line services to
various foreign countries and to resell private line services to provide
switched services to the United Kingdom. Furthermore, the Company is authorized
to provide international data, voice and television services via satellite
systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Cyberlink, Inc. and its wholly-owned
subsidiaries Cyberlink-Nevada, Inc. and Cyberlink-California, Inc. All material
intercompany transactions and balances have been eliminated in consolidation.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
trade accounts receivable and uninsured cash balances. Concentrations of credit
risk with respect to accounts receivable are limited due to the number of
customers comprising the Company's customer base and their geographic
dispersion. The Company requires no collateral from its customers and performs
ongoing credit evaluations.
The Company places its cash deposits with high-credit quality financial
institutions. At times, balances in the Company's cash accounts may exceed the
Federal Deposit Insurance Corporation (FDIC) limit of $100,000.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets. The estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Leasehold improvements..................................... 4 years
Network equipment.......................................... 7 years
Dialers.................................................... 4 years
Computer equipment......................................... 5 years
Office furniture and equipment............................. 5 years
Equipment held under capital leases........................ 4-5 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized.
Capital Lease Obligations--The Company capitalizes certain equipment under
lease obligations which, by their terms, are equivalent to installment
purchases.
Income Taxes--The Company has elected to be taxed as an S Corporation,
whereby the entire Federal and California taxable income or loss of the Company
is reportable by the stockholder. The Company will not be responsible for
Federal income tax, but will incur a 1.5% California surtax.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes.
Deferred income taxes are provided for temporary differences with respect
to balance sheet items that result from different reporting practices for
financial statements and income tax purposes. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes are also recognized for operating losses
that are available to offset future taxable income and tax credits that are
available to offset future federal income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
F-43
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Deferred taxes are classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or noncurrent depending on the periods in
which the temporary differences are expected to reverse.
The principal source of temporary differences is the use of the cash method
of accounting for income tax purposes which results in immaterial deferred
income taxes. Consequently, the provision for income taxes consists of taxes
currently payable (minimum state franchise taxes).
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Property and Equipment:
<TABLE>
<S> <C>
Leasehold improvements..................................... $ 3,818
Network equipment.......................................... 1,761,277
Dialers.................................................... 564,499
Computer equipment......................................... 171,003
Office furniture and equipment............................. 142,956
Equipment held under capital leases........................ 267,452
----------
2,911,005
Accumulated depreciation, including $44,264 for equipment
held under capital leases................................ (352,805)
----------
$2,558,200
----------
----------
</TABLE>
Depreciation expense charged to operations amounted to $221,620 including
$25,768 for capital leases.
Accrued Expenses and Other Current Liabilities:
<TABLE>
<S> <C>
Lawsuit and contingency reserves........................... $7,550,000
Utility taxes.............................................. 990,742
Commissions................................................ 640,965
Unearned revenue........................................... 400,000
Other...................................................... 412,857
----------
$9,994,564
----------
----------
</TABLE>
Other Assets:
<TABLE>
<S> <C>
Advances to European affiliates............................ $ 500,000
Deposits................................................... 171,302
----------
$ 671,302
----------
----------
</TABLE>
4. ADVANCES UNDER ACCOUNTS RECEIVABLE FINANCING LINE
The Company has a credit agreement with a factor for a revolving line of
credit of up to $1,200,000 for financing of its accounts receivable. Advances
are based on 60% of eligible accounts receivable and are secured by
substantially all assets of the Company and the personal guarantee of the
officer/stockholder. Interest is payable monthly at the rate of 2 3/4% per
month.
5. ADVANCES FROM STOCKHOLDER
Advances from stockholder represent a non-interest bearing advance, due on
demand.
F-44
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to officer/stockholder unsecured, interest payable quarterly at the rate of 8% per
annum with all principal and interest due December 15, 1997. The repayment of the note may be
accelerated upon the Company achieving a total stockholder's equity of at least $7,500,000. The
note is subordinated to substantially all obligations of the Company and has been assigned as
collateral by the officer/stockholder of the Company (See Notes 7 and 9)......................... $2,500,000
Demand note payable unsecured, non-interest bearing. The note is subordinated to the advances under
the factoring agreement (Note 4) and is convertible into 187,254 shares of the Company's common
stock (See Note 9)............................................................................... 1,150,000
Capital lease obligations, due in monthly installments aggregating $8,928 including $187,694
interest at rates ranging from 13% to 28.1%...................................................... 187,694
----------
3,837,694
Current maturities, including $45,000 for capital lease obligations................................ 1,226,168
----------
$2,611,526
----------
----------
</TABLE>
The following is a schedule of aggregate annual maturities of long-term
debt:
<TABLE>
<S> <C>
1996................................................................. $1,226,168
1997................................................................. 2,550,860
1998................................................................. 35,477
1999................................................................. 16,670
2000................................................................. 8,519
----------
$3,837,694
----------
----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases its facilities and equipment under
non-cancelable operating and capital leases expiring in various years through
September 30, 2004 and is committed to minimum rental payments (exclusive of
real estate taxes, maintenance, etc.) as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
1996.............................................................. $ 783,361 $ 96,006
1997.............................................................. 787,579 60,477
1998.............................................................. 551,350 36,826
1999.............................................................. 186,120 18,176
2000.............................................................. 89,220 6,708
Thereafter........................................................ 364,315 --
---------- --------
Total minimum lease payments...................................... $2,761,945 218,193
----------
----------
Less amounts representing interest................................ 30,499
--------
Present value of net minimum lease payments....................... $187,694
--------
--------
</TABLE>
Rent expense charged to operations amounted to $371,236 for the eight
months ended August 31, 1995.
F-45
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995
7. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Subordinated Note Payable to Officer/Stockholder--As described in Note 6,
the Company is obligated under a note payable to the officer/stockholder of the
Company, which has been assigned to collateralize a loan secured by the
officer/stockholder. In connection with the underlying financing for the loan,
the Company was required to enter into an agreement whereby it was required to
adhere to various affirmative and negative covenants with respect to the
operations of the Company, disposition of assets, issuance of stock, payment of
dividends, conversion of debt and other actions as defined in the agreement. In
addition, the Company was required to issue stock warrants as described in Note
8.
Litigation--On December 9, 1994 the Company filed suit against one of its
suppliers for breach of contract and unfair business practices, damages to be
proved at trial. A counterclaim in the approximate amount of $3,000,000 has been
filed by the defendant alleging breach of contract and unfair business
practices, among other allegations. Outside counsel for the Company have advised
that at this stage in the proceedings settlement discussions are in progress and
they cannot offer an opinion as to the probable outcome. The Company however,
has provided a reserve in the amount of $4,500,000 in the accompanying financial
statements.
In addition to the litigation noted above, the Company is, from time to
time, subject to routine litigation incidental to its business. The Company
believes that adequate reserves have been provided where appropriate.
8. COMMON STOCK WARRANTS
At August 31, 1995 Cyberlink, Inc. had outstanding warrants to purchase
33 1/3% of the outstanding shares of Cyberlink, Inc. common stock at $.10 per
share. The warrants were subsequently cancelled as discussed in Note 9 to the
financial statements.
9. SUBSEQUENT EVENTS
Additional Financing--On September 8, 1995 the Company refinanced its
factoring arrangement (Note 4) and entered into a credit facility providing a
$5,000,000 revolving line of credit and a $2,000,000 equipment line. The term
loan bears interest at prime plus 2 1/2%. Advances under the revolving line bear
interest at prime plus 2 1/2%.
Conversion of Subordinated Debt--On September 1, 1995 the
officer/stockholder of the Company and the Company entered into an exchange
agreement whereby notes payable aggregating $2,500,000 were exchanged for
349,837 shares of Cyberlink, Inc. common stock. In addition, the warrants, as
described in Note 8 were cancelled.
In addition, on September 1, 1995 the note payable in the amount of
$1,150,000 was converted into 187,294 shares of Cyberlink, Inc. common stock.
Issuance of Common Stock--On September 1, 1995, Cyberlink, Inc. sold
1,213,719 shares of its common stock for $1,500,000 plus an additional capital
contribution of $2,029,397.
F-46
<PAGE>
CYBERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995
9. SUBSEQUENT EVENTS--(CONTINUED)
In addition, on September 1, 1995 the Company issued 71,396 shares in
exchange for services and cancellation of certain rights estimated at
approximately $176,000. Warrants to purchase an additional 47,597 shares at
$.001 per share were also issued for services and cancellation of certain rights
at an estimated cost of approximately $118,000.
Termination of S Corporation Election--Effective September 1, 1995 the
Company's status as an S corporation was terminated when it sold 1,213,719 of
its shares as described above. Consequently, the Company will be taxed as a C
corporation and any deferred income taxes will be reinstated at the corporate
level.
F-47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (U.S.
Version) (the 'U.S. Underwriting Agreement'), the Company has agreed to sell to
each of the U.S. Underwriters named below, and each of such U.S. Underwriters,
for whom Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, and SBC Warburg Dillon Read
Inc. are acting as representatives, has severally agreed to purchase from the
Company, the respective number of shares of Class A Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
- --------------------------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co....................................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.....................................
Morgan Stanley & Co. Incorporated......................................................
SBC Warburg Dillon Read Inc............................................................
------------
Total ............................................................................ 5,760,000
------------
------------
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain brokers and dealers. After the shares of Class
A Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the 'International
Underwriting Agreement') with the underwriters of the International Offering
(the 'International Underwriters' and together with the U.S. Underwriters, the
'Underwriters') providing for the concurrent offer and sale of 1,440,000 shares
of Class A Common Stock in an international offering outside the United States.
The offering price and aggregate underwriting discounts and commissions per
share for the two offerings are identical. The closing of the U.S. Offering is a
condition to the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Merrill Lynch International, Morgan Stanley & Co. International
Limited and Swiss Bank Corporation, acting through its Division, SBC Warburg
Dillon Read.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the 'Agreement Between Syndicates') relating to the Offerings, each
of the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions, it
will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas subject
to its jurisdiction (the 'United States') and to U.S. persons, which term shall
mean, for purposes of this paragraph: (a) any individual who is a resident of
the United States or (b) any corporation, partnership or other entity organized
in or under the laws of the United States or any political subdivision thereof
and whose office most directly involved with the purchase is located in the
United States. Each of the International Underwriters has agreed pursuant to the
Agreement Between Syndicates that, as a part of the distribution of the shares
offered as a part of the International
U-1
<PAGE>
Offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Class A Common Stock (a) in the
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between Syndicates, sales may be made between the
U.S. Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 864,000
additional shares of Class A Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
5,760,000 shares of Class A Common Stock offered hereby. The Company has granted
the International Underwriters a similar option to purchase up to an aggregate
of 216,000 additional shares of Class A Common Stock.
At the request of the Company, the Underwriters have initially reserved up
to 360,000 shares of Class A Common Stock for sale at the initial public
offering price set forth on the cover page of this Prospectus to eligible
employees of the Company and persons having business relationships with the
Company. The number of shares of Class A Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby. Individuals purchasing reserved shares have agreed, with certain
exceptions, not to sell, offer to sell or otherwise dispose of any shares of
Class A Common Stock without the prior written consent of Goldman, Sachs & Co.
for a period of 180 days after the date of this Prospectus.
The Company and certain directors, officers and shareholders have agreed
that during the period beginning from the date of this Prospectus and continuing
to and including the date that is 180 days after the date of this Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, directly or
indirectly, any securities of the Company (other than pursuant to employee stock
option plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Prospectus), which
are substantially similar to the shares of Class A Common Stock or which are
convertible into or exchangeable for securities which are substantially similar
to the shares of Class A Common Stock, without the prior written consent of
Goldman, Sachs & Co., except for the shares of Class A Common Stock offered in
connection with the Offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated among
the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
In connection with the Offerings, the Underwriters may purchase and sell
the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Class A Common Stock; and
syndicate short positions involve the sale by the
U-2
<PAGE>
Underwriters of a greater number of shares of Class A Common Stock than they are
required to purchase from the Company in the Offerings. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the securities sold in the
Offerings for their account may be reclaimed by the syndicate if such shares of
Class A Common Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Class A Common Stock, which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise, and
these activities, if commenced, may be discontinued at any time.
The Company has filed an application for quotation of the Class A Common
Stock on the Nasdaq National Market under the symbol 'RSLC.'
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to the Company and its
affiliates, for which such Underwriters have received and will receive customary
fees and commissions.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Class A Common Stock, including shares initially sold in
the International Offering, to persons located in the United States.
U-3
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to sell or the solicitation of an offer to buy any
securities other than the securities to which it relates or an offer to sell or
the solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................... 4
Risk Factors......................................... 13
Use of Proceeds...................................... 24
Dividend Policy...................................... 24
Dilution............................................. 25
Capitalization....................................... 26
Selected Consolidated Financial Data................. 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 29
Business............................................. 41
Management........................................... 83
Certain Relationships and Related Transactions....... 97
Principal Shareholders............................... 98
Description of Capital Stock......................... 100
Description of Certain Indebtedness.................. 103
Shares Eligible for Future Sale...................... 104
Certain United States Federal Income Tax
Considerations..................................... 107
Certain Bermuda Tax Considerations................... 112
Legal Matters........................................ 113
Experts.............................................. 113
Service of Process and Enforcement of Liabilities.... 113
Additional Information............................... 113
Available Information................................ 114
Index to Consolidated Financial Statements........... F-1
Underwriting......................................... U-1
</TABLE>
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
7,200,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SBC WARBURG DILLON READ INC.
Representatives of the Underwriters
------------------------------------------------------------
------------------------------------------------------------
<PAGE>
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 SEPTEMBER 5, 1997
[LOGO]
7,200,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the 7,200,000 Class A common shares, par value $.00457 per share (the
'Class A Common Stock'), offered by RSL Communications, Ltd. (the 'Company'),
1,440,000 shares are being offered hereby in an international offering outside
the United States (the 'International Offering') and 5,760,000 shares are being
offered in a concurrent United States offering (the 'U.S. Offering' and,
together with the International Offering, the 'Offerings'). The initial public
offering price and the aggregate underwriting discount per share will be
identical for both Offerings. See 'Underwriting.'
The shares of Class A Common Stock offered hereby are being sold by the
Company.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. It is currently anticipated that the initial public
offering price of the Class A Common Stock will be between $19.00 and $22.00 per
share. For factors considered in determining the initial public offering price,
see 'Underwriting.'
As of the date of this Prospectus, the Company has two classes of authorized
common shares, the Class A Common Stock and Class B common shares (the 'Class B
Common Stock', and together with the Class A Common Stock, the 'Common Stock').
The holders of both classes of Common Stock have identical rights, except that
(i) holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to 10 votes per share, (ii) shares
of Class B Common Stock are convertible at any time at the option of the holders
into shares of Class A Common Stock on a share-for-share basis and (iii) shares
of Class B Common Stock may only be transferred to other original holders of
Class B Common Stock and certain related parties. The Company also has
outstanding convertible preferred shares (the 'Preferred Stock') which will be
automatically converted into shares of Class B Common Stock on a share-for-share
basis upon the closing of the Offerings. See 'Description of Capital Stock.'
SEE 'RISK FACTORS' BEGINNING ON PAGE 13 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Company has filed an application for quotation of the Class A Common
Stock on the Nasdaq National Market under the symbol 'RSLC.'
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total (3)............................... $ $ $
</TABLE>
- ------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
'Underwriting.'
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the International Underwriters an option for 30 days
to purchase up to an additional 216,000 shares of Class A Common Stock at
the initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, the Company has granted the
U.S. Underwriters a similar option with respect to an additional 864,000
shares of Class A Common Stock as part of the concurrent U.S. Offering. If
such options are exercised in full, the total initial public offering price,
underwriting discount and proceeds to the Company will be ,
and , respectively. See 'Underwriting.'
----------------------
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates for the shares will be ready for delivery through the
facilities of The Depository Trust Company on or about September , 1997,
against payment therefor in immediately available funds.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
SBC WARBURG DILLON READ
----------------------
The date of this Prospectus is September , 1997.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
(International Version) (the 'International Underwriting Agreement'), the
Company has agreed to sell to each of the International Underwriters named
below, and each of such International Underwriters for whom Goldman Sachs
International, Merrill Lynch International, Morgan Stanley & Co. International
Limited and Swiss Bank Corporation, acting through its Division, SBC Warburg
Dillon Read, are acting as representatives, has severally agreed to purchase
from the Company, the respective number of shares of Class A Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
- --------------------------------------------------------------------------------------- ------------
<S> <C>
Goldman Sachs International............................................................
Merrill Lynch International ...........................................................
Morgan Stanley & Co. International Limited ............................................
Swiss Bank Corporation, acting through its Division,
SBC Warburg Dillon Read .............................................................
------------
Total ............................................................................ 1,440,000
------------
------------
</TABLE>
Under the terms and conditions of the International Underwriting Agreement,
the International Underwriters are committed to take and pay for all of the
shares offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Class A
Common Stock in part directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and in part to certain securities
dealers at such price less a concession of $ per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain brokers and dealers. After the shares of Class
A Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the 'U.S.
Underwriting Agreement') with the underwriters of the U.S. Offering (the 'U.S.
Underwriters' and together with the International Underwriters, the
'Underwriters') providing for the concurrent offer and sale of 5,760,000 shares
of Class A Common Stock in the United States. The offering price and aggregate
underwriting discounts and commissions per share for the two Offerings are
identical. The closing of the International Offering is a condition to the
closing of the U.S. Offering, and vice versa. The representatives of the U.S.
Underwriters are Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and SBC Warburg Dillon Read Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the 'Agreement Between Syndicates') relating to the Offerings, each
of the International Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions, it
(a) will not offer, sell or deliver the shares of Class A Common Stock, directly
or indirectly, (i) in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas subject
to its jurisdiction (the 'United States') or to any U.S. persons (as defined
below) or (ii) to any person who it believes intends to reoffer, resell or
deliver the shares in the United States or to any U.S. persons and (b) will
cause any dealer to whom it may sell such shares at any concession to agree to
observe a similar restriction. The term 'U.S. person' shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any
U-1
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
political subdivision thereof and whose office most directly involved with the
purchase is located in the United States. Each of the U.S. Underwriters has
agreed pursuant to the Agreement Between Syndicates that, as a part of the
distribution of the shares offered as a part of the U.S. Offering, and subject
to certain exceptions, it (i) will offer, sell or deliver shares of Class A
Common Stock, directly or indirectly, (a) only in the United States and to U.S.
persons and (b) only to persons who it believes do not intend to reoffer, resell
or deliver the shares outside of the United States or to non-U.S. persons and
(ii) will cause any dealer to whom it may sell such shares at any concession to
agree to observe a similar restriction.
Pursuant to the Agreement Between Syndicates, sales may be made between the
U.S. Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the International Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 216,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any, at the initial offering price less the Underwriting
Discount, as set forth on the cover page of this Prospectus. If the
International Underwriters exercise their over-allotment option, the
International Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
1,440,000 shares of Class A Common Stock offered hereby. The Company has granted
the U.S. Underwriters a similar option to purchase up to an aggregate of 864,000
additional shares of Class A Common Stock.
At the request of the Company, the Underwriters have initially reserved up
to 360,000 shares of Class A Common Stock for sale at the initial public
offering price set forth on the cover page of this Prospectus to eligible
employees of the Company and persons having business relationships with the
Company. The number of shares of Class A Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby. Individuals purchasing reserved shares have agreed, with certain
exceptions, not to sell, offer to sell or otherwise dispose of any shares of
Class A Common Stock without the prior written consent of Goldman, Sachs & Co.
for a period of 180 days after the date of this Prospectus.
The Company and certain directors, officers and shareholders have agreed
that during the period beginning from the date of the International Underwriting
Agreement and continuing to and including the date 180 days after the date of
this Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, except as provided under the International Underwriting
Agreement and under the U.S. Underwriting Agreement, any securities of the
Company (other than pursuant to employee stock option plans existing on, or upon
the conversion or exchange of convertible or exchangeable securities outstanding
as of, the date of this Prospectus) which are substantially similar to the
shares of Class A Common Stock or which are convertible into or exchangeable for
securities which are substantially similar to the shares of Class A Common
Stock, without the prior written consent of the U.S. representative, Goldman,
Sachs & Co., except for the shares of Class A Common Stock offered in connection
with the Offerings.
Each International Underwriter has also agreed that (a) it has not offered
or sold and will not offer or sell any shares of Class A Common Stock to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their business or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995,
(b) it has complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything done by it
in relation to the shares of Class A Common Stock in, from or otherwise
involving the United Kingdom and (c) it has only issued or passed on and will
only issue or passed on in the United Kingdom any document received by it in
connection with the issuance of the shares of Class A Common Stock to a person
who is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions)
U-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Order 1996 of Great Britain or is a person to whom the document may otherwise
lawfully be issued or passed on.
Buyers of shares of Class A Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the initial public offering price.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated among
the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
In connection with the Offerings, the Underwriters may purchase and sell
the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Class A Common Stock, and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Class A Common Stock than they are required to purchase from
the Company in the Offerings. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to syndicate members or other broker-dealers
in respect of the securities sold in the Offerings for their account may be
reclaimed by the syndicate if such shares of Class A Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise, and these
activities, if commenced, may be discontinued at any time.
The Company has filed an application for quotation of the Class A Common
Stock on the Nasdaq National Market under the symbol 'RSLC.'
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to the Company and its
affiliates, for which such Underwriters have received and will receive customary
fees and commissions.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Class A Common Stock, including shares initially sold in
the U.S. Offering, to persons located outside the United States.
U-3
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to sell or the solicitation of an offer to buy any
securities other than the securities to which it relates or an offer to sell or
the solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................... 4
Risk Factors......................................... 13
Use of Proceeds...................................... 24
Dividend Policy...................................... 24
Dilution............................................. 25
Capitalization....................................... 26
Selected Consolidated Financial Data................. 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 29
Business............................................. 41
Management........................................... 83
Certain Relationships and Related Transactions....... 97
Principal Shareholders............................... 98
Description of Capital Stock......................... 100
Description of Certain Indebtedness.................. 103
Shares Eligible for Future Sale...................... 104
Certain United States Federal Income Tax
Considerations..................................... 107
Certain Bermuda Tax Considerations................... 112
Legal Matters........................................ 113
Experts.............................................. 113
Service of Process and Enforcement of Liabilities.... 113
Additional Information............................... 113
Available Information................................ 114
Index to Consolidated Financial Statements........... F-1
Underwriting......................................... U-1
</TABLE>
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
7,200,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[LOGO]
------------------
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
SBC WARBURG DILLON READ
Representatives of the Underwriters
------------------------------------------------------------
------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant's expenses in connection with the issuance of the securities
being registered, other than underwriting discounts and commissions, are
estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................ $ 45,455
NASD Filing Fee................................................................ 15,500
Printing and Engraving......................................................... 115,000*
Counsel Fees and Expenses...................................................... 250,000
Accountants' Fees and Expenses................................................. 200,000*
Blue Sky Qualification Fees and Expenses....................................... 0*
Transfer Agent and Registrar Fees and Expenses................................. 10,000
Nasdaq Listing Fee............................................................. 50,000
Miscellaneous.................................................................. 314,045*
----------
Total..................................................................... $1,000,000*
----------
----------
</TABLE>
- ------------------
* Estimated
ITEM 14. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion does not give effect to the recapitalization to be
effected by the Registrant in connection with the public offering to be
conducted pursuant to this Registration Statement.
In August 1994, RSL Communications, Inc. (a predecessor of the Registrant)
('RSL Delaware') issued one share of common stock, par value $.01 per share (the
'RSL Delaware Common Stock'), to Ronald S. Lauder, Chairman of the Board of
Directors and a co-founder of the Registrant, for aggregate consideration of
$.01. The issuance of such shares of RSL Delaware Common Stock to Mr. Lauder was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
In February 1995, RSL Delaware issued: (i) 3,000 shares of RSL Delaware
Common Stock to Itzhak Fisher, the President and Chief Executive Officer,
co-founder and a Director of the Registrant for aggregate consideration of
$2,000; (ii) 400 shares of preferred stock, par value $1.00 per share (the 'RSL
Delaware Preferred Stock'), to Itzhak Fisher for aggregate consideration of
$400,000; (iii) 5,878,286 shares of RSL Delaware Preferred Stock to R. S. Lauder
Gaspar & Co., L.P. for aggregate consideration of $5,878,286; (iv) 100 shares of
RSL Delaware Preferred Stock to Ronald S. Lauder for aggregate consideration of
$900,000; (v) 300 shares of RSL Delaware Preferred Stock to Jacob Schuster,
Chief Financial Officer, Assistant Secretary and Treasurer and a Director of the
Registrant, for aggregate consideration of $300,000 and (vi) 121,714 shares of
RSL Delaware Preferred Stock to Nesim Bildirici, Vice President of Mergers and
Acquisitions of the Registrant, for aggregate consideration of $121,714. The
issuance of such shares was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
In April 1995, RSL Delaware merged into RSL Communications Inc. ('RSL
BVI'). In connection with such merger, each shareholder of RSL Delaware
exchanged their respective shares of RSL Delaware common stock and RSL Delaware
Preferred Stock for an equal number of shares of RSL BVI's common stock, par
value $.01 per share (the 'RSL BVI Common Stock'), and preferred stock, par
value $.01 per share (the 'RSL BVI Preferred Stock'). Simultaneous with the
merger, RSL BVI increased the number of authorized shares of each of the RSL BVI
Common Stock and RSL BVI Preferred Stock from 10,000 to 10,000,000 and declared
a share dividend of 1,000 shares of RSL BVI Common Stock and RSL BVI Preferred
Stock for each share of such stock respectively issued and outstanding.
In April 1995, RSL BVI increased the number of authorized shares of each of
the RSL BVI Common Stock and RSL BVI Preferred Stock from 10,000,000 to
20,000,000 and declared a share dividend of
II-1
<PAGE>
two shares of RSL BVI Common Stock and RSL BVI Preferred Stock for each share of
such stock respectively issued and outstanding. Additionally, in April 1995, RSL
BVI issued: (i) 59,306 shares of RSL BVI Common Stock to Ronald S. Lauder for
aggregate consideration of $207,572; (ii) 197,837 shares of RSL BVI Preferred
Stock to Ronald S. Lauder for aggregate consideration of $692,428; (iii) 13,179
shares of RSL BVI Common Stock to Itzhak Fisher for aggregate consideration of
$46,873; (iv) 43,964 shares of RSL BVI Preferred Stock to Itzhak Fisher for
aggregate consideration of $153,873; (v) 422,130 shares of RSL BVI Common Stock
to R. S. Lauder Gaspar & Co., L.P. for aggregate consideration of $1,477,457;
(vi) 1,292,156 shares of RSL BVI Preferred Stock to R. S. Lauder Gaspar & Co.,
L.P. for aggregate consideration of $4,522,543; (vii) 3,954 shares of RSL BVI
Common Stock to certain members of the family of Jacob Schuster for aggregate
consideration of $13,834.20; (viii) 13,189 shares of RSL BVI Preferred Stock to
certain members of the family of Jacob Schuster for aggregate consideration of
$46,161.80 and (ix) 13,179 shares of RSL BVI Preferred Stock to Nir Tarlovsky
for aggregate consideration of $153,873. The issuance of such shares was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof.
In April 1995, the Board of Directors of the Company authorized, and the
shareholders of the Registrant approved, the 1995 Plan. Under the 1995 Plan, the
Registrant's Compensation Committee is authorized to grant options for up to
1,300,000 shares of the Registrant's Class A Common Stock. As of September 4,
1997, the Registrant had granted options to purchase 1,275,291 shares of the
Registrant's Class A Common Stock under the 1995 Plan. In general, options
granted under the 1995 Plan terminate on the tenth anniversary of the date of
grant. The 1995 Plan was developed to provide incentives to employees of the
Registrant and to attract new employees and non-employee directors. The issuance
of such shares pursuant to the 1995 Plan is exempt from registration under the
Securities Act pursuant to Rule 701 thereof.
In July 1996, RSL BVI was amalgamated into the Registrant. Subsequently,
the Registrant increased the number of authorized shares of each of its common
stock, par value $.01 per share (the 'RSL Common Stock'), and preferred stock,
par value $.01 per share (the 'RSL Preferred Stock'), to 20,000,000. Thereafter,
the Registrant issued: (i) 59,306 shares of RSL Common Stock to Ronald S. Lauder
for aggregate consideration of $593.06; (ii) 1,097,837 shares of RSL Preferred
Stock to Ronald S. Lauder for aggregate consideration of $10,978.37; (iii)
2,013,179 shares of RSL Common Stock to Itzhak Fisher for aggregate
consideration of $12,000; (iv) 243,964 shares of RSL Preferred Stock to Itzhak
Fisher for aggregate consideration of $2,439.64; (v) 422,130 shares of RSL
Common Stock to R. S. Lauder Gaspar & Co., L.P. for aggregate consideration of
$4,221.30; (vi) 7,170,442 shares of RSL Preferred Stock to R. S. Lauder Gaspar &
Co., L.P. for aggregate consideration of $71,704.42; (vii) 419,770 shares of RSL
Common Stock to the Schuster Family Partners I, L.P. for aggregate consideration
of $4,197.70; (viii) 365,945 shares of RSL Preferred Stock to the Schuster
Family Partners I, L.P. for aggregate consideration of $3,659.49; (ix) 13,179
shares of RSL Common Stock to Nir Tarlovsky for aggregate consideration of
$131.79; (x) 243,964 shares of RSL Preferred Stock to Nir Tarlovsky for
aggregate consideration of $2,439.64 and (xi) 121,714 shares of RSL Preferred
Stock to Nesim Bildirici for aggregate consideration of $1,217.14. The issuance
of such shares was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In September 1996, the Registrant's capital stock was reclassified as
follows: (i) the Class A Common Shares and Class B Common Shares were authorized
with the RSL Common Shares being converted into Class A Common Shares; (ii) the
Registrant's authorized Class B Common Shares were reclassified as Class C
Common Shares with no changes to the rights of such shares; (iii) the authorized
Class A Common Shares were reclassified as Class B Common Shares with no changes
in the rights of such stock except that each share of Class B Common Shares are
entitled to 10 votes per share; and (iv) the new Class A Common Shares was
authorized.
In September 1996, the Registrant issued to Ronald S. Lauder a warrant to
purchase 210,000 shares of the Registrant's Class B Common Shares in
consideration of a loan from Mr. Lauder to the Registrant in the aggregate
amount of $35 million. Additionally, the Registrant issued: (i) 940,073 shares
of the Registrant's Class B Common Shares to Lauder Gaspar Ventures LLC for
aggregate consideration of $25 million; (ii) 470,037 shares of the Registrant's
Class B Common Shares to Ronald S. Lauder for aggregate consideration of $12.5
million and (iii) 470,037 shares of the Registrant's
II-2
<PAGE>
Class B Common Shares to Leonard A. Lauder for aggregate consideration of $12.5
million. The issuance of such shares was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
In May 1997, the Registrant issued to Mr. Charles M. Piluso 665,340 shares
of the Registrant's Class A Common Shares in connection with the Registrant's
acquisition of 15,619 shares of common stock of ITG held by Mr. Piluso. The
issuance of such shares was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
Prior to the effective sale of this Registration Statement, the Registrant
intends to issue shares of its Class A Common Stock to certain employees. The
issuance of such shares will be exempt from registration under the Securities
Act of 1933, as amended pursuant to Section 4(2) hereof.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Underwriting Agreement.
*3.1 -- Certificate of Incorporation of RSL Communications, Ltd., issued by the Bermuda Registrar of
Companies on March 14, 1996.
*3.2 -- Memorandum of Association of RSL Communications, Ltd., filed with the Bermuda Registrar of
Companies on March 14, 1996.
+3.3 -- Bye-Laws of RSL Communications, Ltd. (as amended through September 2, 1997).
*4.1 -- Placement Agreement, dated as of September 30, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and Morgan Stanley & Co. Incorporated, Bear Stearns Co. Inc. and Dillon Read
& Co. Inc.
*4.2 -- Indenture, dated October 3, 1996, by and among RSL Communications PLC, RSL Communications, Ltd.
and The Chase Manhattan Bank, as Trustee, containing, as exhibits, specimens of 12 1/4% Senior
Notes due 2006.
*4.3 -- Notes Registration Rights Agreement, dated October 3, 1996, by and among RSL Communications PLC,
RSL Communications, Ltd. and the Placement Agents.
*4.4 -- Note Deposit Agreement, dated October 3, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank, as Book Entry Depositary.
*4.5 -- Collateral Pledge and Security Agreement, dated October 3, 1996, by and among RSL Communications
PLC and Trustee.
*4.6 -- Form of Letter of Transmittal.
++4.7 -- Form of 12 1/4% Senior Note due 2006.
++4.8 -- Form of Class A Common Stock Certificate.
++5.1 -- Form of Opinion of Conyers, Dill and Pearman.
8.1 -- Form of Opinion of Rosenman & Colin LLP.
++8.2 -- Form of Opinion of Conyers, Dill & Pearman.
*10.1 -- Warrant Agreement, dated October 3, 1996, between RSL Communications, Ltd., as Issuer, and The
Chase Manhattan Bank, as warrant agent.
*10.2 -- Warrant Registration Rights Agreement, dated October 3, 1996, between RSL Communications, Ltd.,
as issuer, and The Chase Manhattan Bank, as warrant agent.
*10.3 -- Amendment to the Revolving Credit Facility, dated August 20, 1996, from The Chase Manhattan Bank
to RSL Communications, Inc.
*10.4 -- Amendment to the Revolving Credit Facility, dated September 10, 1996, from The Chase Manhattan
Bank to RSL Communications, Ltd.
*10.5 -- Subordinated Promissory Note, dated September 10, 1996, from RSL Communications, Ltd. to Ronald
S. Lauder.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.6 -- Warrant for 210,000 shares of Class B Common Stock of RSL Communications, Ltd. issued to Ronald
S. Lauder on September 10, 1996.
*10.7 -- Standby Facility Agreement, dated October 1, 1996, by and between RSL Communications, Ltd. and
Ronald S. Lauder.
*10.8 -- Consulting Agreement, dated September 15, 1995, between Eugene Sekulow and RSL Communications,
Inc.
*10.9 -- Amendment to Consulting Agreement, dated August 8, 1996, between Eugene Sekulow and RSL
Communications, Ltd.
*10.10 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock Option Plan.
*10.11 -- Employment Agreement, dated September 15, 1995, between Itzhak Fisher and International
Telecommunications Group, Ltd.
*10.12 -- Employment Agreement, dated September 15, 1995, between Itzhak Fisher and RSL Communications Inc.
*10.13 -- Employment Agreement, dated April 1, 1995, between Nir Tarlovsky and International
Telecommunications Group, Ltd.
*10.14 -- Employment Agreement, dated April 1, 1995, between Nir Tarlovsky and RSL Communications Inc.
*10.15 -- Employment Agreement, dated August 9, 1995, between RSL COM Europe Limited and Richard Williams.
*10.16 -- Memorandum of Agreement, dated July 30, 1996, between International Telecommunications
Corporation and Codetel.
*10.17 -- General Purchase Agreement, dated September 14, 1995, between Ericsson Inc. and International
Telecommunications Corporation.
*10.18 -- Lease Agreement between AB LM Ericsson Finans and International Telecommunications Corporation.
*10.19 -- Lease Agreement, dated April 10, 1996, between RSL COM Europe Ltd. and AB LM Ericsson Finans.
*10.20 -- Lease Agreement, dated December 30, 1996, between RSL COM Europe Ltd. and AB LM Ericsson Finans.
*10.21 -- Loan and Security Agreement, dated September 8, 1995, between Cyberlink Inc. and CoastFed
Business Credit Corporation.
*10.22 -- Accounts Collateral Security Agreement, dated September 8, 1995, between Cyberlink Inc. and
CoastFed Business Credit Corporation.
*10.23 -- Equipment Collateral Security Agreement, dated September 8, 1995, between Cyberlink Inc. and
CoastFed Business Credit Corporation.
*10.24 -- Security Stock Pledge Agreement, dated September 8, 1995, between CoastFed Business Credit
Corporation and Cyberlink Inc.
*10.25 -- Security Agreement, dated September 8, 1995, between CoastFed Business Credit Corporation and
Cyberlink-California Inc.
*10.26 -- Security Agreement, dated September 8, 1995, between CoastFed Business Credit Corporation and
Cyberlink-Nevada Inc.
*10.27 -- Asset Purchase Agreement, dated as of May 8, 1996, by and between RSL COM France S.A. and Sprint
Telecommunications France Inc.
*10.28 -- Transition Services Agreement, dated May 8, 1996, by and among Sprint Telecommunications France
Inc., Sprint International France S.A. and RSL COM France S.A.
*10.29 -- Transition Services Agreement, dated May 8, 1996, by and between Sprint Communications Company
L.P. and RSL COM France S.A.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.30 -- Amendment No. 1 to the Transition Services Agreement, effective as of May 8, 1996, among Sprint
Communications Company L.P., Sprint International France S.A. and RSL COM France S.A.
*10.31 -- Transition Services Agreement, dated May 8, 1996, by and between Global One Communications World
Operations, Limited and RSL COM France S.A.
*10.32 -- Asset Purchase Agreement, dated as of May 8, 1996, by and among Siena Vermogensverwaltungs-GmbH,
Sprint Telecommunication Services GmbH and Sprint Fon Inc.
*10.33 -- Transition Services Agreement, dated May 8, 1996, by and among Sprint Telecommunication Services
GmbH, Sprint Fon Inc. and Siena Vermogensverwaltungs- GmbH.
*10.34 -- Transition Services Agreement, dated May 8, 1996, by and between Sprint Communications Company
L.P. and RSL COM Deutschland GmbH.
*10.35 -- Amendment No. 1 to the Transition Services Agreement, effective as of May 8, 1996, among Sprint
Communications Company L.P., Sprint Telecommunication Services GmbH and RSL COM Deutschland GmbH.
*10.36 -- Transition Services Agreement, dated May 8, 1996, by and between Global One Communications World
Operations, Limited and Siena Vermogensverwaltungs-GmbH.
*10.37 -- Asset Purchase Agreement, August 12, 1996, by and between RSL COM UK Limited and Incom (UK) Ltd.
*10.38 -- Stock Purchase Agreement, dated July 3, 1996, between RSL Communications Limited, Charles Piluso
and International Telecommunications Group, Ltd.
*10.39 -- Secured Promissory Note, dated September 9, 1996, from RSL Communications PLC to Charles Piluso.
*10.40 -- Stock Pledge and Security Agreement, dated September 9, 1996 between RSL Communications PLC,
Charles Piluso and Fletcher, Heald & Hildreth, P.L.C.
*10.41 -- New Shareholders Agreement, dated September 9, 1996 among Charles Piluso, Jacqueline and Victoria
Piluso, Richard Rebetti, RSL Communications PLC, RSL Communications, Ltd and International
Telecommunications Group, Ltd.
*10.42 -- Stock Purchase Agreement, dated September 9, 1996, between RSL Communications PLC, Richard
Rebetti, Jr. and International Telecommunications Group, Ltd.
*10.43 -- Secured Promissory Note, dated September 9, 1996, from RSL Communications PLC to Richard Rebetti.
*10.44 -- Stock Pledge and Security Agreement, dated September 9, 1996, between RSL Communications PLC,
Richard Rebetti, Jr. and Fletcher, Heald & Hildreth, P.L.C.
*10.45 -- Agreement and Plan of Reorganization, dated September 9, 1996, among RSL Communications PLC, RSL
Communications, Ltd. and Charles Piluso.
*10.46 -- Tax Agreement, dated September 9, 1996, between RSL Communications PLC, RSL Communications, Ltd.
and Charles Piluso.
*10.47 -- Stock Purchase Agreement, dated September 22, 1995, by and between RSL Communications, Inc. and
Charles Piluso.
*10.48 -- Stock Purchase Agreement, dated September 22, 1995, by and between Richard Rebetti and RSL
Communications, Inc.
*10.49 -- Amendment to the Stock Purchase Agreement, dated September 22, 1995, between and among
International Telecommunications Group, Ltd., International Telecommunications Corporation and
RSL Communications, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.50 -- Stock Purchase Agreement, dated March 10, 1995, between RSL Communication, Inc., International
Telecommunications Group, Ltd. and International Telecommunications Corporation.
*10.51 -- Amendment to Shareholders' Agreement, dated March 10, 1995, between and among Charles Piluso,
Richard Rebetti, Incom (UK) Ltd., International Telecommunications Group, Ltd. and RSL
Communications, Inc.
*10.52 -- Indemnity Agreement, dated March 10, 1995, between and among International Telecommunications
Group, Ltd., International Telecommunications Corporation and RSL Communications, Inc.
*10.53 -- Sublease, dated July 18, 1996, between RSL Communications, Ltd. and RSL Management Corporation.
*10.54 -- Lease, dated as of January 15, 1997, between Longstreet Associates L.P. and RSL COM U.S.A., Inc.
*10.55 -- Employment Agreement, dated January 31, 1997, between Roland T. Mallcott and RSL Communications,
Ltd.
*10.56 -- Amendment of Lease, dated as of December 6, 1995, between Hudson Telegraph Associates and
International Telecommunications Corporation.
10.57 -- Shareholders Agreement of RSL Communications, Latin America, Ltd., dated August 4, 1997, between
and among RSL Communications, Latin America, Ltd., RSL Communications, Ltd. and Coral Gates
Investments Ltd.
10.58 -- Stockholders' Agreement, dated July 23, 1997, by and among Delta Three, Inc., RSL Communications,
Ltd., and the other shareholders of Delta Three, Inc.
++, **10.59 -- Delta Three, Inc. Services Agreement.
+10.60 -- Employment Agreement, dated July 31, 1997, between Andrew C. Shields and RSL Communications, Ltd.
10.61 -- Shareholders Agreement, dated October 10, 1996, between RSL COM Europe, Limited, Gerard van Leest
and Belnet Nederland B.V.
+10.62 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.63 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
+10.64 -- Lease Agreement, dated June 29, 1997 for property at 430 Park Avenue, New York, New York.
++, **10.65 -- Stock Purchase Agreement of Delta Three, Inc.
++10.66 -- Employment Agreement, dated September 2, 1997, between Itzhak Fisher and RSL Communications, Ltd.
++10.67 -- Employment Agreement, dated September 2, 1997, between Itzhak Fisher and International
Telecommunications Group, Ltd.
+10.68 -- 1997 Directors Compensation Plan
+21.1 -- Subsidiaries of the Company.
++23.1 -- Consent of Deloitte & Touche LLP (included on page II-10).
++23.2 -- Consent of Brown, Leifer, Slatkin + Berns (included on page II-11).
++23.3 -- Form of Consent of Conyers, Dill & Pearman (included in Exhibits 5.1 and 8.2 hereto).
23.4......................................... -- Form of Consent of Rosenman & Colin LLP (included in Exhibit 8.1 hereto).
24.1 -- Powers of Attorney (included in the signature pages to the Registration Statement).
++24.2 -- Power of Attorney for Leonard A. Lauder
++24.3 -- Power of Attorney for Gustavo Cisneros
27.1 -- Financial Data Schedule.
99.1 -- Consent of Fred Langhammer as a nominee for director.
</TABLE>
(Footnotes on next page)
II-6
<PAGE>
(Footnotes from previous page)
- ------------------
+ Unless otherwise indicated, the exhibits have been previously filed as part
of this Registration Statement.
* Incorporated by reference to Registrant's Registration Statement on Form S-4
(Registration No. 333-25749).
** Confidential treatment has been requested with respect to certain
information contained in this exhibit.
++ Filed herewith.
+ To be filed by amendment.
++ Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
(b) Financial Statement Schedules:
For the year ended December 31, 1996 and the six months ended June 30,
1997.
Schedule I--Condensed Financial Information of RSL Communications
PLC (included at page S-1).
Schedule II--Schedule of Valuation Allowances (included at page S-4).
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 4th day of September, 1997.
RSL COMMUNICATIONS, LTD.
By: /s/ ITZHAK FISHER
----------------------------------
Itzhak Fisher
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
/s/ RONALD S. LAUDER* Chairman of the Board and Director September 4, 1997
- ------------------------------------------
(Ronald S. Lauder)
/s/ ITZHAK FISHER President, Chief Executive Officer and September 4, 1997
- ------------------------------------------ Director (Principal Executive Officer)
(Itzhak Fisher)
/s/ ANDREW GASPAR* Vice Chairman and Director September 4, 1997
- ------------------------------------------
(Andrew Gaspar)
/s/ JACOB Z. SCHUSTER* Chief Financial Officer, Executive Vice September 4, 1997
- ------------------------------------------ President, Assistant Secretary,
(Jacob Z. Schuster) Treasurer and Director (Principal
Financial Officer)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
/s/ MARK J. HIRSCHHORN* Vice President-Finance, September 4, 1997
- ------------------------------------------ Global Controller and Assistant
(Mark J. Hirschhorn) Secretary (Principal Accounting Officer)
/s/ GUSTAVO CISNEROS* Director September 4, 1997
- ------------------------------------------
(Gustavo Cisneros)
/s/ LEONARD A. LAUDER* Director September 4, 1997
- ------------------------------------------
(Leonard A. Lauder)
/s/ NICOLAS G. TROLLOPE* Director September 4, 1997
- ------------------------------------------
(Nicolas G. Trollope)
/s/ EUGENE SEKULOW* Director September 4, 1997
- ------------------------------------------
(Eugene Sekulow)
</TABLE>
* By /s/ ITZHAK FISHER
-----------------------------------------
ITZHAK FISHER
AS ATTORNEY-IN-FACT
II-9
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-34281 of RSL Communications, Ltd. on Form S-1 of our report dated March 7,
1997 relating to the consolidated financial statements of RSL Communications,
Ltd. and subsidiaries and of our reports dated March 14, 1997 relating to the
consolidated financial statements of International Telecommunications Group,
Ltd. and subsidiaries, appearing in the Prospectus, which is part of this
Registration Statement, and of our report dated March 7, 1997 relating to the
consolidated financial statement schedules of RSL Communications, Ltd. and
subsidiaries appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings 'Selected Financial
Data' and 'Experts' in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
September 3, 1997
II-10
<PAGE>
INDEPENDENT AUDITORS CONSENT
We consent to the use in this Registration Statement of RSL Communications, Ltd.
on Form S-1 of our report dated August 30, 1996 on Cyberlink, Inc. and
subsidiaries appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading 'Experts' in such
Prospectus.
BROWN, LEIFER, SLATKIN + BERNS
Studio City, California
September 3, 1997
II-11
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF
RSL COMMUNICATIONS PLC
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets........................................................................ $201,734,395
Marketable Securities--Held to maturity............................................... 104,370,011
Property and Equipment................................................................ 31,941,441
Other Assets.......................................................................... 88,819,629
------------
Total............................................................................... $426,865,476
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities................................................................... $ 74,949,341
Long Term Debt........................................................................ 94,555,559
Senior Notes, 12 1/4% Due 2006........................................................ 300,000,000
Shareholders' Equity.................................................................. (42,639,424)
------------
Total............................................................................... $426,865,476
------------
------------
</TABLE>
S-1
<PAGE>
SCHEDULE I (CONTINUED)
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
Revenues....................................................................................... $ 113,257,340
Cost of Services............................................................................... 98,461,406
-------------
Gross Profit.............................................................................. 14,795,934
Expenses....................................................................................... 41,618,912
-------------
Loss from Operations........................................................................... (26,822,978)
Interest Expense............................................................................... (7,384,097)
Other Expense-Net.............................................................................. (285,092)
Foreign Currency Transaction Gain.............................................................. 757,696
Minority Interest.............................................................................. (180,100)
Income Taxes................................................................................... (394,556)
-------------
Net Loss.................................................................................. $ (34,309,127)
-------------
-------------
</TABLE>
S-2
<PAGE>
SCHEDULE I (CONTINUED)
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
Net Loss....................................................................................... $ (34,309,127)
Depreciation and amortization.................................................................. 6,617,788
Working capital change and other............................................................... 16,911,146
-------------
Net cash used in operating activities..................................................... (10,780,193)
-------------
Purchases of Property and Equipment............................................................ (15,983,227)
Acquisitions of Subsidiaries................................................................... (38,552,408)
Purchase of Marketable Securities.............................................................. (82,529,263)
Proceeds from Sales of Marketable Securities................................................... 14,700,903
Purchase of Restricted Marketable Securities................................................... (102,807,652)
Other.......................................................................................... 171,367
-------------
Net cash used in investing activities..................................................... (225,000,280)
-------------
Proceeds from notes payable.................................................................... 300,000,000
Advances from Parent........................................................................... 61,006,697
Offering Cost and Other........................................................................ (11,968,884)
-------------
Net cash provided by financing activities................................................. 349,037,813
-------------
Net increase in cash...................................................................... 113,257,340
Cash, January 1, 1996..................................................................... --
-------------
Cash, December 31, 1996................................................................... $ 113,257,340
-------------
-------------
</TABLE>
S-3
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION ALLOWANCES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, COSTS AND OTHER DECEMBER 31,
1996 EXPENSES ACCOUNTS DEDUCTIONS 1996
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Bad debt provision.................. $1,595,766 $2,829,578 -- $ (543,870) $3,881,474
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, COSTS AND OTHER DECEMBER 31,
1995 EXPENSES ACCOUNTS(1) DEDUCTIONS 1995
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Bad debt provision.................. -- $ 148,690 $ 1,447,076 -- $1,595,766
</TABLE>
- ------------------
(1) The bad debt provision was previously recorded in the financial statements
of RSL Communications, Ltd.'s (the 'Company') predecessor, International
Telecommunications Group, Ltd. ('ITG'). The Company began consolidating ITG
effective with its acquisition of interests in ITG in September 1996.
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- ----
<S> <C> <C> <C>
1.1 -- Underwriting Agreement.
*3.1 -- Certificate of Incorporation of RSL Communications, Ltd., issued by the Bermuda Registrar
of Companies on March 14, 1996.
*3.2 -- Memorandum of Association of RSL Communications, Ltd., filed with the Bermuda Registrar
of Companies on March 14, 1996.
+3.3 -- Bye-Laws of RSL Communications, Ltd. (as amended through September 2, 1997).
*4.1 -- Placement Agreement, dated as of September 30, 1996, by and among RSL Communications PLC,
RSL Communications, Ltd. and Morgan Stanley & Co. Incorporated, Bear Stearns Co. Inc. and
Dillon Read & Co. Inc.
*4.2 -- Indenture, dated October 3, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank, as Trustee, containing, as exhibits,
specimens of 12 1/4% Senior Notes due 2006.
*4.3 -- Notes Registration Rights Agreement, dated October 3, 1996, by and among RSL
Communications PLC, RSL Communications, Ltd. and the Placement Agents.
*4.4 -- Note Deposit Agreement, dated October 3, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank, as Book Entry Depositary.
*4.5 -- Collateral Pledge and Security Agreement, dated October 3, 1996, by and among RSL
Communications PLC and Trustee.
*4.6 -- Form of Letter of Transmittal.
++4.7 -- Form of 12 1/4% Senior Note due 2006.
++4.8 -- Form of Class A Common Stock Certificate.
++5.1 -- Form of Opinion of Conyers, Dill and Pearman.
8.1 -- Form of Opinion of Rosenman & Colin LLP.
++8.2 -- Form of Opinion of Conyers, Dill & Pearman.
*10.1 -- Warrant Agreement, dated October 3, 1996, between RSL Communications, Ltd., as Issuer,
and The Chase Manhattan Bank, as warrant agent.
*10.2 -- Warrant Registration Rights Agreement, dated October 3, 1996, between RSL Communications,
Ltd., as issuer, and The Chase Manhattan Bank, as warrant agent.
*10.3 -- Amendment to the Revolving Credit Facility, dated August 20, 1996, from The Chase
Manhattan Bank to RSL Communications, Inc.
*10.4 -- Amendment to the Revolving Credit Facility, dated September 10, 1996, from The Chase
Manhattan Bank to RSL Communications, Ltd.
*10.5 -- Subordinated Promissory Note, dated September 10, 1996, from RSL Communications, Ltd. to
Ronald S. Lauder.
*10.6 -- Warrant for 210,000 shares of Class B Common Stock of RSL Communications, Ltd. issued to
Ronald S. Lauder on September 10, 1996.
*10.7 -- Standby Facility Agreement, dated October 1, 1996, by and between RSL Communications,
Ltd. and Ronald S. Lauder.
*10.8 -- Consulting Agreement, dated September 15, 1995, between Eugene Sekulow and RSL
Communications, Inc.
*10.9 -- Amendment to Consulting Agreement, dated August 8, 1996, between Eugene Sekulow and RSL
Communications, Ltd.
*10.10 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock Option Plan.
*10.11 -- Employment Agreement, dated September 15, 1995, between Itzhak Fisher and International
Telecommunications Group, Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- ----
<S> <C> <C> <C>
*10.12 -- Employment Agreement, dated September 15, 1995, between Itzhak Fisher and RSL
Communications Inc.
*10.13 -- Employment Agreement, dated April 1, 1995, between Nir Tarlovsky and International
Telecommunications Group, Ltd.
*10.14 -- Employment Agreement, dated April 1, 1995, between Nir Tarlovsky and RSL Communications
Inc.
*10.15 -- Employment Agreement, dated August 9, 1995, between RSL COM Europe Limited and Richard
Williams.
*10.16 -- Memorandum of Agreement, dated July 30, 1996, between International Telecommunications
Corporation and Codetel.
*10.17 -- General Purchase Agreement, dated September 14, 1995, between Ericsson Inc. and
International Telecommunications Corporation.
*10.18 -- Lease Agreement between AB LM Ericsson Finans and International Telecommunications
Corporation.
*10.19 -- Lease Agreement, dated April 10, 1996, between RSL COM Europe Ltd. and AB LM Ericsson
Finans.
*10.20 -- Lease Agreement, dated December 30, 1996, between RSL COM Europe Ltd. and AB LM Ericsson
Finans.
*10.21 -- Loan and Security Agreement, dated September 8, 1995, between Cyberlink Inc. and CoastFed
Business Credit Corporation.
*10.22 -- Accounts Collateral Security Agreement, dated September 8, 1995, between Cyberlink Inc.
and CoastFed Business Credit Corporation.
*10.23 -- Equipment Collateral Security Agreement, dated September 8, 1995, between Cyberlink Inc.
and CoastFed Business Credit Corporation.
*10.24 -- Security Stock Pledge Agreement, dated September 8, 1995, between CoastFed Business
Credit Corporation and Cyberlink Inc.
*10.25 -- Security Agreement, dated September 8, 1995, between CoastFed Business Credit Corporation
and Cyberlink-California Inc.
*10.26 -- Security Agreement, dated September 8, 1995, between CoastFed Business Credit Corporation
and Cyberlink-Nevada Inc.
*10.27 -- Asset Purchase Agreement, dated as of May 8, 1996, by and between RSL COM France S.A. and
Sprint Telecommunications France Inc.
*10.28 -- Transition Services Agreement, dated May 8, 1996, by and among Sprint Telecommunications
France Inc., Sprint International France S.A. and RSL COM France S.A.
*10.29 -- Transition Services Agreement, dated May 8, 1996, by and between Sprint Communications
Company L.P. and RSL COM France S.A.
*10.30 -- Amendment No. 1 to the Transition Services Agreement, effective as of May 8, 1996, among
Sprint Communications Company L.P., Sprint International France S.A. and RSL COM France
S.A.
*10.31 -- Transition Services Agreement, dated May 8, 1996, by and between Global One
Communications World Operations, Limited and RSL COM France S.A.
*10.32 -- Asset Purchase Agreement, dated as of May 8, 1996, by and among Siena
Vermogensverwaltungs-GmbH, Sprint Telecommunication Services GmbH and Sprint Fon Inc.
*10.33 -- Transition Services Agreement, dated May 8, 1996, by and among Sprint Telecommunication
Services GmbH, Sprint Fon Inc. and Siena Vermogensverwaltungs- GmbH.
*10.34 -- Transition Services Agreement, dated May 8, 1996, by and between Sprint Communications
Company L.P. and RSL COM Deutschland GmbH.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- ----
<S> <C> <C> <C>
*10.35 -- Amendment No. 1 to the Transition Services Agreement, effective as of May 8, 1996, among
Sprint Communications Company L.P., Sprint Telecommunication Services GmbH and RSL COM
Deutschland GmbH.
*10.36 -- Transition Services Agreement, dated May 8, 1996, by and between Global One
Communications World Operations, Limited and Siena Vermogensverwaltungs-GmbH.
*10.37 -- Asset Purchase Agreement, August 12, 1996, by and between RSL COM UK Limited and Incom
(UK) Ltd.
*10.38 -- Stock Purchase Agreement, dated July 3, 1996, between RSL Communications Limited, Charles
Piluso and International Telecommunications Group, Ltd.
*10.39 -- Secured Promissory Note, dated September 9, 1996, from RSL Communications PLC to Charles
Piluso.
*10.40 -- Stock Pledge and Security Agreement, dated September 9, 1996 between RSL Communications
PLC, Charles Piluso and Fletcher, Heald & Hildreth, P.L.C.
*10.41 -- New Shareholders Agreement, dated September 9, 1996 among Charles Piluso, Jacqueline and
Victoria Piluso, Richard Rebetti, RSL Communications PLC, RSL Communications, Ltd and
International Telecommunications Group, Ltd.
*10.42 -- Stock Purchase Agreement, dated September 9, 1996, between RSL Communications PLC,
Richard Rebetti, Jr. and International Telecommunications Group, Ltd.
*10.43 -- Secured Promissory Note, dated September 9, 1996, from RSL Communications PLC to Richard
Rebetti.
*10.44 -- Stock Pledge and Security Agreement, dated September 9, 1996, between RSL Communications
PLC, Richard Rebetti, Jr. and Fletcher, Heald & Hildreth, P.L.C.
*10.45 -- Agreement and Plan of Reorganization, dated September 9, 1996, among RSL Communications
PLC, RSL Communications, Ltd. and Charles Piluso.
*10.46 -- Tax Agreement, dated September 9, 1996, between RSL Communications PLC, RSL
Communications, Ltd. and Charles Piluso.
*10.47 -- Stock Purchase Agreement, dated September 22, 1995, by and between RSL Communications,
Inc. and Charles Piluso.
*10.48 -- Stock Purchase Agreement, dated September 22, 1995, by and between Richard Rebetti and
RSL Communications, Inc.
*10.49 -- Amendment to the Stock Purchase Agreement, dated September 22, 1995, between and among
International Telecommunications Group, Ltd., International Telecommunications
Corporation and RSL Communications, Inc.
*10.50 -- Stock Purchase Agreement, dated March 10, 1995, between RSL Communication, Inc.,
International Telecommunications Group, Ltd. and International Telecommunications
Corporation.
*10.51 -- Amendment to Shareholders' Agreement, dated March 10, 1995, between and among Charles
Piluso, Richard Rebetti, Incom (UK) Ltd., International Telecommunications Group, Ltd.
and RSL Communications, Inc.
*10.52 -- Indemnity Agreement, dated March 10, 1995, between and among International
Telecommunications Group, Ltd., International Telecommunications Corporation and RSL
Communications, Inc.
*10.53 -- Sublease, dated July 18, 1996, between RSL Communications, Ltd. and RSL Management
Corporation.
*10.54 -- Lease, dated as of January 15, 1997, between Longstreet Associates L.P. and RSL COM
U.S.A., Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER+ DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- ----
<S> <C> <C> <C>
*10.55 -- Employment Agreement, dated January 31, 1997, between Roland T. Mallcott and RSL
Communications, Ltd.
*10.56 -- Amendment of Lease, dated as of December 6, 1995, between Hudson Telegraph Associates and
International Telecommunications Corporation.
10.57 -- Shareholders Agreement of RSL Communications, Latin America, Ltd., dated August 4, 1997,
between and among RSL Communications, Latin America, Ltd., RSL Communications, Ltd. and
Coral Gates Investments Ltd.
10.58 -- Stockholders' Agreement, dated July 23, 1997, by and among Delta Three, Inc., RSL
Communications, Ltd., and the other shareholders of Delta Three, Inc.
++, **10.59 -- Delta Three, Inc. Services Agreement.
+10.60 -- Employment Agreement, dated July 31, 1997, between Andrew C. Shields and RSL
Communications, Ltd.
10.61 -- Shareholders Agreement, dated October 10, 1996, between RSL COM Europe, Limited, Gerard
van Leest and Belnet Nederland B.V.
+10.62 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.63 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
+10.64 -- Lease Agreement, dated June 29, 1997 for property at 430 Park Avenue, New York, New York.
++, **10.65 -- Stock Purchase Agreement of Delta Three, Inc.
++ 10.66 -- Employment Agreement, dated September 2, 1997, between Itzhak Fisher and RSL
Communications, Ltd.
++ 10.67 -- Employment Agreement, dated September 2, 1997, between Itzhak Fisher and International
Telecommunications Group, Ltd.
+10.68 -- 1997 Directors Compensation Plan
+21.1 -- Subsidiaries of the Company.
++23.1 -- Consent of Deloitte & Touche LLP (included on page II-10).
++23.2 -- Consent of Brown, Leifer, Slatkin + Berns (included on page II-11).
++23.3 -- Form of Consent of Conyers, Dill & Pearman (included in Exhibits 5.1 and 8.2 hereto).
23.4 -- Form of Consent of Rosenman & Colin LLP (included in Exhibit 8.1 hereto).
24.1 -- Powers of Attorney (included in the signature pages to the Registration Statement).
++24.2 -- Power of Attorney for Leonard A. Lauder
++24.3 -- Power of Attorney for Gustavo Cisneros
27.1 -- Financial Data Schedule.
99.1 -- Consent of Fred Langhammer as a nominee for director.
</TABLE>
- ------------------
+ Unless otherwise indicated, the exhibits have been previously filed as part
of this Registration Statement.
* Incorporated by reference to Registrant's Registration Statement on Form S-4
(Registration No. 333-25749).
** Confidential treatment has been requested with respect to certain
information contained in this exhibit.
++ Filed herewith.
+ To be filed by amendment.
++ Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
<PAGE>
Exhibit 4.8
CLASS A CLASS A
COMMON SHARES COMMON SHARES
RSL COMMUNICATIONS, LTD.
PAR VALUE $.00455 PAR VALUE $.00455
This Certificate is transferable in CUSIP 67702U 10 2
New York, New York SEE REVERSE FOR CERTAIN
DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE ISLANDS OF BERMUDA
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON SHARES OF
RSL COMMUNICATIONS, LTD.
a Bermuda corporation, transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney in writing upon surrender
of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be subject to all of the provisions of
the Memorandum of Association and the Bye-Laws of the Corporation, and all
amendments thereof, copies of which are on file with the Transfer Agent. This
certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar, respectively.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
RSL COMMUNICATIONS, LTD.
BERMUDA
1998
President and Chief Financial Officer,
Chief Executive Officer Assistant Secretary and Treasurer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY)
Transfer Agent
and Registrar
BY
Authorized Signature
Banknote Corporation of America, Wall Street, 1-708065-942
RSL Communications, Ltd. Proof #2 9/02/97 JL/ALW
<PAGE>
RSL COMMUNICATIONS, LTD.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN ACT - Custodian
in common ------------ -----------
(Cust) (Minor)
TEN ENT - as tenants by under Uniform Gifts to Minors Act
the entireties
---------------------------------
JT TEN - as joint tenants (State)
with right of
survivorship and
not as tenants
in common
Additional abbreviations may also be used though not in the above list
For value received, hereby sell, assign and transfer unto
------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
/ /
- -------------------------------------- -----------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
shares
- --------------------------------------------------------------------------
of capital stock represented by the within Certificate and do hereby irrevocably
constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution the premises.
Dated:
---------------------- -----------------------------------------
Signature
-----------------------------------------
Signature
NOTICE: The signature(s) to this assignment
must correspond with the name as written
upon the face of the Certificate, in every
particular, without alteration or
enlargement, or any change whatever.
SIGNATURE GUARANTEED:
---------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
Banknote Corporation of America, Wall Street, 1-708065-942
RSL COMMUNICATIONS, LTD. PROOF #1 8/29/97 JL/ALW
<PAGE>
DRAFT DATED: 26 August 1997
[ ]August 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, DC 20549
USA
Gentlemen
We have been requested by RSL Communications, Ltd. (the "Company"), a Bermuda
company, to furnish our opinion in connection with the registration statement
(the "Registration Statement") on Form S-1 (Registration Number 33-[ ]), with
respect to the registration of [ ] shares (the "Shares") of the Company's
Class A common shares, par value $.01 per share.
We have made such examination as we have deemed necessary for the purpose of
this opinion. Based upon such examination, it is our opinion that, when the
Registration Statement has become effective under the United States Securities
Act of 1933, when the Shares have been qualified as required under the laws of
those jurisdictions in which they are to be issued and sold and when the Shares
have been sold, issued and paid for in the manner described in the Registration
Statement, the Shares will have been validly issued and will be fully paid.
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the caption "Legal Matters" in
the prospectus included in the Registration Statement.
Yours faithfully
<PAGE>
DRAFT DATED: 26 August 1997
[ ] August 1997
RSL Communications, Ltd.
Clarendon House
Church Street
Hamilton HM CX
Bermuda
Gentlemen
RSL Communications, Ltd. (the "Company")
Form S-1 Registration Statement under The United States Securities Act of 1993
Reg. No. 33-[ ] ("Form S-1")
You have requested our opinion with respect to the material set forth under the
heading "Certain Bermuda Tax Considerations" in the prospectus (the
"Prospectus") included in the Form S-1 initially filed by the Company on 25th
August, 1997 in connection with the Company's proposed offering and sale of
Class A Common Shares in the Company.
In connection with your request, you have provided us with the Form S-1,
including the Prospectus and such other documents as we have deemed necessary or
appropriate to review in rendering this opinion.
It is our opinion that the tax discussion set forth under the heading "Certain
Tax Bermuda Tax Considerations" in the Prospectus is accurate as of the date
hereof in all material respects.
We hereby consent to the use of our name under the caption "Legal Matters" in
the Prospectus and to the use of this opinion as an exhibit to the Prospectus
which is part of the Form S-1.
Yours faithfully
<PAGE>
EXHIBIT 10.59 TO REGISTRATION STATEMENT
ON FORM S-1 OF
RSL COMMUNICATIONS, LTD.
CONFIDENTIAL INFORMATION OMITTED WHERE INDICATED BY "[*]" AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE
406 OF THE SECURITIES ACT OF 1933
SERVICES AGREEMENT
SERVICES AGREEMENT (this "Agreement"), dated July 23rd, 1997,
between RSL COMMUNICATIONS, LTD., a Bermuda corporation ("RSL"), and DELTA
THREE, INC., a Delaware corporation ("Delta").
W I T N E S S E T H :
WHEREAS, Delta is a telecommunications provider utilizing the
Internet and networks based on Internet Protocols to provide
telecommunications services (the "Delta Business");
WHEREAS, pursuant to a Stock Purchase Agreement, dated as of the
date hereof (the "Stock Purchase Agreement"), among RSL, Delta, Jacob A.
Davidson, Pioneer Management Corporation, LLC and Elie C. Wurtman, RSL has
purchased from Delta, and Delta has sold to RSL, 4,201,734 shares of the
common stock of Delta (the "Common Stock");
WHEREAS, in connection with the purchase and sale of the Common
Stock, and as additional consideration for the Common Stock, RSL (together
with its direct and indirect subsidiaries, hereinafter referred to as
"RSL") has agreed to provide to Delta certain services in connection with
the Delta Business and Delta has agreed to provide certain services to RSL.
NOW, THEREFORE, in consideration of the foregoing premises and of
the mutual covenants hereinafter contained, the parties hereto hereby agree
as follows:
ARTICLE I
Term
Section 1.01. Term. The term of this Agreement shall commence on
the date hereof and shall continue for a term of three years, unless
terminated earlier in accordance with the provisions of this Agreement (the
"Term"); provided, however, that RSL may elect to terminate this Agreement
at any time from and after the time it holds less than twenty-five percent
(25%) of Delta's Common Stock. Upon termination of the initial three year
Term, the Term shall be automatically extended for additional one year
periods unless either party notifies the other of its intent not to extend
the Term by giving written notice at least 30 days prior to the end of the
initial term or any extended term.
<PAGE>
ARTICLE II
Office and Equipment Space
Section 2.01. Office Space. (a) If Delta requires office space
for certain of its employees to conduct the Delta Business in a location
where, at such time, RSL maintains an office, Delta shall give written
notice to RSL specifying the office location and the amount of space
therein required by Delta. Upon receipt of such written notice, RSL shall
use its reasonable efforts to provide the requested office space to Delta
for such employees; provided, however, that in no event shall RSL be
obligated to provide Delta with office space for more than that required by
the full-time employment of two individuals; and provided further that,
notwithstanding anything contained herein to the contrary, RSL shall have
the right, in its sole and absolute discretion, to elect not to provide
Delta with office space in any or all locations in Latin America in which
RSL now or hereafter maintains an office. Any such office space provided by
RSL to Delta shall be provided without charge and shall be shared in
accordance with such reasonable procedures for sharing such office space as
they shall establish.
(b) Notwithstanding anything contained herein to the
contrary, RSL may, in its sole and absolute discretion, vacate all or any
of its present or acquired office space, whether or not Delta occupies a
portion of such office space at such time, and relocate to any other
location without such action by RSL being deemed a breach of this
Agreement. In the event that RSL relocates any of its operations to a new
office space or obtains additional office space, it shall notify Delta of
the existence of the new location, and Delta shall have the right to
request a portion of such office space in accordance with the provisions of
paragraph (a) of this Section 2.01.
Section 2.02. Equipment Space. (a) RSL shall provide Delta with
access to each location in which RSL has use of international gateway
switches, whether owned or leased from, or, if such access does not violate
any joint venture agreement, operated in joint venture with, third parties
(collectively, the "Switches"), as soon as reasonably practicable after
receiving a written request therefor as to each location, in order to
permit Delta to colocate the servers used by Delta in connection with the
Delta Business (the "Delta Servers") and four of Delta's 19- inch standard
telco racks with RSL's Switches; provided that with respect to RSL's
Switches located in New York and in RSL's main European hub, RSL shall
provide Delta with sufficient access to such locations in order to permit
Delta to maintain ten 19-inch standard telco racks for the Delta Servers
(collectively, the "Equipment Space"); and provided further that,
notwithstanding anything contained herein to the contrary, RSL shall have
the right, in its sole and absolute discretion, to elect not to provide
Delta with access to Switches located in Latin America.
2
<PAGE>
RSL shall provide the Equipment Space to Delta without charge; provided,
however, that all costs and expenses associated with Internet, frame relay and
dedicated line connectivity, as well as any other direct costs or expenses
incurred by RSL in connection with the Delta Business, shall be payable by
Delta. RSL and Delta shall share the Equipment Space in accordance with such
reasonable procedures for the sharing of such space as RSL and Delta shall
determine.
(b) Notwithstanding anything contained herein to the
contrary, RSL may, in its sole and absolute discretion, relocate its
Switches, whether or not Delta occupies Equipment Space at the original
location of such Switches at the time of such relocation, without such
action by RSL being deemed a breach of this Agreement, and Delta will
immediately remove its equipment from the Equipment Space. In the event
that RSL relocates any of its Switches to a new location or obtains
additional Switches, it shall notify Delta of the existence of the new
location or the new Switches, and Delta shall have the right to request
access to such new location or to the location of any such new Switch in
accordance with the provisions of paragraph (a) of this Section 2.02.
Section 2.03. Conflicts. Notwithstanding anything contained herein
to the contrary, RSL shall not be obligated to provide any office space,
Equipment Space or other services pursuant to this Article II if any of
RSL's current or future strategic partners objects, at any time or from
time to time, to RSL providing such office space, Equipment Space or other
services to Delta; provided that RSL shall use its reasonable efforts to
encourage such strategic partner to permit RSL to provide such office
space, Equipment Space or other services to Delta.
ARTICLE III
Services Provided by RSL
Section 3.01. Connectivity. RSL shall make reasonable efforts to
assist Delta in obtaining Internet, frame relay and dedicated line
connectivity from third parties in each country where RSL Switches are
colocated with Delta Servers for the maintenance of the Delta Business;
provided, however, that Delta shall be solely responsible for any
obligations incurred in connection with such services, including the
obligations incurred in obtaining such services.
Section 3.02. Traffic Termination. (a) RSL shall provide to Delta
"Termination Service" (as hereinafter defined) for Delta's domestic inbound
telephone traffic in each country in which (i) RSL has contracted to
receive such services in the ordinary course of its business (the "Domestic
Inbound
3
<PAGE>
Termination Service") and (ii) Delta Servers are colocated with RSL Switches.
For the purposes of this Agreement, "Termination Services" shall mean the
termination of voice telephone traffic which originates from the global network
utilized by Delta in conducting the Delta Business (the "Delta Global Network").
The Domestic Inbound Termination Service shall be made available to Delta by RSL
at [*].
(b) RSL shall provide to Delta Termination Services for
Delta's international outbound telephone traffic in each originating
country that Delta Servers are colocated with RSL Switches (the
"International Outbound Termination Service"). The International Outbound
Termination Service shall be made available to Delta by RSL at [*].
Section 3.03. Traffic Origination. Within a country where Delta
Servers are colocated with RSL Switches, RSL will use its best efforts to
assist Delta in obtaining services, including toll-free services, from
local third parties which shall provide Delta's customers with the ability
to "access" the Delta Servers at [*]; provided, however, that Delta shall
be solely responsible for any obligations incurred in connection with such
services, including the obligations incurred in obtaining such services.
Section 3.04. Use of RSL Switches and RSL Prepaid Calling Card
Platforms. (a) In each location where a Delta Server is colocated with an
RSL Switch, RSL shall, during the Term, provide Delta with the use of an
RSL Switch to connect to Delta's carrier customers at a charge of [*] per
minute; provided that Delta shall be charged for the use of each switch
port connection provided by RSL to such carrier customers for a minimum of
[*] minutes per month whether or not such level of usage has been achieved.
RSL shall, at Delta's written request, provide such carrier customers with
billing and other similar customer-related services which are comparable to
the services provided to RSL's customers in the ordinary course of RSL's
business (the "Fulfillment Services") at a charge of [*] per minute of
carrier traffic usage.
(b) In each location in which a Delta Server is colocated
with an RSL Switch, RSL shall provide Delta with access to, and the use of,
its prepaid calling platforms for Delta's prepaid calling cards at a charge
of [*] per minute of traffic usage. RSL shall also provide Delta with such
customer-related services which are comparable to the prepaid calling
services provided by RSL to its prepaid calling card customers in the
ordinary course of conducting that business (the "Prepaid Services"), at a
charge of [*] per minute of traffic usage. Delta shall be charged for the
use of RSL's prepaid calling platforms for a minimum of (i) [*] minutes for
the first full
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately with the
Commission.
4
<PAGE>
calendar month after the date hereof, (ii) [*] minutes for the second full
calendar month after the date hereof, (iii) [*] minutes for the third full
calendar month after the date hereof and (iv) [*] minutes for each month
thereafter, whether or not such level of usage has been achieved.
Section 3.05. Procedures. The services to be provided by RSL in
accordance with this Article III shall be provided to Delta in accordance
with reasonable procedures for operation to be agreed upon between RSL's
engineers and Delta within sixty (60) days from the date hereof.
Section 3.06. Conflicts. Notwithstanding anything contained herein
to the contrary, RSL shall not be obligated to provide any services
pursuant to this Article III if any of RSL's current or future strategic
partners objects, at any time or from time to time, to RSL providing such
services to Delta; provided that RSL shall use its reasonable efforts to
encourage such strategic partner to permit RSL to provide such services to
Delta.
ARTICLE IV
Services Provided by Delta
Section 4.01. Internet Telephony Services. Delta shall, at RSL's
direction, provide RSL with Internet telephony services and facilities (the
"Internet Telephony Services") necessary to route RSL's international
telecommunications traffic between all originations and destinations now or
hereafter serviced by Delta (each a "Route"); provided that the Internet
Telephony Services shall be provided to RSL in accordance with reasonable
procedures for operation and quality to be agreed upon between RSL's engineers
and Delta within sixty (60) days from the date hereof; and provided further that
Delta shall not be obligated to provide RSL with more than [*] of the capacity
on Delta's Global Network. With respect to each of Delta's Routes, Delta shall
make the Internet Telephony Services available to RSL at a discount of [*]
from the cheapest rate otherwise payable by RSL COM U.S.A., Inc., a Delaware
Corporation and an indirect subsidiary of RSL to be "least cost routing for
standard quality," as shown in the table attached hereto as Exhibit A (which
rates shall be reviewed, and modified as necessary, in the ordinary course of
RSL's business every forty-five (45) days during the term in accordance with
RSL's customary procedures); provided, however, that, in the event Delta is
unable to maintain a gross profit level of [*] in providing the Internet
Telephony Services to RSL with respect to any Route, the rates payable by RSL
shall be increased in an amount necessary to permit Delta to achieve a gross
profit equal to [*] (it being understood that, in
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately with the
Commission.
5
<PAGE>
determining Delta's gross profit level, the cost to Delta of providing the
Internet Telephony Services to RSL shall mean the effective cost to Delta of
providing such services taking into account the effect of any of Delta's joint
venture, partnership or other arrangements); and provided further that at no
time shall the rates payable by RSL for the Internet Telephony Services provided
by Delta with respect to any Route be greater than (i) [*] of the rates
otherwise payable by RSL for services considered by RSL to be "least cost
routing for standard quality" or (ii) [*] of the rates payable by other carriers
to Delta for Internet Telephony Services to the same destination.
ARTICLE V
Operating Procedures
Section 5.01. Establishing Operating Procedures. The parties
hereto agree to use their reasonable efforts to establish reasonable
procedures within sixty (60) days from the date hereof for the provision of
the services provided hereunder. Such procedures shall specify, among other
things, the operation and quality of such services and the submission, and
completion, of service orders and shall materially comply with procedures
that are customary in the telecommunications industry and currently in use
by RSL and Delta, as the case may be.
ARTICLE VI
Entering New Markets
Section 6.01. Notice to RSL. In the event that Delta desires to
commence operating the Delta Business in a jurisdiction in which it
currently does not conduct such business (a "New Location"), then Delta
shall provide RSL with written notice (the "New Location Notice") at least
ninety (90) days prior to the anticipated commencement of such operations
specifying in reasonable detail Delta's business plan with respect to such
New Location. Within sixty (60) days after receipt of the New Location
Notice, RSL shall decide, in its sole and absolute discretion, whether or
how Delta may operate the Delta Business in the New Location. In the event
that RSL determines, in its sole and absolute discretion, that Delta may
not operate the Delta Business in the New Location, Delta shall be
prohibited from providing any service other than Termination Services in
the New Location. Delta acknowledges and agrees that the provisions of this
Section 6.01 shall be binding and enforceable against Delta regardless of
any conflict of interest that may influence RSL's decision not to permit
Delta to operate the Delta Business in such New Location. Notwithstanding
anything contained herein to the contrary, if any of RSL's
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately with the
Commission.
6
<PAGE>
current or future strategic partners objects, at any time or from time to time,
to either Delta operating the Delta Business in a New Location or the manner in
which Delta is operating the Delta Business in such New Location, Delta shall,
upon receiving written notice from RSL, discontinue operating the Delta Business
in such New Location or in such manner, as the case may be; provided that RSL
shall use its reasonable efforts to encourage such strategic partner to permit
Delta to operate the Delta Business in such New Location or in such manner, as
the case may be.
ARTICLE VII
Payments
Section 7.01. Service Charges. (a) As soon as practicable after the
end of each calendar month during the Term, RSL shall provide Delta with an
invoice detailing the amounts to be paid by Delta in connection with the
services provided to Delta hereunder.
(b) As soon as practicable after the end of each calendar
month during the Term, Delta shall provide RSL with an invoice detailing
the amounts to be paid by RSL in connection with the services provided to
RSL hereunder.
Section 7.02. Payments Due; Late Payment Charges. Amounts due
hereunder shall be paid within thirty (30) days of receipt of the invoice
therefor. Any undisputed amount due hereunder not paid within thirty (30)
days of receipt of the invoice therefor shall accrue interest from the date
such amount was due at the rate of ten percent (10%) per annum, compounded
daily.
Section 7.03. Disputed Payments. If a dispute arises in good faith
with respect to any amount due hereunder, the recipient of the services
which are the basis for such dispute shall pay when due the undisputed
portion of such amount, if any, and, if the dispute is resolved in the
service provider's favor, promptly pay the disputed portion (or applicable
part thereof) when the dispute is resolved without the applicable late
payment charge otherwise incurred in connection with Section 7.02.
Section 7.04. Currency. All invoices hereunder shall be rendered, and
all payments hereunder shall be made, in U.S. Dollars.
7
<PAGE>
ARTICLE VIII
Termination
Section 8.01. Termination for Cause. In the event that (i) either
RSL or Delta materially breaches any of its duties or obligations hereunder
or (ii) a party to the Stock Purchase Agreement or any agreement,
certificate or other instrument or document delivered in accordance
therewith materially breaches any of its obligations under the Stock
Purchase Agreement or any agreement, certificate or other instrument or
document delivered in accordance therewith, which breach shall not be cured
within ten (10) days after written notice is given to the breaching party
specifying the breach, then either RSL or Delta, as the case may be, may,
by giving written notice thereof to the other, terminate this Agreement as
of a date specified in such notice of termination, which date shall be no
earlier than ten (10) days after the date of such notice.
Section 8.02. Termination for Bankruptcy. In the event of the
Bankruptcy (as hereinafter defined) of either RSL or Delta, then the
non-bankrupt party may, by written notice thereof to the party in
Bankruptcy, terminate this Agreement as of a date specified in such notice
of termination, which date shall be no earlier than ten (10) days after the
date of such notice. For the purposes of this Agreement, "Bankruptcy" shall
mean the happening of any of the following: (i) the filing of an
application for, or a consent to, the appointment of a trustee for all or
substantially all of the relevant party's assets, (ii) the filing of a
voluntary petition in bankruptcy, or the filing of a pleading in any court
of record admitting in writing the relevant party's inability to pay its
debts generally as they come due, (iii) the making of a general assignment
for the benefit of creditors, (iv) the entry of an order, judgment or
decree by any court of competent jurisdiction adjudicating the relevant
party a bankrupt, or appointing a trustee of all or substantially all of
such party's assets unless such order, judgment or decree is vacated or
stayed on appeal within thirty (30) days or (v) the filing of an
involuntary case or other proceeding against the relevant party seeking
liquidation, reorganization or other relief under any bankruptcy,
insolvency or other similar law, which case or proceeding shall not have
been dismissed within sixty days after filing.
Section 8.03. Effect of Termination. In the event of the
termination of this Agreement, all rights and obligations of RSL and Delta
shall terminate as of the effective date of such termination, except that
(i) such termination shall not constitute a waiver of any rights that
either RSL or Delta may have by reason of a breach of this Agreement, (ii)
such termination shall not constitute a waiver of any right to receive
payments that are due and owing pursuant to Article VII and (iii)
8
<PAGE>
the provisions of Article X shall continue in full force and effect.
ARTICLE IX
Limited Warranty
Section 9.01. Disclaimer of General Warranty by RSL. RSL MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE SERVICES
PROVIDED HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, MERCHANTABILITY OR OTHERWISE.
Section 9.02. Disclaimer of General Warranty by Delta. DELTA MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE SERVICES PROVIDED
HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE,
MERCHANTABILITY OR OTHERWISE.
ARTICLE X
Confidentiality
Section 10.01. Confidentiality. RSL and Delta each agree that for
the longest period permitted by law each shall hold in strictest confidence
and, without the prior written approval of the other party hereto, not to
use for their own benefit or the benefit of any party other than the other
party hereto, or disclose to any person, firm or corporation other than
such party (other than as required by law) any confidential proprietary
information concerning the business and affairs of the other party hereto;
provided, however, that the foregoing limitations and restrictions shall
not apply to information that (i) is or becomes generally available to the
public other than as a result of a disclosure by the directors, officers,
shareholders, partners, affiliates, employees, agents or advisors of RSL or
Delta, as the case may be, or (ii) is or becomes available to RSL or Delta
on a non-confidential basis from a source other than the other party hereto
or any of its advisors, agents or affiliates, provided that such source is
not known by RSL or Delta, as the case may be, to be bound by a
confidentiality agreement with or other obligation of secrecy to the other
party hereto. Each of RSL and Delta recognize that the absence of a time
limitation in this Section 10.01 is reasonable and properly required for
the protection of the other party hereto and in the event that the absence
of such limitation is deemed to be unreasonable by a court of competent
jurisdiction, RSL and Delta each agree and submit to the imposition of such
a limitation as said court shall deem reasonable.
9
<PAGE>
Section 10.02. Equitable Remedies. RSL and Delta each specifically
recognize that any breach of Section 10.01 will cause irreparable injury to
the other party hereto and that actual damages may be difficult to
ascertain, and in any event, may be inadequate. Accordingly (and without
limiting the availability of legal or equitable, including injunctive,
remedies under any other provisions of this Agreement), each of RSL and
Delta agrees that in the event of any such breach, the other party hereto
shall be entitled to injunctive relief in addition to such other legal and
equitable remedies that may be available. In addition, RSL and Delta each
agree that the provisions of Section 10.01 shall be considered separate and
apart from the remaining provisions of this Agreement and shall be enforced
as such.
ARTICLE XI
Miscellaneous
Section 11.01. Further Assurances. Each party will, at any time
and from time to time after the date hereof, upon the request of the other,
do, execute, acknowledge and deliver, or shall cause to be done, executed,
acknowledged and delivered, all such other instruments as may be reasonably
required in connection with the performance of this Agreement and each
shall take all such further actions as may be reasonably required to carry
out or further effect the transactions contemplated by this Agreement. Upon
request, Delta and RSL will cooperate, and will use their respective best
efforts to have their respective officers, directors and other employees
cooperate, at the requesting parties' expense, during and after the Term in
furnishing information, evidence, testimony and other assistance in
connection with any actions, proceedings, arrangements or disputes
involving Delta and/or RSL.
Section 11.02. Survival of Representations. All statements,
certifications, indemnifications, representations and warranties made by
the parties to this Agreement in this Agreement or in any certificate or
list delivered pursuant hereto, and their respective obligations to be
performed pursuant to the terms hereof and thereof, shall survive the Term
notwithstanding (a) any examination or audit by or on behalf of any party
hereto and (b) any notice of a breach or of a failure to perform not waived
in writing.
Section 11.03. Notices. All notices or other communications
required or permitted hereunder shall be in writing and shall be deemed
given or delivered (i) when delivered personally or by private courier,
(ii) when actually delivered by registered or certified United States mail,
return receipt requested and postage prepaid or (iii) when sent by telecopy
10
<PAGE>
(provided, that, it is simultaneously electronically confirmed), addressed
as follows:
If to Delta:
c/o Delta Three Israel Ltd.
Jerusalem Technology Park
P.O. Box 48265
Jerusalem
96951 Israel
Fax No.: 972-2-679-7366
Attention: Elie Wurtman
with a copy to:
Wolf Haldenstein Adler Freeman & Herz LLP
270 Madison Avenue
New York, New York 10016
Fax No.: (212) 686-0114
Attention: Mark Silverstein, Esq.
If to RSL:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue
Suite 4300
New York, NY 10153
Fax No.: (212) 317-0600
Attention: Avery S. Fischer, Esq.
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022-2585
Fax No.: (212) 940-8776
Attention: Robert L. Kohl, Esq.
or to such other address as such party may indicate by a notice delivered
to the other party hereto pursuant to the terms hereof.
Section 11.04. No Modification Except in Writing. This Agreement
shall not be changed, modified, or amended except by a writing signed by
the party to be charged and this Agreement may not be discharged except by
performance in accordance with its terms or by a writing signed by the
party to be charged.
Section 11.05. Entire Agreement. This Agreement and all other
documents to be delivered in connection herewith set forth the entire
agreement and understanding between the parties as to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of every kind and nature between them.
11
<PAGE>
Section 11.06. Severability. If any provision of this Agreement or
the application of any provision hereof to any person or circumstances is
held invalid, the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected unless
the provision held invalid shall substantially impair the benefits of the
remaining portions of this Agreement.
Section 11.07. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by Delta without the prior
written consent of RSL. RSL may assign this Agreement to any affiliate of RSL or
in connection with a merger or consolidation of RSL or a sale of all or
substantially all of RSL's business. Except as provided in the preceding
sentence, this Agreement may not be assigned by RSL without the prior written
consent of Delta.
Section 11.08. Publicity; Announcements. Except to the extent
required by law, all publicity related to the transactions contemplated
hereby shall be subject to the mutual approval of the parties hereto and,
except as otherwise may be required by law, no public announcement of any
of the transactions contemplated hereby will be made by either party hereto
without the prior written consent of the other party hereto.
Section 11.09. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York,
without giving effect to the conflict of laws principles thereof. For
purposes of this Agreement, each party hereby irrevocably submits to the
nonexclusive jurisdiction of the courts of the State of New York, sitting
in New York County, and the courts of the United States for the Southern
District of New York. Each party irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in any
such court, any claim that any such suit, action or proceeding brought in
such a court has been brought in an inconvenient forum and the right to
object, with respect to any such suit, action or proceeding brought in any
such court, that such court does not have jurisdiction over such party. In
any such suit, action or proceeding, each party waives, to the fullest
extent it may effectively do so, personal service of any summons, complaint
or other process and agrees that the service thereof may be made by
certified or registered mail, addressed to such party at its address set
forth in Section 11.03. Each party agrees that a final non-appealable
judgment in any such suit, action or proceeding brought in such a court
shall be conclusive and binding.
Section 11.10. Captions. The captions appearing in this Agreement
are inserted only as a matter of convenience and for
12
<PAGE>
reference and in no way define, limit or describe the scope and intent of this
Agreement or any of the provisions hereof.
Section 11.11. Interpretation. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular,
or plural as the identity of the person or persons referred to may require.
Section 11.12. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
RSL COMMUNICATIONS, LTD.
By /s/ Itzhak Fisher
---------------------
Name:
Title:
DELTA THREE, INC.
By /s/ Elie C. Wurtman
---------------------
Name:
Title:
13
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Afghanistan [*] 93 [*] [*] [*] [*] [*] [*] [*]
Albania [*] 355 [*] [*] [*] [*] [*] [*] [*]
Algeria [*] 213 [*] [*] [*] [*] [*] [*] [*]
American Samoa [*] 684 [*] [*] [*] [*] [*] [*] [*]
Andorra [*] 376 [*] [*] [*] [*] [*] [*] [*]
Angola [*] 244 [*] [*] [*] [*] [*] [*] [*]
Anguilla [*] 1264 [*] [*] [*] [*] [*] [*] [*]
Antarctica C&S [*] 6721 [*] [*] [*] [*] [*] [*] [*]
Antigua & Barbuda [*] 1268 [*] [*] [*] [*] [*] [*] [*]
Argentina [*] 54 [*] [*] [*] [*] [*] [*] [*]
Argentina - Buenos Aires [*] 54-1 [*] [*] [*] [*] [*] [*] [*]
Armenia [*] 374 [*] [*] [*] [*] [*] [*] [*]
Aruba [*] 297 [*] [*] [*] [*] [*] [*] [*]
Ascension Is [*] 247 [*] [*] [*] [*] [*] [*] [*]
Australia [*] 61 [*] [*] [*] [*] [*] [*] [*]
Australia - Sydney [*] 61-2 [*] [*] [*] [*] [*] [*] [*]
Austria [*] 43 [*] [*] [*] [*] [*] [*] [*]
Austria - Vienna [*] 43-1 [*] [*] [*] [*] [*] [*] [*]
Azerbaijani Rep [*] 994 [*] [*] [*] [*] [*] [*] [*]
Bahamas [*] 1242 [*] [*] [*] [*] [*] [*] [*]
Bahrain [*] 973 [*] [*] [*] [*] [*] [*] [*]
Bangladesh [*] 880 [*] [*] [*] [*] [*] [*] [*]
Barbados [*] 1246 [*] [*] [*] [*] [*] [*] [*]
Belarus [*] 375 [*] [*] [*] [*] [*] [*] [*]
Belgium [*] 32 [*] [*] [*] [*] [*] [*] [*]
Belgium - Antwerp [*] 32-3 [*] [*] [*] [*] [*] [*] [*]
Belgium - Brussels [*] 32-2 [*] [*] [*] [*] [*] [*] [*]
Belize [*] 501 [*] [*] [*] [*] [*] [*] [*]
Benin [*] 229 [*] [*] [*] [*] [*] [*] [*]
Bermuda [*] 1441 [*] [*] [*] [*] [*] [*] [*]
Bhutan [*] 975 [*] [*] [*] [*] [*] [*] [*]
Bolivia [*] 591 [*] [*] [*] [*] [*] [*] [*]
Bosnia [*] 387 [*] [*] [*] [*] [*] [*] [*]
Botswana [*] 267 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Afghanistan Cherry Star Wiltel UK Ladia UCN IDT
Albania Cherry T'globe Startec UCN NOR UK CTS
Algeria T'globe Cherry PGE Startec UNI UK Tresc
American Samoa TotTel ACC CTS Star T'globe UCN Sprint
Andorra Cherry UNI Telco UCN Ladia ACC Wiltel
Angola Cherry UNI ATI UCN Star ACC Ladia
Anguilla Ladia Tresc Telco FCom ATI UK UCN
Antarctica C&S UK IDT Cherry UCN CTS Ladia Primus
Antigua & Barbuda Tresc Ladia ACC FCom CTS Sprint ATI
Argentina IDT Primus Sprint CTS FCom UCN T'globe
Argentina - Buenos Aires IDT UCN Primus Sprint CTS FCom T'globe
Armenia Cherry Primus Star ATI Ladia T'globe UCN
Aruba ATI ACC Star Ladia FCom UCN T'globe
Ascension Is NOR UCN UK Cherry T'globe CTS FCom
Australia PGE LCI Cherry CTS Star Primus FCom
Australia - Sydney PGE LCI Cherry CTS Star Primus FCom
Austria LCI Primus T'globe Star FCom CTS Sprint
Austria - Vienna UNI LCI Primus T'globe Star FCom CTS
Azerbaijani Rep Wiltel Cherry Ladia Telco Startec Star IDT
Bahamas Fonor ACC T'globe FCom Ladia Star ATI
Bahrain Cherry UCN CTS Primus ATI ACC UK
Bangladesh Ladia UCN Startec IDT Primus FCom Tresc
Barbados ATI Ladia Tresc IDT T'globe Sprint UCN
Belarus Cherry ATI T'globe NOR SWE FCom UCN
Belgium Cherry D'Net CTS LCI UCN ATI Ladia
Belgium - Antwerp Cherry D'Net CTS LCI UCN ATI Ladia
Belgium - Brussels Cherry D'Net CTS LCI UCN ATI Ladia
Belize Cherry Primus Wiltel IDT FCom T'globe UCN
Benin Tresc IDT Cherry Primus NOR UCN T'globe
Bermuda Primus T'globe ACC Fonor Star FCom UCN
Bhutan T'globe FCom Ladia UK Startec UCN Cherry
Bolivia MCI Cherry ATI Fonor UCN ComT T'globe
Bosnia T'globe UCN D'Net Cherry Ladia Tresc NOR
Botswana Q'Tel UNI Startec T'globe Cherry Star UCN
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 1
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Brazil [*] 55 [*] [*] [*] [*] [*] [*] [*]
British Virgin Islands [*] 1284 [*] [*] [*] [*] [*] [*] [*]
Brunei [*] 673 [*] [*] [*] [*] [*] [*] [*]
Bulgaria [*] 359 [*] [*] [*] [*] [*] [*] [*]
Burkina Coast [*] 226 [*] [*] [*] [*] [*] [*] [*]
Burundi [*] 257 [*] [*] [*] [*] [*] [*] [*]
Cambodia [*] 855 [*] [*] [*] [*] [*] [*] [*]
Cameroon [*] 237 [*] [*] [*] [*] [*] [*] [*]
Canada [*] 1 [*] [*] [*] [*] [*] [*] [*]
Canada - Alberta [*] 1-403 [*] [*] [*] [*] [*] [*] [*]
Canada - British Columbia [*] 1-604 [*] [*] [*] [*] [*] [*] [*]
Canada - Manitoba [*] 1-204 [*] [*] [*] [*] [*] [*] [*]
Canada - Montreal [*] 1-514 [*] [*] [*] [*] [*] [*] [*]
Canada - Newfoundland [*] 1-709 [*] [*] [*] [*] [*] [*] [*]
Canada - New Brunswick [*] 1-506 [*] [*] [*] [*] [*] [*] [*]
Canada - Nova Scotia [*] 1-902 [*] [*] [*] [*] [*] [*] [*]
Canada - Ontario [*] 1-519 [*] [*] [*] [*] [*] [*] [*]
Canada - Ontario [*] 1-705 [*] [*] [*] [*] [*] [*] [*]
Canada - Ontario [*] 1-807 [*] [*] [*] [*] [*] [*] [*]
Canada - Ontario [*] 1-905 [*] [*] [*] [*] [*] [*] [*]
Canada - Ottawa [*] 1-613 [*] [*] [*] [*] [*] [*] [*]
Canada - Quebec [*] 1-418 [*] [*] [*] [*] [*] [*] [*]
Canada - Quebec [*] 1-819 [*] [*] [*] [*] [*] [*] [*]
Canada - Saskatchewan [*] 1-306 [*] [*] [*] [*] [*] [*] [*]
Canada - Toronto [*] 1-416 [*] [*] [*] [*] [*] [*] [*]
Cape Verde [*] 238 [*] [*] [*] [*] [*] [*] [*]
Cayman Isl [*] 1345 [*] [*] [*] [*] [*] [*] [*]
Centr Afr Rep [*] 236 [*] [*] [*] [*] [*] [*] [*]
Chad [*] 235 [*] [*] [*] [*] [*] [*] [*]
Chile [*] 56 [*] [*] [*] [*] [*] [*] [*]
China [*] 86 [*] [*] [*] [*] [*] [*] [*]
Christmas Isl [*] 6724 [*] [*] [*] [*] [*] [*] [*]
Cocos Isl [*] 6722 [*] [*] [*] [*] [*] [*] [*]
Colombia [*] 57 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Brazil T'globe Star ATI Sprint Startec FCom IDT
British Virgin Islands ACC Tresc Star Primus CTS UCN T'globe
Brunei Cherry Primus Ladia CTS UCN Startec UK
Bulgaria Cherry T'globe UCN ATI NOR FCom SWE
Burkina Coast IDT Cherry T'globe UCN FCom Primus Wiltel
Burundi T'globe Ladia UCN PGE Star CTS Telco
Cambodia CTS Star ATI Ladia TotTel T'globe FCom
Cameroon T'globe Primus Cherry Ladia FCom Startec ATI
Canada ComT CTS Star Cherry ACC Primus Wiltel
Canada - Alberta ComT CTS Star Primus Wiltel Fonor UCN
Canada - British Columbia ComT CTS Star ACC Primus Wiltel Fonor
Canada - Manitoba ComT CTS Star Primus Wiltel Fonor UCN
Canada - Montreal ACC Fonor ComT CTS Star Cherry FCom
Canada - Newfoundland ComT CTS Star Primus Wiltel Fonor UCN
Canada - New Brunswick ComT CTS Star Primus Wiltel Fonor UCN
Canada - Nova Scotia ComT CTS Star Primus Wiltel Fonor UCN
Canada - Ontario ACC ComT CTS Star Cherry FCom Primus
Canada - Ontario ACC ComT CTS Star FCom Cherry Primus
Canada - Ontario ComT CTS Star Primus Wiltel Fonor UCN
Canada - Ontario ACC ComT CTS Star Cherry FCom Primus
Canada - Ottawa ComT ACC CTS Star Cherry FCom Primus
Canada - Quebec ACC ComT CTS Star Cherry Primus Wiltel
Canada - Quebec ComT CTS Star ACC Cherry Primus Wiltel
Canada - Saskatchewan ComT CTS Star Primus Wiltel Fonor UCN
Canada - Toronto ACC Fonor CTS ComT Star Cherry FCom
Cape Verde Sprint IDT T'globe Star ATI Ladia CTS
Cayman Isl ACC Tresc T'globe D'Net Primus FCom CTS
Centr Afr Rep UCN Startec PGE ACC FCom Ladia T'globe
Chad ATI Cherry Startec Tresc UCN UK Star
Chile Star Tresc PGE UCN Primus Cherry IDT
China Star Cherry Ladia IDT FCom UCN UK
Christmas Isl UK CTS Cherry UCN Telco Ladia Star
Cocos Isl UK CTS Cherry UCN Star SWE Telco
Colombia Delta3 UCN Star ATI Tresc FCom Primus
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With
the Commission.
7/11/97 2
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Colombia - Barranquilla [*] 57-53 [*] [*] [*] [*] [*] [*] [*]
Colombia - Bogota [*] 57-1 [*] [*] [*] [*] [*] [*] [*]
Colombia - Cali [*] 57-2 [*] [*] [*] [*] [*] [*] [*]
Colombia - Medellin [*] 57-4 [*] [*] [*] [*] [*] [*] [*]
Colombia - Pareira [*] 57-63 [*] [*] [*] [*] [*] [*] [*]
Comoros [*] 26971 [*] [*] [*] [*] [*] [*] [*]
Congo [*] 242 [*] [*] [*] [*] [*] [*] [*]
Cook Islands [*] 682 [*] [*] [*] [*] [*] [*] [*]
Costa Rica [*] 506 [*] [*] [*] [*] [*] [*] [*]
Croatia [*] 385 [*] [*] [*] [*] [*] [*] [*]
Cuba [*] 53 [*] [*] [*] [*] [*] [*] [*]
Cyprus [*] 357 [*] [*] [*] [*] [*] [*] [*]
Czech Rep [*] 420 [*] [*] [*] [*] [*] [*] [*]
Denmark [*] 45 [*] [*] [*] [*] [*] [*] [*]
Diego Garcia [*] 246 [*] [*] [*] [*] [*] [*] [*]
Djibouti [*] 253 [*] [*] [*] [*] [*] [*] [*]
Dominica [*] 1767 [*] [*] [*] [*] [*] [*] [*]
Dominican Rep [*] 1809220 [*] [*] [*] [*] [*] [*] [*]
Ecuador [*] 593 [*] [*] [*] [*] [*] [*] [*]
Egypt [*] 20 [*] [*] [*] [*] [*] [*] [*]
El Salvador [*] 503 [*] [*] [*] [*] [*] [*] [*]
Equatorial Guinea [*] 240 [*] [*] [*] [*] [*] [*] [*]
Eritrea [*] 291 [*] [*] [*] [*] [*] [*] [*]
Estonia [*] 372 [*] [*] [*] [*] [*] [*] [*]
Ethiopia [*] 251 [*] [*] [*] [*] [*] [*] [*]
Faeroe Islands [*] 298 [*] [*] [*] [*] [*] [*] [*]
Falkland Islands [*] 500 [*] [*] [*] [*] [*] [*] [*]
Fiji Islands [*] 679 [*] [*] [*] [*] [*] [*] [*]
Finland [*] 358 [*] [*] [*] [*] [*] [*] [*]
France [*] 33 [*] [*] [*] [*] [*] [*] [*]
France - Nice [*] 33-4 [*] [*] [*] [*] [*] [*] [*]
France - Paris [*] 33-1 [*] [*] [*] [*] [*] [*] [*]
French Antilles [*] 596 [*] [*] [*] [*] [*] [*] [*]
French Guiana [*] 594 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Colombia - Barranquilla Delta3 IDT UCN Star ATI Tresc FCom
Colombia - Bogota Delta3 IDT UCN Tresc Star ATI Startec
Colombia - Cali Delta3 IDT UCN Star ATI Tresc FCom
Colombia - Medellin Delta3 ATI Star Startec IDT UCN Tresc
Colombia - Pareira Delta3 UCN Star ATI Tresc FCom Primus
Comoros Ladia UCN T'globe Cherry ATI D'Net CTS
Congo T'globe UCN CTS Cherry Startec Star IDT
Cook Islands T'globe Cherry ATI UK UCN PGE Ladia
Costa Rica T'globe Tresc Cherry Primus Sprint FCom ATI
Croatia T'globe NOR SWE Cherry FCom Star ATI
Cuba Cherry Startec ATI CTS FCom IDT Star
Cyprus NOR SWE Ladia CTS Cherry Fonor Merc
Czech Rep T'globe Cherry Ladia CTS NOR SWE UNI
Denmark LCI Merc SWE T'globe IDT Cherry NOR
Diego Garcia T'globe ATI UCN Primus D'Net UK ACC
Djibouti NOR Cherry Ladia CTS IDT Primus UCN
Dominica Ladia TotTel UCN Wiltel ATI CTS Star
Dominican Rep ITC MCI
Ecuador ATI Cherry FCom Tresc CTS TotTel Ladia
Egypt Cherry UCN Primus Star Wiltel ATI TotTel
El Salvador Tresc T'globe Star ATI IDT FCom UCN
Equatorial Guinea Startec Cherry UCN Star UK T'globe ATI
Eritrea CTS IDT Primus ATI UCN Star Ladia
Estonia SWE FCom Cherry NOR T'globe D'Net Ladia
Ethiopia CTS Cherry Ladia IDT ATI Primus T'globe
Faeroe Islands SWE NOR Cherry Startec FCom Ladia UK
Falkland Islands Ladia UCN T'globe Star Startec CTS Primus
Fiji Islands Cherry UK UCN T'globe ATI Primus CTS
Finland SWE D'Net Cherry Ladia CTS ACC FCom
France Cherry Sprint LCI Primus Ladia Star CTS
France - Nice Sprint LCI Cherry UCN Primus Ladia Star
France - Paris Cherry CTS Sprint UK LCI UCN Primus
French Antilles Tresc Star Ladia UCN Wiltel IDT Startec
French Guiana Cherry Star Primus ATI Ladia T'globe IDT
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 3
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
French Polynesia [*] 689 [*] [*] [*] [*] [*] [*] [*]
Gabon [*] 241 [*] [*] [*] [*] [*] [*] [*]
Gambia [*] 220 [*] [*] [*] [*] [*] [*] [*]
Georgia [*] 995 [*] [*] [*] [*] [*] [*] [*]
Germany [*] 49 [*] [*] [*] [*] [*] [*] [*]
Germany - Frankfurt [*] 49-69 [*] [*] [*] [*] [*] [*] [*]
Ghana [*] 233 [*] [*] [*] [*] [*] [*] [*]
Gibraltar [*] 350 [*] [*] [*] [*] [*] [*] [*]
Greece [*] 30 [*] [*] [*] [*] [*] [*] [*]
Greenland [*] 299 [*] [*] [*] [*] [*] [*] [*]
Grenada [*] 1473 [*] [*] [*] [*] [*] [*] [*]
Guadeloupe [*] 590 [*] [*] [*] [*] [*] [*] [*]
Guam [*] 671 [*] [*] [*] [*] [*] [*] [*]
Guantanamo Bay [*] 539 [*] [*] [*] [*] [*] [*] [*]
Guatemala [*] 502 [*] [*] [*] [*] [*] [*] [*]
Guinea [*] 224 [*] [*] [*] [*] [*] [*] [*]
Guinea-Bissau [*] 245 [*] [*] [*] [*] [*] [*] [*]
Guyana [*] 592 [*] [*] [*] [*] [*] [*] [*]
Haiti [*] 509 [*] [*] [*] [*] [*] [*] [*]
Honduras [*] 504 [*] [*] [*] [*] [*] [*] [*]
Hong Kong (Peak) [*] 852 [*] [*] [*] [*] [*] [*] [*]
Hong Kong (Off Peak) [*] 852 [*] [*] [*] [*] [*] [*] [*]
Hungary [*] 36 [*] [*] [*] [*] [*] [*] [*]
Iceland [*] 354 [*] [*] [*] [*] [*] [*] [*]
India [*] 91 [*] [*] [*] [*] [*] [*] [*]
India - Madras [*] 91-44 [*] [*] [*] [*] [*] [*] [*]
India - New Dehli [*] 91-11 [*] [*] [*] [*] [*] [*] [*]
Indonesia [*] 62 [*] [*] [*] [*] [*] [*] [*]
Inmarsal E Atl [*] 871 [*] [*] [*] [*] [*] [*] [*]
Inmarsal IND [*] 872 [*] [*] [*] [*] [*] [*] [*]
Inmarsal PAC [*] 873 [*] [*] [*] [*] [*] [*] [*]
Inmarsal W Atl [*] 874 [*] [*] [*] [*] [*] [*] [*]
Iran [*] 98 [*] [*] [*] [*] [*] [*] [*]
Iraq [*] 964 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
French Polynesia ATI Ladia FCom Startec ACC T'globe UCN
Gabon T'globe Tresc Cherry UK CTS ATI Wiltel
Gambia Cherry T'globe TotTel Ladia Star IDT ATI
Georgia PGE UNI Ladia RTN Cherry UCN Star
Germany PGE FCom Primus Star LCI Cherry Ladia
Germany - Frankfurt PGE FCom Primus Star LCI Cherry CTS
Ghana T'globe IDT Cherry Ladia FCom ATI UCN
Gibraltar Cherry UK ACC Startec Ladia ATI FCom
Greece Cherry PGE DK ACC T'globe Tresc Ladia
Greenland UK ACC ATI Ladia UCN CTS Startec
Grenada Sprint Ladia Wiltel ATI Star T'globe Primus
Guadeloupe Tresc Cherry T'globe FCom Star Ladia IDT
Guam Star PGE ATI Cherry ACC UCN CTS
Guantanamo Bay UK CTS T'globe Cherry ATI ACC Ladia
Guatemala Tresc Cherry ATI Wiltel IDT ACC Ladia
Guinea Cherry Ladia NOR Star ATI Startec UCN
Guinea-Bissau Star CTS Primus Ladia UCN TotTel IDT
Guyana T'globe Cherry ATI UCN FCom Wiltel IDT
Haiti Cherry Star ATI Wiltel TotTel T'globe Tresc
Honduras Cherry Tresc FCom T'globe Primus Startec Sprint
Hong Kong (Peak) Access CTS IDT UCN Ladia Cherry ATI
Hong Kong (Off Peak) Call-C Access CTS IDT UCN Ladia Cherry
Hungary ACC Cherry LCI Tresc Star NOR Ladia
Iceland Star Cherry IDT UCN Ladia FCom CTS
India Telco Primus Wiltel ATI TotTel IDT UCN
India - Madras IDT Telco Primus Wiltel ATI TotTel UCN
India - New Dehli IDT Star Telco Primus Wiltel ATI TotTel
Indonesia Sprint Star Primus Cherry ATI Ladia T'globe
Inmarsal E Atl Cherry UK SWE ATI Ladia ACC FCom
Inmarsal IND UK Cherry SWE ATI Ladia ACC FCom
Inmarsal PAC Cherry SWE ATI UK ACC Ladia FCom
Inmarsal W Atl UK Cherry SWE ATI Ladia ACC FCom
Iran T'globe Startec Cherry Primus UCN UK Star
Iraq Ladia Primus IDT UCN T'globe NOR FCom
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 4
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ireland [*] 353 [*] [*] [*] [*] [*] [*] [*]
Israel [*] 972 [*] [*] [*] [*] [*] [*] [*]
Italy [*] 39 [*] [*] [*] [*] [*] [*] [*]
Italy - Genoa [*] 39-10 [*] [*] [*] [*] [*] [*] [*]
Italy - Milan [*] 39-2 [*] [*] [*] [*] [*] [*] [*]
Italy - Turin [*] 39-11 [*] [*] [*] [*] [*] [*] [*]
Ivory Coast [*] 225 [*] [*] [*] [*] [*] [*] [*]
Jamaica [*] 1876 [*] [*] [*] [*] [*] [*] [*]
Japan [*] 81 [*] [*] [*] [*] [*] [*] [*]
Japan - Tokyo [*] 81-3 [*] [*] [*] [*] [*] [*] [*]
Jordan [*] 962 [*] [*] [*] [*] [*] [*] [*]
Kazakahstan [*] 73 [*] [*] [*] [*] [*] [*] [*]
Kenya [*] 254 [*] [*] [*] [*] [*] [*] [*]
Kiribati [*] 686 [*] [*] [*] [*] [*] [*] [*]
Korea, North [*] 850 [*] [*] [*] [*] [*] [*] [*]
Korea, South [*] 82 [*] [*] [*] [*] [*] [*] [*]
Kuwait [*] 965 [*] [*] [*] [*] [*] [*] [*]
Kyrgyzstan [*] 73312 [*] [*] [*] [*] [*] [*] [*]
Laos [*] 856 [*] [*] [*] [*] [*] [*] [*]
Latvia [*] 371 [*] [*] [*] [*] [*] [*] [*]
Lebanon [*] 961 [*] [*] [*] [*] [*] [*] [*]
Lesotho [*] 266 [*] [*] [*] [*] [*] [*] [*]
Liberia [*] 231 [*] [*] [*] [*] [*] [*] [*]
Libya [*] 218 [*] [*] [*] [*] [*] [*] [*]
Liechtenstein [*] 4175 [*] [*] [*] [*] [*] [*] [*]
Lithuania [*] 370 [*] [*] [*] [*] [*] [*] [*]
Luxembourg [*] 352 [*] [*] [*] [*] [*] [*] [*]
Macau [*] 853 [*] [*] [*] [*] [*] [*] [*]
Macedonia [*] 389 [*] [*] [*] [*] [*] [*] [*]
Madagascar [*] 261 [*] [*] [*] [*] [*] [*] [*]
Madeira (Portugal) [*] 35191 [*] [*] [*] [*] [*] [*] [*]
Malawi [*] 265 [*] [*] [*] [*] [*] [*] [*]
Malaysia [*] 60 [*] [*] [*] [*] [*] [*] [*]
Maldives [*] 960 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ireland Merc Cherry Ladia CTS ACC UK ATI
Israel TotTel Ladia Star Primus IDT FCom Cherry
Italy FCom Star Primus Sprint ACC Ladia IDT
Italy - Genoa Cherry FCom Star Primus Sprint ACC Ladia
Italy - Milan UNI Cherry FCom Star Primus Sprint ACC
Italy - Turin UNI Cherry FCom Star Primus Sprint ACC
Ivory Coast Ladia UK Cherry ATI UCN Tresc Startec
Jamaica Ladia UCN ATI Star Primus Fonor ComT
Japan Telco PGE Primus CTS LCI UCN IDT
Japan - Tokyo Telco PGE CTS Primus LCI UCN Star
Jordan Tresc Cherry Wiltel Startec UCN ATI IDT
Kazakahstan T'globe RTN FCom Startec UCN Ladia ATI
Kenya Ladia Star Primus Cherry ATI TotTel Startec
Kiribati Cherry ATI Ladia UCN ACC UK T'globe
Korea, North ATI Cherry Wiltel ACC ComT Telco UCN
Korea, South PGE Sprint T'globe Star ACC ATI Ladia
Kuwait Cherry Primus FCom UCN Star ATI Wiltel
Kyrgyzstan Cherry Ladia UCN T'globe D'Net TotTel Primus
Laos T'globe UK PGE Star Cherry FCom Ladia
Latvia NOR Merc SWE UNI DK T'Globe Startec
Lebanon Cherry Startec Ladia ATI Primus Star UCN
Lesotho Q'Tel UNI T'globe Ladia UCN CTS Cherry
Liberia Cherry T'globe Wiltel Primus FCom IDT Star
Libya T'globe Cherry ATI UCN CTS Ladia UK
Liechtenstein IDT TotTel NOR Primus ACC Cherry D'Net
Lithuania NOR PGE SWE UNI TGlobe UCN IDT
Luxembourg NOR Ladia T'globe SWE Cherry Primus UNI
Macau T'globe Cherry ATI UCN Primus Ladia UK
Macedonia Ladia D'Net Cherry T'globe FCom UCN UK
Madagascar Cherry Ladia UCN T'globe ATI IDT CTS
Madeira (Portugal) Ladia UK SWE FCom ACC Star
Malawi UNI Ladia T'globe UCN FCom Wiltel Star
Malaysia PGE UCN T'globe Star FCom Primus ATI
Maldives T'globe Cherry D'Net ATI NOR UCN Ladia
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 5
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mali [*] 223 [*] [*] [*] [*] [*] [*] [*]
Malta [*] 356 [*] [*] [*] [*] [*] [*] [*]
Mariana Island [*] 670 [*] [*] [*] [*] [*] [*] [*]
Marshall Islands [*] 692 [*] [*] [*] [*] [*] [*] [*]
Martinique [*] 596 [*] [*] [*] [*] [*] [*] [*]
Mauritania [*] 222 [*] [*] [*] [*] [*] [*] [*]
Mauritius [*] 230 [*] [*] [*] [*] [*] [*] [*]
Mayotte Island [*] 269 [*] [*] [*] [*] [*] [*] [*]
Mexico 1 (Off) [*] 521 [*] [*] [*] [*] [*] [*] [*]
Mexico 1 (Peak) [*] 521 [*] [*] [*] [*] [*] [*] [*]
Mexico 2 (Off) [*] 522 [*] [*] [*] [*] [*] [*] [*]
Mexico 2 (Peak) [*] 522 [*] [*] [*] [*] [*] [*] [*]
Mexico 3 (Off) [*] 523 [*] [*] [*] [*] [*] [*] [*]
Mexico 3 (Peak) [*] 523 [*] [*] [*] [*] [*] [*] [*]
Mexico 4 (Off) [*] 524 [*] [*] [*] [*] [*] [*] [*]
Mexico 4 (Peak) [*] 524 [*] [*] [*] [*] [*] [*] [*]
Mexico 5 (Off) [*] 525 [*] [*] [*] [*] [*] [*] [*]
Mexico 5 (Peak) [*] 525 [*] [*] [*] [*] [*] [*] [*]
Mexico 6 (Off) [*] 526 [*] [*] [*] [*] [*] [*] [*]
Mexico 6 (Peak) [*] 526 [*] [*] [*] [*] [*] [*] [*]
Mexico 7 (Off) [*] 527 [*] [*] [*] [*] [*] [*] [*]
Mexico 7 (Peak) [*] 527 [*] [*] [*] [*] [*] [*] [*]
Mexico 8 (Off) [*] 528 [*] [*] [*] [*] [*] [*] [*]
Mexico 8 (Peak) [*] 528 [*] [*] [*] [*] [*] [*] [*]
Mexico City [*] 525 [*] [*] [*] [*] [*] [*] [*]
Micronesia [*] 691 [*] [*] [*] [*] [*] [*] [*]
Moldova [*] 373 [*] [*] [*] [*] [*] [*] [*]
Monaco [*] 377 [*] [*] [*] [*] [*] [*] [*]
Mongolia [*] 976 [*] [*] [*] [*] [*] [*] [*]
Montserrat [*] 1664 [*] [*] [*] [*] [*] [*] [*]
Morocco [*] 212 [*] [*] [*] [*] [*] [*] [*]
Mozambique [*] 258 [*] [*] [*] [*] [*] [*] [*]
Myanmar [*] 95 [*] [*] [*] [*] [*] [*] [*]
Namibia [*] 264 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mali IDT Cherry NOR ATI Ladia Primus T'globe
Malta NOR Cherry T'globe CTS UNI UCN UK
Mariana Island Star Cherry CTS D'Net T'globe FCom ACC
Marshall Islands ACC Cherry Primus T'globe Startec ATI Ladia
Martinique T'globe Star Ladia Cherry Wiltel ATI UK
Mauritania Star Cherry Ladia ATI UK UCN IDT
Mauritius UCN ATI D'Net ACC Cherry Primus Star
Mayotte Island Cherry T'globe ATI CTS Ladia UK SWE
Mexico 1 (Off) Star ACC CTS IDT Primus Ladia Telco
Mexico 1 (Peak) Star IDT Primus Telco Ladia UCN ACC
Mexico 2 (Off) Star ACC CTS ATI Ladia Telco Primus
Mexico 2 (Peak) ACC Star Telco Primus UCN IDT Ladia
Mexico 3 (Off) Star ACC ATI CTS Telco Ladia UCN
Mexico 3 (Peak) ACC Telco UCN Star Primus Ladia CTS
Mexico 4 (Off) Star ACC CTS ATI Ladia Telco Primus
Mexico 4 (Peak) Telco Primus Star Cherry IDT ACC UCN
Mexico 5 (Off) Star ACC ATI CTS Ladia Cherry T'globe
Mexico 5 (Peak) Cherry IDT Telco Star CTS Primus UCN
Mexico 6 (Off) Ameritel Star T'globe Cherry ATI ACC UCN
Mexico 6 (Peak) Ameritel Cherry UCN Telco IDT Star ATI
Mexico 7 (Off) Ameritel CTS T'globe ATI Star UCN ACC
Mexico 7 (Peak) Ameritel CTS UCN Cherry IDT Star Telco
Mexico 8 (Off) Ameritel T'globe Star ATI UCN ACC Telco
Mexico 8 (Peak) Ameritel UCN Telco ATI Star CTS Cherry
Mexico City Ameritel UCN IDT PGE ComT Star CTS
Micronesia NOR ATI Primus Cherry Star UK SWE
Moldova FCom D'Net PGE SWE Cherry RTN ATI
Monaco UNI UK PGE CTS Primus Cherry Merc
Mongolia ATI Cherry UCN ACC Ladia Star Primus
Montserrat Ladia Wiltel IDT Star T'globe ATI UK
Morocco UNI T'globe Merc Cherry Tresc UCN PGE
Mozambique Q'Tel UNI Cherry Ladia UCN ACC Primus
Myanmar IDT Cherry Ladia ATI UK UCN T'globe
Namibia UNI Q'Tel Startec SWE UK Ladia UCN
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 6
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nauru [*] 674 [*] [*] [*] [*] [*] [*] [*]
Nepal [*] 977 [*] [*] [*] [*] [*] [*] [*]
Netherland Antilles [*] 599 [*] [*] [*] [*] [*] [*] [*]
Netherlands [*] 31 [*] [*] [*] [*] [*] [*] [*]
Netherlands - Amsterdam [*] 31-2 [*] [*] [*] [*] [*] [*] [*]
Nevis [*] 1809469 [*] [*] [*] [*] [*] [*] [*]
New Caledonia [*] 687 [*] [*] [*] [*] [*] [*] [*]
New Zealand [*] 64 [*] [*] [*] [*] [*] [*] [*]
Nicaragua [*] 505 [*] [*] [*] [*] [*] [*] [*]
Niger [*] 227 [*] [*] [*] [*] [*] [*] [*]
Nigeria [*] 234 [*] [*] [*] [*] [*] [*] [*]
Niue Island [*] 683 [*] [*] [*] [*] [*] [*] [*]
Norfolk Island [*] 672 [*] [*] [*] [*] [*] [*] [*]
Norway [*] 47 [*] [*] [*] [*] [*] [*] [*]
Oman [*] 968 [*] [*] [*] [*] [*] [*] [*]
Pakistan [*] 92 [*] [*] [*] [*] [*] [*] [*]
Palau [*] 680 [*] [*] [*] [*] [*] [*] [*]
Panama [*] 507 [*] [*] [*] [*] [*] [*] [*]
Papua New Guinea [*] 675 [*] [*] [*] [*] [*] [*] [*]
Paraguay [*] 595 [*] [*] [*] [*] [*] [*] [*]
Peru [*] 51 [*] [*] [*] [*] [*] [*] [*]
Philippines [*] 63 [*] [*] [*] [*] [*] [*] [*]
Philippines - Manila [*] 63-632 [*] [*] [*] [*] [*] [*] [*]
Poland [*] 48 [*] [*] [*] [*] [*] [*] [*]
Portugal [*] 351 [*] [*] [*] [*] [*] [*] [*]
Puerto Rico [*] 1787 [*] [*] [*] [*] [*] [*] [*]
Qatar [*] 974 [*] [*] [*] [*] [*] [*] [*]
Reunion Island [*] 262 [*] [*] [*] [*] [*] [*] [*]
Romania [*] 40 [*] [*] [*] [*] [*] [*] [*]
Russia [*] 7 [*] [*] [*] [*] [*] [*] [*]
Russia - Moscow [*] 7-095 [*] [*] [*] [*] [*] [*] [*]
Russia - Moscow [*] 7-096 [*] [*] [*] [*] [*] [*] [*]
Russia - Moscow [*] 7-097 [*] [*] [*] [*] [*] [*] [*]
Russia - St. Petersburg [*] 7-812 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Nauru NOR Cherry ATI UK UCN Ladia PGE
Nepal T'globe Cherry UCN CTS Ladia UK IDT
Netherland Antilles Cherry ATI TotTel CTS T'globe FCom Startec
Netherlands IDT LCI Primus NOR Startec Cherry TotTel
Netherlands - Amsterdam IDT LCI Primus NOR Startec Cherry TotTel
Nevis Ladia Tresc CTS Star FCom IDT ATI
New Caledonia Cherry UK T'globe UCN Ladia CTS FCom
New Zealand LCI CTS Star T'globe PGE Ladia Primus
Nicaragua Tresc Sprint Star Cherry ATI Primus IDT
Niger UCN T'globe Cherry CTS NOR IDT ATI
Nigeria Primus Ladia Star ATI FCom T'globe IDT
Niue Island T'globe NOR UCN Cherry CTS UK Ladia
Norfolk Island Cherry ComT Ladia UCN Fonor CTS Telco
Norway NOR Star LCI SWE ACC FCom Primus
Oman UCN Cherry Star ATI UK T'globe Sprint
Pakistan UCN ATI Ladia Star T'globe Primus Trescom
Palau ACC Ladia UCN ATI Star CTS PGE
Panama Cherry T'globe ATI UCN Primus CTS Ladia
Papua New Guinea UK ACC CTS T'globe UCN Cherry ATI
Paraguay T'globe ACC Cherry Fonor ATI CTS ComT
Peru ATI Sprint Star Primus Cherry UCN Tresc
Philippines FCom Primus PGE Cherry Sprint Startec Ladia
Philippines - Manila Cherry Star UCN FCom Primus D'Net PGE
Poland T'globe Merc FCOM Primus Cherry NOR Fonor
Portugal D'Net Merc T'globe Ladia Cherry Startec DK
Puerto Rico Tresc T'globe ACC CTS FCom TotTel UCN
Qatar Cherry Ladia UCN T'globe ATI Primus UK
Reunion Island T'globe Cherry Ladia IDT Primus ATI UCN
Romania T'globe CTS Cherry NOR FCom D'Net UCN
Russia Merc Cherry UCN TotTel IDT PGE D'Net
Russia - Moscow Merc RTN D'Net PGE Cherry UCN TotTel
Russia - Moscow Merc PGE Cherry UCN TotTel IDT D'Net
Russia - Moscow Merc PGE Cherry UCN TotTel IDT D'Net
Russia - St. Petersburg Merc RTN PGE Cherry UCN TotTel IDT
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 7
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Russia - Overlay [*] 7.50x-51x [*] [*] [*] [*] [*] [*] [*]
Rwanda [*] 250 [*] [*] [*] [*] [*] [*] [*]
Saipan [*] 670 [*] [*] [*] [*] [*] [*] [*]
San Marino [*] 378 [*] [*] [*] [*] [*] [*] [*]
Sao Tome [*] 239 [*] [*] [*] [*] [*] [*] [*]
Saudi Arabia [*] 966 [*] [*] [*] [*] [*] [*] [*]
Senegal [*] 221 [*] [*] [*] [*] [*] [*] [*]
Seychelles Island [*] 248 [*] [*] [*] [*] [*] [*] [*]
Sierra Leone [*] 232 [*] [*] [*] [*] [*] [*] [*]
Singapore [*] 65 [*] [*] [*] [*] [*] [*] [*]
Slovakia [*] 421 [*] [*] [*] [*] [*] [*] [*]
Slovenia [*] 386 [*] [*] [*] [*] [*] [*] [*]
Solomon Island [*] 677 [*] [*] [*] [*] [*] [*] [*]
Somali Dem Rep [*] 252 [*] [*] [*] [*] [*] [*] [*]
South Africa [*] 27 [*] [*] [*] [*] [*] [*] [*]
Spain [*] 34 [*] [*] [*] [*] [*] [*] [*]
Spain - Barcelona [*] 34-3 [*] [*] [*] [*] [*] [*] [*]
Spain - Madrid [*] 34-1 [*] [*] [*] [*] [*] [*] [*]
Sri Lanka [*] 94 [*] [*] [*] [*] [*] [*] [*]
St. Helen [*] 290 [*] [*] [*] [*] [*] [*] [*]
St. Kitts [*] 1869 [*] [*] [*] [*] [*] [*] [*]
St. Lucia [*] 1758 [*] [*] [*] [*] [*] [*] [*]
St. Pierre/Miq [*] 508 [*] [*] [*] [*] [*] [*] [*]
St. Vincent/Gren [*] 1784 [*] [*] [*] [*] [*] [*] [*]
Sudan [*] 249 [*] [*] [*] [*] [*] [*] [*]
Suriname [*] 597 [*] [*] [*] [*] [*] [*] [*]
Swaziland [*] 268 [*] [*] [*] [*] [*] [*] [*]
Sweden [*] 46 [*] [*] [*] [*] [*] [*] [*]
Switzerland [*] 41 [*] [*] [*] [*] [*] [*] [*]
Syria [*] 963 [*] [*] [*] [*] [*] [*] [*]
Taiwan [*] 886 [*] [*] [*] [*] [*] [*] [*]
Taiwan - Taipei [*] [*] [*] [*] [*] [*] [*] [*]
Tajikistan [*] 7 [*] [*] [*] [*] [*] [*] [*]
Tanzania [*] 255 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- -------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Russia - Overlay Merc Cherry UCN TotTel IDT D'Net Ladia
Rwanda CTS NOR Cherry ATI IDT Primus Ladia
Saipan Star ACC Sprint PGE ATI UCN Ladia
San Marino Star UNI Cherry Ladia ATI UCN UK
Sao Tome PGE Cherry Ladia TotTel UK FCom Primus
Saudi Arabia ATI FCom Star IDT UCN Wiltel Ladia
Senegal Cherry Star T'globe CTS Primus ATI Startec
Seychelles Island Ladia Cherry ATI UCN UK Primus T'globe
Sierra Leone Ladia ACC ATI Cherry Star Primus IDT
Singapore TotTel Primus Ladia Tresc Wiltel Startec PGE
Slovakia Ladia Cherry CTS FCom ATI Primus IDT
Slovenia FCom Ladia Cherry D'Net IDT SWE NOR
Solomon Island ATI Cherry PGE T'globe UK UCN Telco
Somali Dem Rep NOR FCom Cherry IDT Star UCN ATI
South Africa Q'Tel Star UCN Cherry Ladia PGE UK
Spain ATI Ladia T'globe FCom UCN Star PGE
Spain - Barcelona ATI Ladia T'globe FCom UCN Star PGE
Spain - Madrid ATI Ladia T'globe T'globe CTS FCom UCN
Sri Lanka T'globe UK Primus Cherry TotTel Wiltel UCN
St. Helen NOR Ladia UCN T'globe ATI Cherry UK
St. Kitts Tresc Ladia ACC IDT Wiltel ComT CTS
St. Lucia Ladia T'globe CTS ATI Tresc Wiltel UK
St. Pierre/Miq T'globe Cherry Ladia Fonor Primus CTS ACC
St. Vincent/Gren ATI Ladia Wiltel Tresc IDT Sprint ComT
Sudan T'globe Cherry Ladia UCN CTS Star TotTel
Suriname Tresc T'globe ATI Wiltel Ladia ComT Cherry
Swaziland T'globe Star Cherry Q'Tel UNI Ladia CTS
Sweden SWE FCom Cherry Primus CTS Ladia PGE
Switzerland LCI PGE Primus T'globe Star Cherry Ladia
Syria T'globe UNI Cherry Ladia ATI UCN NOR
Taiwan Star CTS TotTel ATI PGE Primus FCom
Taiwan - Taipei Star CTS TotTel ATI PGE Primus FCom
Tajikistan ATI T'globe Ladia FCom Primus Cherry UCN
Tanzania T'globe ATI IDT Star Telco CTS Wiltel
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 8
<PAGE>
<TABLE>
<CAPTION>
STANDARD Termination Costs - Ranking
7/11/97
Mexico is by the vendors' definition of peak and off-peak
Cost Cost Cost Cost Cost Cost Cost
Country Cost Code RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- ---- --------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Thailand [*] 66 [*] [*] [*] [*] [*] [*] [*]
Togo [*] 228 [*] [*] [*] [*] [*] [*] [*]
Tonga [*] 676 [*] [*] [*] [*] [*] [*] [*]
Trinidad/Tob [*] 1868 [*] [*] [*] [*] [*] [*] [*]
Tunisia [*] 216 [*] [*] [*] [*] [*] [*] [*]
Turkey [*] 90 [*] [*] [*] [*] [*] [*] [*]
Turkmenistan [*] 7 [*] [*] [*] [*] [*] [*] [*]
Turks/Caicos [*] 1809941 [*] [*] [*] [*] [*] [*] [*]
Tuvalu [*] 688 [*] [*] [*] [*] [*] [*] [*]
Uganda [*] 256 [*] [*] [*] [*] [*] [*] [*]
Ukraine [*] 380 [*] [*] [*] [*] [*] [*] [*]
Union Island [*] 1 [*] [*] [*] [*] [*] [*] [*]
United Arab Emirates [*] 971 [*] [*] [*] [*] [*] [*] [*]
United Kingdom [*] 44 [*] [*] [*] [*] [*] [*] [*]
Uruguay [*] 598 [*] [*] [*] [*] [*] [*] [*]
US [*] 1 [*] [*] [*] [*] [*] [*] [*]
US - Alaska [*] 1 [*] [*] [*] [*] [*] [*] [*]
US - Hawaii [*] 1808 [*] [*] [*] [*] [*] [*] [*]
US Virgin Islands [*] 1809690 [*] [*] [*] [*] [*] [*] [*]
Uzbekistan [*] 7365 [*] [*] [*] [*] [*] [*] [*]
Vanuatu [*] 678 [*] [*] [*] [*] [*] [*] [*]
Vatican City [*] 3966982 [*] [*] [*] [*] [*] [*] [*]
Venezuela [*] 58 [*] [*] [*] [*] [*] [*] [*]
Vietnam [*] 84 [*] [*] [*] [*] [*] [*] [*]
Wallis & Futuna [*] 681 [*] [*] [*] [*] [*] [*] [*]
Western Samoa [*] 685 [*] [*] [*] [*] [*] [*] [*]
Yemen Rep of [*] 967 [*] [*] [*] [*] [*] [*] [*]
Yugoslavia (Serbia) [*] 381 [*] [*] [*] [*] [*] [*] [*]
Zaire [*] 243 [*] [*] [*] [*] [*] [*] [*]
Zambia [*] 260 [*] [*] [*] [*] [*] [*] [*]
Zimbabwe [*] 263 [*] [*] [*] [*] [*] [*] [*]
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
<TABLE>
<CAPTION>
Country RC1 RC2 RC3 RC4 RC5 RC6 RC7
- ------------------------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Thailand Star PGE Ladia ATI Sprint Primus UCN
Togo T'globe FCom Cherry UCN ACC Star Startec
Tonga Primus Cherry Ladia UK UCN ATI T'globe
Trinidad/Tob Ladia ATI Star UK Primus Telco ComT
Tunisia Cherry CTS UCN NOR TGlobe Primus IDT
Turkey Merc UNI Cherry Ladia Fonor T'globe UK
Turkmenistan UCN Cherry RTN Ladia T'globe ATI CTS
Turks/Caicos Ladia ATI Wiltel Star T'globe Tresc IDT
Tuvalu CTS ATI Cherry UCN IDT Ladia UK
Uganda Cherry Startec T'globe ATI UCN Star Ladia
Ukraine D'Net FCom UNI Cherry Ladia Startec DK
Union Island ComT Ladia Star FCom
United Arab Emirates MCI Cherry ATI Ladia T'globe FCom Star
United Kingdom UK IDT Cherry CTS Merc LCI ACC
Uruguay Cherry T'globe ACC Primus Sprint Star CTS
US ACC T'globe IDT ComT Startec
US - Alaska ACC T'globe IDT Startec Cherry UK ComT
US - Hawaii ACC T'globe IDT Startec Cherry UK FCom
US Virgin Islands ACC Tresc FCom CTS TotTel IDT Cherry
Uzbekistan RTN UCN Ladia ATI Cherry Primus T'globe
Vanuatu Cherry Primus Star UK Ladia ATI UCN
Vatican City ATI Cherry Ladia Tresc Primus UCN TotTel
Venezuela FCom Star TotTel ATI T'globe Cherry IDT
Vietnam Cherry NOR ATI UCN IDT Primus Wiltel
Wallis & Futuna Cherry Ladia ACC Telco ATI Primus ComT
Western Samoa Cherry Wiltel Primus IDT T'globe Tresc UK
Yemen Rep of Cherry TotTel IDT FCom Primus Wiltel Ladia
Yugoslavia (Serbia) ATI Cherry Ladia T'globe NOR UCN SWE
Zaire T'globe SWE D'Net ATI Ladia Cherry FCom
Zambia Cherry T'globe ATI TotTel IDT Wiltel UCN
Zimbabwe UNI Primus Startec ATI T'globe FCom Cherry
</TABLE>
- ------------
[*] Confidential Portions Omitted Where Indicated and Filed Separately With the
Commission.
7/11/97 9
<PAGE>
EXHIBIT 10.65 TO AMENDMENT NO. 1 TO
REGISTRATION STATEMENT ON FORM S-1
STOCK PURCHASE AGREEMENT
The following is a copy of the Stock Purchase Agreement, dated as of July 4,
1997, among RSL Communications, Ltd., Delta Three, Inc., Jacob A. Davidson,
Pioneer Management Corporation, Inc. and Elie C. Wurtman. The schedules and
exhibits to the attached agreement have been omitted. The schedules to the
attached agreement set forth certain specific information relating to Delta
Three, Inc. in connection with the transaction contemplated by the attached
agreement. The exhibits to the attached agreement relate to certain collateral
agreements (two of which have been or are being filed as an exhibit to the
Registration Statement) and opinions to be entered into in connection with the
transaction contemplated by the attached agreement. Upon request, the Company
shall supplementally furnish to the Securities and Exchange Commission any
omitted schedule or exhibit hereunder not already provided as an exhibit to the
Registration Statement.
<PAGE>
STOCK PURCHASE AGREEMENT
AMONG
RSL COMMUNICATIONS, LTD.,
DELTA THREE, INC.,
JACOB A. DAVIDSON,
PIONEER MANAGEMENT CORPORATION, INC.
AND
ELIE C. WURTMAN
DATED JULY 4, 1997
<PAGE>
Table of Contents
Page
----
Parties.................................................................... 1
Recitals................................................................... 1
ARTICLE I - Purchase and Sale of the Shares................................ 1
Section 1.01. Investment of RSL.................................. 1
Section 1.02. Escrowed Shares.................................... 2
Section 1.03. Exercise of First Refusal Rights................... 2
Section 1.04. Required Use of Proceeds........................... 2
ARTICLE II - Closings; Delivery............................................ 2
Section 2.01. The Closing........................................ 2
Section 2.02. Deliveries......................................... 2
ARTICLE III - Representations and Warranties of Delta...................... 3
Section 3.01. Organization; Good Standing........................ 3
Section 3.02. Capitalization..................................... 3
Section 3.03. Registration Rights................................ 4
Section 3.04. Subsidiaries....................................... 4
Section 3.05. Authorization...................................... 4
Section 3.06. Corporate Instruments.............................. 5
Section 3.07. No Default; Non-Contravention...................... 5
Section 3.08. Compliance with Law................................ 5
Section 3.09. Consents and Approvals............................. 5
Section 3.10. Communications Licenses and Regulations............ 6
Section 3.11. Title to Assets.................................... 7
Section 3.12. Contracts.......................................... 7
Section 3.13. Financial Statements............................... 8
Section 3.14. Absence of Liabilities............................. 8
Section 3.15. Returns and Complaints; Accounts Receivable........ 8
Section 3.16. Customers.......................................... 8
Section 3.17. Tax Matters........................................ 9
Section 3.18. Litigation......................................... 11
Section 3.19. Insurance.......................................... 11
Section 3.20. Employees and Other Matters........................ 11
Section 3.21. ERISA.............................................. 11
Section 3.22. Labor Relations.................................... 12
Section 3.23. Restrictive Agreements of Officers and Key
Employee........................................... 12
Section 3.24. Real Property; Leased Property..................... 12
Section 3.25. Names; Trademarks.................................. 13
Section 3.26. Proprietary Rights................................. 13
Section 3.27. Related Party Transactions......................... 13
Section 3.28. Absence of Certain Changes and Events.............. 13
Section 3.29. Disclosure......................................... 14
Section 3.30. No Brokers......................................... 14
ARTICLE IV - Representations and Warranties of the Principal
Stockholders...................................................... 15
Section 4.01. Authority.......................................... 15
i
<PAGE>
Page
----
Section 4.02. No Default; Non-Contravention...................... 15
Section 4.03. Consents and Approvals............................. 15
Section 4.04. Delta Russia....................................... 15
ARTICLE V - Representations and Warranties of RSL.......................... 15
Section 5.01. Organization and Good Standing..................... 15
Section 5.02. Corporate Authority................................ 16
Section 5.03. No Default; Non-Contravention...................... 16
Section 5.04. Consents and Approvals............................. 16
Section 5.05. Investment Intent; Etc............................. 16
Section 5.06. Restricted Securities.............................. 16
Section 5.07. Legend............................................. 17
Section 5.08. Risks.............................................. 17
Section 5.09. No Brokers......................................... 17
ARTICLE VI - Pre-Closing Covenants of Delta................................ 17
Section 6.01. Conduct of Delta's Business........................ 17
Section 6.02. No Breach of Representations, Warranties and
Covenants.......................................... 18
Section 6.03. Assignment of Contracts............................ 18
Section 6.04. Access to Delta's Business......................... 18
Section 6.05. No Compensation Increases.......................... 19
Section 6.06. Contracts, Commitments and Indebtedness............ 19
Section 6.07. Insurance.......................................... 19
Section 6.08. No Default......................................... 19
Section 6.09. Termination of Management Agreement................ 19
Section 6.10. Reasonable Efforts................................. 19
ARTICLE VII - Pre-Closing Covenants of the Principal Stockholders.......... 19
Section 7.01. Reasonable Efforts................................. 19
Section 7.02. No Breach of Representations, Warranties and
Covenants.......................................... 19
Section 7.03. Divestiture of Delta Russia........................ 20
Section 7.04. Termination of Management Agreement................ 20
ARTICLE VIII - Pre-Closing Covenants of RSL................................ 20
Section 8.01. Reasonable Efforts................................. 20
Section 8.02. No Breach of Representations, Warranties and
Covenants.......................................... 20
ARTICLE IX - Conditions to RSL's Obligations............................... 21
Section 9.01. Representations and Warranties True at the
Closing Time....................................... 21
Section 9.02. Performance of Delta and the Principal
Stockholders....................................... 21
Section 9.03. Certificates....................................... 21
Section 9.04. Opinion of Counsel for Delta and the
Principal Stockholders............................. 21
Section 9.05. Legal Matters Satisfactory to Counsel for
RSL................................................ 21
ii
<PAGE>
Page
----
Section 9.06. Consents and Approvals............................. 21
Section 9.07. Capital Structure.................................. 22
Section 9.08. Employment Agreements.............................. 22
Section 9.09. Stockholder Agreement.............................. 22
Section 9.10. Registration Rights Agreement...................... 22
Section 9.11. Services Agreement................................. 22
Section 9.12. Escrow Agreement................................... 22
Section 9.13. Powers of Attorney................................. 23
Section 9.14. Agreement with ISC................................. 23
Section 9.15. Divestiture of Delta Russia........................ 23
Section 9.16. Termination of Management Agreement................ 23
Section 9.17. First Refusal Rights............................... 23
ARTICLE X - Conditions to the Obligations of Delta
and the Principal Stockholders.................................... 23
Section 10.01. Representations and Warranties of RSL True at
the Closing Time................................... 23
Section 10.02. RSL's Performance.................................. 23
Section 10.03. Certificates....................................... 23
Section 10.04. Opinion of Counsel for RSL......................... 24
Section 10.05. Legal Matters Satisfactory to Counsel for
Delta and the Principal Stockholders............... 24
Section 10.06. Stockholder Agreement.............................. 24
Section 10.07. Registration Rights Agreement...................... 24
Section 10.08. Services Agreement................................. 24
Section 10.09. Escrow Agreement................................... 24
ARTICLE XI - Covenants Subsequent to the Closing........................... 24
Section 11.01. Transfer of the Shares............................. 24
Section 11.02. Financial Reporting................................ 25
Section 11.03. Anti-Dilution...................................... 25
Section 11.04. Treatment of Purchase Price........................ 25
Section 11.05. Stock Option Plan.................................. 26
ARTICLE XII - Indemnification.............................................. 26
Section 12.01. Indemnification by Delta and the Principal
Stockholders....................................... 26
Section 12.02. Indemnification by the Principal
Stockholders....................................... 26
Section 12.03. Indemnification by RSL............................. 27
Section 12.04. Indemnification Procedures......................... 27
ARTICLE XIII - Termination of this Agreement............................... 28
Section 13.01. Right to Terminate................................. 28
Section 13.02. Remedies........................................... 28
ARTICLE XIV - Expenses of the Transaction.................................. 28
ARTICLE XV - Miscellaneous................................................. 29
Section 15.01. Further Assurances................................. 29
Section 15.02. Survival of Representations........................ 29
iii
<PAGE>
Page
----
Section 15.03. Notices............................................ 29
Section 15.04. No Modification Except in Writing.................. 30
Section 15.05. Entire Agreement................................... 30
Section 15.06. Severability....................................... 30
Section 15.07. Assignment......................................... 30
Section 15.08. Publicity; Announcements........................... 31
Section 15.09. Governing Law...................................... 31
Section 15.10. Captions........................................... 31
Section 15.11. Interpretation..................................... 31
Section 15.12. Counterparts....................................... 32
iv
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedule 3.01 Foreign Jurisdictions
Schedule 3.02 Capitalization
Schedule 3.03 Registration Rights
Schedule 3.04 Subsidiaries/Joint Ventures
Schedule 3.07 Defaults
Schedule 3.08 Compliance with Law
Schedule 3.09 Consents and Approvals
Schedule 3.10 Communications Licenses
Schedule 3.12 Contracts
Schedule 3.13 Financial Statements
Schedule 3.14 Liabilities
Schedule 3.16 Customers
Schedule 3.18 Litigation
Schedule 3.19 Insurance
Schedule 3.20 Directors, Officers, Employees,
Independent Contractors
Schedule 3.21 Employee Benefit Plans
Schedule 3.23 Key Employees
Schedule 3.24 Leased Property
Schedule 3.25 Trademarks
Schedule 3.26 Proprietary Rights
Schedule 3.27 Related Party Transactions
Schedule 3.28 Certain Changes and Events
Schedule 3.30 Brokers
Exhibit A Opinion of Counsel for Delta and the
Principal Shareholders
Exhibit B-1 Employment Agreement for Jacob Davidson
Exhibit B-2 Employment Agreement for Elie Wurtman
Exhibit C Stockholders Agreement
Exhibit D Registration Rights Agreement
Exhibit E Services Agreement
Exhibit F Escrow Agreement
Exhibit G Opinion of Counsel for RSL
v
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement"), dated July 4, 1997, among
RSL COMMUNICATIONS, LTD., a Bermuda corporation ("RSL"), DELTA THREE, INC., a
Delaware corporation ("Delta"), and JACOB A. DAVIDSON ("Davidson"), PIONEER
MANAGEMENT CORPORATION, LLC, a Nevada limited liability company ("Pioneer"),
and ELIE C. WURTMAN ("Wurtman" and, together with Davidson and Pioneer, the
"Principal Stockholders").
W I T N E S S E T H :
WHEREAS, Delta desires to issue and sell and RSL desires to purchase
from Delta 4,201,734 shares (the "Shares") of common stock, $.001 par value per
share, of Delta (the "Common Stock") in accordance with Section 2.02;
WHEREAS, Davidson and Pioneer, as the owners of a majority of the
issued and outstanding shares of the capital stock of Delta, are receiving
substantial benefit as a result of the closing of the transactions contemplated
in this Agreement;
WHEREAS, Wurtman, as the owner of all of the issued and outstanding
shares of the capital stock of Pioneer, is receiving substantial benefit as a
result of the closing of the transactions contemplated in this Agreement; and
WHEREAS, as a condition to consummation of the transactions
contemplated by this Agreement, RSL requires that the Principal Stockholders
provide the covenants contained in Article VII of this Agreement and the
indemnities contained in Article XII of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants hereinafter contained, the parties hereto hereby agree as
follows:
ARTICLE I
Purchase and Sale of the Shares
Section 1.01. Investment of RSL. Subject to the terms and conditions
set forth in this Agreement, RSL agrees to purchase at the Closing (as
hereinafter defined), and Delta agrees to sell and issue to RSL at the Closing,
the Shares in consideration of RSL's (i) payment of a cash purchase price of
$5,000,000 (the "Cash Payment") and (ii) execution and delivery of the Services
Agreement (as defined below) (together, the "Purchase Price").
<PAGE>
Section 1.02. Escrowed Shares. Of the Shares, 941,376 shares of Common
Stock (the "Escrowed Shares") shall be held by a mutually agreed upon escrow
agent (the "Escrow Agent") pursuant to the terms of the Escrow Agreement (as
hereinafter defined). Upon the exercise or conversion of a stock option,
warrant or convertible note into shares of Common Stock, RSL shall be entitled
to receive a portion of the Escrow Shares equal to the product of (i) 1.04082
and (ii) the shares so issued. Upon the repurchase or redemption by Delta of a
stock option, warrant or convertible note exercisable or convertible into
shares of Common Stock, RSL shall be entitled to receive a portion of the
Escrow Shares equal to the product of (i) 1.04082 and (ii) the shares of Common
Stock which would have been issued upon an exercise or conversion of such stock
option, warrant or convertible note.
Section 1.03. Exercise of First Refusal Rights. If any of Delta's
security holders which have a right of first refusal with respect to the
issuance and sale of the Shares by Delta to RSL exercise such right of first
refusal (each, an "Exercising Security Holder"), then the Principal
Stockholders shall transfer to RSL at the Closing, for no additional
consideration, the number of shares of Common Stock, which are otherwise
beneficially owned by the Principal Stockholders, equal to the aggregate number
of shares of Common Stock purchased by the Exercising Security Holders pursuant
to the exercise of their respective rights of first refusal (the "First Refusal
Shares").
Section 1.04. Required Use of Proceeds. Delta shall utilize the
proceeds of the Cash Payment solely (a) to fund its working capital
requirements, (b) to expand its global telecommunications network and (c) to
repurchase shares of its Common Stock or securities exercisable or convertible
into the Common Stock.
ARTICLE II
Closings; Delivery
Section 2.01. The Closing. The closing (the "Closing") of the
transactions contemplated in this Agreement shall take place at the offices of
Rosenman & Colin LLP ("Counsel for RSL"), 575 Madison Avenue, New York, New
York, at 10:00 a.m. on the second business day after the fulfillment of the
conditions set forth in Articles IX and X, or at such other place and at such
other time or date as Delta and RSL shall agree upon. (Hereinafter, such date
is referred to as the "Closing Date", such time on the Closing Date is referred
to as the "Closing Time" and such offices are referred to as the "Closing
Place".)
Section 2.02. Deliveries. (a) At the Closing, Delta shall (i) deliver
to RSL a certificate or certificates registered in RSL's name representing an
aggregate of 3,260,358 shares of
2
<PAGE>
Common Stock and (ii) deliver to the Escrow Agent a certificate or certificates
registered in RSL's name representing the Escrow Shares which shall be held by
the Escrow Agent pursuant to the terms of the Escrow Agreement.
(b) The Cash Payment shall be payable at the Closing Time by
wire transfer of immediately available Federal funds to the order of Delta in
accordance with instructions delivered to RSL prior to the Closing Time.
(c) At the Closing, the Principal Stockholders shall deliver
to RSL a certificate or certificates registered in RSL's name representing in
the aggregate the number of shares of Common Stock equal to the First Refusal
Shares.
ARTICLE III
Representations and Warranties of Delta
Delta represents and warrants to RSL as follows:
Section 3.01. Organization; Good Standing. Delta is, and at the
Closing Time will be, a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Delta has, and at the
Closing Time will have, the corporate power and authority to conduct all of the
business and activities conducted by it and to own or lease all of the assets
owned or leased by it; and is, and at the Closing Time will be, duly licensed
or qualified to do business and in good standing as a foreign corporation in
all jurisdictions in which the nature of the business and activities conducted
by it and/or the character of the assets owned or leased by it makes such
qualification or license necessary (such jurisdictions being listed on Schedule
3.01 hereto).
Section 3.02. Capitalization. (a) As of the date hereof, the
authorized capital of Delta consists of, and as of the Closing Date the
authorized capital of Delta will consist of, 100,000,000 shares of Common
Stock. Set forth on Schedule 3.02 hereto is a list of the persons who or which
own, have the right to acquire (whether directly or through ownership of
options, warrants or convertible instruments) or are negotiating to acquire
shares of Common Stock or other securities of Delta and the number of such
securities which each such person owns, has the right to acquire or is
negotiating to acquire. All of the outstanding shares of Common Stock which, as
set forth on Schedule 3.02 hereto, have been issued were duly authorized for
issuance and are validly issued, fully paid and nonassessable.
(b) The Shares have been duly and validly authorized and
reserved for issuance and, upon issuance in accordance with the terms of this
Agreement, will be duly and validly issued,
3
<PAGE>
fully paid and nonassessable and will be free of restrictions on transfer,
other than restrictions on transfer set forth in this Agreement and each of the
other agreements, documents and certificates referred to herein to be entered
into and/or delivered at or prior to the Closing (the "Operative Agreements").
The Shares, upon their issuance at the Closing, will constitute not less than
51% of all of the shares of Common Stock on a fully diluted basis taking into
account all options, warrants, rights and agreements for the purchase or
acquisition of securities of Delta set forth on Schedule 3.02 hereto.
(c) Except as set forth on Schedule 3.02 hereto, there are
not authorized or outstanding any options, warrants, rights or agreements for
the purchase or acquisition from Delta, the Principal Stockholders or any other
person, of any of its or their respective securities, nor are there outstanding
any rights, securities, obligations or other instruments convertible into any
such securities. The issuance of the Shares is not subject to preemptive or
other similar rights. There is no agreement or understanding between any person
which affects or relates to the issuance of, or the voting or giving of written
consents with respect to, any voting securities of Delta or securities
convertible into such voting securities.
(d) For purposes of this Agreement, the term "person" shall
include an individual, corporation, joint venture, partnership, a group
consisting of one or more of the foregoing and any other entity.
Section 3.03. Registration Rights. Except as set forth on Schedule
3.03, Delta is not a party to any agreement or commitment which obligates Delta
to register under the Securities Act of 1933, as amended (the "Securities
Act"), shares of any class of its securities whether now or hereafter issued.
Section 3.04. Subsidiaries. Except as set forth on Schedule 3.04
hereto, Delta does not presently own or control, directly or indirectly, any
interest in any other corporation, association or other business entity or have
any subsidiaries and, at the Closing Time, will not be a participant in any
joint venture, partnership or similar arrangement.
Section 3.05. Authorization. (a) Delta has all corporate and other
requisite authority to execute, deliver, carry out and perform its obligations
under the terms of this Agreement and the Operative Agreements to which it is a
party and all of the transactions contemplated hereunder and thereunder,
including, without limitation, the issuance and sale of the Shares to RSL. This
Agreement and each of the Operative Agreements to which Delta is a party and
the consummation of the transactions contemplated hereby and thereby have been
duly and validly authorized by all requisite corporate action on behalf of
Delta.
4
<PAGE>
(b) This Agreement has been and, to the extent applicable,
each of the Operative Agreements will be, duly and validly executed and
delivered by Delta.
(c) This Agreement constitutes, and the Operative Agreements,
when executed and delivered by Delta, will constitute, valid and binding
obligations of Delta enforceable against it in accordance with their respective
terms.
Section 3.06. Corporate Instruments. Delta has heretofore made
available to RSL true and complete copies of the Certificate of Incorporation,
the By-laws and the minute and stock transfer books of Delta.
Section 3.07. No Default; Non-Contravention. Except as set forth on
Schedule 3.07 hereto, neither the execution and delivery of this Agreement and
the Operative Documents to which Delta is a party nor the consummation of the
transactions hereby and thereby contemplated, (a) will constitute any violation
or breach of (i) the Certificate of Incorporation or the By-Laws of Delta, (ii)
any provision of any Contract (as hereinafter defined) to which Delta is a
party or by which Delta or its assets is bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to Delta, or (b)
will result in the creation of any Lien (as hereinafter defined) on any of the
assets of Delta.
Section 3.08. Compliance with Law. Except as set forth on Schedule
3.08 hereto, Delta has, and at the Closing Time will have, complied in all
material respects with all Governmental Rules applicable to Delta or its assets
and any federal, national, state, regional or local laws, rules or regulations
regulating fair and equal employment practices, the safety of the workplace,
antitrust, wages, hours, collective bargaining and the payment of withholding
or taxes of all types. For the purposes of this Agreement, "Governmental Rules"
shall mean any statute, law, treaty, rule, code, ordinance, regulation, permit,
certificate or order, and amendments thereto, of any Governmental Authority (as
hereinafter defined) or any judgment, decree, injunction, writ, order or like
action of any Governmental Authority.
Section 3.09. Consents and Approvals. (a) Except as set forth on
Schedule 3.09 hereto, no consent, authorization, order or approval of, or
declaration, filing or registration with (including, without limitation, any
filing or registration pursuant to the securities or blue sky laws of the
United States of America or any state or territory thereof), any Governmental
Authority (as hereinafter defined) or third party is required by Delta in
connection with the execution, delivery or performance by Delta of this
Agreement and the Operative Agreements or the consummation by Delta of the
transactions contemplated hereby and thereby. For the purposes of this
Agreement, "Governmental
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Authority" means any federal, national, state, regional, local or foreign
governmental authority or regulatory body, any subdivision, agency, commission
or authority thereof, or any quasi-governmental or private body exercising any
regulatory authority thereunder and any person directly or indirectly owned by
and subject to the control of any of the foregoing, or any court, arbitrator or
other judicial or quasi-judicial tribunal.
(b) Delta has provided notice of the transactions
contemplated hereby to each person entitled to notice thereof, including but
not limited to each person listed on Schedule 3.02 who is the beneficial owner
of a security that entitles the holder thereof to a right of first refusal with
respect to any issuances and/or sales of Common Stock by Delta to a third
party.
Section 3.10. Communications Licenses and Regulations.
(a) All certificates, licenses, permits, franchises and other
authorizations (collectively, the "Communications Licenses") issued to Delta by
the communications regulatory authorities of any Governmental Authority,
including, but not limited to, the Federal Communications Commission (the
"FCC") and state public utility commissions or like agencies (collectively, the
"Regulatory Authorities"), are listed on Schedule 3.10 attached hereto. Each
and every Communications License is in full force and effect. The
Communications Licenses constitute all of the certificates, licenses, permits,
franchises and authorizations necessary or legally required by any Regulatory
Authority or other Governmental Authority for the conduct of Delta's business
as now being conducted or as presently contemplated to be conducted by Delta.
All necessary applications for renewal or extension of any Communications
License have been timely filed under the relevant Communications Laws (as
hereinafter defined).
(b) Delta is in compliance in all material respects with any
and all applicable federal, state, municipal or foreign statutes, rules,
regulations, policies, orders or ordinances (collectively, the "Communications
Laws") governing or relating to the Communications Licenses. No allegations,
complaints, charges, investigations, renewal or revocation hearings, or other
proceedings have been initiated or, to the knowledge of Delta, threatened, nor
has any Regulatory Authority proposed, announced, issued or adopted any
amendment, modification or change to any Communications Law or Communications
License, that could have an adverse effect on Delta. Delta holds no
Communications Licenses issued by the FCC that would subject Delta to the
foreign ownership restrictions established by Section 310(b) of the
Communications Act of 1934, as amended, 47 U.S.C. ss. 310(b), and the FCC
policies, rules, and regulations promulgated with respect thereto. Delta has
not entered into any agreement or relationship that would cause it to be
treated as an
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international "dominant carrier" under the FCC policies, rules
and regulations.
Section 3.11. Title to Assets. Delta has, and at the Closing Time will
have, good, marketable and valid title to all of its assets, free and clear of
all pledges, liens, security interests, conditional sale agreements, charges,
encumbrances or restrictions of any kind and nature (each a "Lien"). Except as
otherwise set forth on Schedules 3.02 and 3.12, Delta has not, and at the
Closing Time will not have, entered into any contract, agreement, arrangement,
commitment or understanding with, or granted any option or right to, any party
other than RSL with respect to the acquisition, transfer or other disposition
of the assets of Delta or any shares of Delta's capital stock.
Section 3.12. Contracts.
(a) Schedule 3.12 hereto sets forth a complete and correct
list of all material contracts, agreements and commitments, whether written or
oral (the "Contracts"), of Delta. Except as set forth on Schedule 3.12, Delta
has, and at the Closing Time will have, performed all obligations under the
Contracts required to be performed by it prior to the Closing Time and is not,
and at the Closing Time will not be, in default under any Contract, and no
event has occurred which, with or without the lapse of time or the giving of
notice or both, would constitute a default by Delta or, to the extent of
Delta's knowledge, by any other party to any Contract. All of the Contracts
are, and at the Closing Time will be, valid, binding and enforceable in
accordance with their respective terms and in full force and effect. Copies or
summaries of all of the Contracts have been made available to RSL.
(b) All international operating agreements, international
service agreements or other contracts involving, or intended to facilitate, the
carriage of international telecommunications traffic (the "Operating
Agreements") among Delta and a carrier or other telecommunications entity are
listed in said Schedule 3.12. The Operating Agreements listed in Schedule 3.12
represent all of the international operating agreements, international service
agreements and like contracts necessary or legally required for the conduct of
Delta's business as such business is now being conducted or presently
contemplated to be conducted. Each Operating Agreement complies in all material
respects with the applicable Communications Laws of the relevant Regulatory
Authorities, including, but not limited to, the FCC's international settlements
policies, rules, and regulations, and no allegation, complaint, charge,
investigation or other proceeding has been initiated or threatened by any
Regulatory Authority or third party regarding the activities of Delta or, to
the best of Delta's and belief after reasonable inquiry, a Correspondent under
an Operating Agreement.
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Section 3.13. Financial Statements. Schedule 3.13 hereto consists of
(i) the audited consolidated balance sheet and consolidated statement of
operations of Delta for the period ended December 31, 1996 and (ii) the
unaudited consolidated balance sheet and consolidated statement of operations
of Delta for the four-month period ended April 30, 1997 (collectively, the
"Financial Statements"). The Financial Statements included in Schedule 3.13 are
in accordance with the books and records of Delta, have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP") (except
and to the extent otherwise disclosed in the footnotes thereto) applied on a
consistent basis with prior periods, are complete and correct in all respects
and fairly present the financial condition and results of operations of Delta
as of the respective dates thereof and for the periods referred to therein.
Section 3.14. Absence of Liabilities. Except as set forth on Schedule
3.14, as of the date hereof (i) Delta has no liabilities, absolute, contingent
or otherwise, direct or indirect, known or unknown, matured or unmatured,
asserted or unasserted, which are not reflected in the Financial Statements,
the notes thereto or the other Schedules hereto, other than those incurred
since April 30, 1997 in the ordinary and regular course of Delta's business and
not of unusual size or duration (none of which liabilities is a result of a
breach of contract, breach of warranty, tort, infringement claim or lawsuit),
and (ii) at the Closing Time there will be no other liabilities except those
reflected in the Schedules hereto or incurred by Delta since the date hereof in
the ordinary and regular course of Delta's business and not of unusual size or
duration (none of which liabilities is a result of a breach of contract, breach
of warranty, tort, infringement claim or lawsuit).
Section 3.15. Returns and Complaints; Accounts Receivable. All
accounts receivable reflected in the Financial Statements at April 30, 1997 and
for the period then ended and on the books of Delta at the close of business on
the Closing Date represented and will represent receivables (i) which arose
from bona fide transactions in the ordinary course of business, (ii) which
represent credit extended in a manner consistent with trade and credit
practices of Delta and (iii) for which adequate reserves have been taken in
accordance and in conformity with GAAP applied on a consistent basis with prior
periods and based on historical experience.
Section 3.16. Customers. Schedule 3.16 hereto sets forth Delta's ten
largest customers as of the date hereof. The relationships of Delta with its
customers are good commercial working relationships and, except as set forth on
Schedule 3.16 hereto, no customer of material importance to the business of
Delta has cancelled or otherwise terminated, or threatened verbally or in
writing to cancel or otherwise to terminate, its relationship with Delta or has
during the last twelve months
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decreased materially, or threatened to decrease or limit materially, its usage
or purchase of the services of Delta. To the best knowledge of Delta, no such
customer intends to cancel or otherwise substantially modify, or is considering
cancelling or otherwise substantially modifying, its relationship with Delta or
to decrease materially or limit its usage or purchase of Delta's services, and
the consummation of the transactions contemplated hereby will not, to the best
knowledge of Delta, adversely affect the relationship of Delta with any such
customer.
Section 3.17. Tax Matters.
(a) For the purposes of this Agreement, the following terms
shall have the following meanings:
"Affiliated Group" or "Affiliated Groups" means any
affiliated, consolidated, combined, unitary or similar group (within the
meaning of Section 1504 of the Code, or any comparable provision of state,
local or foreign law, as the case may be) of which Delta or its Subsidiaries is
or was a member.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute thereto.
"Subsidiary" or "Subsidiaries" shall mean any entity in which
Delta, directly, indirectly, constructively or beneficially owns more than 50%
of either (i) the equity interests in, or (ii) the voting rights in respect of,
such entity.
"Tax" or "Taxes" shall mean federal, state, local or foreign
income, capital gains, profits, gross receipts, payroll, capital stock,
franchise, employment, withholding, social security, unemployment, disability,
real property, personal property, stamp, excise, occupation, sales, use,
transfer, mining, value added, investment credit recapture, alternative or
add-on minimum, environmental, estimated or other taxes, duties or assessments
of any kind, including any interest, penalty and additions imposed with respect
to such amounts.
"Tax Authority" shall mean any federal, national, regional,
foreign, state, municipal or other local government, any subdivision, agency,
commission or authority thereof, or any quasi-governmental body or other
authority exercising any taxing or tax regulatory authority.
"Tax Proceeding" shall mean any audit, other administrative
proceeding or judicial proceeding involving Taxes.
"Tax Returns" shall mean all returns and reports (including
schedules attached thereto) required to be filed with or supplied to a Tax
Authority with respect to Taxes.
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(b) Delta, each of its Subsidiaries, and all Affiliated
Groups have duly filed, or have obtained a valid filing extension from the
appropriate Tax Authority, all Tax Returns that are required to filed by them.
True and complete copies of all such Tax Returns filed by Delta, each of its
Subsidiaries and all Affiliated Groups have been made available to RSL.
(c) Taxes shown to be due on all Tax Returns filed by Delta,
each of its Subsidiaries, and all Affiliated Groups, have been paid in full,
and all written assessments of Taxes due and payable by or with respect to
Delta, any of its Subsidiaries or any Affiliated Group, have been paid in full.
Delta has not been a party to a tax sharing agreement or similar arrangement.
(d) There are no Liens on any of Delta's assets that arose in
connection with any failure (or alleged failure) to pay any Tax, except for
Liens for Taxes not yet due and payable.
(e) Neither the Internal Revenue Service nor any other Tax
Authority is now asserting or threatening to assert against Delta, any of its
Subsidiaries or any Affiliated Group any deficiency or claim for additional
Taxes or any adjustment that could have an adverse effect on Delta. No Tax
Return of Delta, any of its Subsidiaries, or any Affiliated Group is currently
under audit by any Tax Authority and no such Tax Return has been audited by any
Tax Authority since Delta began doing business. Neither Delta, any of its
Subsidiaries, nor any Affiliated Group, have executed any closing agreement
pursuant to Section 7121 of the Code or any predecessor provisions thereof, or
any similar provision of foreign, state or local law, or has any ruling request
pending with any Tax Authority.
(f) All amounts required to be withheld by Delta, any of its
Subsidiaries or any Affiliated Group from employees for income, social security
and other payroll taxes have been collected and withheld, and have either been
paid to the appropriate governmental agencies, set aside in accounts for such
purpose, or accrued and reserved against and entered upon the books and records
of Delta, its Subsidiaries or an Affiliated Group, as the case may be.
(f) The provisions for Taxes reflected on the Financial
Statements adequately and appropriately reflect all Tax Liabilities of Delta,
its Subsidiaries, and all Affiliated Groups, in accordance with GAAP applied on
a consistent basis with prior periods.
(g) Delta has not made any election with respect to its
taxes, including without limitation any election under Section 341(f) of the
Internal Revenue Code, that could have an adverse effect on the amount or
timing of any tax paid by RSL or Delta on or after the Closing Date.
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Section 3.18. Litigation. Except as set forth on Schedule 3.18 hereto,
there is no action, suit, claim, proceeding or investigation pending or, to the
best of Delta's knowledge, threatened against or affecting Delta. Except as set
forth in said Schedule 3.18, Delta is not, and at the Closing Time will not be,
subject to or in default under or with respect to any judgment, order, writ,
injunction or decree of any court or Governmental Authority. Delta is not a
party to, or bound by, any decree, order or arbitration award (or agreement
entered into in any administrative, judicial or arbitration proceeding with any
Governmental Authority) with respect to its properties, assets, personnel or
business activities. Delta has not made any illegal payment or payments which
might directly or indirectly constitute commercial bribery.
Section 3.19. Insurance. Schedule 3.19 hereto contains a complete and
correct list and description (including coverages, deductibles and expiration
dates) of all policies of fire, liability, libel, slander and other forms of
insurance held by Delta and/or which pertain to its assets, business or
employees.
Section 3.20. Employees and Other Matters. Schedule 3.20 hereto is a
correct and complete list of (i) the directors and officers of each of Delta
and all of the present employees, sales personnel and independent contractors
regularly employed by Delta and not otherwise identified in the Schedules
hereto, together with a statement of the full amount payable by way of salary,
wages, bonuses, perquisites, fringe benefits and other direct or indirect
compensation to each such person; (ii) the name of each bank in which Delta has
an account or safety deposit box; and (iii) the names of all persons, if any,
holding powers of attorney from Delta and a summary statement of the terms
thereof.
Section 3.21. ERISA. Except as set forth on Schedule 3.21, neither
Delta nor any ERISA Affiliate (as hereinafter defined) maintains, administers,
contributes to or is obligated to contribute to, nor has Delta or any ERISA
Affiliate maintained, administered, contributed to or been obligated to
contribute to, nor do the employees of Delta receive or expect to receive as a
condition of employment, benefits pursuant to any: employee pension benefit
plan (as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), including, without limitation, any multiemployer
plan as defined in Section 3(37) of ERISA; employee welfare benefit plan (as
defined in Section 3(1) of ERISA); or bonus, deferred compensation, stock
purchase, stock option, severance plan, salary continuation, vacation, sick
leave, fringe benefit, incentive, insurance, welfare or similar arrangement.
For the purposes of this Agreement, "ERISA Affiliate" means all members of a
controlled group of corporations and all trades and businesses (whether or not
incorporated) under common control and all other entities which, together with
Delta, are treated as a single employer under any or all of sections 414(b),
(c), (m) or
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(o) of the Code on either the date of this Agreement or the Closing Date or at
any time since Delta began doing business.
Section 3.22. Labor Relations. Delta is in full compliance with all
Governmental Rules respecting employment and employment practices, terms and
conditions of employment, wages and hours and nondiscrimination in employment,
and is not engaged in any unfair labor practice. There is no charge pending or,
to the best knowledge of Delta, threatened against Delta alleging unlawful
discrimination in employment practices before any court or agency and there is
no charge of or proceeding with regard to any unfair labor practice against
Delta pending or threatened before the National Labor Relations Board or any
charges or complaints pending or threatened before any Governmental Authority
with administrative jurisdiction over unlawful employment practices. There is
no labor strike, dispute, slow- down or work stoppage pending or threatened, to
the best knowledge of Delta, against or involving Delta. No grievance or
arbitration proceeding arising out of or under any collective bargaining
agreement is pending against Delta and no claim therefor has been asserted.
None of Delta's employees is covered by a collective bargaining agreement.
Delta has not experienced any work stoppage or other labor difficulty since it
began doing business.
Section 3.23. Restrictive Agreements of Officers and Key Employee.
Except as otherwise provided in the Operative Agreements, no employee whose
participation in any aspect of Delta's business is deemed by Delta to be of
substantial importance to Delta (a "Key Employee", all of whom are identified
on Schedule 3.23 hereto) is a party to, bound by or subject to any agreement,
contract, commitment or restriction, including, without limitation, any
non-disclosure or non-competition agreements or legal restrictions on the use
by such person of trade secrets or proprietary information of others, which
adversely affects, or which in the future may reasonably be expected to have an
adverse effect, on Delta or the right of any such person to participate in the
affairs of Delta.
Section 3.24. Real Property; Leased Property. (a) Delta does not own,
and at the Closing Time will not own, a fee interest in any real property.
(b) Schedule 3.24 hereto identifies and describes each item
of real and personal property leased by Delta or in which Delta has an interest
(the "Leased Property").
(c) Each Leased Property is subject to a valid and binding
lease agreement which is enforceable in accordance with its terms. A true and
complete copy of each such lease agreement has been made available to RSL. Each
such lease agreement is in full force and effect, Delta has performed all
obligations required to be performed by it thereunder, no default exists
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under any provision thereof, and no event has occurred thereunder which, with
the lapse of time or the giving of notice or both, would constitute a default
by Delta thereunder.
Section 3.25. Names; Trademarks. Schedule 3.25 hereto contains a
complete and correct list of all registered and unregistered trademarks,
service marks, trademark applications, trade names and registered and
unregistered copyrights heretofore or presently owned or used by Delta
(collectively, the "Marks"). Delta owns and has the exclusive right to use each
of said Marks stated on said Schedule 3.25, subject to no license, royalty
arrangement or dispute. Delta has not received any notice that, and Delta has
no reason to believe that, the use of the Marks infringes on the rights of any
other person or entity. Delta has not granted to any other person or entity
and, to the best knowledge of Delta, no other person or entity has, any
interest in any of said Marks, as licensee or otherwise. Delta's rights in the
Marks are sufficient to operate its business as presently conducted.
Section 3.26. Proprietary Rights. Schedule 3.26 hereto is a complete
and correct list of all registered patents, patent applications, know-how,
trade secrets, and other proprietary rights and processes, permits and licenses
heretofore presently owned or used by Delta (collectively the "Proprietary
Rights"). Delta owns and has the exclusive right to use each of the Proprietary
Rights stated on said Schedule 3.26 to be owned by it, subject to no license,
royalty arrangement or dispute. Delta has not granted to any other person any
interest in any of the Proprietary Rights, as licensee or otherwise. Delta's
rights in the Proprietary Rights are sufficient to operate its business as
presently conducted.
Section 3.27. Related Party Transactions. Schedule 3.27 hereto sets
forth every business relationship between Delta, on the one hand, and any of
its shareholders, officers, directors, employees or members of their families
(or any entity in which any of them has a material financial interest, directly
or indirectly), on the other hand. None of said parties owns or has rights in
any of Delta's assets or is engaged in any business which competes with Delta.
Section 3.28. Absence of Certain Changes and Events. Except as set
forth on Schedule 3.28 hereto, since April 30, 1997, (1) Delta has conducted
its business in the ordinary and regular course thereof; (2) there has not been
any adverse change in the business or in the condition, financial or otherwise,
or in the assets or liabilities of Delta, or any damage, destruction or loss,
whether or not covered by insurance, which has affected the business or the
assets of Delta, or any change in the nature or condition of the business or
the assets of Delta, or any event, condition or contingency that is likely to
result in such an adverse change; (3) Delta has not made any disposition of any
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of its assets or incurred any debts, liabilities or obligations other than in
the ordinary and regular course of its business nor has it made any
distributions to its shareholders, in cash, property or in kind, other than
pursuant to the employment of Davidson and Wurtman; (4) Delta has not paid,
discharged or satisfied any claim, liability or obligation (absolute, accrued,
contingent or otherwise), other than the payment, discharge or satisfaction of
liabilities or obligations in the ordinary and regular course of its business;
(5) Delta has not permitted or allowed any of its assets (tangible or
intangible) to be subjected to any Lien; (6) Delta has not cancelled any debts
owed to it or waived any claims or rights of value; (7) Delta has not granted
or extended any power of attorney or acted as guarantor, surety, co-signer,
endorser (other than of checks endorsed in the ordinary and regular course of
business), co-maker, indemnitor or otherwise become liable in respect of the
obligations of any other person; (8) Delta has not purchased or entered into
any contract, agreement or commitment, except in the ordinary and regular
course of its business and not of unusual size or duration; (9) Delta has not
done or permitted to be done any act or omitted to do any act which has or will
cause a breach of any Contract to which it is a party; (10) Delta has not
increased the compensation to, or changed any other terms of employment of, any
of its employees, except increases of a size and at a time consistent with past
practice; and (11) Delta has performed in all material respects all of the
obligations required to be performed by it.
Section 3.29. Disclosure. Neither this Agreement nor any statement,
Schedule, list or certificate furnished, or to be furnished, to RSL pursuant
hereto or in connection with this Agreement or any of the transactions hereby
contemplated contains, or will contain, any untrue statement of a material fact
or omits, or will omit, to state a material fact necessary in order to make the
statements contained herein, in light of the circumstances in which they are
made, not misleading. At the date hereof, Delta is not aware of, and at the
Closing Time Delta will not be aware of, any facts or circumstances material to
the operation of Delta not disclosed to RSL which should be disclosed to RSL in
order to make any of the statements, representations or warranties made on the
part of Delta herein or the Schedules furnished by Delta in connection
herewith, not misleading.
Section 3.30. No Brokers. Except for arrangements with Israel
Securities Center Corp. ("ISC"), as described on Schedule 3.30, Delta has not
employed any broker, finder, commission agent or similar person in connection
with the transactions contemplated hereby and Delta is not under any obligation
to pay any broker's fee or commission in connection with such transactions.
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ARTICLE IV
Representations and Warranties of the Principal Stockholders
Each of the Principal Stockholders, severally and not jointly,
represent and warrant to RSL that:
Section 4.01. Authority. He or it has the power and authority to
execute and deliver this Agreement and the Operative Agreements to which he or
it is a party, to consummate the transactions hereby and thereby contemplated
and to take all other actions required to be taken by he or it pursuant to the
provisions hereof; and this Agreement and the Operative Agreements to which he
or it is a party are valid and binding upon such Principal Stockholder and
enforceable in accordance with their respective terms.
Section 4.02. No Default; Non-Contravention. Neither the execution and
delivery of this Agreement and the Operative Agreements to which he or it is a
party nor the consummation of the transactions hereby and thereby contemplated
by him or it will constitute any violation or breach of (i) the Certificate of
Incorporation or the By-Laws of it, if a corporation, (ii) any provision of any
contract or agreement to which he or it is a party or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to him or it.
Section 4.03. Consents and Approvals. No consent, authorization, order
or approval of, or declaration, filing or registration with, any Governmental
Authority or third party is required in connection with the execution, delivery
or performance by him or it of this Agreement and the Operative Agreements to
which he or it is a party or the consummation by him or it of the transactions
contemplated hereby and thereby.
Section 4.04. Delta Russia. As of the date hereof, Delta Three St.
Petersburg, an entity formed under the laws of Russia and a wholly-owned
subsidiary of Delta ("Delta Russia"), is inactive and does not conduct any
business.
ARTICLE V
Representations and Warranties of RSL
RSL represents and warrants to Delta that:
Section 5.01. Organization and Good Standing. RSL is, and
at the Closing Time will be, a corporation duly organized,
validly existing and in good standing under the laws of Bermuda.
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Section 5.02. Corporate Authority. The Board of Directors of RSL has
authorized the execution and delivery by RSL of this Agreement and the
Operative Agreements to which it is a party and the consummation of the
transactions hereby and thereby contemplated. RSL has the corporate power and
authority to execute and deliver this Agreement and the Operative Agreements to
which it is a party, to consummate the transactions hereby and thereby
contemplated and to take all other actions required to be taken by it pursuant
to the provisions hereof; and this Agreement and the Operative Agreements to
which it is a party are valid and binding upon RSL and enforceable in
accordance with their respective terms.
Section 5.03. No Default; Non-Contravention. Neither the execution and
delivery of this Agreement and the Operative Agreements to which it is a party
nor the consummation of the transactions hereby and thereby contemplated by RSL
will constitute any violation or breach of (i) the Memorandum of Association or
Bye-Laws of RSL, (ii) any provision of any contract or agreement to which RSL
is a party or (iii) any order, writ, injunction, decree, statute, rule or
regulation applicable to RSL.
Section 5.04. Consents and Approvals. No consent, authorization, order
or approval of, or declaration, filing or registration with, any Governmental
Authority or third party is required in connection with the execution, delivery
or performance by RSL of this Agreement and the Operative Agreements to which
it is a party or the consummation by RSL of the transactions contemplated
hereby and thereby.
Section 5.05. Investment Intent; Etc. The Shares are being acquired by
RSL solely for its own account, for investment purposes only, and with no
present intention of distributing, selling or otherwise disposing thereof. RSL
understands that the Shares have not been registered under the Securities Act
by reason of a specific exemption from the registration provisions thereof, the
availability of which depends upon, among other things, the bona fide nature of
RSL's investment intent and accuracy of RSL's representations, as expressed
herein. RSL is an "accredited investor" as defined in rule 501 promulgated
under the Securities Exchange Act of 1933 and has such knowledge and experience
in business and financial matters that RSL is capable of evaluating the merits
and risks of an investment in the Common Stock. At the time of each of the
Closings, RSL will have sufficient funds to make the investment in Delta
contemplated by Section 2.02 hereof.
Section 5.06. Restricted Securities. RSL understands that the Shares,
when issued to it, will be "restricted securities" under the federal securities
laws inasmuch as they are being acquired from Delta in a transaction not
involving a public offering and that under such laws such securities may be
resold
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without registration under the Securities Act only in certain limited
circumstances. RSL understands that there is no public market for the Shares
and that there may never be a public market for such securities, and that even
if a market develops for such securities RSL may never be able to sell or
dispose of the Shares and may thus have to bear the risk of its investment in
such stock for a substantial period of time, or forever.
Section 5.07. Legend. It is understood that upon original issuance,
the certificates evidencing the Shares shall bear the following legend:
"These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold,
offered for sale, pledged or hypothecated in the absence of
an effective registration statement under such Act with
respect to the securities under such Act or an opinion of
counsel satisfactory to Delta that such registration is not
required or unless sold pursuant to Rule 144 of said Act."
Section 5.08. Risks. RSL has evaluated and understands the risks and
terms of investing in Delta and has received all the information it has
requested in writing from Delta.
Section 5.09. No Brokers. RSL has not employed any broker, finder,
commission agent or similar person in connection with the transactions
contemplated hereby and RSL is not under any obligation to pay any broker's fee
or commission in connection with such transactions.
ARTICLE VI
Pre-Closing Covenants of Delta
Delta agrees that subsequent to the date of this Agreement and prior
to the Closing Time:
Section 6.01. Conduct of Delta's Business. Delta will (1) use its best
efforts to continue to conduct its business, maintain its assets, carry on its
business practices and keep its books of account, records and files in the same
manner as heretofore, (2) use its best efforts to preserve its business
organization intact and preserve the present business relationships and
goodwill of the suppliers, customers and others having business relations with
Delta, (3) pay and perform all of its debts, liabilities and obligations as and
when due and all Contracts to which it is a party in accordance with the terms
and provisions thereof, (4) comply in all material respects with all laws,
rules, regulations and orders that may be applicable to it
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and its business and (5) not sell or dispose of any of its rights or assets or
incur any indebtedness, liabilities or obligations other than in the ordinary
course of business. Delta will not make any dividends or other distributions,
in cash, property or in kind, to its shareholders, including the Principal
Stockholders.
Section 6.02. No Breach of Representations, Warranties and Covenants.
Delta will not take any action which would cause or constitute a breach, or
would, if it had been taken immediately prior to the date hereof, have caused
or constituted a breach, of any of the representations, warranties or covenants
set forth in Article III hereof. Delta will, in the event of, and promptly
after the occurrence of, or promptly after becoming aware of the occurrence of,
or the impending or threatened occurrence of, any event which would cause or
constitute a breach or would, if it had occurred immediately prior to the date
hereof, have caused or constituted a breach of any of the representations,
warranties or covenants set forth in said Article III, give detailed notice
thereof to RSL, and Delta shall use its best efforts to prevent or promptly
remedy such breach.
Section 6.03. Assignment of Contracts. Delta shall use its best
efforts to obtain, as promptly as practicable, any written consents, in form
and substance satisfactory to RSL, necessary to the consummation of the
transactions contemplated by this Agreement under any Contract which requires
such consent or as is required from any Governmental Authority or other person.
Section 6.04. Access to Delta's Business. RSL and its representatives
(including any prospective underwriter of an initial public offering of RSL's
common stock and RSL's legal and accounting representatives) will during
business hours on reasonable prior notice be permitted full access to, and will
be permitted to make copies of or abstracts from, all of the books and records,
financial and operating data and other information of Delta, will have access
to the premises and physical properties of Delta as RSL deems necessary or
advisable for the purposes of consummating the transactions contemplated hereby
and will be permitted to discuss the affairs, finances and accounts of Delta
with its directors, officers, counsel, accountants and, following a joint
announcement of the parties, its employees. In the event the transactions
contemplated hereby should not close for any reason, RSL agrees that it will
promptly return to Delta all financial information (including copies thereof)
furnished by Delta to RSL and its representatives within five days after
receipt of written notice by Delta and all other documents within a reasonable
period of time and will hold in strict confidence and will not use or disclose
to any third party any information concerning Delta obtained from such
documents or otherwise in connection with its investigation.
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Section 6.05. No Compensation Increases. Delta shall not grant any
increase in the rates of pay of employees of Delta, nor grant any increase in
the benefits under any bonus or pension plan or other contract or commitment,
except for normal periodic increases and bonuses made in the ordinary course of
business and consistent with the past business practice of Delta. Delta shall
not grant any increase in the rates of compensation of the officers and
directors of Delta, nor grant any increase in the benefits of the officers and
directors of Delta.
Section 6.06. Contracts, Commitments and Indebtedness. Delta shall not
enter into any contract or commitment, incur any indebtedness or engage in any
transaction not in the usual, ordinary and regular course of business and not
of usual size or duration, consistent with the past business practices of
Delta, without the prior written consent of RSL.
Section 6.07. Insurance. Delta shall maintain the Insurance Policies
described on Schedule 3.19 without modification except for renewals of the
policy term.
Section 6.08. No Default. Delta shall not do any act or omit to do any
act, or knowingly permit any act or omission to occur, which will cause a
breach of any Contract, Lien, Insurance Policy, Communications License or
Governmental Rule.
Section 6.09. Termination of Management Agreement. Delta shall use its
best efforts to terminate the Management Agreement, dated June 5, 1996 (the
"Management Agreement"), between Delta and Pioneer.
Section 6.10. Reasonable Efforts. Delta agrees that it will use its
reasonable efforts to effectuate the transactions hereby contemplated and to
fulfill the conditions to RSL's obligations set forth in Article IX of this
Agreement.
ARTICLE VII
Pre-Closing Covenants of the Principal Stockholders
The Principal Stockholders agree that subsequent to the date of this
Agreement and prior to the Closing Time:
Section 7.01. Reasonable Efforts. Each of the Principal Stockholders
will use its reasonable efforts to effectuate the transactions hereby
contemplated and to fulfill the conditions to RSL's obligations set forth in
Article IX of this Agreement.
Section 7.02. No Breach of Representations, Warranties and Covenants.
Each of the Principal Stockholders will not take any action which would cause
or constitute a breach, or would, if it had been taken immediately prior to the
date hereof, have caused
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or constituted a breach, of any of the representations, warranties or covenants
set forth in Article IV hereof. Each Principal Stockholder will, in the event
of, and promptly after the occurrence of, or promptly after becoming aware of
the occurrence of, or the impending or threatened occurrence of, any event
which would cause or constitute a breach or would, if it had occurred
immediately prior to the date hereof, have caused or constituted a breach of
any of the representations, warranties or covenants set forth in said Article
IV, give detailed notice thereof to RSL, and each Principal Stockholder shall
use its best efforts to prevent or promptly remedy such breach.
Section 7.03. Divestiture of Delta Russia. The Principal Stockholders
shall cause Delta to sell its interest in Delta Russia. In connection with the
sale of Delta's interest in Delta Russia, the Principal Stockholders shall
cause Delta to pay or otherwise discharge any indebtedness or other liabilities
payable by Delta which were incurred by Delta in connection with its interest
in Delta Russia.
Section 7.04. Termination of Management Agreement. The Principal
Stockholders shall use their respective best efforts to terminate the
Management Agreement.
ARTICLE VIII
Pre-Closing Covenants of RSL
RSL agrees that subsequent to the date of this Agreement and prior to
the Closing Time:
Section 8.01. Reasonable Efforts. RSL will use its reasonable efforts
to effectuate the transactions hereby contemplated and to fulfill the
conditions to Delta's obligations set forth in Article X of this Agreement.
Section 8.02. No Breach of Representations, Warranties and Covenants.
RSL will not take any action which would cause or constitute a breach, or
would, if it had been taken immediately prior to the date hereof, have caused
or constituted a breach, of any of the representations, warranties or covenants
set forth in Article V hereof. RSL will, in the event of, and promptly after
the occurrence of, or promptly after becoming aware of the occurrence of, or
the impending or threatened occurrence of, any event which would cause or
constitute a breach or would, if it had occurred immediately prior to the date
hereof, have caused or constituted a breach of any of the representations,
warranties or covenants set forth in said Article V, give detailed notice
thereof to Delta, and RSL shall use its best efforts to prevent or promptly
remedy such breach.
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ARTICLE IX
Conditions to RSL's Obligations
All obligations of RSL under this Agreement are subject to the
fulfillment of each of the following conditions at or prior to the Closing
Time, any or all of which may be waived in whole or in part by RSL, in its sole
discretion:
Section 9.01. Representations and Warranties True at the Closing Time.
The representations and warranties contained in Articles III and IV hereof
shall be true and correct at and as of the Closing Time as though such
representations and warranties were made at and as of such time.
Section 9.02. Performance of Delta and the Principal Stockholders.
Each of Delta and the Principal Stockholders shall have performed and complied
with all covenants and agreements on their part required by this Agreement to
be performed or complied with prior to or at the Closing Time.
Section 9.03. Certificates. RSL shall have received (1) written
certificates certifying to the fulfillment on the part of each of Delta and the
Principal Stockholders of the conditions specified in Sections 9.01 and 9.02,
(2) a certificate of the Secretary of Delta setting forth the resolutions of
the Board of Directors and the stockholders of Delta adopting and approving
this Agreement, the Operative Agreements to which it is a party (including the
Employment Agreements, the RSL Services Agreement and the Delta Services
Agreement (all as hereinafter defined)) and the Stock Option Plan (as
hereinafter defined), and authorizing the transactions contemplated hereby and
thereby and (3) such other evidence with respect to the fulfillment of said
conditions as RSL may reasonably request upon reasonable prior notice.
Section 9.04. Opinion of Counsel for Delta and the Principal
Stockholders. RSL shall have received an opinion of Wolf Haldenstein Adler
Freeman & Herz LLP ("Counsel for Delta and the Principal Stockholders") dated
the Closing Date, substantially in the form annexed hereto as Exhibit A.
Section 9.05. Legal Matters Satisfactory to Counsel for RSL. All
actions, proceedings, instruments and documents required to carry out this
Agreement, or incidental hereto, and all other relevant legal matters, shall be
reasonably satisfactory in all respects to Counsel for RSL.
Section 9.06. Consents and Approvals. All authorizations, approvals,
or permits, if any, of any Governmental Authority or any other third party that
are required in connection with the lawful sale and issuance of the Shares and
the consummation of the transactions contemplated by this Agreement, including,
but
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not limited to, any waivers of first refusal, preemptive or other rights held
by the stockholders and potential stockholders of Delta listed on Schedule
3.02, shall have been duly obtained and shall be effective on and as of the
Closing Date. No injunction or other order enjoining the sale of the Shares
shall have been issued and no proceedings for such purpose shall be pending or
threatened by the Securities and Exchange Commission (the "SEC") or any
commissioner of corporations or similar officer of any state having
jurisdiction over this transaction. At the time of the Closing, the issuance
and sale of the Shares and the consummation of the transactions contemplated by
this Agreement shall be legally permitted by all laws and regulations to which
Delta and RSL are subject.
Section 9.07. Capital Structure. Delta shall have sufficient shares of
Common Stock authorized and available for issuance so that after the issuance
of the Shares, the Shares shall constitute not less than 51% of the outstanding
shares of Common Stock on a fully diluted basis and Delta shall have taken such
action, if any, as is necessary or appropriate, in the reasonable judgment of
RSL or its counsel, to prevent any dilution to RSL's 51% interest due to any
right or claim, whether now existing or hereafter asserted, arising with
respect to events prior to the date hereof.
Section 9.08. Employment Agreements. Delta and Davidson shall have
executed and delivered an employment agreement substantially in the form of
Exhibit B-1 and Delta and Wurtman shall have executed and delivered an
employment agreement substantially in the form of Exhibit B-2 (together, the
"Employment Agreements").
Section 9.09. Stockholder Agreement. RSL, Delta, Davidson, Pioneer and
each of the other stockholders and potential stockholders of Delta listed on
Schedule 3.02 shall have entered into a stockholders' agreement, substantially
in the form of Exhibit C hereto (the "Stockholders' Agreement").
Section 9.10. Registration Rights Agreement. RSL, Delta, Davidson,
Pioneer and each of the other stockholders and potential stockholders of Delta
listed on Schedule 3.02 shall have entered into a registration rights
agreement, substantially in the form of Exhibit D hereto (the "Registration
Rights Agreement").
Section 9.11. Services Agreement. Delta shall have executed and
delivered a service agreement, substantially in the form of Exhibit E hereto
(the "Services Agreement").
Section 9.12. Escrow Agreement. Delta shall have executed and
delivered an escrow agreement, substantially in the form of Exhibit F hereto
(the "Escrow Agreement").
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Section 9.13. Powers of Attorney. There shall have been terminated or
revoked all powers of attorney of Delta.
Section 9.14. Agreement with ISC. RSL shall have received evidence
from Delta, satisfactory to Counsel for RSL, that ISC has released Delta from
any and all claims for any fees, commissions or other payments and for any
shares of Common Stock or other securities of Delta.
Section 9.15. Divestiture of Delta Russia. RSL shall have received
evidence, reasonably satisfactory to it, of (i) the sale of Delta's interest in
Delta Russia and (ii) the payment of any indebtedness or other liabilities of
Delta Russia which were incurred by Delta in connection with its interest in
Delta Russia.
Section 9.16. Termination of Management Agreement. RSL shall have
received evidence, reasonably satisfactory to it, of the termination of the
Management Agreement.
Section 9.17. First Refusal Rights. RSL shall have received evidence,
reasonably satisfactory to it, that each of Delta's security holders that has a
right of first refusal with respect to the issuance and sale of the Shares by
Delta to RSL has waived such rights or that sufficient time has passed which
has caused such security holder's right of first refusal to expire.
ARTICLE X
Conditions to the Obligations of Delta
and the Principal Stockholders
All obligations of Delta and the Principal Stockholders under this
Agreement are subject to the fulfillment of each of the following conditions at
or prior to the Closing Time, any or all of which may be waived in whole or in
part by Delta and the Principal Stockholders:
Section 10.01. Representations and Warranties of RSL True at the
Closing Time. The representations and warranties contained in Article V hereof
shall be true at and as of the Closing Time as though such representations and
warranties were made at and as of such time.
Section 10.02. RSL's Performance. RSL shall have performed and
complied with all covenants and agreements on its part required by this
Agreement to be performed or complied with prior to or at the Closing Time.
Section 10.03. Certificates. Delta shall have received (1) a written
certificate certifying to the fulfillment on the part
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of RSL of the conditions specified in Sections 10.01 and 10.02, (2) a
certificate of the Secretary or Assistant Secretary of RSL setting forth the
resolutions of the Board of Directors of RSL adopting and approving this
Agreement and the Operative Agreements to which it is a party (including the
Stockholders Agreement, the Registration Rights Agreement, the RSL Services
Agreement and the Delta Services Agreement) and authorizing the transactions
contemplated hereby and thereby and (3) such other evidence with respect to the
fulfillment of any of said conditions as Delta may reasonably request upon
reasonable prior notice.
Section 10.04. Opinion of Counsel for RSL. Delta shall have received
an opinion of Counsel for RSL, dated the Closing Date, substantially in the
form annexed hereto as Exhibit H.
Section 10.05. Legal Matters Satisfactory to Counsel for Delta and the
Principal Stockholders. All actions, proceedings, instruments and documents
required to carry out this Agreement, or incidental hereto, and all other
relevant legal matters, shall be reasonably satisfactory in all respects to
Counsel for Delta and the Principal Stockholders.
Section 10.06. Stockholder Agreement. RSL, Delta, Davidson, Pioneer
and each of the other stockholders and potential stockholders of Delta listed
on Schedule 3.02 shall have entered into the Stockholders' Agreement.
Section 10.07. Registration Rights Agreement. RSL, Delta, Davidson,
Pioneer and each of the other stockholders and potential stockholders of Delta
listed on Schedule 3.02 shall have entered into the Registration Rights
Agreement.
Section 10.08. Services Agreement. RSL shall have executed and
delivered the Services Agreement.
Section 10.09. Escrow Agreement. RSL shall have executed and delivered
the Escrow Agreement.
ARTICLE XI
Covenants Subsequent to the Closing
Section 11.01. Transfer of the Shares. RSL hereby agrees not to sell,
transfer, assign, pledge, hypothecate or otherwise dispose of the Shares or any
interest therein (collectively, a "Transfer"), except pursuant to an effective
registration statement under the Securities Act or unless Delta shall have
received a written opinion of counsel, in form and substance reasonably
satisfactory to Delta, to the effect that the Transfer may be effected without
registration under the Securities Act.
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Section 11.02. Financial Reporting.
(a) Delta shall prepare and furnish to RSL (i) monthly
unaudited financial statements no later than thirty (30) days after the end of
each month, (ii) quarterly unaudited financial statements no later than
forty-five (45) days after the end of each quarter and (iii) audited financial
statements no later than ninety (90) days after the end of each fiscal year.
The financial statements to be provided to RSL in accordance with this Section
11.02 shall be prepared in accordance with the books and records of Delta,
shall be prepared in accordance with GAAP applied on a consistent basis with
prior periods, shall be complete and correct in all respects and shall fairly
present the financial condition and results of operations of Delta as of the
respective dates thereof and for periods referred to therein.
(b) Delta shall prepare and furnish to RSL for RSL's approval
no later than thirty (30) days prior to the beginning of each fiscal year, a
proposed budget for the ensuing fiscal year. Delta's business plan for the
fiscal year ending December 31, 1997 shall be provided to RSL within thirty
(30) days of the Closing. Each business plan for each fiscal year shall be in
substantially the form and shall contain the type of information and level of
detail as shall be agreed upon and approved by RSL.
Section 11.03. Anti-Dilution. (a) In the event an action, suit or
claim which arises as described in clause (ii) of Section 12.02 results in the
issuance of shares of Common Stock, or other securities convertible or
exercisable into shares of Common Stock, to a third party, then Delta shall
issue such additional shares to RSL so that RSL's ownership percentage of the
outstanding shares of Common Stock subsequent to such issuance to a third party
shall be equal to RSL's ownership percentage immediately prior to such issuance
to such third party.
(b) If the consummation of the transactions contemplated
hereby results in the issuance to any security holder of Delta of shares of
Common Stock in excess (the "Excess Shares") of the number of shares of Common
Stock which would have been issued to such security holder if the transactions
contemplated hereby did not occur whether by reason of the anti-dilution
provisions included in such holder's security or otherwise, then the Principal
Stockholders shall be obligated, jointly and severally, to transfer to RSL, for
no consideration, the number of shares of Common Stock, which are otherwise
beneficially owned by the Principal Stockholders, equal to 51% of the Excess
Shares.
Section 11.04. Treatment of Purchase Price. RSL and Delta shall use
reasonable efforts to agree upon the valuation and tax treatment of the
transactions contemplated hereunder within sixty (60) days of the Closing and
neither party shall file any tax
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return or take any position, tax or otherwise, or make any filing inconsistent
with such agreed upon valuation and tax treatment.
Section 11.05. Stock Option Plan. The Principal Stockholders and RSL
shall use reasonable efforts to agree upon an employee stock option plan
pursuant to which (i) five percent (5%) of Delta's capital stock shall be made
available for grant in the form of non-voting common stock and (ii) Delta's
Board of Directors shall be permitted to grant such non-voting common stock to
Delta's employees. After the Principal Stockholders and RSL have agreed upon an
employee stock option plan for Delta, the Principal Stockholders and RSL shall
use their best efforts to cause the Board of Directors and stockholders of
Delta to adopt and approve said employee stock option plan, as well as an
amendment to Delta's Certificate of Incorporation which authorizes the issuance
of a sufficient number of shares of non-voting common stock.
ARTICLE XII
Indemnification
Section 12.01. Indemnification by Delta and the Principal
Stockholders. Delta and each of the Principal Stockholders jointly and
severally agrees to indemnify and hold harmless RSL from and against, and to
reimburse RSL with respect to, any and all loss, damage, liability, cost and
expense, including, without limitation, attorneys' fees (collectively, the
"Losses"), incurred by RSL by reason of or arising out of or in connection with
(1) a breach of any representation or warranty made by Delta or the Principal
Stockholders contained in Article III or Article IV of this Agreement or in any
agreement, certificate or other instrument or document delivered in accordance
herewith, (2) the failure of Delta to perform any covenant or agreement
required by this Agreement or by any agreement, certificate or other instrument
or document delivered in accordance herewith, to be performed by it, (3) the
taking of any action by Delta prior to the Closing Date which would constitute
a breach of a representation, warranty or covenant contained in this Agreement
or in any agreement, certificate or other instrument or document delivered in
accordance herewith or (4) the assertion by any third party of any liability,
obligation, contract, lease, agreement or other commitment or state of facts
which, if it existed, would constitute a breach of a representation or warranty
contained in this Agreement or in any agreement, certificate or other
instrument or document delivered in accordance herewith.
Section 12.02. Indemnification by the Principal Stockholders. Each of
the Principal Stockholders jointly and severally agrees to indemnify and hold
harmless Delta from and against, and to reimburse Delta with respect to, any
and all
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Losses incurred by Delta by reason of or arising out of or in connection with
(i) any and all claims, liabilities and obligations arising out of the
operation of Delta Russia and (ii) any actions, suits or claims commenced by
any third party not listed on Schedule 3.02 in connection with a claim that
such third party is a holder of an equity or derivative security issued by
Delta.
Section 12.03. Indemnification by RSL. RSL agrees to indemnify and
hold harmless Delta and the Principal Stockholders from and against, and to
reimburse Delta and the Principal Stockholders with respect to, any and all
Losses incurred by Delta and the Principal Stockholders by reason of or arising
out of or in connection with (1) a breach of any representation or warranty
made by RSL contained in Article V of this Agreement or in any agreement,
certificate or other instrument or document delivered in accordance herewith or
(2) the failure of RSL to perform any covenant or agreement required by this
Agreement or by any agreement, certificate or other instrument or document
delivered in accordance herewith, to be performed by it.
Section 12.04. Indemnification Procedures. A party entitled to recover
an indemnification payment pursuant to this Agreement ("Indemnified Party") (a)
shall give the parties required to make such payment ("Indemnifying Party")
prompt notice of any claim, demand, suit, proceeding or action ("Claim") by any
person against the Indemnified Party, (b) shall consult with the Indemnifying
Party as to the procedure to be followed in defending, settling, or
compromising the Claim, (c) shall not consent to any settlement or compromise
of the Claim without the written consent of the Indemnifying Party (which
consent, unless the Indemnifying Party has elected to assume the exclusive
defense of such Claim, shall not be unreasonably withheld or delayed), and (d)
shall permit the Indemnifying Party, if it so elects, to assume the exclusive
defense of such Claim, all at the cost and expense of the Indemnifying Party.
If the Indemnified Party shall (i) fail to notify or to consult with the
Indemnifying Party with respect to any Claim in accordance with subparagraph
(a) or (b) above and such failure shall prejudice the ability of the
Indemnifying Party to defend such claim or (ii) consent to the settlement or
compromise of any Claim without having received the written consent of the
Indemnifying Party (unless, if the Indemnifying Party has not elected to assume
the exclusive defense of such Claim, the consent of the Indemnifying Party is
unreasonably withheld or delayed), the Indemnifying Party shall be relieved of
its indemnification obligation with respect to such Claim. If the Indemnifying
Party shall elect to assume the exclusive defense of any Claim, it shall notify
the Indemnified Party in writing of such election, and the Indemnifying Party
shall not be liable hereunder for any fees or expenses of the Indemnified
Party's counsel relating to such Claim after the date of delivery to the
Indemnified Party of such notice of election. In the event of such election,
the
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Indemnified Party shall cooperate with the Indemnifying Party and provide it
with access to all books and records of the Indemnified Party relevant to the
Claim. The Indemnifying Party will not compromise or settle any Claim without
the written consent of the Indemnified Party if the relief provided would
materially and adversely affect the Indemnified Party. Notwithstanding the
foregoing, the party which defends any Claim shall, to the extent required by
applicable insurance policies, share or give control thereof to any insurer
with respect to such Claim.
ARTICLE XIII
Termination of this Agreement
Section 13.01. Right to Terminate. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing by
prompt notice given in accordance with the terms of Section 15.03:
(a) by the mutual written consent of RSL and Delta; or
(b) by either of such parties after August 31, 1997 if the
Closing shall not have occurred by 11:59 p.m. on August 31, 1997 (the
"Termination Date"); provided, however, that the right to terminate this
Agreement under this paragraph (b) shall not be available to any party whose
failure to fulfill any material obligation under this Agreement has been the
cause of or resulted in the failure of the Closing to occur on or prior to the
aforesaid date.
Section 13.02. Remedies. In the event of a breach of this Agreement,
the non-breaching party shall not be limited to the remedy of termination of
this Agreement, but shall be entitled to pursue all available legal and
equitable rights and remedies, and shall be entitled to recover all of its
actual damages and the reasonable costs and expenses incurred in pursuing them
(including, without limitation, reasonable attorneys' fees); provided, however,
that in no event shall any party be entitled to any special or consequential
damages, including, but not limited to, lost profits.
ARTICLE XIV
Expenses of the Transaction
Each of the parties hereto agrees to pay its own expenses (including
brokers', attorneys' and auditors' fees) in connection with this Agreement and
the transactions hereby contemplated, except as contemplated by Section 13.02
or Article XII.
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ARTICLE XV
Miscellaneous
Section 15.01. Further Assurances. Each party will, at any time and
from time to time after the Closing Date, upon the request of the other, do,
execute, acknowledge and deliver, or shall cause to be done, executed,
acknowledged and delivered, all such other instruments as may be reasonably
required in connection with the performance of this Agreement and each shall
take all such further actions as may be reasonably required to carry out or
further effect the transactions contemplated by this Agreement. Upon request,
Delta and RSL will cooperate, and will use their respective best efforts to
have their respective officers, directors and other employees cooperate, at the
requesting parties' expense, on and after the Closing Date in furnishing
information, evidence, testimony and other assistance in connection with any
actions, proceedings, arrangements or disputes involving Delta and/or RSL.
Section 15.02. Survival of Representations. All statements,
certifications, indemnifications, representations and warranties made by the
parties to this Agreement in this Agreement or in any certificate or list
delivered pursuant hereto, and their respective obligations to be performed
pursuant to the terms hereof and thereof, shall survive the Closing Time
notwithstanding (a) any examination or audit by or on behalf of any party
hereto and (b) any notice of a breach or of a failure to perform not waived in
writing.
Section 15.03. Notices. All notices or other communications required
or permitted hereunder shall be in writing and shall be deemed given or
delivered (i) when delivered personally or by private courier, (ii) when
actually delivered by registered or certified United States mail, return
receipt requested and postage prepaid or (iii) when sent by telecopy (provided,
that, it is simultaneously electronically confirmed), addressed as follows:
If to Delta or the Principal Stockholders:
c/o Delta Three Israel Ltd.
Jerusalem Technology Park
P.O. Box 48265
Jerusalem
96951 Israel
Fax No.: 972-2-679-7366
Attention: Elie Wurtman
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with a copy to:
Wolf Haldenstein Adler Freeman & Herz LLP
270 Madison Avenue
New York, New York 10016
Fax No.: (212) 686-0114
Attention: Mark C. Silverstein, Esq.
If to RSL:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue
Suite 4300
New York, NY 10153
Fax No.: (212) 317-0600
Attention: Avery S. Fischer, Esq.
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022-2585
Fax No.: (212) 940-8776
Attention: Robert L. Kohl, Esq.
or to such other address as such party may indicate by a notice delivered to
the other parties hereto pursuant to the terms hereof.
Section 15.04. No Modification Except in Writing. This Agreement shall
not be changed, modified, or amended except by a writing signed by the party to
be charged and this Agreement may not be discharged except by performance in
accordance with its terms or by a writing signed by the party to be charged.
Section 15.05. Entire Agreement. This Agreement, the Schedules hereto
and all other documents to be delivered in connection herewith set forth the
entire agreement and understanding between the parties as to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of every kind and nature between them.
Section 15.06. Severability. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, the remainder of this Agreement and the application of such provision
to other persons or circumstances shall not be affected unless the provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
Section 15.07. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may
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not be assigned by Delta without the prior written consent of RSL. RSL may
assign this Agreement to any affiliate of RSL or in connection with a merger or
consolidation of RSL or a sale of all or substantially all of RSL's business.
Except as provided in the preceding sentence, this Agreement may not be
assigned by RSL without the prior written consent of Delta.
Section 15.08. Publicity; Announcements. Except to the extent required
by law, prior to the Closing Date, all publicity related to the transactions
contemplated hereby shall be subject to the mutual approval of the parties
hereto and, except as otherwise may be required by law, no public announcement
of any of the transactions contemplated hereby will be made by either party
hereto without the prior written consent of the other party hereto and no
communication whatsoever of the Purchase Price will be made by either party
hereto to any third party without the prior written consent of the other party
hereto.
Section 15.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof. For purposes of this
Agreement, each party hereby irrevocably submits to the nonexclusive
jurisdiction of the courts of the State of New York, sitting in New York
County, and the courts of the United States for the Southern District of New
York. Each party irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of the venue of
any such suit, action or proceeding brought in any such court, any claim that
any such suit, action or proceeding brought in such a court has been brought in
an inconvenient forum and the right to object, with respect to any such suit,
action or proceeding brought in any such court, that such court does not have
jurisdiction over such party. In any such suit, action or proceeding, each
party waives, to the fullest extent it may effectively do so, personal service
of any summons, complaint or other process and agrees that the service thereof
may be made by certified or registered mail, addressed to such party at its
address set forth in Section 15.03. Each party agrees that a final
non-appealable judgment in any such suit, action or proceeding brought in such
a court shall be conclusive and binding.
Section 15.10. Captions. The captions appearing in this Agreement are
inserted only as a matter of convenience and for reference and in no way
define, limit or describe the scope and intent of this Agreement or any of the
provisions hereof.
Section 15.11. Interpretation. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons referred to may require.
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Section 15.12. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RSL COMMUNICATIONS, LTD.
By ________________________________
Name:
Title:
DELTA THREE, INC.
By ________________________________
Name:
Title:
___________________________________
JACOB A. DAVIDSON
PIONEER MANAGEMENT CORPORATION, LLC
By ________________________________
Name:
Title:
___________________________________
ELIE C. WURTMAN
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of September 2, 1997, by and
between RSL Communications, Ltd., a Bermuda corporation (the "Company"), and
Itzhak Fisher ("Executive").
W I T N E S S E T H:
WHEREAS, the Company is currently contemplating making an
initial public offering of its Class A Common Shares (the "IPO");
WHEREAS, the Company desires to enter into an agreement,
effective on the closing of the IPO (the "Agreement") to set out the terms and
conditions of Executive's employment by the Company; and
WHEREAS, the Executive desires to continue in the employment
of the Company from and after the closing of the IPO under those terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
(the "Term") commencing on the closing of the IPO (the "Commencement Date") and
ending December 31, 2002, provided such IPO is completed on or before December
31, 1997, unless extended by a written agreement signed by both parties. The
period commencing on the Commencement Date and ending on the earlier of (i) the
expiration of the Term, or (ii) the date of Executive's termination of
employment pursuant to Section 5(a) shall be referred to as the "Employment
Period".
<PAGE>
2. Position and Duties.
(a) In general. Executive shall be employed as President and Chief
Executive Officer and shall perform such duties and services, consistent with
such position for the Company, as may be (i) specified in the Bye-Laws of the
Company or (ii) assigned to him from time to time by the Executive Committee
(the "Executive Committee") of the Board of Directors (the "Board"). The
Company shall use its best efforts to continue Executive as a director and
member of the Executive Committee so long as Executive continues to serve as
Chief Executive Officer. The duties of the Executive shall include serving as
an officer or director or otherwise performing services for any "Affiliate" of
the Company as requested by the Company. An "Affiliate" of the Company means
any entity that controls, is controlled by or is under common control with the
Company. Executive shall report to the Chairman of the Board (the "Chairman").
(b) Full-time employment. During the Employment Period, Executive
shall devote his full business time to the services required of him hereunder,
except for time devoted to services required by him to be performed for any
"Affiliate" of the Company, vacation time and reasonable periods of absence due
to sickness, personal injury or other disability, and shall use his best
efforts, judgement, skill and energy to perform such services in a manner
consonant with the duties of his position and to improve and advance the
business and interests of the Company, provided, however, that Executive shall
perform such services under this Agreement outside the United States. Executive
shall not be engaged in any other business activity which, in the reasonable
judgment of the Chairman, conflicts with the duties of the Executive under this
Agreement. Executive shall travel to such location or locations as may be
requested by the Company, or which Executive believes is necessary or
advisable, in the performance by Executive of his duties hereunder or to the
extent appropriate to improve and advance the interests of the Company and its
Affiliates.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$200,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 1999, by $25,000 plus an amount equal to the base salary
then in effect, including the $25,000 increase, multiplied by the percentage
increase in the Cost of Living Index during the preceding year, and provided
further that Executive's base salary from all employments with the Company and
its Affiliates shall exceed the base salary of any other executive officer of
the Company from all employments with the Company and its
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Affiliates by no less than $50,000. The "Cost of Living Index" means the
consumer price index for all urban consumers in the New York metropolitan area
published by the Department of Labor, or if such index is no longer available,
such other generally available index measuring changes in consumer purchasing
power (in the New York metropolitan area or nationally) designated by the Board
of Directors. Any delay in increase in Executive's annual base salary by reason
of the unavailability of any such index at the time any such increase shall
otherwise be due shall be made up by a lump sum payment promptly after the
index becomes available. Executive's salary, as adjusted for any increase in
the Cost of Living Index, may be further increased at the option and in the
discretion of the Board of Directors (such salary, as the same may be increased
from time to time, is referred to herein as the "Base Salary"). The Base Salary
shall be payable in such installments (but not less frequent than monthly) as
the salaries of other executives of the Company are paid.
(b) Performance Incentive Plan. Executive shall participate in the
Company's 1997 Performance Incentive Plan at the level established for the
Chief Executive Officer of the Company. The discretionary portion of the bonus
shall be determined by the Compensation Committee. If the Company shall amend
or terminate the 1997 Performance Incentive Plan in a manner that would reduce
the opportunity of Executive to earn an incentive bonus as provided in the 1997
Performance Incentive Plan, the Company shall provide a substitute arrangement
so that Executive's total bonus opportunity will not be materially reduced.
(c) Total Return Bonus. Executive shall receive a bonus (the "Total
Return Bonus") of $1,500,000 at December 31, 2000, and $1,000,000 at December
31, 2002, which bonuses shall be earned and payable only if Executive is
employed by the Company on the applicable date and the cumulative "Total
Return" on the Company's Class A Common Shares from the Commencement Date to
the end of the year for which the determination is made exceeds the unweighted
average Total Return to the common stockholders of the companies included in
the peer group or line of business index in the Company's proxy statement for
such period. If a peer group or line of business comparison is not included in
the proxy statement, then the peer group shall be a group of companies agreed
to by Executive and the Compensation Committee as representing comparable
investment opportunities as the Company (the comparator group is hereinafter
referred to as the "Peer Group"). The bonus shall be payable promptly after the
mailing to shareholder of the Company's proxy statement for the applicable
year, unless deferred by Executive on such terms as may be approved by the
Company in its discretion. "Total Return" means dividends and other
distributions of property on common stock and the change in price of the common
stock during the period. For the purposes of this subsection (c), the price of
any stock on any day shall be the average
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closing prices of such stock on the principal market on which such stock is
traded for the 20 trading days preceding the date of determination, provided
that the price of the Company's Class A Common Shares on the Commencement Date
shall be the price at which shares are sold to the public in the IPO. If
Executive's employment with the Company is terminated for any reason other than
a Termination for Cause or a Termination Without Good Reason, Executive shall
receive a Total Return Bonus through the date of termination of Executive's
employment if the Total Return on the Company's Class A Common Shares exceeds
the Total Return of the Peer Group for such period, equal to the next Total
Return Bonus payable multiplied by a fraction the numerator of which is the
portion of the period elapsed through the date of termination and the
denominator of which is the entire measurement period, such bonus to be paid as
soon as practicable following such termination.
(d) Equity Participation. The Company shall grant Executive an option
(the "Option") to purchase one percent (1.0%) of the total common equity
outstanding after closing of the IPO, including any shares issued to the
underwriters pursuant to their option to cover over-allotments, computed after
assuming conversion of all warrants and the exercise of all other rights to
acquire Class A Common Shares of the Company, other than stock issuable upon
the exercise of employee and director stock options. The Option exercise price
shall initially be the price at which shares are sold to the public in the IPO
and shall increase on the first day of each calendar quarter, compounded
annually, by an amount based on the yield to maturity on U.S. Treasury
Securities with a maturity of approximately seven years on the date that the
Option is granted. The Option grant date shall be the date of closing of the
IPO, and the initial exercise price shall be the price at which shares are sold
to the public in the IPO. The Option shall become exercisable as set forth
below, provided Executive is employed by the Company on such date, and once
exercisable shall remain exercisable until the expiration of seven years from
the date of grant, unless otherwise earlier terminated by reason of termination
of Executive's employment by the Company for Cause or by the Executive other
than for Good Reason (as those terms are hereinafter defined).
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
December 31, 2000 40%
December 31, 2001 70%
December 31, 2002 100%
The Option shall become immediately exercisable in full in
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, by the Executive for Good Reason, or by reason of
the death or Disability (as
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<PAGE>
hereinafter defined) of the Executive and shall remain exercisable for the
lesser of two years and the remaining term of the Option.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be
eligible to participate in (i) each welfare benefit plan sponsored or
maintained by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, and (ii) each pension, profit sharing,
retirement, deferred compensation or savings plan sponsored or maintained by
the Company, in each case, whether now existing or established hereafter, to
the extent that Executive is eligible to participate in any such plan under the
generally applicable provisions thereof, provided that if Executive is also
entitled to any of such benefits under an agreement with an Affiliate, the
benefits shall be provided by the Company and its Affiliates to Executive in a
manner that avoids duplication. The Company may amend or terminate any such
plan in its discretion.
(b) Perquisites. During the Employment Period, Executive shall be
entitled to five weeks' paid vacation annually and shall also be entitled to
receive such perquisites as are generally provided to other senior officers of
the Company in accordance with the then current policies and practices of the
Company.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which Executive serves at the request of the Company to
the maximum extent permitted by applicable law and the Company's Memorandum of
Association and Bye-Laws. If any claim is asserted against Executive with
respect to which Executive reasonably believes in good faith he is entitled to
indemnification, the Company shall either defend Executive or, at its option,
pay Executive's legal expenses (or cause such expenses to be paid) on a
quarterly basis, provided that Executive shall reimburse the Company for such
amounts, plus simple interest thereon at the 90-day United States Treasury Bill
rate as in effect
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<PAGE>
from time to time, compounded annually, if Executive shall be found by a court
of competent jurisdiction not to have been entitled to indemnification.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment
on account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause,
(v) a Termination for Good Reason, (vi) a Termination Without Good Reason, or
(vii) the expiration of the Term. The Company or the Executive may initiate a
termination in any manner permitted hereunder by giving the other party written
notice thereof (the "Termination Notice"). The effective date (the "Termination
Date") of any termination shall be deemed to be the later of (i) in the case of
a Termination Notice from Executive, 45 days after the receipt by the Company
of the Termination Notice, (ii) the date on which the Termination Notice is
given, or (iii) the date specified in the Termination Notice; provided,
however, that in the case of the Executive's death, the Termination Date shall
be the date of death. Upon termination of his employment for any reason,
Executive will immediately resign from all positions that he holds with the
Company and its Affiliates, including the Executive Committee, provided that
Executive shall be required to resign as a director of the Company only in the
event of termination of the Executive's employment for Cause or Without Good
Reason.
(b) Payments Upon Certain Terminations.
(i) Termination for Good Reason or Termination Without Cause.
In the event that Executive's employment is terminated by Executive for Good
Reason or by the Company Without Cause, the Company shall pay Executive his
Earned Salary, Vested Benefits, a Severance Benefit (as such terms are
hereinafter defined) and a Total Return Bonus as provided in Section 3(c). In
addition, if Executive's employment terminates pursuant to this subsection (i),
the Company shall continue to provide to Executive the welfare benefits (other
than disability insurance) referred to in Section 4, or substantially
comparable benefits, until the earlier of (x) the date on which Executive is
eligible to obtain comparable benefits from other employment or (y) the
expiration of the Term.
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits, a lump
sum payment equal to 12 months of Executive's Base Salary (at the rate in
effect on the date of his death) and a Total Return Bonus as provided in
Section 3(c).
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(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary, Vested Benefits and a Total Return Bonus as provided in Section 3(c),
plus, in the event of termination due to Disability, to the Executive or his
estate his Base Salary at the Termination Date on a monthly basis for 12 months
following the month in which Executive's employment is terminated. In the event
that Executive's employment with the Company is terminated due to Disability,
Executive's benefits under this subsection (iii) shall be reduced by the amount
of any Company sponsored (and paid for) disability benefits paid to Executive.
(iv) Termination Without Good Reason. In the event of a
termination of Executive's employment by Executive Without Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination
of Executive's employment by the Company for Cause, the Company shall pay
Executive his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event more than 60 days, following the
end of the Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or agreement
under which such benefits have accrued except as otherwise expressly modified
by this Agreement. Fifty percent (50%) of Severance Benefits shall be paid
within 30 days after the Termination Date and the remaining 50% of the
Severance Benefits shall be paid in equal monthly installments for a period
commencing one month after the payment of the first 50% of Severance Benefits
and ending on the expiration date of the Term.
(d) Definitions. The following capitalized terms have the following
meanings:
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the
Employment Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means the sum of (i) Executive's minimum
Base Salary for the remainder of the Term, but in no event less than 12 months,
and (ii) an
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<PAGE>
amount equal to Executive's award, if any under the 1997 Performance Incentive
Plan for the year immediately preceding the year in which Executive's
employment is terminated.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and
obligations set forth in this Agreement because of physical, mental or
emotional incapacity resulting from injury, sickness or disease for a period of
(i) at least six consecutive months or (ii) more than nine months in any twelve
month period. Any question as to the existence, extent or potentiality of
Executive's disability upon which Executive and the Company cannot agree shall
be determined by a qualified, independent physician selected by the Company and
reasonably acceptable to Executive. The determination of any such physician
shall be final and conclusive for all purposes of this Agreement. Executive or
his legal representative or any adult member of his immediate family shall have
the right to present to such physician such information and arguments as to
Executive's disability as he, she or they deem appropriate, including the
opinion of Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive, or termination of Executive's employment by the
Company other than a Termination for Cause, on or after Executive's Normal
Retirement Age.
"Termination for Cause" means a determination by a majority
of the Board to terminate Executive's employment by the Company due to (i)
Executive's conviction of a felony or the entering by Executive of a plea of
nolo contendere with respect to a charged felony, (ii) Executive's gross
negligence, recklessness, dishonesty, fraud, willful malfeasance or willful
misconduct in the performance of the services con templated by this Agreement,
(iii) a willful failure without reasonable justification to comply with a
reasonable written order of the Board of Directors; or (iv) a willful and
material breach of Executive's duties or obligations under this Agreement.
Notwith standing the foregoing, a termination shall not be treated as a
Termination for Cause unless the Company shall have delivered a written notice
to Executive stating that it intends to terminate his employment for Cause and
specifying the factual basis for such termination, affording Executive the
opportunity to make a presentation to a meeting of the Board regarding his
action or conduct, and the event or events that form the basis for the notice,
if capable of being cured, shall not have been cured within 30 days of the
receipt of such notice.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a reduction in
Executive's annual
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<PAGE>
Base Salary or opportunity under the 1997 Performance Incentive Plan below the
levels contemplated by Sections 3(a) and (b), (ii) a material reduction in
Executive's positions, duties, responsibilities or reporting lines from those
described in Section 2 hereof; (iii) failure to elect or reelect Executive as a
director and member of the Executive Committee, (iv) 18 months following Ronald
S. Lauder ("Lauder") ceasing to be Chairman by reason of his death or
disability, (v) Lauder ceasing to be Chairman for any reason other than his
death or disability, (vi) the taking by the Company of an "Unapproved Action",
(vii) a material breach of this Agreement by the Company, (viii) filling of a
vacancy on the Executive Committee by a person who has not been approved by
Executive in writing, (ix) any termination of the Executive's employment with
ITG due to a "Termination Without Cause" by ITG or a "Termination With Good
Reason by Executive", as those terms are defined in the employment agreement
between the Executive and ITG, or (x) a "Change in Control" of the Company.
Notwithstanding the foregoing, a termination shall not be treated as a
Termination for Good Reason (x) if Executive shall have consented in writing to
the occurrence of the event giving rise to the claim of Termination for Good
Reason or (y) unless Executive shall have delivered a written notice to the
Company within 30 days of his having actual knowledge of the occurrence of one
of such events stating that he intends to terminate his employment for Good
Reason and specifying the factual basis for such termination, and such event,
if capable of being cured, shall not have been cured within 30 days of the
receipt of such notice.
An "Unapproved Action" shall be approval by the Executive
Committee of the Board or referral by the Executive Committee to the Board for
its consideration, without the affirmative vote of the Executive as member of
the Executive Committee given in person or in writing in accordance with the
provisions of the Company's Bye- Laws, of any of the following:
(A) any investment or borrowing commitment in excess of
$10,000,000 or any agreement requiring the payment
in any 12- month period in excess of $1,000,000 or
in excess of $5,000,000 over the term of such
agreement (in each case whether in a single or a
series of related transactions);
(B) any merger or consolidation of the Company with or
into any other person or the sale, lease or other
disposition of all or substantially all of the
Company's assets;
(C) any disposition (other than in the ordinary course
of the Company's business) if after giving effect to
such disposition the
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<PAGE>
aggregate book value of assets disposed of by the
Company other than in the ordinary course of the
Company's business in any 12- month period would
exceed $10,000,000;
(D) the budget of the Company or any subsidiary of the
Company the revenues of which in the next preceding
fiscal year represented more than 10% of the
revenues of the Company and its consolidated
subsidiaries ("Significant Subsidiary"); or
(E) nomination or election of a Chairman other than
Lauder, removal of the Chairman, nomination,
election or removal of the Deputy Chairman, Vice
Chairman, Treasurer, Chief Financial Officer or any
other officer of the Company whose base salary is
$250,000 per annum or more, or nomination or
election of the chief executive officer or the chief
financial officer of any Significant Subsidiary; or
(F) any material amendment of the Company's Memorandum
of Association or Bye-laws except as may be required
by the laws of Bermuda;
(G) any major strategic decision (such as entering into
new markets or providing new services); or
(H) recapitalization of the Company or the issuance or
sale of share capital of the Company by the Company
except pursuant to previously adopted stock option
plans.
"Change in Control" means the occurrence of (i) a sale or
other disposition of stock of the Company, or an issuance of stock of the
Company as a result of which any "person" (as such term is used in section
13(d) and 14(d) of the Securities Exchange Act of 1934), other than Lauder is
or becomes the beneficial owner of more than 25% of the total voting power of
the Company, and Lauder (x) beneficially owns a lesser percentage of the total
voting power of the Company and (y) does not have the right or ability by
voting power, contract or otherwise to elect or designate a majority of the
Board of Directors or (ii) more than 50% of the total value of the assets of
the Company and its consolidated subsidiaries are sold and the acquirer of such
assets is not Lauder or a company controlled by Lauder.
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"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder other than (i) a termination due
to Executive's death, (ii) a Termination due to Retirement, (iii) a Termination
for Good Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, at or sub sequent to the date of his termination without
regard to the performance by Executive of further services or the resolution of
a contingency and expenses incurred prior to termination of employment that are
reimbursable under Section 4(c).
(e) Registration Rights. The Company and Executive will enter into a
Registration Rights Agreement that grants Executive and family transferees (A)
the right to piggyback registration rights to sell Class A Common Shares
(including Class A Common Shares, which are issuable in exchange for Class B
Common Shares upon Executive's demand), provided that during the Employment
Period, Executive and family transferees shall not reduce their ownership of
common equity to less than 70% of the amount of common equity owned by them at
the closing of the IPO, and (B) following a "Qualified Severance Event", two
demand registration rights to sell Class A Common Shares. A Qualified Severance
Event is (i) a Termination Without Cause, (ii) a Termination for Disability,
(iii) a Termination for Good Reason, (iv) a termination due to death, (v) a
Termination due to Retirement, or (vi) termination of Executive's employment
following expiration of the Term.
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full
and complete satisfaction of Executive's rights under this Agreement and any
other claims he may have in respect of his employment by the Company or any of
its subsidiaries. Such amounts shall constitute liquidated damages with respect
to any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all
liability to Executive in connection with this Agreement or otherwise in
connection with Executive's employment with the Company and its subsidiaries,
other than Executive's rights to indemnification under Section 4(d).
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6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of one year
thereafter, Executive shall not directly or indirectly own, manage, operate,
finance, join, control, advise, consult, render services to, have an interest
or future interest or participate in the ownership, management, operation,
financing or control of, or be employed by or connected in any manner with any
Competing Business (other than as a holder of common stock of the Company, and
not in excess of 1% of the outstanding voting shares of any other publicly
traded company). "Competing Business" means the business of international long
distance communication services engaged in by the Company in any country where
the Company or an Affiliate conducts such business at any time during the Term.
Any opportunity directly or indirectly related to any business engaged in by
the Company, its subsidiaries and Affiliates of which Executive becomes aware
during the Term shall be deemed a corporate opportunity of the Company, and
Executive shall promptly make such opportunity available to the Company.
(b) If, during the period of one year after expiration of the
Term, Executive or an Affiliate of Executive proposes to engage in what may be
a Competing Business, Executive shall so notify the Company in a writing which
shall fully set forth and describe in detail the nature of the activity which
may be a competitive Business, the names of the companies or other entities
with or for whom such activity is proposed to be engaged in by Executive or by
an Affiliate of Executive (the "Section 6 Notice"). If, within 30 days after
receipt by the Company of a Section 6 Notice, the Company shall fail to notify
Executive that it deems the proposed activity to be a Competitive Business,
then Executive shall be free to engage in the activities described in the
Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the one-year period following expiration of the Term, and (ii) the
Company shall pay Executive, during such one-year period, in equal monthly
installments, an amount equal to his highest Base Salary; provided that the
amount payable under this Section 6(b) shall be reduced by the amount of
Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter
any Confidential Information (as defined below) to any third person other than
in the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the
public by the Company or an Affiliate
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<PAGE>
or is in the public domain (other than by reason of Executive's breach of the
provisions of this paragraph).
(b) "Confidential Information" is any non-public information
pertaining to the Company or an Affiliate, any of their businesses or the
business or personal affairs of Lauder or his family and how any of them
conducts its or his business or affairs. "Confidential Information" includes
not only information disclosed by the Company or an Affiliate to Executive, but
information developed, created or learned by Executive during the course of or
as a result of Executive's employment with the Company. "Confidential
Information" specifically includes information and documents concerning the
Company's and its Affiliates' methods of doing business; research, telecommuni
cations technology, its actual and potential clients, transactions and
suppliers (including the Company's or an Affiliate's terms, conditions and
other business arrangements with them); client or potential client or
transaction lists and billing; advertising, marketing and business plans and
strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals,
objectives and projections; compilations, analyses and projections regarding
the Company, its Affiliates or any of its clients or potential clients or their
businesses; trade secrets; salary, staffing, management organization or
employment information; information relating to members of the Board of
Directors and management of the Company or an Affiliate; files, drawings or
designs; information regarding product development, marketing plans, sales
plans or manufacturing plans; operating policies or manuals, business plans,
financial records or packaging design; or any other financial, commercial,
business or technical information relating to the Company, an Affiliate, Lauder
or his family or information designated as confidential or proprietary that the
Company, an Affiliate or Lauder may receive belonging to others who do business
with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall immediately (and at the
latest within two business days) notify the Company of that request and
cooperate to the maximum extent authorized by law with the Company in
protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information.
8. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory
comments about the other party, members of the Board or Affiliates, except to
the extent required by law,
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and then only after consultation with the other party to the maximum extent
possible in order to maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Confidential Information (as defined above), and
any other property or Confidential Information of the Company
or its Affiliates, including all copies thereof in
Executive's possession, custody or control, and
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a two-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity, and during the Employment Period and for a
one-year period thereafter, shall not directly or indirectly, either
individually or as owner, agent, employee, consultant or otherwise, employ or
offer employment to any person who is or was employed by the Company or any
Affiliate as an employee, other than the Company's current Vice President of
Business Development and Executive's secretary or personal assistant.
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the
Company is terminated, whether voluntarily, for Cause, for Good Reason, without
Cause or otherwise.
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12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in New York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agreement of the parties or by the
toss of a coin.
(D) If the lists contain no names in
common, each party shall strike four names from the other
party's list and the Arbitrator shall be selected from the
remaining two names by mutual agreement of the parties or by
the toss of a coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that
the President deems closest to satisfying the purposes of
this Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
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(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) determine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the
manner of presentation of arguments and/or evidence before or at any hearing,
whether and to what extent formal rules of evidence shall govern the proceeding
and the parties' rights following the proceeding, and (ii) be governed in
exercising such discretion by the goal of reaching a fair and reasonable
decision in an expeditious and efficient manner while endeavoring to streamline
the process and avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that matters of equity or important considerations of fairness
dictate otherwise.
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for
such decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the
arbitrator(s) who shall thereafter have full power to continue, modify or
vacate the terms of any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it
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(including but not limited to any pleading, brief or other document submitted
or exchanged, any testimony or other oral submission, and any award) shall not
be disclosed except to the arbitrator(s), the CPR Institute for Dispute
Resolution, the parties, their counsel and any person necessary to the conduct
of the proceeding, except as may be lawfully required in judicial proceedings
relating to the arbitration or otherwise.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are
of a personal, special, unique, unusual, extraordinary and intellectual
character.
(b) Executive acknowledges and agrees that the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and
extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company and its Affiliates irreparable
injury for which adequate remedies are not available at law. Executive
therefore agrees that the Company shall be entitled to an order of specific
performance, injunction, restraining order or such other interim or permanent
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in
this Agreement
(d) These injunctive remedies are cumulative and are in addition to
any other rights and remedies the Company may have at law or in equity.
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(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory
to him and them.
15. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable.
All other terms will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
155 West 70th Street
New York, New York 10023
if to the Company, at
Clarendon House
Church Street
Hamilton HM CX
Bermuda
Fax: (441) 292-4720
Attention: Roger Burgess
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with a copy to each of:
c/o RSL Communications, N. America, Inc.
Suite 4200
767 Fifth Avenue
New York, New York 10153
Fax: (212) 572-4046
Attention: Ronald S. Lauder
Rosenman & Colin, LLP
575 Madison Avenue
New York, New York 10022-2585
Fax: (212) 940-8776
Attention: Robert L. Kohl, Esq.
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day
following the day on which such communication was posted, and (iii) in the case
of mailing, on the third business day following the day on which such notice
was posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive. Coincident herewith,
Executive and ITG are entering into an Employment Agreement covering
Executive's services to ITG and its subsidiaries.
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18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its
four corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is
a material part of this Agreement and, should any party try to introduce
evidence contrary to this provision, any other party shall be entitle to
consider it a breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
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22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be wholly performed in New York, without
reference to principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
Date: Sept. 2, 1997 /s/ Itzhak Fisher
------------- --------------------------
Executive
RSL COMMUNICATIONS, LTD.
Date: Sept. 2, 1997 BY: /s/ Ronald S. Lauder
------------- -----------------------
Title: Chairman
--------------------
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<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of September 2, 1997, by and
between International Telecommunications Group, Inc., a Delaware corporation
(the "Company"), and Itzhak Fisher ("Executive").
W I T N E S S E T H:
WHEREAS, the Company and Executive are parties to an
Employment Agreement, dated September 15, 1995;
WHEREAS, RSL Communications, Ltd. ("RSL Com"), a Bermuda
corporation, and the indirect parent of the Company, is currently contemplating
making an initial public offering (the "IPO") of its Class A Common Shares (the
"Class A Common Shares");
WHEREAS, the Company desires to enter into a new agreement,
effective on the closing of the IPO (the "Agreement"), to set out the terms and
conditions of Executive's employment by the Company from and after the closing
of the IPO; and
WHEREAS, the Executive desires to continue in the employment
of the Company from and after the closing of the IPO under those terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
<PAGE>
2
(b) Term of Employment. The Company shall employ Executive for a term
(the "Term") commencing on the closing of the IPO (the "Commencement Date") and
ending December 31, 2002, provided such IPO is completed on or before December
31, 1997, unless extended by a written agreement signed by both parties. The
period commencing on the Commencement Date and ending on the earlier of (i) the
expiration of the Term, or (ii) the date of Executive's termination of
employment pursuant to Section 5(a) shall be referred to as the "Employment
Period".
2. Position and Duties.
(a) In general. Executive shall be employed as President and Chief
Executive Officer and shall perform such duties and services, consistent with
such position for the Company, as may be (i) specified in the Bylaws of the
Company or (ii) assigned to him from time to time by the Board of Directors
(the "Board"). The Company shall use its best efforts to continue Executive as
a director so long as Executive continues to serve as Chief Executive Officer.
The duties of the Executive shall include serving as an officer or director or
otherwise performing services for any subsidiary of the Company as requested by
the Company.
(b) Full-time employment. During the Employment Period, Executive
shall devote his full business time to the services required of him hereunder,
except for time devoted to services required by him to be performed for any
"Affiliate" of the Company, vacation time and reasonable periods of absence due
to sickness, personal injury or other disability, and shall use his best
efforts, judgement, skill and energy to perform such services in a manner
consonant with the duties of his position and to improve and advance the
business and interests of the Company, provided, however, that Executive shall
perform such services under this Agreement outside the United States. An
"Affiliate" of the Company means any entity that controls, is controlled by or
is under common control with the Company. Executive shall report to the
Chairman of the Board (the "Chairman"). Executive shall not be engaged in any
other business activity which, in the reasonable judgment of the Chairman,
conflicts with the duties of the Executive under this Agreement. Executive
shall travel to such location or locations as may be requested by the Company,
or which Executive believes is necessary or advisable, in the performance by
Executive of his duties hereunder or to the extent appropriate to improve and
advance the interests of the Company and its Affiliates.
3. Compensation.
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3
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$200,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 1999, by $25,000 plus an amount equal to the base salary
then in effect, including the $25,000 increase, multiplied by the percentage
increase in the Cost of Living Index during the preceding year. The "Cost of
Living Index" means the consumer price index for all urban consumers in the New
York metropolitan area published by the Department of Labor, or if such index
is no longer available, such other generally available index measuring changes
in consumer purchasing power (in the New York metropolitan area or nationally)
designated by the Board of Directors. Any delay in increase in Executive's
annual base salary by reason of the unavailability of any such index at the
time any such increase shall otherwise be due shall be made up by a lump sum
payment promptly after the index becomes available. Executive's salary, as
adjusted for any increase in the Cost of Living Index, may be further increased
at the option and in the discretion of the Board of Directors (such salary, as
the same may be increased from time to time, is referred to herein as the "Base
Salary"). The Base Salary shall be payable in such installments (but not less
frequent than monthly) as the salaries of other executives of the Company are
paid.
(b) Performance Incentive Plan. Executive shall participate in RSL
Com's 1997 Performance Incentive Plan at the level established for the Chief
Executive Officer of the Company. The discretionary portion of the bonus shall
be determined by the Compensation Committee. If RSL Com shall amend or
terminate the 1997 Performance Incentive Plan in a manner that would reduce the
opportunity of Executive to earn an incentive bonus as provided in the 1997
Performance Incentive Plan, the Company shall provide a substitute arrangement
so that Executive's total bonus opportunity will not be materially reduced.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be
eligible to participate in (i) each welfare benefit plan sponsored or
maintained by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, and (ii) each pension, profit sharing,
retirement, deferred compensation or savings plan sponsored or maintained by
the Company, in each case, whether now existing or established hereafter, to
the extent that Executive is eligible to participate in any such plan under the
generally applicable provisions thereof, provided that if Executive is also
entitled to any of such benefits under an agreement with an Affiliate, the
benefits shall be provided by the Company and its Affiliates to Executive in a
manner that avoids duplication. The Company may amend or terminate any such
plan in its discretion.
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4
(b) Perquisites. During the Employment Period, Executive shall be
entitled to five weeks' paid vacation annually and shall also be entitled to
receive such perquisites as are generally provided to other senior officers of
the Company in accordance with the then current policies and practices of the
Company. In addition, the Company shall continue paying the premiums on
$1,000,000 of term life insurance on the life of Executive, with the
beneficiaries to be named by Fisher, or provide an equivalent amount of
insurance through one or more other policies. The Company shall lease an
automobile of Fisher's choice (with monthly lease, insurance and parking
charges to be borne by the Company not to exceed $1,250) for use by Fisher.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which Executive serves at the request of the Company to
the maximum extent permitted by applicable law and the Company's Certificate of
Incorporation and Bylaws. If any claim is asserted against Executive with
respect to which Executive reasonably believes in good faith he is entitled to
indemnification, the Company shall either defend Executive or, at its option,
pay Executive's legal expenses (or cause such expenses to be paid) on a
quarterly basis, provided that Executive shall reimburse the Company for such
amounts, plus simple interest thereon at the 90-day United States Treasury Bill
rate as in effect from time to time, compounded annually, if Executive shall be
found by a court of competent jurisdiction not to have been entitled to
indemnification.
5. Termination of Employment.
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6
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment
on account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause,
(v) a Termination for Good Reason, (vi) a Termination Without Good Reason, or
(vii) the expiration of the Term. The Company or the Executive may initiate a
termination in any manner permitted hereunder by giving the other party written
notice thereof (the "Termination Notice"). The effective date (the "Termination
Date") of any termination shall be deemed to be the later of (i) in the case of
a Termination Notice from Executive, 45 days after the receipt by the Company
of the Termination Notice, (ii) the date on which the Termination Notice is
given, or (iii) the date specified in the Termination Notice; provided,
however, that in the case of the Executive's death, the Termination Date shall
be the date of death. Upon termination of his employment for any reason,
Executive will immediately resign from all positions that he holds with the
Company and its subsidiaries.
(b) Payments Upon Certain Terminations.
(i) Termination for Good Reason or Termination Without Cause.
In the event that Executive's employment is terminated by Executive for Good
Reason or by the Company Without Cause, the Company shall pay Executive his
Earned Salary, Vested Benefits and a Severance Benefit (as such terms are
hereinafter defined). In addition, if Executive's employment terminates
pursuant to this subsection (i), the Company shall continue to provide to
Executive the welfare benefits (other than disability insurance) referred to in
Section 4, or substantially comparable benefits, until the earlier of (x) the
date on which Executive is eligible to obtain comparable benefits from other
employment or (y) the expiration of the Term.
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits plus a
lump sum payment equal to 12 months of Executive's Base Salary (at the rate in
effect on the date of his death).
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits, plus, in the event of termination due to
Disability, to the Executive or his estate his Base Salary at the Termination
Date on a monthly basis for 12 months following the month in which Executive's
employment is terminated. In the event that Executive's employment with the
Company is terminated due to Disability, Executive's benefits under this
subsection (iii) shall be reduced by the amount of any Company sponsored (and
paid for) disability benefits paid to Executive.
(iv) Termination Without Good Reason. In the event of a
termination of Executive's employment by Executive Without Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay
Executive his Earned Salary and Vested Benefits.
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7
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event more than 60 days, following the
end of the Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or agreement
under which such benefits have accrued except as otherwise expressly modified
by this Agreement. Fifty percent (50%) of Severance Benefits shall be paid
within 30 days after the Termination Date and the remaining 50% of the
Severance Benefits shall be paid in equal monthly installments for a period
commencing one month after the payment of the first 50% of Severance Benefits
and ending on the expiration date of the Term.
(d) Definitions. The following capitalized terms have the following
meanings:
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the
Employment Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means the sum of Executive's minimum Base
Salary for the remainder of the Term, but in no event less than 12 months, and
(ii) an amount equal to Executive's award, if any, under the 1997 Performance
Incentive Plan for the year immediately preceding the year in which Executive's
employment is terminated.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and
obligations set forth in this Agreement because of physical, mental or
emotional incapacity resulting from injury, sickness or disease for a period of
(i) at least six consecutive months or (ii) more than nine months in any twelve
month period. Any question as to the existence, extent or potentiality of
Executive's disability upon which Executive and the Company cannot agree shall
be determined by a qualified, independent physician selected by the Company and
reasonably acceptable to Executive. The determination of any such physician
shall be final and conclusive for all purposes of this Agreement. Executive or
his legal representative or any adult member of his immediate family shall have
the right to present to such physician such information and arguments as to
Executive's disability as he, she or they deem appropriate, including the
opinion of Executive's personal physician.
<PAGE>
8
"Termination due to Retirement" means termination of
employment by Executive, or termination of Executive's employment by the
Company other than a Termination for Cause, on or after Executive's Normal
Retirement Age.
"Termination for Cause" means a determination by a majority
of the Board to terminate Executive's employment by the Company due to (i)
Executive's conviction of a felony or the entering by Executive of a plea of
nolo contendere with respect to a charged felony, (ii) Executive's gross
negligence, recklessness, dishonesty, fraud, willful malfeasance or willful
misconduct in the performance of the services contemplated by this Agreement,
(iii) a willful failure without reasonable justification to comply with a
reasonable written order of the Board of Directors; or (iv) a willful and
material breach of Executive's duties or obligations under this Agreement.
Notwithstanding the foregoing, a termination shall not be treated as a
Termination for Cause unless the Company shall have delivered a written notice
to Executive stating that it intends to terminate his employment for Cause and
specifying the factual basis for such termination, affording Executive the
opportunity to make a presentation to a meeting of the Board regarding his
action or conduct, and the event or events that form the basis for the notice,
if capable of being cured, shall not have been cured within 30 days of the
receipt of such notice.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a reduction in
Executive's annual Base Salary or opportunity under the 1997 Performance
Incentive Plan below the levels contemplated by Sections 3(a) and (b), (ii) a
material reduction in Executive's positions, duties, responsibilities or
reporting lines from those described in Section 2 hereof; (iii) failure to
elect or reelect Executive as a director, (iv) a material breach of this
Agreement by the Company, or (v) any termination of the Executive's employment
with RSL Com due to a "Termination Without Cause" by RSL Com or a "Termination
With Good Reason by Executive", as those terms are defined in the employment
agreement between the Executive and RSL Com. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Good Reason (x) if
Executive shall have consented in writing to the occurrence of the event giving
rise to the claim of Termination for Good Reason or (y) unless Executive shall
have delivered a written notice to the Company within 30 days of his having
actual knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall
not have been cured within 30 days of the receipt of such notice.
<PAGE>
9
"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement, (iii) a Termination for
Cause, or (iv) a Termination due to Disability .
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder other than (i) a termination due
to Executive's death, (ii) a Termination due to Retirement or (iii) a
Termination for Good Reason.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, at or subsequent to the date of his termination without
regard to the performance by Executive of further services or the resolution of
a contingency and expenses incurred prior to termination of employment that are
reimbursable under Section 4(c).
(e) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full
and complete satisfaction of Executive's rights under this Agreement and any
other claims he may have in respect of his employment by the Company or any of
its subsidiaries. Such amounts shall constitute liquidated damages with respect
to any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all
liability to Executive in connection with this Agreement or otherwise in
connection with Executive's employment with the Company and its subsidiaries,
other than Executive's rights to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of one year
thereafter, Executive shall not directly or indirectly own, manage, operate,
finance, join, control, advise, consult, render services to, have an interest
or future interest or participate in the ownership, management, operation,
financing or control of, or be employed by or connected in any manner with any
Competing Business (other than as a holder of common stock of the Company, and
not in excess of 1% of the outstanding voting shares of any other publicly
traded company). "Competing Business" means the business of international long
distance communication services engaged in by the Company in any country where
the Company or a subsidiary conducts such business at any time during the Term.
Any opportunity directly or indirectly related to any business engaged in by
the Company and its subsidiaries of which Executive becomes aware during the
Term shall be deemed a corporate opportunity of the Company, and Executive
shall promptly make such opportunity available to the Company.
<PAGE>
10
(b) If, during the period of one year after expiration of the
Term, Executive or an Affiliate of Executive proposes to engage in what may be
a Competing Business, Executive shall so notify the Company in a writing which
shall fully set forth and describe in detail the nature of the activity which
may be a competitive Business, the names of the companies or other entities
with or for whom such activity is proposed to be engaged in by Executive or by
an Affiliate of Executive (the "Section 6 Notice"). If, within 30 days after
receipt by the Company of a Section 6 Notice, the Company shall fail to notify
Executive that it deems the proposed activity to be a Competitive Business,
then Executive shall be free to engage in the activities described in the
Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the one-year period following expiration of the Term, and (ii) the
Company shall pay Executive, during such one-year period, in equal monthly
installments, an amount equal to his highest Base Salary; provided that the
amount payable under this Section 6(b) shall be reduced by the amount of
Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter
any Confidential Information (as defined below) to any third person other than
in the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the
public by the Company or a subsidiary or is in the public domain (other than by
reason of Executive's breach of the provisions of this paragraph).
<PAGE>
11
(b) "Confidential Information" is any non-public information
pertaining to the Company or a subsidiary, any of their businesses or the
business or personal affairs of Ronald S. Lauder ("Lauder") or his family and
how any of them conducts its or his business or affairs. "Confidential
Information" includes not only information disclosed by the Company or a
subsidiary to Executive, but information developed, created or learned by
Executive during the course of or as a result of Executive's employment with
the Company. "Confidential Information" specifically includes information and
documents concerning the Company's and its subsidiaries' methods of doing
business; research, telecommunications technology, its actual and potential
clients, transactions and suppliers (including the Company's or a subsidiary's
terms, conditions and other business arrangements with them); client or
potential client or transaction lists and billing; advertising, marketing and
business plans and strategies (including prospective or pending licensing
applications or investments in license holders or applicants); profit margins,
goals, objectives and projections; compilations, analyses and projections
regarding the Company, its subsidiaries or any of its clients or potential
clients or their businesses; trade secrets; salary, staffing, management
organization or employment information; information relating to members of the
Board of Directors and management of the Company or a subsidiary; files,
drawings or designs; information regarding product development, marketing
plans, sales plans or manufacturing plans; operating policies or manuals,
business plans, financial records or packaging design; or any other financial,
commercial, business or technical information relating to the Company, a
subsidiary, Lauder or his family or information designated as confidential or
proprietary that the Company, a subsidiary or Lauder may receive belonging to
others who do business with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall immediately (and at the
latest within two business days) notify the Company of that request and
cooperate to the maximum extent authorized by law with the Company in
protecting the Company's and it subsidiaries' interest in maintaining the
confidentiality of any Confidential Information.
8. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory
comments about the other party, members of the Board or subsidiaries, except to
the extent required by law, and then only after consultation with the other
party to the maximum extent possible in order to maintain goodwill for each of
the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Confidential Information (as defined above), and
any other property or Confidential Information of the Company
or its subsidiaries, including all copies thereof in
Executive's possession, custody or control, and
<PAGE>
12
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its subsidiaries.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a two-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
subsidiary, other than Executive's secretary or personal assistant, to
terminate employment with such entity, and during the Employment Period and for
a one-year period thereafter, shall not directly or indirectly, either
individually or as owner, agent, employee, consultant or otherwise, employ or
offer employment to any person who is or was employed by the Company or any
subsidiary as an employee, other than the Company's current Vice President of
Business Development and Executive's secretary or personal assistant.
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the
Company is terminated, whether voluntarily, for Cause, for Good Reason, without
Cause or otherwise.
12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in New York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
<PAGE>
13
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agreement of the parties or by the
toss of a coin.
(D) If the lists contain no names in
common, each party shall strike four names from the other
party's list and the Arbitrator shall be selected from the
remaining two names by mutual agreement of the parties or by
the toss of a coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that
the President deems closest to satisfying the purposes of
this Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) determine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the
manner of presentation of arguments and/or evidence before or at any hearing,
whether and to what extent formal rules of evidence shall govern the proceeding
and the parties' rights following the proceeding, and (ii) be governed in
exercising such discretion by the goal of reaching a fair and reasonable
decision in an expeditious and efficient manner while endeavoring to streamline
the process and avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that matters of equity or important considerations of fairness
dictate otherwise.
<PAGE>
14
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for
such decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the
arbitrator(s) who shall thereafter have full power to continue, modify or
vacate the terms of any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
13. No Punitive or Emotional Damages
<PAGE>
15
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are
of a personal, special, unique, unusual, extraordinary and intellectual
character.
(b) Executive acknowledges and agrees that the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and its subsidiaries' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and
extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company and its subsidiaries
irreparable injury for which adequate remedies are not available at law.
Executive therefore agrees that the Company shall be entitled to an order of
specific performance, injunction, restraining order or such other interim or
permanent equitable relief (without the requirement to post bond) restraining
Executive from committing any violation of the covenants and obligations
contained in this Agreement
(d) These injunctive remedies are cumulative and are in addition to
any other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory
to him and them.
15. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
<PAGE>
16
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
155 West 70th Street
New York, New York 10023
if to the Company, to
c/o RSL Communications, N. America, Inc.
Suite 4200
767 Fifth Avenue
New York, New York 10153
Fax: (212) 572-4046
Attention: Ronald S. Lauder
with a copy to each of:
Rosenman & Colin, LLP
575 Madison Avenue
New York, New York 10022-2585
Fax: (212) 940-8776
Attention: Robert L. Kohl, Esq.
<PAGE>
17
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day
following the day on which such communication was posted, and (iii) in the case
of mailing, on the third business day following the day on which such notice
was posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement and supersedes the Employment Agreement,
dated September 15, 1995, which shall be of no further force and effect upon
the closing of the IPO. There are no other promises, representations,
understandings or inducements by the Company to Executive or Executive to the
Company other than those specifically set forth in this Agreement. This
Agreement may not be altered, amended or added to except in a single writing
signed by the Company and the Executive.
18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
20. Arm's Length
<PAGE>
18
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its
four corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is
a material part of this Agreement and, should any party try to introduce
evidence contrary to this provision, any other party shall be entitle to
consider it a breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be wholly performed in New York, without
reference to principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.
<PAGE>
19
IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
Date: Sept. 2, 1997 /s/ Itzhak Fisher
------------- --------------------------
Executive
RSL COMMUNICATIONS, LTD.
Date: Sept. 2, 1997 BY: /s/ Ronald S. Lauder
------------- -----------------------
Title: Chairman
--------------------
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Itzhak Fisher and Mark J. Hirschhorn, or
either of them, as such person's true and lawful attorney-in-fact and agent,
with full powers of substitution and resubstitution, for him/her and in his/her
name, place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commissison, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
SIGNATURE TITLE DATE
- ------------------------- ------------ -----------------
/s/ LEONARD A. LAUDER Director August 25, 1997
- -------------------------
(Leonard A. Lauder)
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Itzhak Fisher and Mark J. Hirschhorn, or
either of them, as such person's true and lawful attorney-in-fact and agent,
with full powers of substitution and resubstitution, for him/her and in his/her
name, place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commissison, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
SIGNATURE TITLE DATE
- ------------------------ ------------ -------------------
/s/ GUSTAVO CISNEROS Director September 3, 1997
- ------------------------
(Gustavo Cisneros)
